University of Cagliari, Faculty of Economics, Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 9 credits Lecturer: Dr Alberto Asquer Phone:

Introduction 0. Mergers & Acquisitions 1. M&A trends and features 2. M&A rationales 3. M&A performance 4. Vertical integrations 5. Outsourcing Summary

0. Mergers & Acquisitions M&As are operations that result in joint ownership and control of previously independent firms. Mergers lead to the inclusion of previously independent firms within one only organisational hierarchy. Acquisitions lead to the control of other firms by exercising the right to appoint and remove top managers.

0. Mergers & Acquisitions Different types of M&As: 1) Consensual or conflictual (hostile takeovers) 2) Horizontal or vertical 3) Within the same or different industries (conglomerates)

1. M&A trends and features M&A operations often tend to concentrate within periods of higher activity (merger waves)

1. M&A trends and features M&A operations mostly take place within the same country (domestic M&As, about ¾ total), but occasionally are conducted between different countries (international or cross-border M&As, about ¼ total) Example: Flows of cross-border M&As in banking sector,

1. M&A trends and features Most M&A operations take place within the US and other industrialised countries. Example: Number of domestic M&As in banking sector,

2. M&A rationales Some strategic rationales for M&As: Increasing total turnover (i.e., size and market share) Expansion of geographical reach (i.e., expanding market channels) Extension of product range (i.e., diversification) Quick access to new technologies, resources, and competences More cost efficiency (by optimising joint production and marketing, by increasing scale, by exploiting synergies)

2. M&A rationales Some context rationales for M&As: Advantageous tax provisions Privatisation or forced sales of company assets Deregulation Dismal business prospects (i.e., trying to become 'too big to fail')

2. M&A rationales Some 'unconfessed' rationales for M&As: Managers' aim to 'build empires' and get higher remuneration Diversifying development options in face of strategic uncertainties Employing free cash flow rather than paying it out to shareholders Protecting national interest on the basis of geo-political and other reasons

2. M&A rationales Some rationales for cross-border M&As: To exploit a comparative advantage of firms of acquirer countries with respect to those of the target countries To exploit similarity of markets and institutions, provided that firms can better understand activities and services in the target countries To overcome limitations to growth in the domestic market, possibly provided by anti-trust regulations

3. M&A performance Some examples of M&As in history $116.7 billion $81.4 billion $182 billion

3. M&A performance Some examples of M&As in history $116.7 billion $81.4 billion $182 billion , $99 billion losses

3. M&A performance Performance of M&As is questionable, in terms of profitability, growth, efficiency, and strategic advantages. Often novel issues arise, such as cultural conflicts, increased labour costs, more bureaucracy, and inefficiencies of scale. Managers may be 'myopic' when assessing M&A operations, i.e., overestimating expected benefits and underestimating future costs. As a result, firms may overpay target companies when conducting an M&A deal ('winner's curse').

4. Vertical integrations Vertical integrations are M&A operations directed towards suppliers (upwards) or clients (downwards) Upwards integration: It is especially valuable to gain control of production inputs, in particular rare resources. Upwards integration allows the firm to be less strategically dependent upon suppliers' bargaining power. Downwards integration: It is especially valuable to gain control of distribution channels, in particular when clients are accessed through intermediaries. Downwards integration allows the firm to be less dependent upon clients' bargaining power.

4. Vertical integrations Issues that originate from vertical integration: Less flexibility to adapt to changing technologies and consumers' demand Need to fill the installed production capacity in all value chain segments Need to develop further managerial skills and practices Additional administrative costs

5. Outsourcing Rather than integrating other firms' operations, firms may outsource part of their value chain. Outsourcing is driven by the advantages (1) to let other firms carry out the activities that they excel to perform and (2) to focus firms' scarce resources on the activities that they excel to perform. Strategic rationales for outsourcing: Cost efficiency when outside firms perform activities at lower cost Focus on activities that are not related to distinctive competences Avoiding committing on technologies and product features Maintaining flexibility and facilitating innovation Acquiring knowledge from other sources

6. Summary Main points M&As are important operations that relate to companies' growth and strategic 'manoeuvring'. M&As are primarily triggered by strategic rationales, but an important role is also played by context conditions and 'unconfessed' reasons. M&A performance is questionable, however. Apart from the M&A operation, it is very important to well manege the process of implementing the merging or the two firms. A special class of M&A operations are those directed towards vertical integration of firms' activities. Rather than integrating, firms may pursue outsourcing of their activities.