1. Chapter 10 Studying Mergers and Acquisitions

2. 1 OBJECTIVES Explain the motivations behind acquisitions and show how they’ve changed over time 1 Explain why mergers and acquisitions are important vehicles of corporate strategy 2 Identify the various types of acquisitions 3 Understand how the pricing of acquisitions affects the realization of synergies 4 Outline the alternative ways to integrate acquisition and explain the implementation process 5 Discuss the characteristics of acquisitions in different industry contexts 6

3. 2 MERGER VS. ACQUISITION Merger Acquisition A A B B C A The purchase of one firm by another so that ownership transfers The “merger” of Daimler with Chrysler in 1997 is considered by many to have been an acquisition in disguise The consolidation or combination of one firm with another

4. 3 MOTIVES FOR MERGERS AND ACQUISITIONS Sometimes termed “Managerialism”, manager can conceivably make acquisitions-and even willingly overpay for them-to maximize their own interests at the expense of shareholder wealth Managers may make mis- taken valuation and have unwarranted confidence in their valuation and in their ability to create value because of pride, over- confidence, or arrogance Managers may believe that the value of the firms combined can be greater than the sum of the two independently Reduced threats Increased market power and access Realized cost savings Increased financial strength Sharing and leveraging capabilities Managerial self-interestHubrisSynergy

5. 4 M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND M&A and the Strategy Diamond While mergers and acquisition are explicitly vehicles of strategy, they have major implications for arenas staging, and economic logic as well Economic logic Arenas VehiclesStaging Differentiators Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59 How does the acquisition help the firm earn profit? Where? How? Speed and sequence of moves?

6. 5 BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT Speed Critical Mass Access to complementary assets Reduced competition More expensive Inherit adjunct businesses Cannot spread commitment over several years (one-time, all-or-nothing decision) Potential for organizational conflict

7. 6 CLASSIFICATION OF ACQUISITIONS Overcapacity M&A Roll-up-M&A Product/ Market Extension M&A as R&D Industry Convergence ExampleDaimlerChrysler merger Service Corporation International more than 100 acquisitions of funeral homes Pepsi’s acquisition of Gatorade Intel’s dozens of acquisitions of small high tech companies AOL’s acquisition Time-Warner ObjectivesEliminating capacity, gaining market share, and increasing efficiency Efficiency of larger operations (e.g., economies of scale, superior management) Synergy of similar but expanded product lines of geographic markets Short cut innovation by buying it from small companies Anticipation of new industry emerging; culling resources from firms in multiple industries whose boundaries are eroding Percent of all M&A deals 37%9%36%1%4% Source: J.L. Bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101

8. THE NATURE OF ACQUISITIONS CAN TAKE MANY FORMS 7

9. 8 THE SYNERGY TRAP – NOT ALL ACQUISITIONS SUCCEED Acquisition premiumsCreate two problems for managers Premiums increase the level of returns the combined businesses must extract The longer it takes to implement performance improvements, the more likely the acquisition will fail

10. 9 THE ACQUISITION PROCESS Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York Free Press, 1991), 42 A process perspective Idea Justification due diligence, negotiation Acquisition integration Results Decision-making process problems Integration process problems

11. EIGHT KEY QUESTIONS FOR STRATEGIC ASSESSMENT 1. What is the strategic logic behind the acquisition? Why this company? 2. Is the target industry attractive? What are the key segments? What is the prognosis for industry evolution? 3. Is this an international acquisition? What are the key differences and performance implications? 4. Does an analysis of the target indicate it is healthy and viable? 5. How well does the company fit with ours? What are the expected benefits? What risks might occur? 6. How will the organization be integrated – how will it be organized? 7. Have alternative scenarios been considered? What is the best case/worst case scenario? 8. Is the valuation reasonable? 10

12. 11 ACQUISITION SCREENING “Soft-fit” acquisition screening by Cisco systems Screening criteriaMeans of achieving criteria Offer both short- and long-term win-wins for Cisco acquired company Have complementary technology that fills a need in Cisco’s core product space Have a technology that can be delivered through Cisco’s existing distribution channels Have a technology and products that can be supported by Cisco's support organization Is able to leverage Cisco’s existing infrastructure and resource base to increase its overall value Share a common vision and chemistry with Cisco Have a similar understanding and vision of the market Have a similar culture Have a similar risk-taking style Be located (preferably) in Silicon Valley or near one of Cisco’s remote sites Have a company headquarters and most manufacturing facilities close to one of Cisco's main sites

13. 12 ABSORPTION Need for strategic interdependence Need for organizational autonomy High Low High PreservationSymbiosis HoldingAbsorption Low Acquiring company completely absorbs the target company. If the target company is large, this can take time (e.g., Franklin Quest’s acquisition of the Covey Leadership Center to create Franklin Covey)

14. 13 PRESERVATION Need for strategic interdependence Need for organizational autonomy High Low High PreservationSymbiosis HoldingAbsorption Low The acquiring company makes very few changes to the target, and instead learned from it in preparation for future growth (e.g., many of Wal-Mart’s early international acquisitions)

15. 14 HOLDING Need for strategic interdependence Need for organizational autonomy High Low High PreservationSymbiosis HoldingAbsorption Low The acquiring company allows little autonomy - yet does not integrate the target into its businesses (e.g., Bank One’s acquisitions of local banks )

16. 15 SYMBIOSIS Need for strategic interdependence Need for organizational autonomy High Low High PreservationSymbiosis HoldingAbsorption Low The acquiring company integrates the target in order to achieve synergies - but allows for autonomy, for example to retain and motivate employees. This is possibly the most difficult to implement (e.g., Cisco's acquisitions which cost the firm $1 million per employee on average)

17. 16 KEY LESSONS FOR IMPLEMENTING M & As Integration management is a full-time job Many successful acquirers appoint an “integration manager” because integration is too much work for acting managers to add to their workloads Key decisions should be made swiftly Speed is of the essence because of the cost and time value of money Integration should address technical and cultural issues Most managers focus on technical issues only. This is a mistake It’s a continual process, not an event Start the integration process long before the deal is closed

18. 17 TIPS FROM PERRY AND HERD Firms must study failed M&As as much as successes. 1 Traditional due diligence is no longer sufficient. With M&A deals increasingly risky, there is more need for pre-deal planning. 2

19. 18 DUE DILIGENCE PAYS Penalties Due Diligence

20. 19 M&As AND INDUSTRY LIFE CYCLE Introduction M&As tend to be R&D and product- related GrowthMaturity M&As tend to be for acquiring products that are proven and gaining acceptance M&As primarily for dealing with over capacity in the industry

21. 20 M&As IN DYNAMIC CONTEXTS Technological change Cisco and Microsoft both use acquisitions to ensure they maintain their strong competitive positions Demographic change Geopolitical change Trade liberalization When the Tribune Company merged with Times-Mirror in 2000, it acquired Spanish-language “Hoy” to target the growing U.S Hispanic market IBM divested its PC division to a Chinese company as that country emerges Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA Deregulation AT&T divested local operations into “Baby Bells” and set off a state of almost constant M&A