mg week 7

jj163

Barney_SMCA4_10.ppt

Home >English homework help >Article writing homework help >mg week 7

Mergers and Acquisitions

10-*

Chapter 10

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Mission

Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

The Strategic Management Process

Corporate Level

Strategy

Which Businesses

to Enter?

• Vertical Integration

• Diversification

• Strategic Alliances

Mode of Entry?

• Mergers &

Acquisitions

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Logic of Corporate Level Strategy Applies

Corporate level strategy should create value:

2) such that businesses forming the corporate whole

are worth more than they would be under

independent ownership

3) that equity holders cannot create through

portfolio investing

1) such that the value of the corporate whole increases

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Mergers & Acquisitions Defined

• two firms are combined on

a relatively co-equal basis

• one firm buys another

firm

• the words are often used interchangeably even

though they mean something very different

• merger sounds more amicable, less threatening

Mergers

Acquisitions

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

• parent stocks are usually

retired and new stock issued

• name may be one of the

parents’ or a combination

• can be a controlling

share, a majority, or

all of the target firm’s

stock

• can be friendly or

hostile

Mergers & Acquisitions Defined

• usually done through

a tender offer

• one of the parents usually

emerges as the dominant

management

Mergers

Acquisitions

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Do Mergers and Acquisitions Create Value?

The Logic

Unrelated M&A Activity

• there would be no expectation of value creation

due to the lack of synergies between businesses

• there might be value creation due to efficiencies

from an internal capital market

• there might be value creation due to the exploitation

of a conglomerate discount

• a corporate raider who buys and restructures firms

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Mergers & Acquisitions Defined

Types of M&A Activity

Vertical

Horizontal

Product Extension

Market Extension

Conglomerate

» suppliers or customers

» competitors

» complementary products

» complementary markets

» everything else

Unrelated

FTC

Categories

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Do Mergers and Acquisitions Create Value?

The Logic

Related M&A Activity

• value creation would be expected due to

synergies between divisions

• economies of scale

• economies of scope

• transferring competencies

• sharing infrastructure, etc.

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Do Mergers and Acquisitions Create Value?

The Empirical Evidence

• this reflects the market’s assessment of the

expected value of the merger or acquisition

• these studies look at what happens to the price

of both the acquirer’s stock and the target’s stock

• thus, we can see who is capturing any expected

value that may be created

Research is based on stock market reaction to the

announcement of M&A activity

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Do Mergers and Acquisitions Create Value?

The Empirical Evidence

Acquiring

Firms

Target

Firms

M&A Activity creates value, on average, as follows:

• related M&A activity creates more value than

unrelated M&A activity

M&A activity creates value, but target firms capture it

• no value created

• value increases by

about 25%

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Do Mergers and Acquisitions Create Value?

Expected versus Operational Value

Wells Fargo: down $0.25 to $39.50

First Security: up $1.19 to $13.38

Stock Price Market Cap.

12/1999 $40.44 $65.7 B

12/2000 $56.69 $95.2 B

12/2001 $43.60 $74.0 B

12/2002 $46.87 $82.0 B

12/2003 $58.89 $100.0 B

12/2004 $62.15 $105.0 B

April 2000: Wells Fargo offers to acquire First Security Bank

for about $3 billion

Stock values were:

Wells Fargo: $43.69

First Security: $15.50

The Deal:

.355 shares of WF for each

share of FS stock

Expected

Operational

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not

capture any value from M&A’s, why do they

continue to merge and acquire?

• cash generating, normal return investment

• avoid competitive disadvantage

• avoid scale disadvantages

Survival

Free Cash

Flow

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not

capture any value from M&A’s, why do they

continue to merge and acquire?

• managers benefit from increases in size

• managers benefit from diversification

• managers believe they can beat the odds

Agency

Problems

Managerial

Hubris

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not

capture any value from M&A’s, why do they

continue to merge and acquire?

• proposed M&A activity may satisfy

the logic of corporate level strategy

• managers may see economies that

the market can’t see

• some M&A activity does generate

above normal profits (expected and

operational over the long run)

Above Normal

Profits

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Competitive Advantage

Can an M&A strategy generate sustained

competitive advantage?

Yes, if managers’ abilities meet VRIO criteria

Managers may be good at doing ‘deals’

Managers may be good at recognizing & exploiting

potentially value-creating economies with other firms

Managers may be good at both

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Competitive Advantage

Recognizing and Exploiting Economies of Scope

$10,000

$12,000

• Firm C’s recognized

value is $10,000

• Firm A can earn a

profit of $2,000

only if the economy

remains private

Bidders

Target

• Firm A sees value

of $12,000 in Firm C

Private Economies

Firm A

Firm B

Firm C

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Competitive Advantage

Recognizing and Exploiting Economies of Scope

$10,000

$12,000

Bidders

Target

• if the economy

between A & C

is costly to imitate,

it doesn’t matter

if other firms know

• Firm A can still earn

a $2,000 profit

Costly-to-Imitate

Economies

Firm A

Firm B

Firm C

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Competitive Advantage

Recognizing and Exploiting Economies of Scope

$10,000

Bidders

Target

• Firm C has a market

value of $10,000

• Firm A buys Firm C

for $10,000

• Firm C turns out to be

worth $12,000

$12,000

Firm A

Firm B

Firm C

Unexpected

Economies

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Competitive Advantage

Doing the Deal

Bidding Firm’s

Perspective

Search for

Rare Economies

Limit Information

to Other Bidders

Limit Information

to the Target

Avoid Bidding

Wars

Close the

Deal Quickly

Seek Thinly

Traded Markets

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Competitive Advantage

Doing the Deal

Target Firm’s

Perspective

Seek Information

from Bidders

Invite Other Bidders to

Join in Bidding Contest

Delay, But Do Not

Stop the Acquisition

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Implementation Issues

Structure, Control, and Compensation

• m-form structure is typically used

• management controls & compensation policies

are similar to those used in diversification strategies

• target firm may remain somewhat autonomous

• target firm may be completely integrated

M&A activity requires responses to these issues:

Managers must decide on the level of integration:

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Implementation Issues

Cultural Differences

• combining elements of both cultures

• essentially replacing one culture with the other

• high levels of integration require greater cultural

blending

• cultural blending may be a matter of:

• integration may be very costly, often unanticipated

• the ability to integrate efficiently may be a source

of competitive advantage

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

Summary

M&A activity is a mode of entry for vertical

integration and diversification strategies

M&A activity can create economic value at

announcement, but target firms usually capture

that value

A firm’s M&A strategy should satisfy the

logic of corporate level strategy

M&A activity can create value over the long term

for the acquiring firm

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly

Mergers and Acquisitions

10-*

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.