: Growth Stategies- Home Entertainment Retail Industry

Session10KeystrategicconsiderationininorganicgrowthMergersandAcquisitions.pdf

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School of Business

BUS304 Evidence Based Strategy Creation

WEEK 10

IN-ORGANIC GROWTH: MERGERS AND

ACQUISITIONS

The Popularity of Merger and Acquisition

Strategies

➢Merger and acquisition (M&A) strategies have been popular for many years.

➢M&A strategies: ➢Are being used with greater frequencies in many

regions of the world today ➢Are used to try to create more value for all firm

stakeholders ➢Are challenging to effectively implement

GSK https://www.nature.com/art

icles/35002148

Mergers, Acquisitions, and Takeovers: What

Are the Differences?

• A merger is a strategy through which two firms agree to integrate

their operations on a relatively coequal basis.

• An acquisition is a strategy through which one firm buys a

controlling, or 100 percent, interest in another firm with the intent of

making the acquired firm a subsidiary business within its portfolio.

• After the acquisition is completed, the management of the acquired firm

reports to the management of the acquiring firm.

• A takeover is a special type of acquisition where the target firm

does not solicit the acquiring firm’s bid; thus, takeovers are

unfriendly acquisitions.

• Acquisitions are more common that mergers and takeovers.

Reasons for Acquisitions

• Firms use acquisition strategies to:

• Increase market power

• Overcome entry barriers

• Avoid the costs of developing new

products and Reduce the risk of entering

a new business

• Become more diversified

• Reshape their competitive scope by

developing a different portfolio of

businesses

• Enhance their learning as the foundation

for developing new capabilities

Deloitte acquires Bistech,

Toyota acquires

Revolution Software Services

Increased Market Power (1/3)

• Market power exists when either:

• A firm is able to sell its goods or services above competitive levels.

• The costs of a firm’s primary or support activities are lower than those of

its competitors.

• Market power is usually derived from:

• The size of the firm

• The quality of the resources it uses to compete

• Its share of the market(s) in which it competes

• Greater market power through buying a competitor, a supplier, a

distributor, or a business in a highly related industry so that a core

competence can be used

Porter 5 Forces!!

Amaysim acquires OVO (mobile virtual network operator)

Adds 77000 subscriber

Vodafone acquires

TPG

Increased Market Power (2/3)

• To increase market power, firms use:

• Horizontal acquisitions

• Vertical acquisitions

• Related acquisitions

• These three types of acquisitions are subject to regulatory review by

the government.

Horizontal Acquisitions

• The acquisition of a company competing in the same industry as the

acquiring firm is a horizontal acquisition.

• Horizontal acquisitions:

• Increase a firm’s market power by exploiting cost-based and revenue-

based synergies

• Result in higher performance when the firms have similar characteristics

Increased Market Power (3/3)

Vertical Acquisitions

• A vertical acquisition refers to a firm acquiring a supplier or

distributor of one or more of its products.

• Through a vertical acquisition, the newly formed firm controls

additional parts of the value chain, which leads to increased market

power.

Related Acquisitions

• Acquiring a firm in a highly related industry is called a related

acquisition.

• Through a related acquisition, firms seek to create value through the

synergy that can be generated by integrating resources and

capabilities.

Overcoming Entry Barriers

• Barriers to entry are factors associated with a market, or the firms

currently operating in it, that increase the expense and difficulty new

firms encounter when trying to enter a particular market.

• Examples: Economies of scale and customer loyalty

• The higher the barriers to entry, the greater the probability that a firm

will acquire an existing firm to overcome them.

Cross-Border Acquisitions

• Acquisitions made between companies with headquarters in

different countries are called cross-border acquisitions.

• Cross-border acquisitions can be difficult to implement due to

various obstacles and differences in foreign cultures.

BAT acquired

Reynold American (2016)

Cost of New Product Development

and Increased Speed to Market (1/2)

Internal product development is often perceived as

a high-risk activity. Many firms are not able to achieve adequate returns

compared to the amount of capital they invest to

develop and commercialize the product.

Quick entry is a key if opportunity is perishable

Astrazeneca acquired Alexion Pharma (rare diseases drugs)

for $39bn

Cost of New Product Development

and Increased Speed to Market (2/2)

• An acquisition strategy allows a firm to gain

access to new products and to current products

that are new to it.

• Compared with internal product development

processes, acquisitions provide:

• More predictable returns

• This is because the performance of the acquired firm’s products

can be assessed prior to completing the acquisition.

• Faster market entry

Increased Diversification

• It is relatively uncommon for a firm to develop new

products internally to diversify its product lines.

• It is difficult for companies to develop products that differ from

the current lines for markets in which they lack experience.

• Acquisition strategies can be used to support the use of

both related and unrelated diversification strategies.

• The more related the acquired firm is to the acquiring firm, the

greater is the probability that the acquisition will be successful.

• Thus, horizontal acquisitions and related acquisitions tend to

contribute more to the firm’s strategic competitiveness than do

acquisitions of companies operating in product markets that differ

from those in which the acquiring firm competes.

Reshaping the Firm’s Competitive Scope

• To reduce the negative effect of an intense

rivalry on financial performance, firms may use

acquisitions to lessen their product and/or

market dependencies.

• Reducing a company’s dependence on specific

products or markets shapes the firm’s competitive

scope.

Problems in Achieving Acquisition Success

• The difficulty of INTEGRATION

• Incorrectly EVALUATION

• DEBT loads

• Overestimating synergy potential

• Too much diversification

Integration Difficulties

• Resistance because of cultural clashes and organizational politics

• Meld two or more unique corporate cultures

• Link different financial and information control systems

• Build effective working relationships (particularly when management

styles differ)

• Determine the leadership structure and those who will fill it for the

integrated firm

Inadequate Evaluation of Target

• Due diligence is a process through which a potential

acquirer evaluates a target firm for acquisition. • Financing for the intended transaction

• Tax consequences of the transaction

• Actions that would be necessary to successfully meld the two

workforces

• When conducting due diligence, companies almost

always work with intermediaries, such as a large

investment bank, to facilitate their due-diligence efforts.

• Due diligence should:

• Accuracy of the financial position of the target

• Strategic fit between the two companies

• Commonly, firms are willing to pay a premium to acquire

a company they believe will increase their ability to earn

above-average returns.

Inadequate Evaluation of Target

Large or Extraordinary Debt

• Large or extraordinary debt can result from:

• Bidding wars

• Paying a large premium

• Executives sometimes pay a large premium because they

are influenced by:

• Hubris - excessive pride

• Escalation of commitment to complete a particular transaction

• Self-interest

Inability to Achieve Synergy

• Synergy exists when the value created by units working together

exceeds the value that those units could create working

independently.

• Synergy is created by:

• The efficiencies derived from economies of scale

• The efficiencies derived from economies of scope

• Sharing resources (e.g., human capital and knowledge) across the

businesses in the newly created firm’s portfolio

Too Much Diversification

• Lack of experience/learning curve

• Overdiversification can negatively affect a firm’s overall

performance.

• The scope created by additional amounts of diversification often

causes managers to rely on financial, rather than strategic,

controls to evaluate business units’ performance.

• Using financial controls causes managers to focus on generating

short-term profits at the expense of long-term investments.

• Costs associated with acquisitions may result in fewer

allocations to activities that are linked to internal innovation.

Reasons for Acquisitions

and Problems in Achieving Success

Effective Acquisitions

• Firms have complementary resources, foundation for developing new

capabilities.

• The acquisition is friendly, thereby facilitating integration of the firm’s

resources.

• Purchase on the basis of due-diligence process.

• Rationalization to maintain a low or moderate level of debt by

downsizing or Downscoping

• R&D and innovation are emphasized in the new firm.

Attributes of Successful Acquisitions

Attributes Results

1. Assets or resources that are

complementary

1. High probability of synergy and

competitive advantage

2. Faster and more effective integration

and possibly lower premiums

2. Acquisition is friendly

3. Ddue diligence to select target firms

and evaluate the firm’s health

(financial, cultural, and human

resources)

3. Firms with strongest

complementarities are acquired and

overpayment is avoided

Attributes Results

4. Financing (debt or equity) is easier

and less costly to obtain

4. Acquiring firm has financial slack

(cash or a favorable debt position)

5. Merged firm maintains low to

moderate debt position

5. Lower financing cost, lower risk

(e.g., of bankruptcy), and avoidance

of trade-offs that are associated

with high debt

6. Acquiring firm maintains long-term

competitive advantage in markets

6. Acquiring firm has a sustained and

consistent emphasis on R&D and

innovation

7. Acquiring firm manages change

well and is flexible and adaptable

7. Faster and more effective

integration facilitates achievement

of synergy

Attributes of Successful Acquisitions

Restructuring – Retrenchment Strategy

• Restructuring is a strategy through which a firm changes its set of

businesses or its financial structure.

• Commonly, firms focus on fewer products and markets following

restructuring.

• Restructuring strategies are:

• Generally used to deal with acquisitions that are not reaching

expectations

• Sometimes used because of changes detected in the external

environment by the firm

• Firms use three types of restructuring strategies:

1. Downsizing

2. Downscoping

3. Leveraged buyouts

Downsizing

• Reduction in the number of a firm’s employees, in the

number of its operating units.

• Strategy to adjust firm size, not necessarily a sign of

decline.

• Intentional managerial strategy for improving firm performance.

• Rationalizing resources to retain and resources to eliminate.

• Organizational decline is an unintentional outcome of what turned

out to be a firm’s ineffective competitive actions.

• With organizational decline, firms lose access to an array of resources,

many of which are critical to current and future performance.

Downscoping

• Downscoping refers to divestiture, spin-off, or

some other means of eliminating businesses

that are unrelated to a firm’s core businesses.

• Downscoping:

• more positive effect on firm performance than does

downsizing

• Causes firms to refocus on their core business

• Is often used with downsizing simultaneously

Restructuring and Outcomes

Thank you