Chapter 10 - Studying Mergers and Acquisitions docx

CLASSIFICATION OF ACQUISITIONS Overcapacity M&A Roll-up-M&A Product/ Market Extension M&A as R&D Industry Convergence Example DaimlerChrysler merger Service Corporation International

Chapter 10

Studying Mergers and Acquisitions

Understand how the pricing of acquisitions affects the realization of synergies

THE eBAY-PAYPAL ACQUISITION

The partnership made sense … … but would it work?

so that ownership transfers

willingly overpay for them-to

maximize their own

interests at the expense of

shareholder wealth

Managers may make taken valuation and have unwarranted confidence in their valuation and in their ability to create value

mis-because of pride, confidence, or arrogance

over-Managers may believe that the value of the firms

combined can be greater than the sum of the two independently

• Sharing and leveraging capabilities

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

Vehicles Staging

Differentiators

Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59

Value of transactions ($, 2003)

No of transactions

1972

1`

In 1972,

brothers-in-law Leonard Marsh

and Hyman Golden

and Arnold Greenberg,

The name Snapple

was coined while

trying to develop an

apple soda In 1987,

Snapple introduced

iced teas with fun

names and flavors and

Cadbury Schweppes buys Snapple from Triarc

for $1.45 billion Snapple is now part of the

very successful America’s Beverage division, which includes 7up, Dr Pepper, Mystic, and Mott’s juices, among other brands Has Snapple found its home?

Fewer than three years later, Quaker throws in the towel and sells Snapple

for $300 million to Triarc

UPs AND DOWNs AT SNAPPLE

After sizzling success, Snapple is sold to Quaker

for $1.8 billion

THE FLIP SIDE OF ACQUISTIONS

“…the sale preparation process rarely gets the same attention as the acquisition process.”

– McPhee and Heckler

• Inherit adjunct businesses

• Cannot spread commitment over several years (one-time, all-or-nothing decision)

• Potential for organizational conflict

CLASSIFICATION OF ACQUISITIONS

Overcapacity M&A Roll-up-M&A

Product/

Market Extension M&A as R&D Industry Convergence Example DaimlerChrysler

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

Objectives Eliminating

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

THE SYNERGY TRAP

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

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

ACQUISITION SCREENING

“Soft-fit” acquisition screening by Cisco systems

Screening criteria Means 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

Holding Absorption

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)

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)

Holding Absorption 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 )

Holding Absorption 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)

KEY LESSONS FOR IMPLEMENTING M & As

Integration management is a full-time job

Many successful acquirers appoint an “integration manager” becauseintegration 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

TIPS FROM PERRY AND HERD

Firms must study failed M&As as much as successes

DUE DILIGENCE PAYS

Penalties Due Diligence

M&As AND INDUSTRY LIFE CYCLE

Introduction

M&As tend to be R&D and product-related

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

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