International Strategy and
Organization
Internationalization through
Mergers and Acquisitions
0447092 ALVES, João
0447093 BORREGO DO VALE, João
0447094 LAGINHA, Luís
0447095 NUNES, Bruno
Overview - 1
Alliances vs. Acquisitions
 The Value of M&A Strategies
 Performance Implications of M&A
 Reasons for M&A
 Sustained Competitive Advantage
 Implications for Bidding Firm Managers
 Implications for Target Firm Managers

Overview - 2
Decision of Internationalization
 Entry Modes
 Problems in Entry Modes
 Performance of M&As
 Synergy Realization of M&As
 Case Study: “Mannesmann and
Vodafone: The unfriendly takeover”

Alliances vs. Acquisitions
Alliances allow simultaneous and fast
entering into multiple countries
 Objective: achieve complementary
capabilities or economies of scale
 Do not have high risks of failure and high
transaction costs

Alliances vs. Acquisitions
Acquisitions allow for a greater
rationalization than alliances
 In alliances all decisions must be made
by consensus among the partner firms
 Alliances are transient in nature and
must remain reversible

Alliances vs. Acquisitions
Alliances are inherently less efficient
than acquisitions
 Future alliances might be formed as a
first step toward a merger
 Alliances make it possible to avoid the
culture shock in the wake of an
acquisition

The Value of M&A Strategies

The unrelated case
NPV(A+B) = NPV(A) + NPV(B)
 P = NPV(A+B) – NPV(A)
 Only generates normal economic profit


The related case

NPV(A+B) > NPV(A) + NPV(B)
M&A: The Related Case

FTC Categories






Vertical Merger
Horizontal Merger
Product Extension Merger
Market Extension Merger
Conglomerate Merger
Lubatkin (1983):



Technical economies
Pecuniary economies
Diversification economies
M&A: The Related Case

Jensen and Ruback (1983):

To reduce production or distribution costs
1.
2.
3.
4.
5.
Through economies of scale
Through vertical integration
Through the adoption of more efficient
production or organizational technology
Through the increased utilization of the
bidder’s management team
Through a reduction of agency costs by
bringing organization-specific assets under
common ownership
M&A: The Related Case

Jensen and Ruback (1983) (cont.):

Financial motivations
1.
2.
3.
4.


To gain access to underutilized tax shields
To avoid bankruptcy costs
To increase leverage opportunities
To gain other tax advantages
To gain market power in product markets
To eliminate inefficient target management
Performance Implications of M&A
The more strategically related bidding
and target firms are, the more economic
value M&A create
 Economic value appropriated by the
owners of the target firm
 Why do managers of bidding firms
continue to engage in M&A strategies?

Reasons for M&A
Ensuring survival
 Free cash flow
 Agency problems
 Managerial hubris
 The potential for above-normal profits

Sustained Competitive Advantage

To generate above-normal profits
Valuable, rare, and private synergies
between bidding and target firms
 Valuable, rare, and costly-to-imitate
synergies between bidding and target firms
 Unexpected valuable synergies between
bidding and target firms

Implications for Bidding Firm
Managers
Search for valuable and rare synergies
 Keep information away from other
bidders
 Keep information away from targets
 Avoid winning bidding wars
 Close the deal quickly

Implications for Target Firm
Managers
Seek information from bidders
 Invite other bidders to join the bidding
competition
 Delay but do not stop the acquisition

Decision of Internationalization

Knowledge Clusters
Interrelated groups of firms
 Technology leading firms
 Highly skilled labor
 In urban areas or regions nearby


Incentives to not enter into
Knowledge Spillovers
 Locals may imitate know-how

Entry modes

3 Entry Type Modes
Greenfield Investment
 Joint Venture
 Acquisition


Greenfield Investment (79%)
Acquisition (15%)
 Joint Venture (6%)

Assets

Acquisition
Problem if acquired have a high ratio of
undesired resources
 Advantage to ‘plug into’ a local firm


Greenfield Investment


Gradually develop its own network
Joint Ventures

Only have access to selected assets
Problems in Entry Modes
Assets
 Absorptive Capacity
 Social Entry Barriers
 Local Labor Market
 Institutions and Membership

Problem of Absorptive Capacity
Entry Mode
Advantages
Slow and expensive communication
process
Greenfield
Investment
Joint Venture
Disadvantages
May fail to build own code books
Access to local 'interpreter'
Internal communication problems
Risk of imitation by partner firm
Acquisition

Acquisition of code books
Long process of constructing code books
 ‘Interpreter’ for the firm
 Transfer knowledge from local do global
 Preferred should be Acquisition
Problem of Social Entry Barriers
Entry Mode
Greenfield
Investment
Joint Venture
Acquisition
Advantages
Disadvantages
Lower social entry barriers through
signaling commitment
Slow and expensive trust-building
process
May remain an outsider
Lowering social barriers through
preserving local 'flavor'
Access to indirect networks
through local partner firm
Acquisition of direct networks
Hostile acquisitions may raise social
entry barriers
Acquisition of indirect networks
through employees' social
relations
Direct networks may dissolve after
acquisitions
Employees key to indirect networks
may leave after acquisition
Local Labor Market
Entry Mode
Greenfield
Investment
Joint Venture
Acquisition
Advantages
Disadvantages
Less insecure hiring process
Slow hiring process
Access to partner firms' labor
Scale problems
Acquisition of labor
Knowledgeable employees may
leave after acquisition
Condemned by local firms – firms should avoid
the raise social barriers
 Personnel may want to quit after acquisition
 Joint Venture may be more costly than
acquisition

Institutions and Membership
Entry Mode
Advantages
Disadvantages
Slow and expensive process of
becoming a member
Greenfield
Investment
Joint Venture
Access to membership through
local partner firm
Risk of partner firm appropriating
benefits
Acquisition
Acquisition of membership through
employees
Employees key to membership may
leave after acquisition

Specialized firms and educations and research
institutions
 Creation of shared codebooks
 Same problem as in the social entry barriers
Performance of M&As
Strategic Management
 Economics
 Finance
 Organizational Research
 Human Resources Management

Synergy Realization of M&As
M&As success is calibrated by the degree
of synergy realization

Combination potential

Organizational integration

Lack of employee resistance
Achieving Synergies through
Combination Potential
“Economies of sameness” – similar operations
 “Economies of fitness” – different, but
complementary operations


Operational synergies
 Administration synergies
 Managerial synergies
 Financial synergies
Achieving Synergies through
Organizational Integration

Degree of interaction (the greater it is, the
greater the degree of synergy realization)
 Coordinative effort to improve the quality of
interaction (with special integrators, transition
teams and preplanning

Little, or poorly executed, interaction and
coordination are unlikely to produce
substantial joint benefits
Employee resistance, undermining
synergy realization

M&As affect career plans
 M&As create appearance of psychological
problems such as:



“We versus they” antagonism
Condescending attitudes
Distrust, Tension and Hostility

Grave cultural problems

Occur more with similarities in operations than
in differences
Other important factors of synergy
realization

Management style similarity



Cross-border Combination



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Attenuates employee resistance
Cushions the degree of change and enhances cooperation
Impede the interaction and coordination because of country
differences
Culture clashes promoting employee resistance
May speed new markets access and promote globalization
synergies
Relative Size


Insufficient managerial attention to smaller targets
Positively associated Organizational integration
Case Study
Mannesmann and Vodafone – The
Unfriendly Takeover
 Vodafone – focus on providing mobile
telephone services
 Mannesmann – aimed to become the
European leader in integrated
telecommunications

Main objectives
Achieving a bigger scale that would
stimulate cost reduction
 Achieving technological leadership
 Achieving a significant presence in
continental Europe

The takeover - 1
Vodafone’s expansion focused
exclusively on mobile communications
 Acquiring Mannesmann would give a
quick access to the German
telecommunication market and foster the
fast growing strategy

The takeover - 2
Friendly start – Vodafone starts
negotiating with Mannesmann
 Defensive Tactics – Mannesmann
acquisition of Orange
 Vodafone’s response

The takeover - 3

The final bid

53.7 Vodafone shares for each
Mannesmann share (266.40 € each; total of
120 billion €)
Synergy effects
Customer base from 28 million to 59
million
 Enhancement of logistics, marketing
strategy, brand awareness and
technological capacity and capabilities
 Product development, based on
technological innovation became the
watchword

Questions and Considerations
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