***Integration processes***
M&A
Topics covered by the lesson:
• Corporate level strategy
• Mergers and acquisitions
• Joint venture & strategic alliance
Key Concepts and Skills
• Be able to define the various terms associated with M&A
activity
• Understand the various reasons for mergers & acquisitions
Introduction
• M&A activity has increased substantially since the mid-1960s
• The increased takeover activity that started in the 1980s due to the
global changes: increase in foreign competition, major changes in
certain industries and deregulation that brought about a need for a
change in the way companies did business
• https://www.youtube.com/watch?v=cT1Rjzs5Ul8
4
Examples…
Integration & organisation
Taking part
in
integrations
External
design
element
Organizational
change caused by
integration
6
The Strategic Management Process
External
Analysis
Mission
Strategic
Choice
Objectives
Strategy
Implementation
Competitive
Advantage
Which Businesses
to Enter?
Internal
Analysis
Corporate Level
Strategy
• Vertical Integration
• Diversification
Mode of Entry?
• Strategic Alliances
• Mergers & Acquisitions
• Corporate-level Strategy
– Specifies actions a firm takes to gain a competitive
advantage by selecting and managing a group of different
businesses competing in different product markets
• Expected to help firm earn above-average returns
• Value ultimately determined by degree to which “the businesses
in the portfolio are worth more under the management of the
company then they would be under any other ownership
8
Corporate level strategy types
1.
Stability strategy or stable growth – status quo if the company is satisfied
2.
Growth
- Concentration on a single product or service – internal growth
- Horizontal integration
Growth strategies in
- Vertical integration
action result with
- Concentric diversification
- Conglomerate diversification
integration processes
Retrenchment - Turnaround
- Divestment
- Liquidation
Combination – pursuing several corporate level strategies
3.
4.
with past performance and plans to continue on the same track
GROWTH
Corporate level strategy-explained
• Horizontal integration
- Growth trough the acquisition of one or more similar firms
operating at the same stage of the production chain (i.e., the
same industry), competitors
ADV:
- Eliminate competitors and provide the acquiring firm access to
new markets (possible monopoly??) - expl. MOL-Tifon in the oil
industry
- Economies of scale and increasing efficiency of capital use
- Moderately increased risk as the success of the expansion usually
depends upon proven abilities
RISK: Increased commitment to one type of business
GROWTH
Corporate level strategy-explained
• Vertical integration
- Growth trough acquiring firms that supply original firm with inputs
or are customers for its outputs
- Backward – move into supplying products and services used in
production
- Forward – move towards distribution of own products
- Reasons: decreasing dependability of the supply or to take
control over sales or distribution channels
Raw
material
Intermediate
Manufacturer
Assembly
Distribution
Retail
GROWTH
Vertical and horizontal integrations
Textile producer
Textile producer
Shirt manufacturer
Shirt manufacturer
Clothing store
Clothing store
Acquisition or merger of competing businesses – HORIZONTAL integration
Acquisition or merger of suppliers or customer businesses –VERTICAL integration
Vertical integration
Value is added by:
- production cost savings (production processes carried out in
quick succession)
- avoidance of market costs (no buying/selling costs)
- better quality control
- protection of proprietary technology
Disadvantages:
- cost disadvantages (commitment to certain supplier or
retailer)
- technological change
- demand uncertainty
GROWTH
• Concentric diversification
–
departure from firm’s existing base of operations, typically
by acquisition of a separate business with synergic
possibilities counterbalancing the strengths and
weaknesses of the two businesses – example Head
- products and services added must lie within
organization’s know how, experience in technology,
distribution channels or customer base
- Difference among horizontal integration and concentric
diversification – horizontal integration aims at
competitors
15
16
GROWTH
• Conglomerate diversification
- Growth pattern based on the most promising and profitable
opportunity available (little attention given to creating productmarket synergy with the existing businesses).
- Reasons: balance in portfolio, better access to capital, synergy
- Possible forms: product conglomerate, geographical conglomerate,
pure conglomerate
• Combination strategies
strategies
–
pursuing several corporate level
- can be used in simultaneous or sequential form
Simultaneous: retrenching in certain areas or products while
pursuing in other areas or products
Sequential: using a turnaround strategy and then employing
growth strategy when conditions improve
RETRENCHMENT
Retrenchment strategy - used to reduce the diversity or the overall
size of the operations; often used in order to cut costs with the aim of
becoming a more stable business
• Turnaround – an attempt to improve efficiency during a
decline by cost or asset reduction (change management, cut
capital expenditures, centralized decision making, reduced
advertising, selling off assets, rethinking firm’s products lines
and customer groups etc.)
• Divestment – company sells a piece of itself to another
company or setting it up as a separate corporation
• Liquidation – business is terminated and assets are sold off
- last resort strategy
Mergers & Acquisitions Defined
Mergers
Methods used for
previously mentioned
growth strategies
Two firms are combined
on a relatively co-equal
basis creating a third
company
A+B=C
Acquisitions
One firm buys another
firm and controls other
company
A+B=A+B; A; or B
NOTE:
These words are often used interchangeably even
though they mean something very different
Basic Facts – Mergers
• Generally friendly
• Entirely new firm is created from combination of existing
firms
• Parent stocks are usually retired and new stock issued
• One of the parents usually emerges as the dominant
management
• Require the approval of both management teams/boards
before the stockholders vote.
Basic facts - Acquisitions
• A firm can be acquired by another firm or individual(s) by
purchasing voting shares of the firm’s stock (can be a controlling
share, a majority, or all of the target firm’s stock)
• Tender offer – public offer to buy shares (possibly hostile?)
• Stock acquisition
– No stockholder vote required
– Can deal directly with stockholders, even if management is unfriendly
– May be delayed if some target shareholders hold out for more money –
complete absorption requires a merger
•
Classifications
–
–
–
Horizontal – both firms are in the same industry
Vertical – firms are in different stages of the production process
Conglomerate – firms are unrelated
Reasons for M&A
• Synergies
– Combined performance is expected to be better than the sum of the separate
performances
– Usually cost saving or marketing opportunities
• Growth
– External growth through acquisition is faster than internal growth
• Diversification to Reduce Risk
– Collection of diverse businesses less risky than a single line
– Variations in different business lines offset each other
• Economies of Scale
• Guaranteed Sources and Markets
• Acquiring Assets Cheaply
Carrying out mergers and acquisitions:
- Can be carried out in friendly or a hostile environment
- Friendly M or A when stockholders and management of both
organizations agree that the combination will be good for both
organizations, and they work together to ensure its success
- Takeover (hostile M or A) when organization that is to be acquired
(target firm) resists the attempt
A target's management may resist a takeover because:
- Acquiring firm offered too low a price for the stock
- Target’s management often loses jobs, power, and influence
• Some factors to avoid in order to ensure a successful
M or A:
- Paying too much
- Marring disparate corporate cultures
- Counting on key managers staying
- Assuming a boom market won’t crash
- Swallowing to large company
Joint ventures
- Separate corporate entity jointly owned by two or
more organizations
- One organizational form for achieving
organizational objectives that neither organization
could normally attain acting alone
- Reasons for entering joint ventures: formal restrictions,
economies of scale, risk sharing, access to resources
Strategic Alliances
• Partnerships that exist for a defined time period during
which partners contribute their skills and expertise to a
cooperative project
• usually not equal position among partners
Acquisition
Joint Venture
Strategic
Alliance
Allows 100% control
No need for interfirm
consensus
Less flexible
Larger commitment of
resources
Greater risk
May cause conflicts of
corporate culture
Requires combining IS
Affords cost cutting
possibilities
Can be used to correct
previous errors in strategy
selection
Firms intersect over narrow,
well-defined segments
Exploit distinctive
opportunities
Usually involves only two
firms
Enables joint production of a
single product
Combines known resources
Can be used to avoid risks in
merger transaction
Tensions: Each firm seeks to
learn as much possible but
not to convey too much
Useful for creating complex
systems among multiple
firms
Partners usually larger than
in joint venture
Allows firms to focus on fewer
core competencies
Difficult to measure
contribution of participants
Limited time duration
Active participation of senior
managers
Substitute for governmentprohibited, cross-border
mergers
Homework – M&A vocabulary???
• Golden parachute
• Poison put
• Crown jewel
• White knight
• Shark repellent
• Bear hug