M
A
R
C
U
S
5-2
5
MERGERS,
ACQUISITIONS
AND
DIVESTITURES
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5-3
Chapter Learning Objectives




Understanding the difference between business and
corporate strategy.
Being cognizant of the different forms of firm organization
including horizontal and vertical integration.
Being aware of the reasons there has been so much
merger, acquisition, and divestiture activity.
Understanding the motivations for this activity, the
outcomes of this activity, and what can be learned from it.
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Chapter Learning Objectives
(Continued)



Realizing how such factors as deregulation have speeded
up the pace of this activity.
Becoming acquainted with portfolio management
techniques such as the BCG matrix and the GE/McKinsey
model.
Examining vertical integration.
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Firm Options to Expand or
Narrow Scope




It can do so through internal ventures and
development
It can partner with and form alliances with
other firms, for example, by means of joint
ventures
It can acquire or merge with other firms that
have the resources, capabilities, and
competencies it needs
It can eliminate some areas by divesting,
liquidating, selling, or disposing of them
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5-6
Ex. 5.1
Expanding the Scope of the Firm:
Five Choices
Horizontal
Dominant Product
MOVES
Related Product
Vertical
Conglomerate
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5-7
Ex. 5.2
The Main Tasks of Corporate
Strategy
Determine the scope of the firm.
Decide what business or businesses to be in.
* Should the portfolio be broad or narrow?
Horizontal, dominant product, related product, vertical, or
conglomerate
* What merger, acquisition, and divestiture (MAD) strategy
should be adopted?
Create cohesiveness and direction among the
assembled pieces.
Allocate resources to the different businesses
Help formulate their business strategies
Coordinate their activities
Control their performance
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Motivations Behind M&As

To expand

To avoid or halt decline

To cut costs

To bring about turnarounds
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Motivations Behind M&As
(Continued)

To gain access to products and
technologies

To gain production or distribution
capabilities

To increase earnings per share
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5-10
Ex. 5.5
Railroad Industry’s Major Players,
1999
Company
Burlington Northern Santa Fe
Union Pacific
CSX
Norfolk Southern
Canadian National
Total Track
Routes (miles)
Revenues
($ billions)
33,500
33,400
23,000
21,600
17,000
9.1
10.2*
6.6*
5.2
3.6
* Union Pacific and CSX have nonrail subsidiaries that contribute to revenues
Source: H. Sun, “The Sources of Railroad Merger Games,” The Transportation Journal 39,, no. 4.
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5-11
Ex. 5.6
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Banking Industry Deposits (in $
billions)
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Why Do M&As Fail?
Price too high
Products or services less than expected
Lack of marketing leverage
Few benefits for the overlapping of core
competencies
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Why Do M&As Fail?
(Continued)
Cultural problems
Unfriendly mergers and acquisitions
Failure to retain key personnel
Failure to achieve a turnaround
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Key Issues For an Acquisition
to Succeed
1. Does the acquirer’s management team know enough
about the acquired company’s businesses to completely
run them?
2. Are the businesses of the acquired company more
attractive than the businesses in which the acquiring
company is engaged?
3. Are the costs of entry so high that they will destroy the
added income the acquiring company hopes to gain?
4. Is it possible to establish synergies between the new
and old businesses?
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Sources of Synergy
1. Sharing of tangible resources (research
labs, distribution systems) across multiple
businesses
2. Sharing of intangible resources (brands,
technology) across multiple businesses
3. Transferring functional capabilities
(marketing, product development) across
multiple businesses
4. Applying general management capabilities
to multiple businesses
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Ex. 5.8 Top Management’s Role: Theory
and Practice
In Theory
In Practice
Creates value
Acquires new businesses
Restructures inefficiently
managed businesses
Transfers skills and
capabilities to divisions
Establishes linkages
Determines logic of
integration
Is often in conflict with divisions
over strategic and operational
issues
May try to impose
uniformity despite
advantages of differences
May be pushed to limit by
complex systems for
managing interrelationships
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Management’s Corporate Strategy
Roles
1.
2.
3.
4.
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Expansion
The M-Form
Portfolio Management
Contraction
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5-18
Ex. 5.9
SWOT Analysis
External
Opportunities and Threats
High
STARS
hold and increase
QUESTION
MARKS
Selectively hold and
increase
CASH COWS
DOGS
hold and maintain
harvest and divest
Low
High
Low
Internal
Strengths and Weaknesses
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Ex. 5.10
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GE/McKinsey Model: Evaluation
Criteria
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Ex. 5.11 Vertical Integration: Entertainment
Industry
Content
Distribution
Resources Creation
Delivery
Actors
Writers
Broadcast TV networks Local affiliates
Cable TV networks
Local cable cos.
Movie distribution
Local theaters
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TV production
Movie production
Retail
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Ex. 5.12 Vertical Integration at Disney
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