Chapter 10
Studying Mergers and
Acquisitions
OBJECTIVES
1
Explain the motivations behind acquisitions and
show how they’ve changed over time
2
Explain why mergers and acquisitions are important
vehicles of corporate strategy
3
Identify the various types of acquisitions
4
Understand how the pricing of acquisitions affects
the realization of synergies
5
Outline the alternative ways to integrate acquisition
and explain the implementation process
6
Discuss the characteristics of acquisitions in
different industry contexts
1
THE eBAY-PAYPAL ACQUISITION
The partnership made sense …
… but would it work?
 Rely on transaction-based
Can we recoup the $250 million
premium we paid with savings
and revenue growth?
revenue
 No inventory or warehousing
 No sales force
2
THE eBAY-PAYPAL BUSINESS MODELS
eBay business model
PayPal business model
eBay
Seller
Contract and
payment occur
between buyer
and seller
eBay revenue comes from
sellers paying auction
posting fees
PayPal
Buyer
Payer
Payee
PayPal’s revenue comes
from float in the personal
accounts and fees for premier and business accounts
3
MERGER VS. ACQUISITION
A
B
C
The consolidation
or combination
of one firm with
another
Merger
A
B
A
The purchase of
one firm by another
so that ownership
transfers
Acquisition
The “merger”
of Daimler with Chrysler
in 1997 is considered by many
to have been an acquisition
in disguise
4
MOTIVES FOR MERGERS AND ACQUISITIONS
Managerial self-interest
Hubris
Synergy
Sometimes termed
“Managerialism”, manager
can conceivably make
acquisitions-and even
willingly overpay for them-to
maximize their own
interests at the expense of
shareholder wealth
Managers may make mistaken valuation and have
unwarranted confidence in
their valuation and in their
ability to create value
because of pride, overconfidence, or arrogance
Managers may believe that
the value of the firms
combined can be greater
than the sum of the two
independently
• Reduced threats
• Increased market power
•
•
•
and access
Realized cost savings
Increased financial
strength
Sharing and leveraging
capabilities
5
M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND
M&A and the Strategy Diamond
While mergers and acquisition are
explicitly vehicles of strategy, they
have major implications for arenas
staging, and economic logic as well
Staging
Arenas
Economic
logic
Vehicles
Differentiators
Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59
6
US ACQUISITION ACTIVITY
Value of transactions ($, 2003)
Number of transactions
Value of transactions
($, 2003)
$2,000,000
No. of transactions
12,000
$1,800,000
10,000
$1,600,000
8,000
$1,400,000
$1,200,000
6,000
$1,000,000
4,000
$800,000
$600,000
2,000
$400,000
0
$200,000
1990 91
92
93
94
95
96
Source: Data compiled from SDC Platinum, a product of Thompson Financial
97
98
99 2000 01
02 2003
7
UPs AND DOWNs AT SNAPPLE
In 1972, brothers-inlaw Leonard Marsh
and Hyman Golden
and Arnold Greenberg,
Marsh’s childhood
friend, founded a
business called the
Unadulterated Food
Corporation and began
selling juice in Queens.
The name Snapple
1`
was coined while trying
to develop an apple
soda. In 1987, Snapple
introduced iced teas
with fun names and
flavors and enlisted (2)
controversial radio
personalities, Howard
Stern and Rush
Limbaugh, to promote
them
After sizzling success,
Snapple is sold to Quaker
for $1.8 billion
1972
1994
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?
1997
2000
Fewer than three years later, Quaker
throws in the towel and sells Snapple
for $300 million to Triarc
8
BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT
• Move expensive
• Inherit adjunct businesses
• Cannot spread commitment over several
years (one-time, all-or-nothing decision)
• Potential for organizational conflict
• Speed
• Critical Mass
• Access to complementary assets
• Reduced competition
9
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
37%
9%
36%
Percent of
all M&A
deals
1%
Source: J.L. bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101
4%
10
PRICING MERGERS AND ACQUISITIONS
Market value
Intrinsic value
Target value
Synergy value
Current market
capitalization of firm (i.e.,
what stock market believe
company is worth )
Market value of two firms
combined with synergies
taken into account
Fundamental value of
cash flows
Fundamental value of
cash flows of two firms
with synergies taken into
account
11
PREMIUMS
Percent of market value
145
15
~ 30 - 45%
100
130
Market
value
Average premiums in US range:
30 - 45%
Acquisition
price
12
THE SYNERGY TRAP
Acquisition premiums
Create two problems for managers
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
13
HOW WOULD YOU DO THAT? – PAYPAL ACQUISITION
eBay paid
a $250 million
premium for
PayPal, now
they must earn
that premium
back
Years until
synergies are
implemented
Cost of capital
10%
15%
20%
0
0.100
0.150
0.200
1
0.110
0.173
0.240
2
0.121
0.198
0.288
incremental net
income must you
generate if you
implement synergies
in two years?
3
0.133
0.228
0.346
• What if they take five
• “How much
years to implement?
4
0.146
0.262
0.415
5
0.161
0.302
0.498
14
PAYING TOO MUCH
“The market, like the Lord, helps
those who help themselves. But,
unlike the Lord, the market does not
forgive those who know not what
they do… (A) too-high purchase
price for the stock of an excellent
company can undo the effects of a
subsequent decade of favorable
business development “
15
THE ACQUISITION PROCESS
A process perspective
Results
Acquisition
integration
Justification
due diligence,
negotiation
Idea
Decision-making
process problems
Integration process problems
Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York
Free Press, 1991), 42
16
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
17
ABSORPTION
Need for strategic interdependence
Low
High
High
Preservation
Symbiosis
Low
Holding
Absorption
Need for
organizational
autonomy
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)
18
PRESERVATION
Need for strategic interdependence
Low
High
High
Preservation
Symbiosis
Low
Holding
Absorption
Need for
organizational
autonomy
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)
19
HOLDING
Need for strategic interdependence
Low
High
High
Preservation
Symbiosis
Low
Holding
Absorption
Need for
organizational
autonomy
The acquiring company allows little autonomy - yet does
not integrate the target into its businesses (e.g., Bank
One’s acquisitions of local banks )
20
SYMBIOSIS
Need for strategic interdependence
Low
High
High
Preservation
Symbiosis
Low
Holding
Absorption
Need for
organizational
autonomy
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)
21
SYMBIOSIS
Need for strategic interdependence
Low
High
High
Preservation
Symbiosis
Low
Holding
Absorption
Need for
organizational
autonomy
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)
22
KEY LESSONS FOR IMPLEMENTING M & As
It’s a continual process, not an event
Start the integration process long before the deal is closed
Integration management is a full-time job
Many successful acquirers appoint an “integration manager” because
integration 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
23
M&As AND INDUSTRY LIFE CYCLE
Introduction
M&As tend to be
R&D and productrelated
Growth
M&As tend to be for
acquiring products
that are proven and
gaining acceptance
Maturity
M&As primarily for
dealing with over
capacity in the
industry
24
M&As IN DYNAMIC CONTEXTS
Technological
change
Cisco and Microsoft both use acquisitions to ensure
they maintain their strong competitive positions
Demographic
change
When the Tribune Company merged with Times-Mirror in 2000,
it acquired Spanish-language “Hoy” to target the growing U.S
Hispanic market
Geopolitical
change
IBM divested its PC division to a Chinese company as that
country emerges
Trade
liberalization
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
25
SUMMARY
1
Explain the motivations behind acquisitions and
show how they’ve changed over time
2
Explain why mergers and acquisitions are important
vehicles of corporate strategy
3
Identify the various types of acquisitions
4
Understand how the pricing of acquisitions affects
the realization of synergies
5
Outline the alternative ways to integrate acquisition
and explain the implementation process
6
Discuss the characteristics of acquisitions in
different industry contexts
26