M&A 4-1-07

M&A 4-1-07 - Diversification and Corporate Strategy...

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Unformatted text preview: Diversification and Corporate Strategy Four Main Tasks in Crafting Corporate Strategy A company is diversified when it is in two or more lines of business that operate in differing market environments Pick new industries to enter and decide on means of entry Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business Initiate actions to boost combined performance of the different businesses A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments Pursue opportunities to leverage crossbusiness value chain relationships and strategic fits into competitive advantage Establish investment priorities, steering resources into most attractive business units Strategies for Entering New Businesses Acquisition of an Existing Company Most popular approach to diversification Acquire existing company Advantages Quicker entry into target market Easier to hurdle certain entry barriers Internal start-up Acquiring technological know-how Establishing supplier relationships Becoming big enough to match rivals’ efficiency and costs Joint ventures/strategic partnerships Having to spend large sums on introductory advertising and promotion Securing adequate distribution access Internal Startup Joint Ventures and Strategic Partnerships An attractive way to enter a new business when Parent firm already has most of needed resources to build a new business Ample time exists to launch a new business from ground up Internal entry has lower costs than entry via acquisition New start-up does not have to go head-to-head against powerful rivals Additional capacity will not adversely impact supply-demand balance in industry Incumbents are slow in responding to new entry Good way to diversify when Uneconomical or risky to go it alone Pooling competencies of two partners provides more competitive strength Only way to gain entry into a desirable foreign market Foreign partners are needed to Surmount tariff barriers and import quotas Offer local knowledge about Market conditions Customs and cultural factors Customer buying habits Access to distribution outlets 1 Diversification is capable of Diversification increasing shareholder value if it passes 3 tests: Industry Attractiveness Test Evaluate the industry conditions (5 forces + complements) for the industries chosen for diversification. Cost of Entry Test Merger and Acquisitions Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Value created by diversification >> Costs of Entry Better-Off Test The new business unit must gain value from its link with the firm and vice versa. Mergers and Acquisitions •Acquisition •A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses •Takeover •An acquisition where the target firm did not solicit the bid of the acquiring firm 2005 record year for mergers -- over $1 trillion in mergers of US firms • the $ value was 50% greater in ‘05 than ‘04 • resulting firms were on a scale that is significantly larger • managers and regulators no longer perceive big biz as bad Competition now comes from multiple sources worldwide • M&A should be judged on a global market scale rather than just reviewing impact on local, regional or national markets • US firms must strengthen themselves so that they can • exploit new opportunities abroad • fend off foreign competitors in the US Reasons for Acquisitions Increased Market Power Increased Acquisition intended to reduce the competitive Acquisition balance of the industry Unable to exploit core competence because of size Unable Increase size often yields increase market power Increase Generally involve buying a supplier, competitor or Generally business in a highly related industry same industry -- horizontal acquisition same supplier of distributor -- vertical acquisition supplier related industry -- related acquisition related Reasons for significant merger activity... • Increase in US stock prices, increase their buying power • Cheap interest rates so debt financing is less of a burden • End of cold war • increased political stability • expanded capitalism -- new market opportunities • a global desire for a higher standard of living 2 To take advantage, US firms ……. • realize that fewer opportunities to increase profitability through reducing costs & layoffs • pursue acquisition strategies that will enable Them to achieve market power on a global scale Earnings Performance Value of Assets Management Team Strategic Considerations in M & A Regulatory Clearance $ $ $ $ $ $ $ $ 200 Billion 162 Billion 110 Billion 107 Billion 104 Billion 100 Billion 96 Billion 84 Billion Reasons for Acquisitions Capital Intensity Structuring the Merger Deal Overcome Barriers to Entry • Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive start- ups” Legal/Accounting Formalities Financing Physical • Although acquisition cost might be high, the acquiring firms gain • immediate market access • brand w/ access to existing distribution channels • brand loyalty Whirlpool buys Philips’ European appliance business Philips’ Postmerger Integration Procedural Commercial Banking Radio & TV Insurance Health Services Investment Banking Utilities Oil & Gas Refining Hotels & Casinos Product Line Market Position Price Negotiation Significant Merger Activity in the Last 5 Years Managerial Reasons for Acquisitions Viable strategy for entering int’l markets because… • may be fastest way to enter new markets • provide more control over foreign operations than do strategic alliances with a foreign partner • enable the acquiring firm to make changes in acquired firm’s operations • provide the acquirer with access to the resources and capabilities of the acquired firm Reasons for Acquisitions Lower Cost and Risk of New Product Development • Buying established businesses reduces risk of start-up startventures • New ventures require and avg of 8 yrs for profitability • 88% of innovations fail to achieve adequate returns on investment • 60% of all innovations are effectively imitated by competitors within 4 years of the time patent is obtained • Acquired firm has track record with est. sales vol. and customer base • Acquiring firm gains immediate market access Ford’s acquisition of Jaguar Ford’ 3 Reasons for Acquisitions Increased Speed to Market • Closely related to Barriers to Entry, allows market entry in a more timely fashion BMW’s acquisition of Rover BMW’ Avoiding Excessive Competition • Firms may acquire businesses in which competitive pressures are less intense than in their core business • Reduce their dependence on core markets where they were faced with intense foreign competition Reasons for Acquisitions Increased Speed to Market • Closely related to Barriers to Entry, allows market entry in a more timely fashion BMW’s acquisition of Rover BMW’ Avoiding Excessive Competition • Firms may acquire businesses in which competitive pressures are less intense than in their core business • Reduce their dependence on core markets where they were faced with intense foreign competition General Electric’s acquisition of NBC Electric’ General Electric’s acquisition of NBC Electric’ Reasons for Acquisitions Reasons for Acquisitions Diversification • Provide improved capacity utilization • Make better use of existing sales force • Reduce managerial staff • Gain economies of scale • Smooth out seasonal trends in sales • Gain access to new suppliers, distributors and creditors • Gain new technology • Reduce tax obligations Problems with Acquisitions Inability to Achieve Synergy • Justifying acquisitions can increase estimate of expected benefits • Private synergy -- benefit from merging the acquiring and target firms that is due to a unique resource or set of resources that are complimentary between two firms and not available among other potential bidders for that target firm • rare, misinterpret common synergies as private may explain why acquiring shareholders rarely receive significant positive returns Quick way to move into businesses when firm currently lacks experience and depth in industry gained popularity because allow rapid moves into related markets or to expand market power changes in court and regulatory interpretation and enforcement of of anti-trust laws antifirms must be careful when making acquisitions to diversify because…. because… horiz. acquisitions are more successful than diversifying horiz. acquisitions performance may often be more pronounced when the acquired firm operates in markets that are more diverse than those of the acquiring firm Problems with Acquisitions Overly Diversified • managerial expertise • type of diversification • top level managers emphasize the financial outcomes of strategic actions rather than appropriateness of the strategy itself • forces divisions or SBU managers to be s-t performance oriented • problem becomes more serious when managers compensation is tied to achieving s-t financial outcomes • l-t, risky investments (such as R&D) may be reduced to boost s-t returns • l-t performance deteriorates 4 Problems with Acquisitions Managers Overly Focused on Acquisitions Managers lose track of core business by spending so much effort on acquisitions Too Large Problems with Acquisitions Integration Difficulties • Differing cultures • Linking different financial and control systems • Building effective working relationships (esp. when management styles differ) Large bureaucracy reduced innovation and flexibility • Differing status of acquired and acquiring firms’ firms’ executives ….can make integration of firms difficult Problems with Acquisitions Inadequate evaluation of Target • “Winners Curse” bid causes acquirer to overpay for firm Curse” • Not thoroughly analyze the target firm failing to evaluate true market value • Managerial hubris • Shareholders of target firm must be convinced to sell • acquirer forced to pay premium Problems with Acquisitions Large or Extraordinary Debt • Costly debt can create onerous burden on cash outflows • If external conditions change, no cushion • Utilize junk bonds to finance acquisitions • Bidding war if more than one acquirer Characteristics of Effective Acquisitions Characteristics of Effective Acquisitions Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness • Low-to-Moderate Debt Low- to• Merged firm maintains financial flexibility Friendly Acquisitions Friendly deals make integration go more smoothly Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone • Flexibility • Has experience at managing change and is flexible and adaptable • Emphasize Innovation • Continue to invest in R&D as part of the firm’s firm’ overall strategy 5 Characteristics of Effective Acquisitions Characteristics of Effective Acquisitions • Target & acquirer have complimentary assets &/or resources which result in synergy and gaining competitive advantage • Maintain financial slack to make acquisition less costly and easier to obtain • Making friendly acquisitions to facilitate integration speed & effectiveness & lower acquisition premium • Maintain low to moderate debt position which lower costs & avoids the trade-offs of high debt & lowers risk of failure •Target selection & negotiation which result in selection of targets having resources & assets that are complimentary to acquiring firm’s core business • possessing flexibility to facilitate integration speed & achievement of synergy • Working relationships to facilitate integration speed & effectiveness • Continuing to invest in R&D & emphasize innovation to maintain competitive advantage Hostile Takeovers Generally anti-productive acquisitions because... • animosity between two top management teams • more key personnel may leave • remaining staff may resist changes necessary to successfully integrate the two firms Restructuring Activities Restructuring Activities Downsizing • Wholesale reduction of employees • Sometimes reduction of # of operating units • May or may not represent a change in the composition of the businesses in corporation’s portfolio corporation’ General Motors cuts 74,000 workers and closes 21 plants Relatively Unsuccessful • 89% of firms intended to reduce expenses but only 46% achieved the goal • 71% had a productivity goal but only 22% met this objective • 67% downsized to achieve competitive advantage but only 19% did Restructuring Activities Downsizing • Wholesale reduction of employees • Sometimes reduction of # of operating units • May or may not represent a change in the composition of the businesses in corporation’s portfolio corporation’ General Motors cuts 74,000 workers and closes 21 plants Relatively Unsuccessful • 89% of firms intended to reduce expenses but only 46% achieved the goal • 71% had a productivity goal but only 22% met this objective • 67% downsized to achieve competitive advantage but only 19% did Downscoping Reduce level of firm unrelatedness Selectively divesting or closing non-core businesses nonReducing scope of operations Leads to greater focus Break up of ATT into three businesses in 1995 1995 6 ...
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This note was uploaded on 04/04/2012 for the course BUSINESS 181 taught by Professor Dara during the Spring '07 term at uot.

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