Ch.12 Mergers, Acquisitions and Alliances Flashcards
Name the three strategy methods/options.
Organic development, Merger & Acquisitions, Strategic alliances
What is Organic development?
Organic development is a strategy pursued by building upon and enhancing an organization’s own resources and
capabilities.
An example of organic development is McLaren’s launch of the Artura, its first series production hybrid. This new car was not an adaptation but a completely new design, highlighting McLaren’s decision to rely on internal resources for
its development.
What are the five advantages of organic development?
- Knowledge and Learning: Direct involvement in a new market or technology promotes the acquisition and internalization of deep organizational knowledge and learning vs hands-off strategic alliance.
- Spreading Investment Over Time: Unlike acquisitions which require immediate upfront payments, organic growth
allows for investments to be distributed over time, offering flexibility. Easier to reverse or adjust a strategy if conditions change. - No Availability Constraints: This approach isn’t dependent on the availability of acquisition targets or potential alliance partners.
- Strategic Independence: Organic growth allows for strategic autonomy without the need for compromises, as might be necessary in alliances.
- Culture Management: Relying on internal development reduces the risk of cultural clashes that might occur in external growth options.
Organic development: What are the limitations?
Despite its advantages, organic development can be slow, costly, and risky.
It might not always be suitable for significant leaps in innovation, diversification, or internationalization.
Organic development: What is Corporate Entrepreneurship?
Corporate entrepreneurship represents significant change within a business, mainly driven by the organization’s internal capabilities.
It merges the concepts of ‘entrepreneurship’ and ‘corporate’, emphasizing that significant change or novelty can arise from within a corporate structure. McLaren’s creation of the Artura is an example, marking its entry into the plug-in hybrid supercar market.
This concept fosters a creative mindset within the organization. However, sometimes, businesses need to seek external methods to realize their strategies, leading to mergers, acquisitions, and strategic alliances.
Define Mergers & Acquisitions.
In an acquisition, one company (the acquirer) takes control of another (the target) by buying a majority of its shares.
Acquisitions can be friendly (endorsed by the target’s management) or hostile (opposed by the target’s
management).
Mergers, on the other hand, involve two companies combining to form a new one, often with partners of roughly equivalent size.
The terms “merger” and “acquisition” are often used interchangeably.
M&A isn’t exclusive to the private sector; it can also occur in public and non-profit sectors. For example, UK local councils have been urged to merge for greater efficiency.
What are the three M&A contexts? Give a brief explanation of each.
Historical Context: M&A has shown a cyclical pattern since the late 19th century. 2021 was a peak year with
deals totaling $5.1 trillion, influenced by various factors, including global economic shifts, regulations, technological disruptions, and managerial optimism or pessimism.
Geographical Context: Historically, North America and Western Europe have dominated global M&A activity. China has also been active, aiming to access Western markets and technologies. While many M&A deals cross borders, national governance can pose challenges.
Organisational Context: The nature of M&A is often a larger company acquiring a smaller one. However,
sometimes the roles are reversed. M&A isn’t just about one company taking over another; it can involve a larger entity with multiple ongoing strategic initiatives.
Name the three motives for M&A strategies.
Strategic Motives: These involve enhancing the competitive edge of a company. The main categories are extension (reaching new geographies or markets), consolidation (reducing competition), and acquiring new resources and capabilities (like technology).
Financial Motives: These are related to the optimal utilization of financial resources. They include achieving financial efficiency, benefiting from tax structures, and asset stripping or unbundling.
Managerial Motives: At times, M&A may benefit managers more than shareholders. Personal ambitions or desires to follow trends (Bandwagon effects) can drive these motives.
What are the two initial steps of the M&A process? Describe them briefly.
Growth strategy: Before any M&A activity, a company needs to ensure that the acquisition aligns with its growth strategy. This involves ensuring resources, capabilities, and stakeholder support are in place. Expert external
help, like investment banks, lawyers, and accountants, can be valuable.
Target investigations and choice in M&A: Companies often review multiple potential acquisition targets before deciding on one. Two primary criteria for selecting targets are strategic fit (how well the target aligns with the acquirer’s strategy. Realtes to the orgiginal strategic motives for the acquisition: extension, consolidation and
capabilities. Danger: potential synergies in M&A exaggerated to justify high acquisition prices 9.3) and
organisational fit (how well the companies’ cultures and operations align. Mismatch → integration problems). Due diligence, a comprehensive target review, is vital to avoid post-acquisition issues.
What are the two steps of the acquisition process?
Negotiation and Integration
Describe the Negotiation process in M&A.
A critical step where the acquirer and the target negotiate terms and conditions, including
the acquisition price. Price determination often involves various valuation methods (DCF, asset valuation and shareholder value analysis ch. 13). The price usually includes a “premium for control” above the target’s market
value.
Acquisitions are liable to the winner’s curse - to win - paid to much that can never be earned back.
Vicious circe of overvaluation, cut down on things that made up the strategic value of target company
Describe the Integration process in M&A. What are the two key criteria for choosing the right approach?
Integration in M&A: Post-acquisition, the integration process begins, which can be challenging due to
organisational differences.
Most suitable approach to integration depend on 2 key criteria:
The extent of strategic interdependence: The need for the transfer or sharing of capabilities or resources.
Significant transfer or sharing through tight integration enable the creation of value from the acquisition, but some acquisitions ofc capture value purely through the ownership of assets.
The need for organisational autonomy: Acquired firm can have a very distinct culture or geographically
distant which makes integration problematic. In some circumstances, it is the distinctiveness of the
acquired organisation that is valuable to the acquirer - here best to learn the distinct culture than risk
spoiling it.
Integration process in M&A: What are the five integration approaches based on the two key criteria; Extent of strategic interdependence & Need for organisational autonomy? (Post-acquisition integration matrix)
- Absorption: Preferred where: High level of strategic interdependence is necessary and little need for
organisational autonomy. Appoint new top manager to manage org differently. - Preservation: Acquired company well runt but not compatible with acquirer. High need for autonomy and low need for integration - found in conglomerate deals. Retain the incumbent top manager.
- Symbiosis: Strong need for interdependence, but also high requirement for autonomy. Implies: both
acquired firm and acquirer learn the best qualities from the other. Retain incumbent top manger first before bringing in new top manager to make bigger changes. - Intensive care: Little to be gained by integration. Acquired company in poor financial health, Company will not be integrated to avoid contamination.
- Reorientation acquisitions: Acquired company in good health and well run but need to integrate administrative areas and align marketing. In order to drive through changes quickly a new top manager is brought in to run acquired firm.
How can M&A strategy change over time?
Companies often engage in multiple acquisitions over time, making them “serial acquirers.” Repeat acquisitions offer companies the chance to refine and improve their M&A strategies.
In-house M&A functions can help streamline and improve the acquisition process. These functions can provide strategic insights, technical execution capabilities, and support for specific transactions.
Sometimes, a previously acquired business may no longer fit a company’s strategy, leading to divestiture (or divestment), it getting sold. Divestitures can be seen as a way to refine a company’s portfolio, but they can also
result from regulatory pressures.
What are strategic alliances?
Strategic alliances involve collaboration between organizations with either partial changes in ownership or no
ownership changes at all.
(Strategic Alliance:) They allow organizations to share resources and pursue a common strategy. They may be part of large networks or ecosystems.
Alliance strategy challenges the traditional organization-centric approach, emphasizing the collective success of networks rather than individual organizations.
Strategic alliances: What are Collective strategy and Collaborative advantage?
Collective strategy: about how the whole network of alliances compete against rival network of alliances. It
challenges ti individualistic approach to strategy by highlighting the importance of effective collaboration. Thus, success involves collaborating as well as competing.
Collaborative advantage: about managing alliances better than competitors.
What are the two types of Strategic alliances?
- Equity Alliances:
Creation of a new entity jointly owned by the partners.
Common forms include joint ventures and consortium alliances.
Example: Mount Sinai Health System and RenalytixAI’s joint venture, Kantaro Biosciences, for COVID-19 antibody testing. - Non-Equity Alliances:
Looser alliances without ownership commitment.
Often based on contracts, such as franchising, licensing, and long-term subcontracting.
Example: McDonald’s and Subway’s franchising model.
What are the four motives for alliances?
Strategic alliances allows for org to extend its strategic advantage fast, and require less commitment than other forms of expansion.
Key motivators: sharing resources/activities, entering new markets, gaining knowledge, reducing risk.
- Scale Alliances: Combine to achieve scale for economies in output and input, and shared risk.
- Access Alliances: Ally to access capabilities of another organization, such as distribution channels or knowledge.
Ex a Western company (A) in China (local distributor B) - Complementary Alliances: Combine distinctive resources to bolster each partner’s gaps or weaknesses. Ex.
Nissan-Renault alliance - Collusive Alliances: Secret collaborations to increase market power, often illegal.
What are the five stages of strategic alliance processes?
- Courtship: Initial process of finding potential partners.
- Negotiation: Define mutual roles, ownership proportions, profit share, and managerial responsibilities.
- Start-up: Initial operation, test of alliance agreements, and beginning of day-to-day collaboration.
- Maintenance: Ongoing operation of the alliance, with adjustments for external and internal changes.
- Termination: End of the alliance, which can be amicable, extended, or result in a buyout.
What are the two key themes in Alliance processes?
Co-evolution: Alliances change over time, requiring flexibility and adaptability. Need realignment → evolve in harmony.
Trust: Vital for the success of alliances, involving expectations of non-opportunistic behavior and confidence in a partner’s reliability.
What is the Buy, Ally or DIY scenario?
A significant number of M&A and strategic alliances fail due to various reasons, such as miscalculations in
strategic and organisational fit and trust issues.
Acquisitions can go wrong: excessive initial valuations, exaggerated expectations of strategic fit, underestimated problems of organisational fit etc.
Alliances: miscalculations on strategic and organisational fit, lack on control on either side → issues of trust
and co-evaluation.
Given the high failure rates, it’s essential to weigh the options of acquisitions, alliances, or organic development
(do-it-yourself or DIY).
Buy, Ally or DIY: What are the three decision criteria?
- Urgency: Acquisitions offer rapid strategic pursuit, followed by alliances, while organic development is typically the slowest. Acquisitions are a rapid method for pursuing a strategy, ex Google expanded rapidly through many acquisitions.
- Uncertainty: Alliances are preferable in high uncertainty scenarios, offering shared risks and the potential for
future acquisition. - Type of Resources and Capabilities: Acquisitions work best for tangible (hard) resources like physical assets. Organic methods are often most effective for intangible assets (soft resources) like people or culture, while
alliances can bridge gaps in both.
M&A and Alliances: What are the four key success factors?
Strategic fit, Organisational fit, Valuation, Distinct management issues
