Chapter 12 - Mergers, acquisitions and alliances Flashcards
Organic developement
is where a strategy is pursued by building on, and developing, an organisation’s own capabilities.
Five prinicipal advantages to relying on organinc developement:
* Knowledge and learning. Using organisations existing capabilities to pursue a new strategy → enhance organisational knowledge and learning
* ** Spreading investment over time.** Organic development allows the spreading of investment over the whole timespan of the strategy’s development.
* No availability constraints. Organic development has the advantage of not being dependent on the availability of suitable acquisition targets or alliance partners.
* Strategic independence. independence for organic development → an organisation doesn’t have to compromise as might be necessary if it made an alliance with a partner organisation.
* Culture management. Organic development allows new activities to be created in the existing cultural environment.
Acquisition
achieved by purchasing a majority of shares in a target company.
In acquisition (takeover), an acquirer takes control of another company through share purchase.
Two types of acquisitions
* Friendly acquisitions - Target’s firm’s management recommends accepting the deal to its shareholders.
* Hostile acquisitions - Target management refuses the acquirer’s offer. The acquirer appeals directly to the target’s shareholders for ownership of their shares.
Merger
combination of two previously separate organisations in order to form a new company.
Merger partners are often of similar size, with expectations of broadly equal status
In practice, the terms ‘merger’ and ‘acquisition’ are often used in the same way = M&A
M&A contexts
M&A are embedded in historical, geographic and organisational contexts.
Historical M&A context
M&A have shown a cyclical quality, high peaks and deep valleys. Even in bad times, multiple M&A deals happen, it’s an important and constant way in which businesses adjust to changing contexts.
M&A cycles are linked to:
* changes in the global economy
* Influence by new regulations, availability of finance, stock market performance, technological disturbances and supply of available target firms.
Geographical M&A context
Global activity in mergers has traditionally been dominated by North America and Western Europe.
- Approximately ⅓ of all M&A are cross border, M&A continues to spread into new geographies. Many national governance systems put barriers in the way, especially for hostile acquisitions.
- Majority of M&A are within national boundaries
Organisational M&A context
M&A is generally talked about as one company taking over another which is engaged in a wide range of other activities that might also include other acquisitions and alliances.
Strategic motives for M&A
Strategic motives can be categorised in three ways:
* Extension - M&A can be used to extend the reach of a firm in terms of geography, products or markets
* Consolidation. M&A can be used to consolidate the competitors in an industry. Bringing together two competitors increase market power by reducing competition, higher prices, efficiency by sharing resources or scale of production.
* Resources and capabilities. To increase an acquirer’s resources and capabilities. Instead of researching new technologies from scratch, take over start-ups to incorporate the technological capability within their own portfolio.
Acquisitions also enable an acquirer to deploy its own capabilities and resources to a greater extent.
Financial motives for M&A
Financial motives concern the optimal use of financial resources, not only improving the actual business. Three main financial motives:
- Financial efficiency. An acquirer with a strong balance sheet (plenty of cash) may help improve a highly indebted target company (weak balance sheet). Target company saves on interest payments by using the acquirer’s assets to pay off its debt, get investment funds that otherwise would be hard to get. Acquirer gets a good price in acquiring the weaker company.
- Tax efficiency. Tax advantages from bringing together different companies. Ex. profits or tax losses may be transferable within the combined organisation in order to benefit from different tax regimes between industries or countries. called ‘tax inversion’
- Asset stripping or unbundling. By spotting other companies whose underlying assets are worth more than the price of the company as a whole.
Managerial motives for M&A
As for diversification, M&A sometimes serve managers’ more than shareholders’ interests. ‘Managerial’ motives are therefore self-serving rather than efficiency-driven. M&A may serve managerial self-interest for two reasons:
- Personal ambition - Can fro example be explained by: Senior managers’ personal financial incentives, larger acquisitions attract media attention and that acquisitions provide opportunities to spread greater responsibility (nepotism)
- Bandwagon effects, acquisitions are highly cyclical.
M&A processes
Acquisitions are a process that elapses over time and is not just a simple transaction. Each step in the process imposes different tasks on managers.
Four key steps:
* growth strategy
* target investigations and choice,
* bid negotiation
* integration.
Growth strategy
A lot of work before embarking on an M&A transaction.
Strategy of the acquirer is driving the wish to make an acquisition, NOT an attractive looking deal is driving the strategy.
Important for the acquirer to ensure that it has the necessary resources and capabilities to finance and manage the acquisition. Consider the levels of stakeholder support.
Target investigations and choice in M&A
There is a lot of work when selecting and evaluating possible acquisition targets. e.g. BM assessed 500 different potential acquisitions targets to get 50 software acquisitions, get the best ones.
Two criteria to apply in the search process:
* Strategic fit. The extent to which the target firm strengthens or complements the acquiring firm’s strategy. Original strategic motives for the acquisition: extension, consolidation and capabilities.
* Organisational fit. Match between the management practices and routines, cultural practices and staff characteristics between the target and the acquiring firms.
Strategic and organisational fit can be used to create a list according to which potential acquisition targets can be ruled in or ruled out.
Negotiation in M&A
The negotiation process in M&A is critical to the outcome of friendly deals.
- If top management cannot agree because the price or terms and conditions are unacceptable, or they cannot agree on who will run the combined organisation post-deal, the transaction will not take place.
- If the price offered to the target is too little, the bid will be unsuccessful. Senior managers will lose credibility and wasted management time. Pay too much, the acquisition will unlikely reach profit net of the original acquisition price.
Integration in M&A
To extract value from an acquisition depends critically on how it is integrated with the acquirer. Integration is challenging because of problems of organisational fit.
Two key criteria for successful integration:
* The extent of strategic interdependence
* The need for organisational autonomy
