Merger & Acquisition Strategy (Chapter 7) Flashcards
What are the 8 merger & acquisition strategies?
- Merger
- Acquisition
- Takeover
- Divestment
- Restructuring
- Downsizing
- Downscoping
- Leveraged Buyout
What is a merger?
A strategy through which two firms agree to integrate their operations on a relatively coequal basis. (Examples: Orange & T- Mobile merger in the UK; Kraft and Heinz merger).
What is an acquisition?
A strategy through which one firm buys a controlling, or 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. (Unilever’s acquisition of Seventh Generation)
What is a takeover?
A special type of acquisition wherein the target firm does not solicit the acquiring firm’s bid; thus takeovers are unfriendly acquisitions. (Comcast attempted a takeover of Disney in 2004 and failed; Billionaire-Investor Carl Icahn attempted takeover of Dell in 2013 and failed: Kraft succeeded to take over UK’s Cadbury in 2010).
What are the strategic reasons for acquisitions?
- To reduce the number of competitors in a mature, highly fragmented or struggling industry (Air Canada tried to acquire Air Transat in 2020; Telus acquired Public Mobile, T- Mobile acquired Sprint in 2020)
→ Antitrust laws can prevent acquisitions from going through
→ When M&As become a trend in a fragmented industry, this leads to industry consolidation - Geographic expansion and overcoming entry barriers (Quebec’s Couche-Tard acquired Norway’s Stateoil who also had presence in Eastern Europe)
- Reduction of cost and risk of new product development (acquisition as a substitute for R&D: Apple’s acquisition of AuthenTec, Google’s acquisition of Android in 2005 for $50M)
- Increased speed to market (Walmart’s acquisition of Kosmix to speed up entry into Social E-Commerce)
__________
- Executing backward or forward integration strategy (acquiring a supplier or a buyer, Delta Airline acquired oil refinery)
- Diversification into new products or markets (Amazon’s acquisition of Whole Foods to enter physical grocery retail)
- Pursuit of multipoint competition (acquisitions by Energizer and Rayovac of razor companies to compete against Gillette who previously acquired Duracell)
- Bring necessary human resources and expertise in the company (Walmart’s acquisition of Jet.com to bring a former Amazon’s executive on board)
Strategic reasons behind an acquisition determine what Management needs to focus on post-acquisition to gain expected results and synergies.
What are antitrust laws?
The Government can intervene by blocking an acquisition or a merger if it is judged as damaging to fair competition and puts consumers at a disadvantage.
- In 2020, European commission banned the acquisition of Air Transat by Air Canada, stating that it would give Air Canada too much market power and would hurt competition.
- AT&T tried to acquire T-Mobile USA in 2011 but the deal was banned by the U.S. government as disadvantageous to consumers. (If the deal went through, AT&T would control 3⁄4 of the mobile market in the U.S.)
- Microsoft tried to acquire Yahoo to gain market power over Google in search but the U.S. Government blocked the acquisition.
3 Out of 4 Acquisitions Fail to Achieve Their Financial and Strategic Objectives!
What are common reasons why antitrust laws are applied/violated during acquisitions? (Just read this slide)
- # 1 Reason - Integration difficulties:
→ Clash of organizational cultures
→ Key strategic people leaving the acquired company
→ Lowered morale due to layoffs and imposed changes
→ Human politics interfering with effective cost cuts (wrong plants shutting down)
- Overpaying for acquisition creates large or extraordinary debt that is not justified by returns
- Misjudging potential synergies (often because of insufficient “due diligence” prior to acquisition)
- A company becomes too large to manage effectively
What are the 5 integration strategies?
- Absorption: high degree of change in the acquired company + low degree of change in the acquiring company
- Preservation: low degree of change in the acquired company + low degree of change in the acquiring company
- Transformation: high degree of change in the acquired company + high degree of change in the acquiring company
- Reverse Takeover: low degree of change in the acquired company + high degree of change in the acquiring company
- Best of Both: medium degree of change in both companies
When does preservation work best?
Works best when:
- both companies own different and independent parts of a supply chain
- both contribute different competencies
- the acquirer is a holding company and is diversifying its portfolio
Amazon’s acquisition of Zappos shoes LVMH’s acquisition of Christian Dior
What is absorption and when does it work best?
Buyer replaces the acquired company’s management, imposed acquiring company’s systems and standards
Works best when:
- The acquirer doesn’t buy the brains of a company but rather its products and brands
- When you don’t need the top management to stay, you are buying assets more than people or systems
Apple’s acquisition of Authentec
What is the ‘Best of Both’ and when does it work best?
Buy but consider it a merger of equals. Look for best practices in each company, create a new hybrid company.
Works best when:
- You are buying complementary skills
- You need their people or systems
- The overlap in products/services isn’t too large
Heinz acquisition of Kraft (Heinz owns 51% of “Kraft Heinz”)
What is a transformation?
Use the acquisition as a lever to reinvent both companies, both companies come together with different strategies, structures etc.
Dell’s acquisition of EMC (cloud storage company) to accomplish Dell’s turn around
What is a reverse takeover?
Buy but let the management of the acquired company run the show. It will work if the acquired company is bigger and more experienced, so they should be put in charge.
Rare, but can be seen in some cross-border acquisitions: an acquirer from a developing country buys a target in the U.S. or Europe.
This approach can also be used if an acquiring company is seeking to transition away from its core industry through acquisition.
What does post-acquisition drift/post-merger drift mean? (Just read this slide)
See illustration
What is restructuring and its strategies?
A strategy through which a firm changes its set of business or its financial structure
Downsizing–reduction in the number of a firm’s employees and, sometimes, in a number of its operating units, but it may or may not change the composition of businesses in the company’s portfolio.
Downscoping—divestiture, spin-off or some other means of eliminating businesses that are unrelated to a firm’s core business. EBay span off PayPal in 2015 to focus on being an e-commerce marketplace.
Leveraged Buyouts–a restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private. (Dell in 2013 successful, Playboy magazine in 2011 - successful, BCE in 2008 - failed).
