Merger and Acquisition Strategies Flashcards
merger
A strategy through which two firms agree to integrate their operations on a relatively coequal basis.
Examples: Orange & TMobile merger in the UK; Kraft and Heinz merger).
what are some synergies of mergers
can remove duplications to cut costs
a joint customer base means more market power
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
example: Unilever’s acquisition of Seventh Generation)
takeover
A special type of acquisition wherein the target firm does not solicit the acquiring firm’s bid; thus takeovers are unfriendly acquisitions
examples: 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 some strategic reasons for acquisitions? (8)
1.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)
• Anti-trust 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)
what determines what management needs to focus on post-acquisition to gain expected results and synergies?
strategic reasons behind an acquisition
What are some anti-trust laws? and what are they?
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 ¾ 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.
What is the number 1 reason that acquisitions fail to achieve their financial and strategic objectives?
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 (ex. wrong plants shutting down because an executive has a friend that runs the less efficient one)
What are some other common reasons for acquisition failures?
- 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 change in acquired company, low change in acquiring company)
- Preservation (low change in acquired company, low change in acquiring company)
- Transformation (high change in acquired company, high change in acquiring company)
- Reverse takeover (low change in acquired company, high change in acquiring company)
- Best of both (middle change for acquiring and acquired companies)
Preservation Strategy
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
Examples:
- Amazon’s acquisition of Zappos shoes
- LVMH’s acquisition of Christian Dior
Absorption
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
Examples:
-Apple’s acquisition of Authentec
Best of Both
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
Example::
Heinz acquisition of Kraft (Heinz owns 51% of “Kraft
Heinz”)
Transformation
Use the acquisition as a lever to reinvent both companies, both companies come together with different strategies, structures etc.
Example:
Dell’s acquisition of EMC (cloud storage company)
to accomplish Dell’s turn around
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.
