Mergers & Acquisitions Flashcards
What are 3 Strategy Options for Growth?
Diversification
Internationalisation
Innovation.
What are the Strategy Methods to Obtain Growth?
Organic Development
Mergers & Acquisitions
Strategic Alliances
What is Organic Development?
Develops organisations own capabilities.
DIY method.
Advantages of Organic Development:
- Knowledge & learning enhanced.
- Spreading investment over time, easier to finance.
- No availability constraints, no need to for suitable acquisition targets.
- Strategic independence, less need to compromises or accept strategic constraints.
- Culture management, new activities with less risk of culture clash.
Disadvantages of Organic Development:
- Slow
- Expensive
- Risky
What are Mergers & Acquisitions?
Concerned with the combination of 2 or more organisations.
Acquisition = takeover by purchasing majority shares of a company.
A merger is bringing together 2 previously separate companies of similar size.
What are the Different Types of Acquisitions?
“Friendly” Acquisition -
Targets management recommend accepting acquirers deal.
“Hostile” Acquisition -
Targets management oppose acquirer, appealing directly to shareholders.
What is the Motivation for M&A’s
Strategic Motives
Financial Motives
Managerial Motives
Motives not always business related. Many fail to deliver on objectives. Often mix of motives.
What are Strategic Motives?
- Extension –
Expand geographic reach of firm, product, markets (e.g. Walmart’s takeover of Asda). - Consolidation –
Increase scale, efficiency, and market power (e.g. M&A in the car industry and airline industry). - Resources & Capabilities –
Enhance resources and capabilities (e.g. Disney acquisition of Pixar = access to creative and animation tech resources and capabilities.
What are Financial Motives?
- Financial Efficiency – Cash rich company acquire/merge with company with weak balance sheet (high debt).
- Tax Efficiency –
Reduce combined tax burden, may be prevented by legal restrictions (e.g. Pfizer proposed deal with Allergan). - Asset Stripping and Unbundling –
Selling business units of acquired company to maximise asset value.
Also called bargain hunting.
What are Managerial Motives Serving in the Interest of Managers?
- Personal ambition –
Financial incentives tied to SR growth, boosting personal reputations, giving positions of greater importance to friend (loyalty). - Bandwagon effects –
Managers branded as conservative if M&A trend isn’t followed, shareholder pressure to merge or acquire, company may become takeover target.
What are Risks of M&A’s?
- Overpayment
- Synergies oversold
- Acquired firm not completely understood
- Integration and culture clash
- Management hubris
What is the Acquisition Process?
Target Choice –> (due diligence)
Negotiations –> (due diligence)
Completion & Change of Ownership
Integration –>
Results.
What Occurs During the Target Choice of the Acquisition Process?
Structured investigation of target firm regarding fit & reliability of financial and legal info.
What is the Criteria for the Target Choice of the Acquisition Process?
Strategic Fit -
Does firm strengthen acquiring firms strategy? Easy to overestimate potential synergy.
Organisational Fit -
Match between management/cultural practices and staff characteristics?
What Occurs During the Negotiation Stage of the Acquisition Process?
Price and T&Cs need to be agreed in M&A.
Pay too little unsuccessful.
Pay too much, unlikely to make profit, “winners curse”.
May have to pay “premium for control”, above market value.
Vicious cycle of overvaluation, overpaying firms cut back on investment to boost SR profits.
What is the Criteria for Integration of the Acquisition Process?
Extent of strategic interdependence –
Need for transfer/sharing of capabilities, resources & knowledge.
Need for organisational autonomy –
Distinctiveness of acquired company can be either and advantage or problematic.
What are the Approaches for the Integration Stage of the Acquisition Process?
Absorption
Preservation
Symbiosis
Intensive Care
Reorientation
Cross-border integration especially complex given local differences.
What is Absorption as One of the Integration Approaches for the Acquisition Process?
Target company has strong strategic interdependence, little need for organisational autonomy. Rapid adjustment, change CEO.
What is Preservation as One of the Integration Approaches for the Acquisition Process?
Target company has little interdependence and high need for autonomy. Old strategies/culture continues, CEO retained.
What is Symbiosis as One of the Integration Approaches for the Acquisition Process?
Target firm has strong strategic interdependence but needs high autonomy. Both firms adopt best qualities from each other. CEOs often retained.
What is Intensive Care as One of the Integration Approaches for the Acquisition Process?
Little gain through integration.
Acquired company is in poor financial health.
Rapid remedial action required.
Situation severe enough, CEO replaced.
What is Reorientation as One of the Integration Approaches for the Acquisition Process?
Acquired company in good health & well run, but needs to integrate central administration and align marketing/sales functions. New top manage brought in.
What Happens with M&A’s Over Time?
Rarely one-off events, firms may undertake an “acquisition programme”.
Serial Acquirers -
Multiple acquisitions (e.g. Interbrew became global player “ANheuser-busch InBev”.
Divestment/Divesture -
Selling business that no longer fits corporate strategy.
