Mergers & Acquisitions and Alliances Flashcards
What is the point of M&A and Alliances?
Enables businesses to develop and grow through three methods of development:
1) Organic (based on internal resources)
2) Mergers and acquisitions
3) Strategic alliances.
What are the Key success factors for M&A and Aliiances?
- Strategic fit
- Organisational fit
- Correct valuation
- Integration
- Co-evolution
- Appropriate exit strategies
What is organic development?
building on and developing an organisation’s own capabilities. This is the ‘do it yourself’ (DIY) method.
Adv/Dis-adv of Organic development method to grow a business
Advantages of organic development include:
* Knowledge and learning can be enhanced
* Spreading investment over time – easier to finance
* No availability constraints – no need to search for suitable partners or acquisition targets
* Strategic independence – less need to make compromises or accept strategic constraints
* Culture management – new activities with less risk of a culture clash
Disadvantages include:
* slow
* expensive
* risky
What kinds of acquisition can there be?
- ‘Friendly’ acquisitions are where the target’s management recommend accepting the acquirer’s deal
*‘Hostile’ acquisitions are where the target’s management oppose the acquirer’s offer. Here the acquirer appeals directly to the shareholders
How do you decide between whether to pursue Organic development, Strategic Alliance or an acquisition?
Three factors:
1) Urgency: organic development is usually slowest, alliances accelerate the process but acquisitions are often quickest.
2) Uncertainty: an alliance means risks and costs are shared and thus a failure means these costs are shared.
3) Type of resources and capabilities: acquisitions work best with ‘hard’ resources (e.g. production units) rather than ‘soft’ resources (e.g. people). Culture clash is the big issue.
Adv/Disadvantages of Strategic Alliances
Adv:
* Share risks
* More bargaining power to suppliers etc
* Partners may have something business is lacking/ enhance capabilities
Dis:
* Partners can be untrustworthy and act opporutnistically etc
* Companies dont evolve together as competition, strategies change
* Failure rates are high
Adv/Disadvantages of Acquiring a company
Adv:
* Increase market power
* Tax efficiency
* New product/services/ markets
* Enhancing resources and capabilities
Dis-adv:
* Overpay lead to winners curse where theres no net profit after acquisition
* Companies dont integrate well
* Demanding of a companies time and skills when trying to negotiate and integrate etc.
What types of motives are M&A driven by?
- Strategic
- Financial
- Managerial
Explain different types of strategic motivation in a M&A process
1) Extension: of the reach of a firm in terms of geography, products or markets. e.g. Walmart’s takeover of Asda
2) Consolidation: increasing scale, efficiency and market power e.g. M&A in the car industry and airline industry
3) Resources and Capabilities: enhancing resources and capabilities e.g. Disney acquisition of Pixar - access to creative and animation technology resources and capabilities.
Explain different types of financial motivation in a M&A process
1) Financial efficiency: a company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt)
2) Tax efficiency: reducing the combined tax burden – may be prevented by legal restrictions e.g. Pfizer proposed deal with Allergan
3) Asset stripping or unbundling: selling off business units of the acquired company to maximise asset values. This bargain hunting is sometimes termed ‘asset stripping’.
Explain different types of managerial motivation in a M&A process
1) Personal ambition: financial incentives tied to short-term growth or share price targets; boosting personal reputations; giving friends/colleagues greater responsibility or better jobs (for loyalty).
2) Bandwagon effects: managers may be branded as conservative if they don’t follow an M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target.
What are the risks for M&A?
1) overpayment
2) synergies oversold
3) don’t understand the acquired firm
4) integration and culture clash,
5) management hubris (managers thinking they can manage better than the current firm)
Describe the Acquisition process and explain the key criterias needed
1) Target choice:
* is the firm a good organisation fit (culture, management practices, staff characteristics)
* is the firm a good strategic fit (strengthen or complement the existing firm buying?)
2) Negotiations: agree on price and T&C’s, is there a big premium for control? (above market value to control)
3) Integration:
* Is there a a need for strategic interdependence – the need for transfer or sharing of capabilities and/or resources (knowledge transfer)
* is there a need for organisational autonomy – sometimes the distinctiveness of the acquired company can be an advantage, but sometimes it is problematic.
4) Results
What are the five types of integration that can be done after an M&A is complete?
1) Absorption
2) Preservation
3) Symbiosis
4) Intensive care
5) Reorientation acquisitions
Describe the Absorption process during integrating a company after M&A (Interdependence? Autonomy?)
- Strong need for interdependence (important knowledge needed from acquired company)
- little need for autonomy (happy to change values, strategies, culture and replace CEO)
Describe the Preservation process during integrating a company after M&A (Interdependence? Autonomy?)
- Little interdependence (dont need knowledge transfer)
- High need for autonomy (run by itself, same culture, strategies, CEO retained)
Describe the Symbiosis process during integrating a company after M&A (Interdependence? Autonomy?)
- Strong need for interdependence (important knowledge needed from acquired company)
- High need for autonomy (Keeps it culture, strategies and both companies learn from each other initially)
Describe the Intensive care process during integrating a company after M&A (Interdependence? Autonomy?)
- Little to be gained by integrating
- Rapid remedial action, CEO replaced if severe.
Describe the Reorientation Acquisitions process during integrating a company after M&A (Interdependence? Autonomy?)
- Need to integrate central admin and marketing/sales other than that few internal changes
- new top manager to run
Describe the post-acquisition integration matrix (in terms of knowledge transfer and autonomy)
Low knowledge & low autonomy = Intensive care
Low knowledge, high autonomy = Perservation
High knowledge, low autonomy = Absorption
High knowledge, high autonomy = Symbiosis
Whats a Strategic Alliance?
A strategic alliance is where two or more organisations share resources and activities to pursue a common strategy.
What do strategic alliances offer?
- Mutual gain
- Flexibility
- Risk sharing
Whats collective strategy?
how the whole network of alliances, of which an organisation is a member, competes against rival networks of alliances. e.g. in car industry, airline industry
