Week 5 - Mergers and Acquisitions Flashcards
What are 3 examples of Strategic Options and 3 Strategic Methods that arise from these?
Strategic Options:
- Diversification
- Internalisation.
- Innovation.
From these options, a firm can decide on a strategy method such as:
- Organic Development.
- Mergers and Acquisitions.
Strategic Alliances.
Therefore M&A is a strategic method that arises depending on which strategic option a firm chooses.
What is a Merger + example of merger + reference?
Merger = Combination of 2 previously separate organisations, typically as more or less equal partners.
Company A + Company B = Company C.
Example = Disney (characters and entertainment portfolio) + Pixar (tech. and creativity in production)
(HBR 2024).
What is an Acquisition + example + reference?
Acquisition = 1 firm taking over the ownership (‘equity’) of another, hence the alternative term ‘takeover’.
Company A + Company B = Company A.
Example = Vodafone acquiring Mannesmann for roughly $180bn.
(HBR 2024).
What are the different types of Motives for M&A?
- Financial.
- Strategic.
- Managerial.
What are the Financial Motives for M&A + examples?
Financial Motives =
- Tax Reasons (Burger King merger with Tim Hortons, so that BK could move its’ headquarters to Canada in order to pay less corporation tax).
- Acquire firm if it is undervalued in the market.
- Capital Restructuring (e.g. Man Utd owners bought the club to leverage assets - they took out large amounts of debt on the club’s assets to make the deal more affordable).
What are the Managerial Motives for M&A + example?
Financial Motives =
- To gain control, to build ego + Increase manager’s pay and profile.
- (E.g. Sports Direct acquiring House of Fraser when it was undervalued so financial, but also more importantly, Nike and Adidas who were refusing to supply Sports Direct so therefore Mike Ashley acquired one of their retailers to put more pressure on them to agree to Sports Direct’s prices).
What are the Strategic Motives for M&As + the different types of M&A?
Strategic Motives = To increase the profitability and successful of BOTH companies.
Different types of Strategic M&A:
- Horizontal M&A.
- Vertical M&A.
- Geographic M&A.
- Diversifying M&A.
What is a Horizontal M&A + example? (Strategic M&A).
Horizontal M&A:
- To increase market power (2 companies join to build power).
Example:
British Airways + Iberia = International Aviation group.
- BA = significant share and power of Heathrow.
- Iberia = Significant share over Madrid Airport.
Together = Significant power of 2 of Europe’s major airports and their links with other airports and airlines.
What is a Vertical M&A + example? (Strategic M&A)
Vertical M&A =
To gain control at either end of the product/service line - over suppliers or distributors .
Example: Tesco (largest grocery retailer) acquisition of Bookers (largest wholesaler of groceries in the UK).
Together = Economies of Scale for Tesco, guaranteed sales from Tesco to Bookers.
What is a Geographic M&A + example? (Strategic M&A).
Geographic M&A = Good geographic fit between the 2 firms.
Example:
- Kraft’s hostile acquisition of Cadbury’s (Cadbury’s has good international footprint that Kraft did not).
What is a Diversifying M&A + example? (Strategic M&A).
Diversifying M&A = To build market share in different areas, to spread risk, to expand to new markets.
Example: IBM between 2000 and 2011 completed 115 different M&As (1 of which was selling their computer hardware software to Lenovo to diversify into the software/PC industry).
What are the 2 types of ‘EDGE mindset’ for M&A? + reference.
- Journey EDGE
- Enterprise EDGE
(Lewis & McKone 2016).
What is the ‘Journey EDGE’ + example + reference?
‘Journey Edge’ = How will the deal contribute to the customer’s journey (e.g. complimentary products that add to the journey of using the other product).
(Lewis & McKone 2016).
Example: P&G + Gillette.
- P&G had the products such as the balms and creams in the women’s beauty and skincare market, whilst Gillette had the best razor blades in men’s shaving.
Result = Products such as creams and balms for Gillette men’s market
+ P&G can provide women with razor blades (Gillette Venus range).
What is the ‘Enterprise EDGE’ + example + reference?
‘Enterprise Edge’ = How is the deal using our foundational assets to create value in a different context?
(Lewis & McKone 2016).
Example = Juliet (Pharmaceutical Company) + Cell Design Labs.
‘Enterprise Edge’ = Common in Pharmaceutical Industry whereby one pharmaceutical company will buy another company that has developed a drug that is attractive or new within the industry to build a wider product portfolio, gain market share, build reputation, etc.
How are ‘Waves’ formed in the Number and Value of worldwide M&A deals? + examples.
Waves are caused by Economic fluctuations such as 2008/09 financial crisis.
- 2008/09 Financial Crisis - Number of acquisitions of remained stable but the value reduced – many acquisitions where firms were struggling and therefore acquired for less than market value. But also link to many banks reducing the loans they gave out (liquidity crisis) causing firms not getting the loans and money to make large acquisitions.
However, also during these periods there can be a few larger acquisitions by firms for managerial reasons (ego) - this causes a ‘wave’ of acquisitions and mergers from other firms to not fall behind the competition – ‘Mimetic deals’.
Waves are caused by ‘Mimetic Deals’.
What is an example of a large-scale M&A that happened when there was an economic downturn?
2007- Altria spin off of Phillip Morris Intl Inc. (Phillip Morris Tobacco Co. rebranded to Altria in 2003, and then in 2007 Altria “spun-off” Phillip Morris to create a separate independent firm (Phillip Morris) that Altria Group then offered the shares to their (Altria) shareholders for).
Reduction in overhead costs of at least $250 million when banks were loaning less therefore needed to raise capital and reduce costs, before financial crisis.
What is an example of a large unsuccessful M&A?
1999 - Vodafone acquired Mannesmann for $183bn (over spent by £28bn – Christopher Gent).
What is one of the main determinants for differences in the number of M&As that a country facilitates + example.
- Differences in Protectionist Policies.
E.g. UK and N.I. facilitates large number of M&As compared to low number for France.
This is because France has greater Protectionist Policies so the Government can prevent cross-border mergers and acquisitions to stay aligned with national interests – (E.g. France Gov. stopping Pepsi acquiring Danone (French Yoghurt Company) as Danone is seen as a ‘flower of French Industry’).
What do the stats show about acquiring during an Economic Downturn? + reference.
- An analysis of total shareholder returns among Fortune 1000 companies shows that companies making acquisitions totalling at least 10% of their market cap. (“active acquirers”) outperformed those that took a “wait and see” approach.
(EY Analysis).
What is the M&A process? + reference.
- Target Choice
- Negotiations.
- Integration
- Results.
- Between steps 1-2, due diligence occurs.
- Between steps 2-3, The change of ownership is completed.
(Johnson et al. 2017).
What are the 2 main criteria in Target Choice for M&A?
- Strategic Fit - Does the target firm strengthen or complement the acquiring firm’s strategy?
(Note: It is easy to over-estimate this potential synergy). - Organisational Fit - Is there a match between the management practices, cultural practices, and staff characteristics of the target and the acquiring firms?
What is the equation for working out ‘Premium’ when making a valuation for a M&A?
Premium =
Price Offered - Pre-Merger Target Price / Pre-Merger Target Price.
What the considerations for valuating a M&A?
- Offer the target too little = bid unsuccessful.
- Pay too much = acquisition unlikely to make a profit net of the original acquisition price (‘ the winner’s curse’).
- Acquirers do not simply pay the current market value of the target, but also pay a ‘premium for control’.
- If the firm is paying with stock or debt, the value of its own stock should be taken into account.
How can a company ensure they don’t experience ‘Post-Merger Syndrome’? + reference.
- Antecedents: M&A related features and events (such as communication and management behaviour).
- Intermediary Variable: Emotions.
- Outcome Variables: Employee attitudes and behaviour.
(Sinkovics et al. 2011).
What are the requirements of Warren Buffet when making a M&A deal/negotiation?
- Must be a large business. The exception is if the company will fit into one of Berkshire Hathaway’s existing businesses.
- The company’s earning power must be consistent. Berkshire doesn’t care about a company’s future projections.
- Good returns on equity with little or no debt. (Buffett hates excessive debt).
- A management team must be in place. Berkshire loves acquiring companies that are already being run by great managers.
- A simple business. Buffett wants to be able to clearly understand the businesses he owns. 6. An offering price. Buffett doesn’t want to negotiate if he doesn’t know how much the business owners want.
How can a CFO (Chief Financial Officer) help a firm to make a better deal? + reference.
- Generalist Skills
- Companies with generalist CFOs pay 9% lower premiums.
- Around 40% of CFOs have specialist backgrounds. - Independence
- Companies with independent CFOs pay 18% lower premiums.
- Less than 40% of CFOs are independent. - High Status
- Companies with high status CFOs pay 7% lower premiums.
- CFO compensation is, on average, less than 40% of the compensation of the CFO.
(Karaevli and Ozcan 2022).
How can companies improve the successfulness of their M&A by ‘giving’ as well as ‘taking’? + reference.
Companies that focus on what they are going to get from a M&A are less likely succeed than those on what they have to give.
Companies should:
- Be a smarter provider of growth capital.
- Provide better managerial oversight.
- Transfer valuable skills.
- Share valuable capabilities.
(Martin 2016).
How can a Manager or Employee survive the turmoil of a M&A?
How to ‘survive’ amid the turmoil:
- Assess the situation.
- Seize growth opportunities.
- Find your opening.
(Marks et al. 2017).
