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STRATEGIC METHOD: ORGANIC GROWTH, MERGERS, ACQUISITIONS AND ALLIANCES

ROBIN JOHN Department of Management

METHODS OF GROWTH

STRATEGY IMPLEMENTATION THROUGH: INTERNAL/ ORGANIC GROWTH ACQUISITIONS AND MERGERS JOINT VENTURES STRATEGIC ALLIANCES

Internal Development

Incremental, based on existing value chain

mainly used for product or market development

Retains control Allows retention of all gains Bears all financial risks Can take much longer than acquisition or alliance

Mergers and acquisitions (M&A)

Merger: creation of new firm from two or more independent organisations

usually consensual eg Asea Brown Boveri

Acquisition/takeover: purchase of one organisation by another

often implies target is unwilling eg Vodafone/Mannesmann

Difference between merger and acquisition merely semantic?

Mergers and Acquisitions

M & A tend to occur in cyclical waves historically reflecting business and stock market cycles NB changes in number and value Distinction between horizontal, diversificatory and vertical mergers & acquisitions Majority in any one year are domestic Increasing importance of large, cross border mergers & acquisitions do they present distinctively different business issues?

VOLUME OF CROSS-BORDER M & A

Source: Van Marrewijk (2005).

LARGEST MERGERS IN THE LAST TEN YEARS

Rankings are based on deal value at completion except for Gillette.

REASONS FOR MERGERS/ACQUISITIONS


Corporate growth; sales & market share growth Horizontal integration, economies of scale & scope, cost reduction Investment demands of fast technological change & shortening product life cycles Acquiring new competences & capabilities Speed of international market entry, building global presence & reach Bid proofing by growing larger

REASONS FOR MERGERS/ACQUISITIONS

Brand buying vs brand building


Nestle paid double the market valuation of Rowntree in 1989, Ford 4x for Jaguar Market consolidation, elimination of competitors Diversification mergers & risk Financial motivations & Asset stripping Management ambition & corporate control Privatisations Divestments & portfolio management

VALUE CREATION IN M&A

Source: Lasserre (2003) p. 141

M & A EFFECTIVENESS

Paradox that despite the boom in Mergers and Acquisitions (including international ones) much of the evidence on M & A success is negative Diversificatory mergers generally less successful than horizontal ones (Michael Porter 1987 study found 60% subsequent disposal rate) Much of the evidence on the effectiveness of M & A as growth strategy is from a series of 1980s financial studies.

M & A EFFECTIVENESS

RAVENSCRAFT & SCHERER (1987) AND AUERBACH (1988) Both found a significant deterioration in corporate profitability and share price post merger compared to the combined performance pre merger, but methodology problems include time period studied (only two years after) McKinsey consultants (1990) found only a 57% success rate for cross border M & As

Mergers/Acquisitions Effectiveness

Laurence Caprons (1999) questionnaire survey of 253 cross border manufacturing M & A less than half found that cost savings were achieved in terms of production cost synergies (46%) or input cost savings (40%) but a majority (56%) reported improved results in terms of market share, sales revenue growth and geographical market coverage

Mergers and acquisition Management


Importance of identifying four stages in M & A management: Quality of Pre-acquisition process Choice of M & A integration framework Transition Management Consolidation HASPESLAGH & JEMISON (1991) emphasised that poor pre-acquisition planning and partner selection, and poor post-merger integration were key causes of failure

Mergers and acquisition Management


Pre-Acquisition planning: Need for lengthy planning process Target research, partner selection & screening (possible no target available?) Due diligence and accurate valuation Negotiation of terms/ determining bid price (s) Importance of secrecy Importance of stakeholder support Anti-trust & regulatory issues

Haspelagh & Jemison (1991) Integration Models

Preservation Mode - Keep businesses separate - low synergy - high autonomy preserves existing cultures Absorption Mode - Acquirer dominates and absorbs acquired business into its own operating systems & dominant culture Symbiotic Mode - high autonomy and high interdependency of the two businesses build new hybrid - joint integration - new common culture

Mergers and acquisition Management


Transition Management Costs of acquisition Programme for synergies and cost reduction Integration mechanisms and planning New leadership and interface management New strategic mission and purpose Stakeholder management

Mergers and acquisition Management


Consolidation: Determining final post merger integration structure Cultural issues reconciling (international) cultural differences and possibly building new cultural web for the merged company Managing the human resource issues Setting new strategic and management objectives Monitoring, measurement and control

M & A & Governmental Regulatory Approval

Competition & anti-trust policies have in limited cases prevented acquisitions or imposed conditions eg EU & Nestle/Perrier & Vodafones forced disposal of Orange to FranceTelecom. 2005/6 New Protectionism UK permitted Telefonica/O2, Santander/ Abbey National, Kraft/Cadbury Acquisitions

M & A & Governmental Regulatory Approval

A widening of National Strategic Interest appears to be occuring beyond national airlines and defence industries Conflict of UK & US Govts over Dubai Port Authority bid for UK P & O port interests. French promotion of Suez/Gaz de France merger in energy sector to protect against bid for Suez from Italian Enel energy group.

Overall what can go wrong?


POOR PARTNER SELECTION FAILURE OF DUE DILIGENCE COSTS OF ACQUISITION STRATEGIC MISMATCH FAILURE TO ACHIEVE COST SAVINGS/ INCREASE IN X INEFFICIENCIES CULTURAL DIFFERENCES STAKEHOLDER OPPOSITION

Strategic Alliances & Joint Ventures Defined

Voluntary arrangements between firms involving exchange, sharing or codevelopment of products, technologies or services Gulati, 1998 Not just for market entry and development but can occur in any part of the value chain SAs usually non-equity based arrangements but not always (note Rover and Hondas cross shareholdings here)

AIRLINE ALLIANCE NETWORKS EXAMPLE


513 alliances involving 204 airlines ONE WORLD ALLIANCE involving BA, QUANTAS, AMERICAN AIRLINES, JAL STAR ALLIANCE involving LUFTHANSA, SAS, UNITED AIRLINES,CANADA, THAI

Strategic Alliances & JVs Defined

A JOINT VENTURE BY CONTRAST INVOLVES THE CREATION OF A NEW, JOINTLY OWNED, LEGAL ENTITY, INCORPORATED AS A SEPARATE BUSINESS EG TOYOTA and GENERAL MOTORS NUMMInc. IN CALIFORNIA TO PRODUCE SMALL US CARS EG SONY-ERICSSON MOBILE TELEPHONE JOINT VENTURE

Relative merits/drawbacks of internal development, acquisitions and alliances

Advantages
Internal Development Keep control Retain all benefits Ready-made products, markets, know-how, organisation. Fast

Disadvantages
Limited to own resources Take all risks. Slow Acquisitions are: difficult to value difficult to integrate Partners goals may conflict Organisational confusion Lose control of know-how and technology

Mergers and Acquisitions

Alliances & Joint Ventures

Pool resources and know-how. Fast Spread risk, costs, capital commitment

DETERMINANTS OF METHOD

SPEED AND TIME SCALES COSTS AND RESOURCES CAPABILITY BUILDING CONTROL RISKS INCLUDING DISSEMINATION RISK TRANSACTION COST SAVINGS