Chapter 9_Alternatives to M&A

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Alternatives to Mergers

and Acquisitions

Oxford University Press 2011. All rights reserved.

Chapter 9


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Oxford University Press 2011. All rights reserved.2

Understand the concept divestitures, strategic alliances and

internal development

Understand the types of and reasons behind divestitures

Understand the types and reasons behind strategic alliances

Understand the benefits and weaknesses of strategic alliances

Learning Objectives:


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Sale of a part of a firm to another company

Firm that sells a part receives the payment in cash, marketable

securities, or a combination of both

Divestiture are simple exit routes and do not result in the

creation of a new entity

Involves simultaneous contraction (of the selling firm) and

expansion (of the purchasing firm) processes

Concept of Divestitures


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Reasons for adoption of Divestitures

The particular (saleable) assets do not contribute to the firms

profits; rather, put extra pressure on its resources.

Divesting off the excess assets can help a firm focus on its

remaining assets. Thereby, increasing the overall efficiency of

the enterprise



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Voluntary Divestitures

Process wherein the selling entity feels that a certain division

is not adding to its profitability and is in fact diverting the

companys attention from more profitable divisions

Help the company get rid of the unprofitable divisions assets

and helps in improving its overall profitability

Results in increased cash flows for the company which could

be deployed in/for:

Expanding profitable divisions

Distribution amongst the shareholders or

Repaying outstanding debt value

Types of Divestitures


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For Example:

The divestment of Raymonds Synthetics to RelianceIndustries and the steel business to Thyssen Krupp and again

the divestment of the detergents division by Tata Chemicals

are examples of voluntary divestitures.

Types of Divestitures


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Firm compelled to divest itself of a particular asset as a result of

a legal dispute, it is referred to as involuntary divestiture

For Example:

One of the biggest mergers in the history of railways took place in June

1983 when Santa Fe merged with Southern Pacific. However, it was

followed by an anti-trust petition filed against the merger. In June 1987,

the merger was adjusted against fair competition by the Inter State

Commerce Commission. It was believed that such a giant firm would

reduce the competition in the market. Subsequently, the ISCC ordered

Santa Fe-Southern Pacific to submit a divestiture plan within 90 days. As

a result, the stock prices of Santa Fe registered a steep decline and the

firm became a target of a bid by Henley Group.

Involuntary Divestitures


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Failure to generate hurdle rate of return

Capital market factors

For Example: A combined entity has business interest in FMCG and

automobiles. Some investors might be interested in investing in FMCG

but are not keen at investing in the combined entity for they want to stay

away from automobiles and vice versa.

Increased cash flowsFor example: Chrysler Corporation was compelled to sell off its prized tank

division in the face of imminent bankruptcy (1980). Similarly Navistar, in

order to pay a part of its huge debts, had to sell off its well performing asset

(Solar Turbines) to Caterpillar Tractors Company.

Reasons for Divestiture


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Abandoning core business

For Example:

Greyhound sold off its business just because the management felt the

bus business had matured and had no growth potential

Dell, a $35 billion company with a $3.5 billion cash flow, startedlooking for growth beyond the PC segment . It started exploring a range

of adjacency initiatives, including low-end switches, printers, and

supplies; handheld devices; and even retail kiosks.

Hillenbrand Industries is another classic example of this situation.

Hillenbrand is in two businessesmechanical hospital beds andcaskets. Both markets have been growing at less than 5 percent per year

with Hillenbrand having more than 70 percent market share in each of

the segment

Reasons for Divestiture


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Justification lies in increased economies of scale and

economies of scope

For example: If a steel mill owns a coal mine and also ventures into say

road transport business, such an entity could make better use of its coal

mine in its own operations than could use the road transport business. The

company would do well by focusing on the coal mine and divesting its

assets in the road transport business.

Benefits of Divestitures


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When companies fail to attain anticipated synergies especially

product-specific technologies to entirely different markets.

For Example: A manufacturer of military aircraft may purchase a company

building business jets but operating at a loss. This plan is driven by the fact

that the company's engineering expertise could be applied to design better andtherefore more profitable, airplanes for business and passenger segment of the

market. The company however realizes that its expertise can be applied only

in manufacturing military aircrafts and other high-speed manoeuvrability and

radar-evading designs, but not for making aircrafts for the private operators.

Thus the company is unable to apply the benefits from its most valuablemilitary technologies to the civilian aircraft market. Given this scenario the

company may not be able to exploit its strength and capitalize on synergistic

benefits. It would be better for the company to divest from the civilian aircraft

market.



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Advantageous where business cycles are involved.

For Example:

A paper and lumber company may diversify its operations and start producing

certain types of specialty chemicals. This can certainly provide the company

with an alternative source of income unlike the market of paper and lumberthat is seasonal in nature. What is even more important to note is that when

one sector is unprofitable, the other would provide stability in earnings. This

obviously is in the interest of the company. While the industry presumes this

would to coincide conveniently it may not happen every time. If the

companies do not coincide as presumed in the example, the company mightdecide to divest from one industry to stem its financial losses and generate

capital to pay off its debt, if any. The decision to divest may actually increase

the value of the company and it may continue to grow unabated.

http://www.referenceforbusiness.com/encyclopedia/Cos-Des/Debt.htmlhttp://www.referenceforbusiness.com/encyclopedia/Cos-Des/Debt.html


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May also choose to divest itself of unrelated divisions if the

management believes that it can no longer administer the entity,

efficiently.

For example: A Steel manufacturer decides to diversify into manufacturing

final products, say automotive components, household appliances, and

missiles. It is important to remember that while all the products are made

out of the steel manufactured by the parent company each division may

build unique administrative organizations and reflect different culturesbased on the markets each would serve. If the parent company loses its

competitive position in steel all the division would also suffer.




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Companies also go in for divestment for it is an invaluable

strategy of discovering unanticipated economies and synergies

through trial and error.

For Example: A company whose core competency lies in the financialcontrol and administrative consolidation might aim to become a fully

diversified conglomerate hoping it would add to its profitability. But if

this does not happen, the company may divest from some of its operations

and try to get into another sector.




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Refer to arrangements in which business entities join forces to

form a cooperative partnership

Typically neither owns the other, though they often create a

third entity

Also termed as Joint Venture

Can provide companies with meaningful ways of achieving

growth through cooperation

For Example: IBM has over 400 alliances with firms ranging from Sears

to Apple. It is more important to note is that in each arrangement the

company pursues different goals.


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Strategic Alliances


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Strategic Alliances

IBM Partners GoalFerranti Market penetration of PS/2 SystemsToshiba Sharing of development costsDEC, Apollo, HP Development of a competitive advantage

over Sun and AT&TSiemens Sharing of R & D costsMicrosoft Improvement in competitive position


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Internal reasons:

To spread costs and risks

To safeguard resources which cannot be obtained through themarket

To improve access to financial resources

To derive benefits of economies of scale

To gain access to new technologies, customers and innovativemanagerial practices


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Why companies enter into Strategic

Alliances?


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Competitive Goals

To pre-empt competitors

To create stronger competitive units

To influence structural evolution of the industry

To respond defensively to blurring industry boundaries and

globalization


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Alliances?


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Competitive goals

To pre-empt competitors

To create stronger competitive units

To influence structural evolution of the industry

To respond defensively to blurring industry boundaries and

globalization


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Alliances?


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Complementary Alliance

Partners combine their technologies to diversify their existing

products/market portfolios

Market Alliance

Aims at combining the market knowledge of one partner with

the production or product know-how of the other

Sales alliance

Producer and a local partner cooperate in an arrangement that

is a mixture of independent representation and own branch.


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Types of Strategic Alliances


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Concentration Alliance

Competing partners cooperate to form larger and more

economical units.

Research and Development alliance: Partners aim to create synergy by making joint use of research

facilities, exploiting opportunities to specialize and standardize

combining know-how and sharing risks.

Supply Alliance

Competitors using similar inputs cooperate to safeguard

supplies, reduce procurement costs, or to prevent the entry of

new competitors.

Oxford University Press 2011. All rights reserved. 22

Types of Strategic Alliances


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Formal structure of the relationship between partners

Internationality of alliance

Value added chains

Profit / ownership related issues

Orientation of the alliance


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Implications of Strategic Alliance


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Partners can share the burden of investment required in thealliance

Able to attract funds easily as it is backed by entities that are

willing to contribute in all possible ways to make the alliancesuccessful

Very beneficial to small firms that may not have the required

competencies in all the areas

For example: Cetus, one of the leading biotech firms, entered into a number

of alliances to produce and market some of the first diagnostic instruments

based on the new biotechnology and provided bulk research and larger firms

took care of activities such as financing, marketing and manufacturing Oxford University Press 2011. All rights reserved.

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Benefits of Strategic Alliances


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Harmony related issues

Implementation issues

Problems of coherence

Changes in business environment


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Weaknesses of Strategic Alliances


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Is a strategy of building new businesses, more or less, from the

scratch.

Also known as corporate entrepreneurship.


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Internal Development


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Venture Capitalists

New venture incubator

Idea generation and transfer program

Intrapreneurship


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Methods of Internal Development


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Thank you!


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