Mergers and Acquisitions Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-1...

Mergers and Mergers and AcquisitionsAcquisitions

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-11

Chapter 10Chapter 10

Mergers & Acquisitions

Strategic Management & Competitive Advantage – Barney & Hesterly 2

Mergers and AcquisitionsMergers and Acquisitions


Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

The Strategic Management Process

Corporate LevelStrategy

Which Businessesto Enter?

• Vertical Integration• Diversification

• Strategic Alliances

Mode of Entry?

• Mergers & Acquisitions





Logic of Corporate Level Strategy Applies

Corporate level strategy should create value:

2) such that businesses forming the corporate wholeare worth more than they would be under independent ownership

3) that equity holders cannot create throughportfolio investing

1) such that the value of the corporate whole increases





Mergers & Acquisitions Defined

Mergers Acquisitions

• two firms are combined ona relatively co-equal basis

• one firm buys anotherfirm

• the words are often used interchangeably eventhough they mean something very different

• merger sounds more amicable, less threatening





• parent stocks are usuallyretired and new stock issued

• name may be one of the parents’ or a combination

• can be a controllingshare, a majority, or all of the target firm’sstock

• can be friendly orhostile

Mergers Acquisitions


• usually done througha tender offer

• one of the parents usuallyemerges as the dominantmanagement





Do Mergers and Acquisitions Create Value?

The Logic

Unrelated M&A Activity

• there would be no expectation of value creationdue to the lack of synergies between businesses

• there might be value creation due to efficienciesfrom an internal capital market

• there might be value creation due to the exploitationof a conglomerate discount

• a corporate raider who buys and restructures firms






Types of M&A Activity

FTC Categories

Vertical

Horizontal

Product Extension

Market Extension

Conglomerate

» suppliers or customers

» competitors

» complementary products

» complementary markets

» everything else

Related

Unrelated






The Logic

Related M&A Activity

• value creation would be expected due tosynergies between divisions

• economies of scale

• economies of scope

• transferring competencies

• sharing infrastructure, etc.






The Empirical Evidence

• this reflects the market’s assessment of theexpected value of the merger or acquisition

• these studies look at what happens to the priceof both the acquirer’s stock and the target’s stock

• thus, we can see who is capturing any expectedvalue that may be created

Research is based on stock market reaction to the announcement of M&A activity






The Empirical Evidence

AcquiringFirms

TargetFirms

M&A Activity creates value, on average, as follows:

• no value created • value increases byabout 25%

• related M&A activity creates more value thanunrelated M&A activity

M&A activity creates value, but target firms capture it






Expected versus Operational Value

April 2000: Wells Fargo offers to acquire First Security Bankfor about $3 billion

Wells Fargo: down $0.25 to $39.50

First Security: up $1.19 to $13.38

Stock Price Market Cap.12/1999 $40.44 $65.7 B12/2000 $56.69 $95.2 B12/2001 $43.60 $74.0 B12/2002 $46.87 $82.0 B12/2003 $58.89 $100.0 B12/2004 $62.15 $105.0 B

Stock values were: Wells Fargo: $43.69 First Security: $15.50

The Deal:

.355 shares of WF for eachshare of FS stock

Expected Operational





Why is M&A Activity So Prevalent?

If managers know that acquiring firms do notcapture any value from M&A’s, why do theycontinue to merge and acquire?

Survival

Free CashFlow

• cash generating, normal return investment

• avoid competitive disadvantage

• avoid scale disadvantages







AgencyProblems

ManagerialHubris

• managers benefit from increases in size

• managers benefit from diversification

• managers believe they can beat the odds







Above NormalProfits

• proposed M&A activity may satisfythe logic of corporate level strategy

• managers may see economies thatthe market can’t see

• some M&A activity does generateabove normal profits (expected andoperational over the long run)





Yes, if managers’ abilities meet VRIO criteria

Competitive Advantage

Can an M&A strategy generate sustainedcompetitive advantage?

2 Managers may be good at doing ‘deals’

1 Managers may be good at recognizing & exploitingpotentially value-creating economies with other firms

3 Managers may be good at both






Recognizing and Exploiting Economies of Scope

Private Economies

Firm A

Firm B

Firm C

$10,000

$12,000

• Firm C’s recognizedvalue is $10,000

• Firm A can earn aprofit of $2,000only if the economyremains privateBidders Target

• Firm A sees valueof $12,000 in Firm C







Costly-to-ImitateEconomies

Firm A

Firm B

Firm C

$10,000

$12,000

Bidders Target

• if the economybetween A & Cis costly to imitate,it doesn’t matterif other firms know

• Firm A can still earna $2,000 profit







Firm A

Firm B

Firm C

$10,000

$10,000

Bidders Target

UnexpectedEconomies

• Firm C has a marketvalue of $10,000

• Firm A buys Firm Cfor $10,000

• Firm C turns out to beworth $12,000

$12,000






Doing the Deal

Bidding Firm’sPerspective

Search forRare Economies

Limit Informationto Other Bidders

Limit Informationto the Target

Avoid BiddingWars

Close theDeal Quickly

Seek ThinlyTraded Markets






Doing the Deal

Target Firm’sPerspective

Seek Informationfrom Bidders

Invite Other Bidders toJoin in Bidding Contest

Delay, But Do NotStop the Acquisition





Implementation Issues

Structure, Control, and Compensation

M&A activity requires responses to these issues:

• m-form structure is typically used

• management controls & compensation policiesare similar to those used in diversification strategies

Managers must decide on the level of integration:

• target firm may remain somewhat autonomous

• target firm may be completely integrated





Implementation Issues

Cultural Differences

• high levels of integration require greater culturalblending

• cultural blending may be a matter of:

• combining elements of both cultures

• essentially replacing one culture with the other

• integration may be very costly, often unanticipated

• the ability to integrate efficiently may be a sourceof competitive advantage





Summary

M&A activity is a mode of entry for verticalintegration and diversification strategies

M&A activity can create economic value atannouncement, but target firms usually capturethat value

A firm’s M&A strategy should satisfy thelogic of corporate level strategy

M&A activity can create value over the long termfor the acquiring firm





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