Date post: | 19-May-2015 |
Category: |
Documents |
Upload: | alistercrowe |
View: | 3,238 times |
Download: | 0 times |
BN 926 Strategy and Management of Change
Mergers, Acquisitions, Strategic Alliances
and the Boundaries of the Firm
Professor Julian Lowe
Aims
To highlight corporate considerations in strategy
To examine diversification as a strategyTo understand the nature of the firm and its
limitationsTo assess where mergers, or acquisitions or
alliances are most appropriateTo assess the impact and importance of
scale, scope and transaction costs on the size, scope and nature of the firm
Questions
What determines the scale and scope of your organisation? How does it differ from its competitors?
What is diversification and why diversify?
Why do mergers fail? Why has there been a boom in
alliances? What are the dangers? Are alliances and partnerships different
in Asia/Europe/N. America?
Wesfarmers
Why did Wesfarmers diversify? What sort of diversification strategy
did it follow? How does it manage diversification?
Diversification
Define corporate strategy and its importance to the diversified firm
Explain why firms move from a single business strategy to a multi business strategy?
How do diversified firms create value? Related/unrelated?
What incentives and resources help manage diversified businesses
Why do diversified businesses go wrong?
Company Name Net Profit ($000)
Return on Revenue (%)
1 Wesfarmers 100,079 8.3
2 SouthCorp 91,548 9.7
3 Howard Smith 61,955 6.2
4 Pacific Dunlop 60,700 3.3
5 Smorgan Steel 40,005 5.0
6 Futuris Corporation 30,888 1.9
7 Austrim Nylex 30,756 9.0
8 Email 24,028 3.6
9 GWA International 21,618 10.7
10 Pacifica Group 17,867 5.7
11 Hills Industries 8,962 8.0
12 McPherson’s 6,959 5.7
13 Steamships Trading 6,889 11.8
14 Coventry Group 3,958 3.8
15 Hancock & Gore 3,488 11.5
Australian Diversified Industrials
Levels of diversification
Single business – 95% of revenue comes from a single business
Dominant – 70 – 95% from a single business
Related - < 70% from a single business but these have strong links
Unrelated - < 70% and no strong links
Examples in each category?
Motives, Incentives and Resources for Diversification
That enhance strategic competitiveness?
Neutral to strategic competitiveness? Managerial motives?
Motives, Incentives and resources for Diversification
Motives to enhance strategic competitiveness Economies of scope (related diversification)
Sharing activitiesTransferring core competencies
Market power (related diversification)Blocking competitors through multi-point competitionVertical integration
Financial economies (unrelated diversification)Efficient internal capital allocationBusiness restructuring
Incentives and resources with neutral effects on strategic competitiveness
Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources Managerial motives (value reduction) Diversifying managerial employment risk Increasing managerial compensation
Related Diversification
Operational relatedness? Corporate relatedness? Market power?
Unrelated diversification
Financial economies Efficient internal capital market
allocation Restructuring and sell - off
Value-creating strategies of diversification: Operational and corporate relatedness
Value
Related constrained diversification
Vertical integration(market power)
Both operational and corporate relatedness
(rare capability and can
create diseconomies of scope)
Unrelated diversification
(financial economies)
Related linked diversification
(economies of scope)
High
Low
Low High
Corporate relatedness: Transferring skills into businesses through corporate headquarters
Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p203
Sharing: Operationa
l relatedness
between businesses
Incentives for diversification
Low performance Uncertain future cash flows Firm risk reduction
Resources required for diversification
Tangible Intangible
Mergers and Acquisitions (M&A)
Current scope of mergers? Why are M&A popular? Why M&A and not internal growth? Conflict between M&A and
competitive strategy? Attributes of M&A that influence
competitive success? The nature of restructuring?
Extent?
1999 – US$3.4 trillion world – wide
Why? – internet, cross border/wto, fad
Result- 1999 KPMG report – 83% failed to increase shareholder wealth in acquiring firms. 53% significantly reduced shareholder wealth.
KPMG 2005 survey The biennial survey, which was undertaken
in conjunction with an independent research company, is the third in the series and looks at major global deals completed during 2000/20001. The survey shows that a higher proportion of deals now enhance value for the acquirer’s shareholders. At 34 percent the figure is double that in our 1999 survey, and for the first time it exceeds the proportion reducing value. Indeed, if the measure is restricted to post-acquisition performance only, then 52 percent of deals can be said to enhance value, up from 36 percent in 2001.
Reasons for acquisitions and problems in achieving successSource: Hanson, Dowling, Hitt, Ireland & Hoskisson p243
Reasons for acquisitions Problems in achieving success
Increased market power
Overcome entry barriers
Cost of new product development
Increased speed to market
Lower risk compared to developing new products
Increased diversification
Avoid excess competition
Integration difficulties
Inadequate evaluation of target
Large or extraordinary
debt
Inability to achieve synergy
Too much diversification
Managers overly focused on acquisitions
Too large
Acquisitions
Attributes Results
1 Acquired firm has assets or resources that are complementary to the acquiring firm’s core business
High probability of synergy and competitive advantage by maintaining strengths
2 Acquisition is friendly Faster and more effective integration; possibly lower premiums
3 Acquiring firm selects target firms and conducts negotiations carefully and deliberately
Firms with strongest complementarities and acquired and overpayment is avoided
4 Acquiring firm has financial slack (cash or a favourable debt position)
Financing (debt or equity) is easier and less costly to obtain
5 Merged firm maintains low to moderate debt position
Lower financing cost, lower risk (eg of bankruptcy) and avoidance of trade-offs associated with high debt)
6 Has experience with change and is flexible and adaptable
Faster and more effective integration
7 Sustained and consistent emphasis on R & D and innovation
Maintain long-term competitive advantage in markets
Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p251
Attributes of successful acquisitions
Alternatives Short-term outcomes Long-term outcomes
Downsizing
Downscoping
Leveraged buyout
Reduced labour costs
Reduced debt costs
High debt costs
Emphasis on strategic controls
Loss of human capital
Lower performance
Higher risk
Higher performance
Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p258
Restructuring and outcomes
Some Diagnostics
IPR and complementary
assets
strategic impact/relative competences
control v. risk
Boundaries of the firm
Examine why we have firms How they can be improved The value of strategic alliances
Quote – Day, J., & Wendler, J.C. (1998) ‘The New Economics of Organisation’ McKinsey Quarterly No. 1. Pp 5 – 18.
In their present forms, markets motivate and hierarchies coordinate
Have we learned to combine the best of both
Two challenges for the corporation of the future: Entrepreneurialism and knowledge
Problems With Modern Corporation
Central control Costly consensus building Lack of entrepreneurship/motivation Extensive path dependencies Can disaggregation help?
Internal – but corrupted and planning interventions
External – loss of control and potential synergy
Alliance v. Acquisition
Alliancev.
Acquisitions
Infeasibility
Indigestibility
Investment in options
Information asymmetry
Relational Forms
Market
Relational forms
Hierarchy
External disaggregation
Internal disaggregation
Personal initiative
Enforced cooperation and coordination
Relational forms – making coordinated moves in a more entrepreneurial environment
Strategic Alliances: Definitions and Distinctions
Collaboration Networks Partnerships Alliances Joint Ventures Consortia Constellations
…… vertical and/or horizontal
School of Strategic Management, Bristol Business School
Traditional Competition
single firms
Collective Competition
group
triad
pair
Theoretical Perspectives
Transaction costs Scale Risk Control Agency Synergy Knowledge transfer
Alliances and Constellations
Alliance incomplete or open contract between
separate firms, involving shared control Constellation
set of firms linked through alliances alternative to a single firm as a way to
control a set of capabilities needed to compete in a given context
Strategic Alliances: Rationales
INCREASING ATTRACTIVENESS OF
STRATEGIC ALLIANCES
Increasing Development
Costs
Shorter Product Life-
cycles
Increasing Cost
Pressures
Globalisation
Building new businesses or introducing
new products
Improving economics of
existing business
New generation of product technology
SpeedNPD
Develop upstream technology
Achieve market penetration
Fill product line gaps
Exploit economies of
scale
Increase capacity utilisation
Small Firm : Large Firm Issues
Large Firms Growth and sales Partners R & D Additional
resources Preempt comp’n
Small Firms Exploit
technology Access foreign
markets Access
reputation and expertise
Access finance Share risk
Some Diagnostics
IPR and complementary
assets
strategic impact/relative competences
control v. risk
Strategic Alliances: Pitfalls
Transaction costs
Diffusion of Strategic Assets
Appropriation of Competitive Advantage
Effect on Competitiveness and Innovation
School of Strategic Management, Bristol Business School
Strategic Alliances: Reasons for Failure
Not enough attention paid to detail Different strategic goals Lack of top executive commitment Mutual trust failed to develop Organisational culture differences Change in partner objectives
School of Strategic Management, Bristol Business School
Strategic Alliances: The Problem of Fit
School of Strategic Management, Bristol Business School
stra
teg
ic
fit
cultural fit- +
+
-
Collaborative Advantage if
Cultural Adjustment
Optimal Collaborative Advantage
No Compatibility
or Collaborative Advantage
Compatible but no
Collaborative Advantage
School of Strategic Management, Bristol Business School
Strategic Alliances: The Network Organisation
DESIGN
MARKETING & DISTRIBUTION
BROKER
PRODUCTION
SUPPLY DESIGN
MARKETING & DISTRIBUTION
BROKER
PRODUCTION
SUPPLY
DISTRIBUTORS
STABLE NETWORK
SUPPLIERS
CORE FIRM
School of Strategic Management, Bristol Business School
Strategic Alliances: New Managerial Roles
Move to boundary spanning roles More emphasis on (less) human resources New control strategies Acceptance of organisation as an open
network system Politics and conflicts Organising learning processes Incongruence and divergence between
authority and responsibility Changing labour relations
School of Strategic Management, Bristol Business School
Strategic Alliances: Design and Management Issues
Goal congruence and strategic compatibility
Trust and mutual interaction Structural and cultural compatibility Communication and systems
compatibility Interaction and transaction costs Flexibility within strategic control
School of Strategic Management, Bristol Business School
Strategic Alliances: The View From a Guru
Individual excellence Importance Interdependence Investment Information Integration Institutionalisation Integrity
strategictacticaloperationalinterpersonalcultural
Strategic Issues Pre and Post Alliance
Capture value : Ownership of assets that are scarce and complementary brand supply chain technology
Control of ‘stickiness’ facilitate transfer and absorption but guard
against loss of critical knowledge
Maintain large surface area of contact disaggregation provide more access points for
knowledge management
Control costs of coordination disaggregation can go too far
The Future
No one way Innovative forms of joint ownership Further growth through growth of
connectivity Trust v. Contract v. Guanxi Focus on the strategic
Questions
How do transaction costs influence the scale and scope of an enterprise?
Does the failure of many mergers mean we will see fewer of them?
What impact on scale and scope of the firm and alliances will we see from capital markets, technology change, and globalisation?