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Transcript of Barney SMCA4 10
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
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-22
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 3
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-33
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
Strategic Management & Competitive Advantage – Barney & Hesterly 4
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-44
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 5
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-55
• 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
Mergers & Acquisitions Defined
• usually done througha tender offer
• one of the parents usuallyemerges as the dominantmanagement
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 6
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-66
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 7
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-77
Mergers & Acquisitions Defined
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 8
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-88
Do Mergers and Acquisitions Create Value?
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.
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 9
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-99
Do Mergers and Acquisitions Create Value?
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 10
Mergers and AcquisitionsMergers and Acquisitions
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Do Mergers and Acquisitions Create Value?
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 11
Mergers and AcquisitionsMergers and Acquisitions
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Do Mergers and Acquisitions Create Value?
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 12
Mergers and AcquisitionsMergers and Acquisitions
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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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 13
Mergers and AcquisitionsMergers and Acquisitions
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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?
AgencyProblems
ManagerialHubris
• managers benefit from increases in size
• managers benefit from diversification
• managers believe they can beat the odds
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 14
Mergers and AcquisitionsMergers and Acquisitions
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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?
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)
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 15
Mergers and AcquisitionsMergers and Acquisitions
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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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 16
Mergers and AcquisitionsMergers and Acquisitions
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Competitive Advantage
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 17
Mergers and AcquisitionsMergers and Acquisitions
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Competitive Advantage
Recognizing and Exploiting Economies of Scope
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 18
Mergers and AcquisitionsMergers and Acquisitions
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Competitive Advantage
Recognizing and Exploiting Economies of Scope
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 19
Mergers and AcquisitionsMergers and Acquisitions
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Competitive Advantage
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 20
Mergers and AcquisitionsMergers and Acquisitions
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Competitive Advantage
Doing the Deal
Target Firm’sPerspective
Seek Informationfrom Bidders
Invite Other Bidders toJoin in Bidding Contest
Delay, But Do NotStop the Acquisition
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 21
Mergers and AcquisitionsMergers and Acquisitions
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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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 22
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-2222
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 23
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-2323
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
Mergers & Acquisitions
Strategic Management & Competitive Advantage – Barney & Hesterly 24
Mergers and AcquisitionsMergers and Acquisitions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-10-2424
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