Chapter 10
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Chapter 10. The Strategic Management Process. External Analysis. Strategic Choice. Strategy Implementation. Competitive Advantage. Mission. Objectives. Which Businesses to Enter?. Internal Analysis. •Vertical Integration. Corporate Level Strategy. •Diversification.

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Chapter 10

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Chapter 10

Chapter 10


Chapter 10

The Strategic Management Process

External

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Mission

Objectives

Which Businesses

to Enter?

Internal

Analysis

•Vertical Integration

Corporate Level

Strategy

•Diversification

Mode of Entry?

•Strategic Alliances

•Mergers &

Acquisitions


Chapter 10

1)such that the value of the corporate whole increases

2)such that businesses forming the corporate whole

are worth more than they would be under

independent ownership

3)that equity holders cannot create through

portfolio investing

Logic of Corporate Level Strategy Applies

Corporate level strategy should create value:


Chapter 10

Acquisitions

Mergers

Mergers & Acquisitions Defined

•one firm buys another

firm

•two firms are combined on

a relatively co-equal basis

•the words are often used interchangeably even

though they mean something very different

•merger sounds more amicable, less threatening


Chapter 10

Acquisitions

Mergers

Mergers & Acquisitions Defined

•can be a controlling

share, a majority, or

all of the target firm’s

stock

•parent stocks are usually

retired and new stock issued

•name may be one of the

parents’ or a combination

•can be friendly or

hostile

•one of the parents usually

emerges as the dominant

management

•usually done through

a tender offer


Chapter 10

Do Mergers and Acquisitions Create Value?

The Logic

Unrelated M&A Activity

•there would be no expectation of value creation

due to the lack of synergies between businesses

•there might be value creation due to efficiencies

from an internal capital market

•there might be value creation due to the exploitation

of a conglomerate discount

•a corporate raider who buys and restructures firms


Chapter 10

FTC

Categories

Mergers & Acquisitions Defined

Types of M&A Activity

Vertical

» suppliers or customers

Horizontal

» competitors

Related

» complementary products

Product Extension

» complementary markets

Market Extension

Conglomerate

» everything else

Unrelated


Chapter 10

Do Mergers and Acquisitions Create Value?

The Logic

Related M&A Activity

•value creation would be expected due to

synergies between divisions

•economies of scale

•economies of scope

•transferring competencies

•sharing infrastructure, etc.


Chapter 10

Do Mergers and Acquisitions Create Value?

The Empirical Evidence

Research is based on stock market reaction to the

announcement of M&A activity

•this reflects the market’s assessment of the

expected value of the merger or acquisition

•these studies look at what happens to the price

of both the acquirer’s stock and the target’s stock

•thus, we can see who is capturing any expected

value that may be created


Chapter 10

•value increases by

about 25%

•no value created

Do Mergers and Acquisitions Create Value?

The Empirical Evidence

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

Target

Firms

Acquiring

Firms

•related M&A activity creates more value than

unrelated M&A activity

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


Chapter 10

April 2000:Wells Fargo offers to acquire First Security Bank

for about $3 billion

Expected

Operational

The Deal:

Stock values were:

Wells Fargo: $43.69

First Security: $15.50

.355 shares of WF for each

share of FS stock

Do Mergers and Acquisitions Create Value?

Expected versus Operational Value

Stock Price Market Cap.

12/1999 $40.44 $65.7 B

12/2000 $56.69 $95.2 B

12/2001 $43.60 $74.0 B

12/2002 $46.87 $82.0 B

12/2003 $58.89 $100.0 B

12/2004 $62.15 $105.0 B

Wells Fargo: down $0.25 to $39.50

First Security: up $1.19 to $13.38


Chapter 10

Survival

Free Cash

Flow

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not

capture any value from M&A’s, why do they

continue to merge and acquire?

• avoid competitive disadvantage

• avoid scale disadvantages

• cash generating, normal return investment


Chapter 10

Agency

Problems

Managerial

Hubris

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not

capture any value from M&A’s, why do they

continue to merge and acquire?

• managers benefit from increases in size

• managers benefit from diversification

•managers believe they can beat the odds


Chapter 10

Above Normal

Profits

Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not

capture any value from M&A’s, why do they

continue to merge and acquire?

•some M&A activity does generate

above normal profits (expected and

operational over the long run)

•proposed M&A activity may satisfy

the logic of corporate level strategy

•managers may see economies that

the market can’t see


Chapter 10

Yes, if managers’ abilities meet VRIO criteria

Managers may be good at doing ‘deals’

2

Managers may be good at recognizing & exploiting

potentially value-creating economies with other firms

1

Managers may be good at both

3

Competitive Advantage

Can an M&A strategy generate sustained

competitive advantage?


Chapter 10

Private Economies

Firm A

Firm C

Firm B

Competitive Advantage

Recognizing and Exploiting Economies of Scope

•Firm C’s recognized

value is $10,000

$12,000

•Firm A sees value

of $12,000 in Firm C

$10,000

•Firm A can earn a

profit of $2,000

only if the economy

remains private

Bidders

Target


Chapter 10

Costly-to-Imitate

Economies

Firm A

Firm C

Firm B

Competitive Advantage

Recognizing and Exploiting Economies of Scope

•if the economy

between A & C

is costly to imitate,

it doesn’t matter

if other firms know

$12,000

$10,000

•Firm A can still earn

a $2,000 profit

Bidders

Target


Chapter 10

Unexpected

Economies

Firm A

Firm C

Firm B

Competitive Advantage

Recognizing and Exploiting Economies of Scope

•Firm C has a market

value of $10,000

$10,000

$12,000

•Firm A buys Firm C

for $10,000

$10,000

•Firm C turns out to be

worth $12,000

Bidders

Target


Chapter 10

Search for

Rare Economies

Limit Information

to Other Bidders

Seek Thinly

Traded Markets

Bidding Firm’s

Perspective

Close the

Deal Quickly

Limit Information

to the Target

Avoid Bidding

Wars

Competitive Advantage

Doing the Deal


Chapter 10

Seek Information

from Bidders

Target Firm’s

Perspective

Invite Other Bidders to

Join in Bidding Contest

Delay, But Do Not

Stop the Acquisition

Competitive Advantage

Doing the Deal


Chapter 10

M&A activity requires responses to these issues:

Managers must decide on the level of integration:

Implementation Issues

Structure, Control, and Compensation

•m-form structure is typically used

•management controls & compensation policies

are similar to those used in diversification strategies

•target firm may remain somewhat autonomous

•target firm may be completely integrated


Chapter 10

•high levels of integration require greater cultural

blending

•cultural blending may be a matter of:

•integration may be very costly, often unanticipated

•the ability to integrate efficiently may be a source

of competitive advantage

Implementation Issues

Cultural Differences

•combining elements of both cultures

•essentially replacing one culture with the other


Chapter 10

•governments may constrain ownership by

foreign firms

•governments may restrict repatriation of profits

•government labor policy may limit a firm’s ability

to apply management practices to target firm

International Issues

Government Policy


Chapter 10

Social Orientation

Collectivism

Individualism

Power Orientation

Respect

Tolerance

Uncertainty Orientation

Avoidance

Acceptance

Goal Orientation

Aggressive

Passive

Time Orientation

Short-term

Long-term

International Issues

Cultural Issues

(Hofstede, 1980)


Chapter 10

M&A activity is a mode of entry for vertical

integration and diversification strategies

A firm’s M&A strategy should satisfy the

logic of corporate level strategy

M&A activity can create economic value at

announcement, but target firms usually capture

that value

M&A activity can create value over the long term

for the acquiring firm

Summary


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