1 / 13

Corporate Strategy: Mergers and Acquisitions

Corporate Strategy: Mergers and Acquisitions. Learning Objectives: Understand the types of mergers and acquisitions (M & A); how they create value; the success of M & A activity, according to Barney and Porter; motives for M & A, other than value creation for shareholders.

Jims
Download Presentation

Corporate Strategy: Mergers and Acquisitions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Corporate Strategy:Mergers and Acquisitions Learning Objectives: Understand the types of mergers and acquisitions (M & A); how they create value; the success of M & A activity, according to Barney and Porter; motives for M & A, other than value creation for shareholders.

  2. Means to Achieve Diversification

  3. Types of Mergers and Acquisitions • Acquisition – bidding firm makes ‘tender offer’ for shares of target firm • Merger – two or more firms ‘come together’ by combining assets and stock • Friendly vs. hostile takeovers • Related vs. unrelated

  4. FTC Categories of Mergers and Acquisitions • Vertical (backward and forward) • Horizontal • Product extension • Market extension • Conglomerate Which of these pertain to ‘related’ mergers and acquisition ?

  5. Creating Value, According to Barney • Recall from Chapter 7: two conditions must hold for this strategy to produce value: • Valuable economies of scope • Stockholders cannot achieve these economies at a lesser-cost by themselves • Potential sources of value (related M & A) • Technical economies (scale / scope) • Exploiting market power (pecuniary) • Diversification economies (risk reduction) How can value be created in the case of unrelated M & A ?

  6. M & A and Sustained Competitive Advantage … even if these ‘economies’ generate value, the bidding firm can gain a competitive advantage through M & A activity only when the market for corporate control is imperfectly competitive … When is this market imperfectly competitive ? Hint: consider the following assumptions of perfect competition: • Homogeneity • Costless entry and exit • Perfect and complete information • Atomicity & price taking • Equal access • Independence (of buyers and sellers)

  7. Conditions of Imperfectly Competitive Marketfor Corporate Control • Target firm worth more to one bidder than another AND this knowledge is private • Target firm worth more to one bidder than another AND other bidders cannot easily imitate these “economies” • Inherent uncertainty and incomplete information results in unexpected surplus profits

  8. M & A Activity and the VRIO Framework • Valuable – when ‘economies’ exist AND market for corporate control is imperfectly competitive • Rare – if the resources of the combined firm are unique or less than what’s needed to reach perfect competition • Imitable – if the resources of the combined firm are costly to duplicate • Organization – post M & A coordination and integration is essential; M-form structure; addressing operational, systems and cultural differences are key

  9. Suggestions for Bidding Firms • Search for valuable and rare economies • Keep information private (from target and potential bidders) • Avoid bidding wars • Close the deal quickly • Operate in thinly traded markets Have your firms followed all of these suggestions ?

  10. Suggestions for Target Firms • Seek information from bidders • Invite other firms to bid • Delay (but do not stop) the acquisition Have your target firms adopted any of these suggestions ?

  11. Common Responses From Target Firms • Greenmail • Standstill agreements • Poison pills • Shark repellents • Pac Man defense • Crown jewel sale • Search for white knights • Create bidding auctions • Golden parachutes Tend to reduce shareholders’ equity Little effect on shareholders’ equity Tend to increase shareholders’ equity

  12. Do Mergers and Acquisitions Create Value ? • Barney: • 25% increase in value for target firm • no increase for bidding firm. • Porter: • More than half of all related acquisitions are divested • Nearly 75% of all unrelated acquisitions are divested • No evidence of increased ROI for parent firm Are these findings at odds with each other ?

  13. Possible Motives for Mergers and Acquisitions ? … if the bidding firm fails to generate value to its shareholders, why do we see so much M & A activity ? • Ensure survival • Free cash flow • Agency problems • Managerial hubris • Potential for above-normal profits

More Related