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Creating Value Through External Collaboration. Combinations of Means and Forms of Diversification. Forms. VERTICAL. HORIZONTAL. CONCENTRIC. Phillip Morris buys Miller Brewing to diversify out of the cigarette business. .

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slide2

Combinations of Means and Forms of Diversification

Forms

VERTICAL

HORIZONTAL

CONCENTRIC

Phillip Morris buys Miller Brewing to diversify out of the cigarette business.

TimeInc. acquires Warner Communication, creating a vertically integrated entertainment business.

IBM purchased the assets of lotus corporation to expand its presence in the software industry.

ACQUISITIONS

Dow Chemical and Corning Glass create joint venture, more profitable than either parent.

Cetus,a leading firm in the biotechnology field, teams up with larger corporations which provide needed capital.

GE and Boeing are considering an alliance to produce the next generation 777 engine.

STRATEGIC

ALLIANCES

Means

Lockheed’s plans for a new satellite system are part of a strategy to grow by loading assets into a new telecom unit.

Humana develops a full line of health care services, vertically integrating across businesses.

3M generates more than 25% of revenues from newly developed products. (5 years)

INTERNAL

DEVELOPMENT

Mergers and Acquisitions Dr. George H. Webster

mergers and acquisitions

Mergers and Acquisitions

Mergers and Acquisitions Dr. George H. Webster

financial transactions
Financial Transactions
  • Operating changes
  • New controlling shareholder
  • New board of directors
  • Change in business strategy

Mergers and Acquisitions Dr. George H. Webster

who buys
Who Buys?
  • An operating company
  • A group of managers
  • A group of financial investors

Mergers and Acquisitions Dr. George H. Webster

objective
Objective

To increase the per-share value of

the acquirer

  • Long term
  • Discounted cash flows

Mergers and Acquisitions Dr. George H. Webster

merger and acquisition types
Merger and Acquisition Types
  • Horizontal
  • Vertical
  • Congeneric
  • Conglomerate

Mergers and Acquisitions Dr. George H. Webster

valuation of an acquisition candidate

Valuation of an Acquisition Candidate

Mergers and Acquisitions Dr. George H. Webster

value to parties to the transaction
Value to Parties to the Transaction
  • Value to Buyer
    • Discounted present value of cash flows
    • Value represents maximum price
  • Value to Seller
    • Similar discounted cash flow analysis
    • Value may be lower for seller

Mergers and Acquisitions Dr. George H. Webster

merger analysis using npv
Merger Analysis Using NPV
  • Identify cash flows
  • Adjust for synergy's
  • Calculate PV- risk adjusted discount rate
  • Add market value of tax shield
  • Adjust for side effects
  • Subtract outstanding debt
  • Acquire with cash/securities

Mergers and Acquisitions Dr. George H. Webster

a merger exercise

A Merger Exercise

High Tech Corporation Acquires APEX Company

Mergers and Acquisitions Dr. George H. Webster

slide13

A View of Merger Analysis (Millions of Dollars)

Change in Stockholders’ Wealth ($)

Apex (Target)

Hightech(Acquirer)

0

Price Paid for Target ($)

$92.8

$62.5

Bargaining Range

= Synergy

the ford volvo merger
The Ford-Volvo Merger
  • Bought Volvo’s Car Business for $6 billion
  • Worldwide sales now 7.2 million units
  • Ford will achieve three goals; boost market share, fill a hole in the lineup, gain momentum in battle with G.M.
  • Volvo forecasts 200,000 units sold in U.S. by 2001
  • Ford will now compete in the $30,000-$40,000 range
  • Analysts see only six major players by 2010
first union corestates
First Union- CoreStates
  • Takeover was a $19.7 Billion deal
  • CoreStates 1997 net income - $830 million
  • First Union forecast $258 Million savings in after tax expenses from synergy
  • In 1998 FUC missed goal by $50 Million
  • Payback period is about 18 years- Does this make sense?
  • Why else spend that much money?
  • Expand into the Northeast
  • Capture CoreStates investment banking business
  • Position itself to merge with another large bank (Chase Manhattan)
strategic alliances

Strategic Alliances

An Alternative to Mergers and Acquisitions

Strategic Allinaces Dr. George H. Webster

creating value through strategic alliances
Creating Value Through Strategic Alliances
  • Mergers and alliances are not substitutes for each other
  • For each situation there is a best structure

Strategic Alliances Dr. George H. Webster

global logic of strategic alliances
Global Logic of Strategic Alliances
  • National identity of products has disappeared - markets not defined by geographic borders
  • Dispersion of technology
  • The importance of fixed costs

Strategic Alliances Dr. George H. Webster

slide19

Strategies for Entering Foreign Markets

High

Subsidiary

Typical Direction of Evolution

Joint Venture

Low

Level of investment at Risk

Franchising

Licensing

Exporting

None

None Low High

Ownership and Control of Foreign Operations

slide20

Advantages and Disadvantages of Different Entry Modes

Entry Mode Advantages Disadvantages

Exporting

Ability to realize location

and experience-curve

economies

High transport costs

Trade barriers

Problems with local

marketing agents

Licensing

Lack of control over

technology

Inability to realize location

and experience curve economies

Inability to engage in global

strategic coordination

Low development costs and

risks.

Franchising

Low development costs and

risks

Lack of control over quality

Inability to engage in global

strategic coordination

Strategic Alliances Dr. George H. Webster

slide21

Advantages and Disadvantages

of Different Entry Modes

Entry Mode Advantages Disadvantages

Joint Ventures

Lack of control over

technology

Inability to engage in global

strategic coordination

Inability to realize location

and experience economies

Access to local partner’s

knowledge

Sharing development costs

and risks

Political acceptability

High costs and risks

Wholly owned

subsidiaries

Protection of technology

Ability to engage in global

strategic coordination

Ability to realize location and

experience economies

Strategic Alliances Dr. George H. Webster

creating value through strategic alliances1
Creating Value Through Strategic Alliances
  • The potential for merger synergy is greatest where both partners have significant overlapping geographic positions. Important sources of synergy are:
    • Consolidation on a national basis
    • Improving skills transfers across borders
  • By contrast strong overlapping geographic markets frequently suggest trouble for strategic alliances
creating value through strategic alliances2
Creating Value Through Strategic Alliances
  • Keys to success in alliances are complementary activities and well-matched functional strengths
  • Keys to success in M.&A. are often overlapping activities and skills
  • In cross-border M.&A. much of the value is based on sharing skills, products and customers across national borders

Strategic Alliances Dr. George H. Webster

advantages of global strategic alliances
Advantages of Global Strategic Alliances
  • Facilitates entry into a foreign market
  • Share costs and risks associated with development of new products or processes
  • Bring together complementary skills and assets that neither company could easily develop on its own
  • Might help the company set technological standards for its industry
disadvantages of global strategic alliances
Disadvantages of Global Strategic Alliances
  • Give competitors a low cost route to gain new technology and market access

Strategic Alliances Dr. George H. Webster

choosing partners
Choosing Partners
  • Alliance partners should be complementary in products, geographic presence or functional skills they bring to venture
  • Complementarity between technology partners

Strategic Alliances Dr. George H. Webster

slide27

High-Tech Alliances Driven by Economic Factors

Increasing

development

cost

Shorter

product

life-cycles

Speed

new product

introduction

Develop

upstream

technology

Building new

businesses/

introducing

new products

Leapfrog

generation

of product

technology

Increasing

attractiveness of

strategic alliances

Achieve

market

penetration

Increase

capacity

utilization

Improving

economics of

existing

businesses

Fill

product

line

gaps

Exploit

economies

of scale

Increasing

cost pressure

Globalization

final thoughts on strategic alliances
Final Thoughts on Strategic Alliances
  • Expanding existing businesses into new geographic regions
  • Acquisitions successful in building core business in existing geographic market
  • Alliances work well for moving into new businesses

Strategic Alliances Dr. George H. Webster

final thoughts on strategic alliances1
Final Thoughts on Strategic Alliances
  • Equal strength partners more likely to be successful
  • Autonomy and flexibility
  • Issue of ownership should be separated from managerial control
  • Realize that joint venture fill intermediate-term needs but may mortgage long-term global future

Strategic Alliances Dr. George H. Webster

pirelli cooper a strategic alliance example
Pirelli-Cooper- a Strategic Alliance Example
  • Pirelli designated Cooper as exclusive distributor of Pirelli tires in N. A.
  • Cooper supplies tires for the replacement market
  • Cooper needs a major brand to complement its own
  • Pirelli gives Cooper a “ tier one” product (meets O.E.M. standards)
  • Cooper can now supply a complete line of tires
  • Pirelli will use Cooper’s strong dealer relationships in U.S.
let s make a deal a proposed strategic alliance
“Let’s Make a Deal”- A Proposed Strategic Alliance
  • General Electric’s contribution:
  • G.E. will invest $500 million to develop an enlarged version of the GE90 (777)
  • The engine will have a 5,000-pound thrust margin over the competition
  • G.E. Capital will finance 747 sales, either through lease or sale in Asia
  • Boeing’s contribution:
  • Boeing must proceed to develop the 777 (by 2003)
  • Cost of development will be at least $1 Billion
  • Boeing must make G.E. the sole engine supplier
let s make a deal a proposed strategic alliance1
“Let’s Make a Deal”- A Proposed Strategic Alliance
  • General Electric receives:
  • $20 Billion contract from Boeing
  • Engine sales for 20 years
  • Approximately 20 per cent return on 747 sales/lease
  • Boeing receives:
  • Exclusive use of an engine that which will make the 777 competitive with the Airbus A340
  • Financing help with the sale of 747’s (critical in Asia)