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MGT. 5391 M&A: Mergers/Acquisitions

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  1. MGT. 5391 M&A: Mergers/Acquisitions D:/Macy Class/MGT 5391/Spring 2006/MandA

  2. Quiz #4 • Why do approximately 85% of “M&A’s” fail? • Why are Cisco’s acquisitions’ successful? • How many internal groups or teams does Cisco use in their acquisitions? • What are the names of these Cisco groups or teams? • What are “Enterprise Teams”? Where are they located at? D:/Macy Class/MGT 5391/Spring 2006/MandA

  3. External Market and Other Forces A Firm’s Internal and External Growth Strategies Market/Customer Insights Commercial Organizational Corporate And Business Strategies Value Chain: Core Competencies Identification Increased Capabilities (Internal Growth) Increased Performance Outsourcing (Non- Core Competencies) Team/Individuals Technological M&A/JV’s (External Growth) D:/Macy Class/MGT 5391/Spring 2006/MandA _____ Source: Barry A. Macy, Successful Strategic Change, Berrett-Koehler Publishers, San Francisco, CA. (forthcoming)

  4. Mergers and Acquisitions: Three Types Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm D:/Macy Class/MGT 5391/Spring 2006/MandA

  5. Remember: Approximately 85% Of all M&A’s are FAILURES!! (Why?) D:/Macy Class/MGT 5391/Spring 2006/MandA

  6. Strategic Alliance Model: The Five Most Frequent Types of Alliances/M&A Competitors Key Suppliers Retail Store Or Large Preferred Consumers Customer Accounts Firm Supply Chain Demand Chain D:/Macy Class/MGT 5391/Spring 2006/MandA

  7. Question:In what world region M&A’s perform well? • North America • Asia • Europe D:/Macy Class/MGT 5391/Spring 2006/MandA

  8. Increased market power Integration Difficulties/Cultures Overcome entry barriers Inadequate evaluation of target Cost of new product development Large or extraordinary debt Increased speed to market Acquisitions Inability to achieve synergy Lower risk compared to developing new products Too much diversification Increased diversification Managers overly focused on acquisitions Avoid excessive competition Too large Reasons for Acquisitions Problems in Achieving Success D:/Macy Class/MGT 5391/Spring 2006/MandA

  9. Increased Market Power Acquisition intended to reduce the competitive balance of the industry Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive Lower Cost and Risk of New Product Development Buying established businesses reduces risk of start-up ventures Reasons for Acquisitions Example: British Petroleum’s acquisition of U.S. Amoco Example:Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group Example:Watson Pharmaceuticals’ acquisition of TheraTech D:/Macy Class/MGT 5391/Spring 2006/MandA

  10. Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Diversification Quick way to move into businesses when firm currently lacks experience and depth in industry Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a single or a few products or markets Reasons for Acquisitions Example:Kraft Food’s acquisition of Boca Burger Example:CNET’s acquisition of mySimon Example:General Electric’s acquisition of NBC D:/Macy Class/MGT 5391/Spring 2006/MandA

  11. Integration Difficulties Only a “financial team” assembled and they make “the decision” (should have two teams: one financial And one organizational – where the organizational Team says “Yes” or “No” (i.e., Cisco & G.E.) Differing financial and control systems can make integration of firms difficult Problems with Acquisitions Example:Intel’s acquisition of DEC’s semiconductor division D:/Macy Class/MGT 5391/Spring 2006/MandA

  12. Inadequate Evaluation of Target “Winners Curse” bid causes acquirer to overpay for firm Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Problems with Acquisitions Example:Marks and Spencer’s acquisition of Brooks Brothers Example:AgriBioTech’s acquisition of dozens of small seed firms D:/Macy Class/MGT 5391/Spring 2006/MandA

  13. Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Managers Overly Focused on Acquisitions Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy Too Large Large bureaucracy reduces innovation and flexibility Problems with Acquisitions Example:Quaker Oats and Snapple Example:GE--prior to selling businesses and refocusing Example:Ford and Jaguar D:/Macy Class/MGT 5391/Spring 2006/MandA

  14. + Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness + Friendly Acquisitions Friendly deals make integration go more smoothly + Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies + Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone Attributes of Effective Acquisitions D:/Macy Class/MGT 5391/Spring 2006/MandA

  15. + Low-to-Moderate Debt Merged firm maintains financial flexibility + Flexibility Has experience at managing change and is flexible and adaptable + Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy Attributes of Effective Acquisitions D:/Macy Class/MGT 5391/Spring 2006/MandA

  16. + Sabre paid $758M + ONLY did an “accounting/financial assessment” No Org./Culture assessment + Outcome: It will take 10 years for them to payback Rule of thumb = 5 years pay back Case Example: Sabre and Get There D:/Macy Class/MGT 5391/Spring 2006/MandA

  17. M&A Summary • Current Dilemma in Creating Profitable Growth • High Failure Rate of M&A • Tempting to focus on what is wrong with M&A and pass on acquisitions • Approximately 85% of all M&A’s are failures • Organic (internal) growth is hard • Most companies have to grow externally to meet shareholder expectations. D:/Macy Class/MGT 5391/Spring 2006/MandA

  18. M&A Summary • Questions Managers Should Ask About M&A • What are the common denominators of companies that are successful at M&A? • How do successful companies organize and approach M&A? • Are these methods transferable to other firms? D:/Macy Class/MGT 5391/Spring 2006/MandA

  19. M&A Summary • Bain & Co. Study • 724 publicly held U.S. firms • Measured performance over 15 year period: 1968-2001 • Compared firms’ behavior across 7,476 acquisitions to the excess return they provided to shareholders D:/Macy Class/MGT 5391/Spring 2006/MandA

  20. M&A Summary • Key Findings of Study • Bank on Experience • Frequent buyers outperform both non-buyers and infrequent buyers • Think Small • Shareholder returns are negatively correlated with deal size • Small M&A deals are most successful D:/Macy Class/MGT 5391/Spring 2006/MandA

  21. M&A Summary • Key Findings cont’d • Don’t assume home runs • Do not put “all of your eggs in one basket” by only doing a few big M&A deals • Buy in fair and foul weather • Develop a rigorous program of M&A and stick to it • Constant buyers are most successful D:/Macy Class/MGT 5391/Spring 2006/MandA

  22. M&A Summary • Key Findings (cont’d) • Reinforce M&A commitment • Frequent buyers succeed because they are organized and have institutionalized disciplines • There is no magic in making M&A deal work • Firms that are successful at M&A make it an integral part of their strategies and support M&A just as they would any other core competency D:/Macy Class/MGT 5391/Spring 2006/MandA

  23. M&A Summary • How to Succeed at M&A • Get in the game, start small, ramp up • Frequent acquirers outperform other companies • Firms that focus on small deals (less than 15% of buyer size) have the highest returns • Combining deal frequency (high vs. low) with deal size (big vs. small) forms 5 strategic approaches to M&A D:/Macy Class/MGT 5391/Spring 2006/MandA

  24. M&A Summary • 5 Approaches to M&A • Mountain Climbing • Frequent acquirers that start with small deals and ramp up to larger ones • Stringing Pearls • Frequent acquirers that focus on small targets • Betting Small • Infrequent acquirers that set their sights on small targets • Rolling the Dice • Infrequent acquirers that make a few big bets • Playing Dead • Firms that do not do M&A D:/Macy Class/MGT 5391/Spring 2006/MandA

  25. M&A Summary • 5 Approaches to M&A (cont’d) • The worst strategy is Rolling the Dice • Most firms that make a few big bets, are infrequent acquirers with no M&A experience • Like putting a teenager behind the wheel of an 18-wheeler—little mistakes can be devastating • Difficult to integrate with larger targets • The best strategy is Mountain Climbing • Frequent buyers work their way up from small to large firms and gain experience on the way D:/Macy Class/MGT 5391/Spring 2006/MandA

  26. M&A Summary • How to Succeed at M&A • Avoid Rookie Mistakes • Acquire companies that best fit your organization’s strategy • Do not buy firms just because they are available or look cheap • Consult the frontline managers • These are the people who can best assess the quality of the target and will be responsible for the new firm • Develop a planned process for M&A • Helps avoid “deal fever” D:/Macy Class/MGT 5391/Spring 2006/MandA

  27. M&A Summary • How to Succeed at M&A (cont’d) • Use Dollar Cost Averaging • Constant Buyers—buy consistently through all economic cycles • Recession Buyers—increase frequency of buying during recessions • Growth Buyers—buy mainly during economic growth • Doldrums Buyers—buy in stable periods between recession and growth D:/Macy Class/MGT 5391/Spring 2006/MandA

  28. M&A Summary • How to Succeed at M&A • The most successful strategy is the constant buyer • These firms buy high and they buy low • Similar to the way dollar cost averaging is treated in mutual funds • Always on the hunt for deals. D:/Macy Class/MGT 5391/Spring 2006/MandA

  29. M&A Summary • How to Succeed at M&A (cont’d) • Get on the Learning Curve • Start with small, low risk deals and build M&A capabilities • Institutionalize M&A processes • This helps the firm to quickly recognize strategically fit deals, evaluate them, seal the contact, and integrate the acquired company • Create a feedback loop to learn from mistakes D:/Macy Class/MGT 5391/Spring 2006/MandA

  30. M&A Summary • How to Succeed at M&A • Build a Standing Deal Team • Maintain an experienced core M&A team • This team serves as a firm’s institutional memory bank as members learn lessons from each deal • Deal team members are in charge of the entire purchase—from screening to due diligence • Core deal team should stay involved in integration • Company should do post-mortem after every M&A to update deal guidelines and learn from mistakes D:/Macy Class/MGT 5391/Spring 2006/MandA

  31. M&A Summary • Deal Teams at Clear Channel Communications • Clear channel has a central M&A team at its company headquarters • 3 person team that imposes clear criteria for every purchase (Problem!) • Local M&A teams in each of its three major divisions—radio, outdoor displays, and entertainment • Work with line management to look for and evaluate deals • Are in the best position to size up prospects and evaluate synergies according to central team criteria D:/Macy Class/MGT 5391/Spring 2006/MandA

  32. M&A Summary • How to Succeed at M&A (cont’d) • Pull in Line Management Early and Often • These are people that will be responsible for integrating and running the acquired business D:/Macy Class/MGT 5391/Spring 2006/MandA

  33. M&A Summary • Line Management Involvement at Washington Mutual • 6 member core deal team picks and analyzes acquisition prospects • Deal team seeks advice and help from business unit leaders who know operations best • This collaboration helps ensure that the right decisions are made at the right price • Kick starts integration • Early understanding and buy-in from business units D:/Macy Class/MGT 5391/Spring 2006/MandA

  34. M&A Summary • How to Succeed at M&A (cont’d) • Find Ways to Kill Deal Fever • Be prepared to walk away from a bad deal • Insist on high-level management approval for all M&A • Use a compensation system to ward off ill-considered acquisitions • e.g. Clear Channel ties its M&A team’s pay to the contributions that acquisitions make to the firm’s financial performance • Set a walk-away price D:/Macy Class/MGT 5391/Spring 2006/MandA

  35. M&A Summary • Cintas—Successful Frequent Buyer • Cintas has supplemented its internal growth with the acquisition of hundreds of companies • Over the last 5 years, the firm has spent $3 billion on more than 250 acquisitions, driving 40% of its topline growth • Cintas is the market leader and revenues have risen over 20% per year to $2.3 billion in 2002 D:/Macy Class/MGT 5391/Spring 2006/MandA

  36. M&A Summary • Cintas—Successful Frequent Buyer • Cintas CEO Robert Kohlepp states: “Success depends on three things: top and line management involvement, institutionalizing the process of making acquisitions, and being willing to pass up a bad deal.” D:/Macy Class/MGT 5391/Spring 2006/MandA

  37. M&A Summary • Problems with Acquisitions • Only a “financial team” assembled and they make “the decision” • Should have two teams • One financial and one organizational—where the organizational team says “Yes” or “No” • A firm should maintain a core M&A team to deal with all aspects of a purchase D:/Macy Class/MGT 5391/Spring 2006/MandA

  38. M&A Summary • Problems with Acquisitions • Integration Difficulties • Differing financial and control systems can make integration of firms difficult • “Deal Smarts” authors recommend involving line management at an early stage to help with integration • Also discuss the need for an integration team to help make the transition smooth D:/Macy Class/MGT 5391/Spring 2006/MandA

  39. M&A Summary • Problems with Acquisitions (cont’d) • Inadequate Evaluation of Target • “Winners Curse” bid causes acquirer to overpay for firm • Article recommends developing a structured process for M&A and maintaining an experienced deal team in order to avoid “deal fever” • Managers Overly Focused on Acquisitions • Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy • This can be overcome by requiring high-level management approval for M&A and by tying compensation systems to acquisition performance D:/Macy Class/MGT 5391/Spring 2006/MandA

  40. M&A Summary • Problems with Acquisitions • Too Large • Large bureaucracy reduces innovation and flexibility • The best strategy is mountain climbing • Start with small deals and move up to big ones • The larger the target, the more difficult it will be to integrate D:/Macy Class/MGT 5391/Spring 2006/MandA