Barney SMCA4 10

Chapter 10
Mergers and Acquisitions
Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall.
10-1
Mergers andAcquisitions Mergers & Acquisitions
The Strategic Management Process

External Analysis Strategic Choice
Mission
Objectives
Strategy Implementation
Competitive Advantage
Internal Analysis
Which Businesses to Enter? Corporate Level Strategy
Vertical Integration Diversification

Mode of Entry? Strategic Alliances Mergers & Acquisitions
Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall. Strategic Management & Competitive
Advantage Barney & Hesterly
10-2 2
Logic of Corporate Level Strategy Applies

Corporate level strategy should create value:
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

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Mergers & Acquisitions Defined

Mergers
two firms are combined on a relatively co-equal basis
Acquisitions
one firm buys another firm
the words are often used interchangeably even though they mean something very different
merger sounds more amicable, less threatening

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Mergers
parent stocks are usually retired and new stock issued name may be one of the parents or a combination one of the parents usually emerges as the dominant management
Acquisitions
can be a controlling share, a majority, or all of the target firms stock can be friendly or hostile usually done through a tender offer
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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
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Types of M&A Activity FTC Categories Vertical Horizontal Related Product Extension complementary products Market Extension complementary markets Unrelated Conglomerate everything else
suppliers or customers competitors
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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.
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The Empirical Evidence
Research is based on stock market reaction to the announcement of M&A activity
this reflects the markets assessment of the expected value of the merger or acquisition these studies look at what happens to the price of both the acquirers stock and the targets stock thus, we can see who is capturing any expected value that may be created
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The Empirical Evidence
M&A Activity creates value, on average, as follows:
Acquiring Firms
no value created
Target Firms
value increases by about 25%
related M&A activity creates more value than unrelated M&A activity
M&A activity creates value, but target firms capture it

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Expected versus Operational Value
April 2000: Wells Fargo offers to acquire First Security Bank for about $3 billion Expected
The Deal: Stock values were: Wells Fargo: $43.69 First Security: $15.50 .355 shares of WF for each share of FS stock Wells Fargo: down $0.25 to $39.50 First Security: up $1.19 to $13.38 Stock Price 12/1999 $40.44 12/2000 $56.69 12/2001 $43.60 12/2002 $46.87 12/2003 $58.89 12/2004 $62.15
Operational
Market Cap. $65.7 B $95.2 B $74.0 B $82.0 B $100.0 B $105.0 B

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Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not capture any value from M&As, why do they continue to merge and acquire?
avoid competitive disadvantage avoid scale disadvantages
Survival
Free Cash Flow
cash generating, normal return investment
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Agency Problems
managers benefit from increases in size

managers benefit from diversification
Managerial Hubris
managers believe they can beat the odds
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some M&A activity does generate above normal profits (expected and operational over the long run) Above Normal Profits
proposed M&A activity may satisfy the logic of corporate level strategy
managers may see economies that the market cant see
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Can an M&A strategy generate sustained competitive advantage? Yes, if managers abilities meet VRIO criteria
1
Managers may be good at recognizing & exploiting potentially value-creating economies with other firms Managers may be good at doing deals Managers may be good at both
2 3
10-15 15
Recognizing and Exploiting Economies of Scope
Private Economies Firm A Firm C Firm B Bidders Target Firm Cs recognized value is $10,000 Firm A sees value of $12,000 in Firm C Firm A can earn a profit of $2,000 only if the economy remains private
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Costly-to-Imitate Economies Firm A if the economy between A & C is costly to imitate, it doesnt matter if other firms know Firm A can still earn a $2,000 profit
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Firm C
Firm B Bidders Target
Unexpected Economies Firm A Firm C Firm B Bidders Target
Firm C has a market value of $10,000 Firm A buys Firm C for $10,000 Firm C turns out to be worth $12,000
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Doing the Deal
Search for Rare Economies
Seek Thinly Traded Markets Bidding Firms Perspective Limit Information to Other Bidders
Close the Deal Quickly
Limit Information to the Target
Avoid Bidding Wars

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Doing the Deal
Seek Information from Bidders
Target Firms Perspective
Invite Other Bidders to Join in Bidding Contest
Delay, But Do Not Stop the Acquisition

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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 policies are 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

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Implementation Issues
Cultural Differences
high levels of integration require greater cultural blending 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 source of competitive advantage

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Summary
M&A activity is a mode of entry for vertical integration and diversification strategies A firms 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
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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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Chapter 10

Mergers and Acquisitions

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall.

Mergers andAcquisitions Mergers & Acquisitions

The Strategic Management Process

Which Businesses to Enter? Corporate Level Strategy

Vertical Integration Diversification

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Logic of Corporate Level Strategy Applies

3) that equity holders cannot create through portfolio investing

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Mergers & Acquisitions Defined

merger sounds more amicable, less threatening

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Mergers & Acquisitions Defined

Mergers andAcquisitions Mergers & Acquisitions

Do Mergers and Acquisitions Create Value?

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Mergers & Acquisitions Defined

suppliers or customers competitors

Mergers andAcquisitions Mergers & Acquisitions

Do Mergers and Acquisitions Create Value?

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Do Mergers and Acquisitions Create Value?

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Do Mergers and Acquisitions Create Value?

value increases by about 25%

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

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Do Mergers and Acquisitions Create Value?

Market Cap. $65.7 B $95.2 B $74.0 B $82.0 B $100.0 B $105.0 B

Mergers andAcquisitions Mergers & Acquisitions

Why is M&A Activity So Prevalent?

Free Cash Flow

cash generating, normal return investment

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Why is M&A Activity So Prevalent?

managers benefit from increases in size

managers believe they can beat the odds

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Why is M&A Activity So Prevalent?

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Mergers andAcquisitions Mergers & Acquisitions

Mergers andAcquisitions Mergers & Acquisitions

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Mergers andAcquisitions Mergers & Acquisitions

Close the Deal Quickly

Limit Information to the Target

Avoid Bidding Wars

Advantage Barney & Hesterly

Mergers andAcquisitions Mergers & Acquisitions

Target Firms Perspective