Mergers & Acquisitions

Learning Objectives
1. Define alliances and acquisitions.
2. Articulate how institutions and resources influence
alliances and acquisitions.
3. Describe how alliances are formed.
4. Outline how alliances are dissolved.
5. Discuss how alliances perform.
6. Explain why firms make acquisitions and what
performance problems they tend to encounter.
7. Articulate what you can do to make global alliances
and acquisitions successful.

Target Nationality

Source: January 6, 2011, The Economist, http://www.economist.com/node/17851583

United-Continental Merger
United-Continental Merger

Truly United?

GM and Daewoo
Why did GM and Daewoo form strategic
alliances?
Why did they choose a JV form both times?
Why did one JV fail but the second JV (an
acquisition) succeed?

Definitions
Strategic Alliances: Voluntary agreements
between firms involving exchange, sharing or codeveloping of products, technologies, or services

Acquisition: Transfer of the control of operations and

management from one firm (target) to another (acquirer),
the former becoming a unit of the latter.

Merger: Combination of operations and management

of 2 firms to establish a new legal entity. Eg: South
African Brewery and Miller Beer merging to become
SABMiller.

Institution based View

Alliances function within a set of formal legal
and regulatory frameworks.
Antitrust concerns
Entry mode requirements

Resource-based View
Value
Rarity
Imitability
Organization

Merger Nervousness or Antitrust Concerns

Proposed Merger: American Airlines & British
Airways

Solution: Alliance between the two: One World

Formal Requirements on Entry Modes

Many countries discourage/ban acquisitions to
establish wholly owned subsidiaries (WOSs)
Result: Alliance with local firms
Recent trends:
1) More liberal policies
2) Many governments still impose big
requirements on acquiring domestic
assets
Ex: Chinese automobile and Russian oil
industry permitting only JVs.

Influence of Informal Institutions

Collective Norms:
Copying others to maintain legitimacy
Cognitive Pillar:
Internalized values and beliefs guiding
alliances and acquisitions

Alliances Must Create Value

Reduce costs, risks, and uncertainties
Allow firms to tap into partners'
complementary assets and facilitate learning
(eg: Sony Ericsson JV)
Value as real options (ie: investment in real
operations rather than financial capital)
Alliances permit firms to sequentially increase
their investment for potential acquisition.

Alliances Drawbacks
1) Possibility of being stuck with wrong partner

2) Potential partner opportunism

Acquisitions and the VRIO

framework
70% of acquisitions reportedly fail
Shareholders stand a chance to gain from an
acquisition premium
Firms must have rare skills to make
acquisitions work
Organization is key to success (eg: Northrop)

Alliance Formation
Diagram Handout

Alliance Dissolution
Initiatio
n

Reconciliatio
n

Going
Public

Reconciliation

Mediation by 3rd
Parties

Last-Minute
Salvage

Uncouplin
g
Aftermat
h

Go Alone

New
Relationship

Motives for Acquisitions Institution-based

Issues
Synergistic motives: Respond to formal
institutional constraints and transitions
Hubristic motives: herd bebaviour (the M&A fad)
Managerial motives: self-interested actions

Motives for Acquisitions Resource-based

Issues
Synergistic motives:
Leverage superior managerial capabilities
Enhance market power and scale
economies
Access to complementary resources
Hubristic motives: Managers' over-confidence in
their capabilities

Problems for all M&As

Managers over-estimate their ability to create
value
Inadequate pre-acquisition screening
Poor strategic fit
Poor organizational fit
Failure to address multiple stakeholder
groups' concerns

Problems for cross-border M&As

Lack of familiarity with foreign cultures,
institutions, and business systems
Nationalistic concerns against foreign
takeovers (political and medial levels)
Clashes of organizational cultures
compounded by clashes of national cultures
Nationalistic concerns against foreign
takeovers (firm and employee levels)

What can be done to make global

alliances and acquisitions
successful?

Recipe For Success

Understand and master the rules of the game
governing alliances and acquisitions globally.
Pay attention to soft relationship aspects when
managing alliances.
When managing acquisitions:
1) Do not over-pay.
2) Focus on both strategic and
organizational fit.
3) Thoroughly address integration
concerns.

Lenovo and IBM: An Acquisition and

an Alliance
Discussion (Handout)