Introduction to Mergers and

Acquisitions Strategy
Prof Ashutosh Kumar Sinha
IIM Lucknow

References: Bower J. (2001) Not all M&As are alike: and that Matters, HBR
Terence Fan (2008), Creating Value through Mergers and Acquisitions: A
Conceptual Primer
 Once upon a time...
• There was a cake and bakery shop called ‘BigCakes’

• The sole proprietor

– bought eggs and flour
– converted it into cake batter
– baked the batter into cakes in the oven
– Sold directly to the customers

• Slowly, the profits grew...

What to do with the excess cash?
 Some Options…
• Accumulate more cash?

• Distribute part/ all to the owner?

• Expand the business?

– Make/ sell more cakes in the same shop
– Open more shops

• Develop new business?

– Trading baking equipment
– Online cake ordering

• Acquire/ merge with other businesses?

– Consider tradeoffs between organic growth and growing
through M&A
 Organic Growth vs. M&A
FAVOURS ORGANIC GROWTH FAVOURS MERGERS AND
ACQUISITIONS

Customer Behavior - Low switching cost - High switching cost

- Low customer acquisition cost - High customer acquisition cost
- High growth Customer Base - Low growth Customer Base

Time to grow - Longer time frame to grow - Shorter time frame to grow
- More uncertainty allowed - Less uncertainty allowed

Resource -Few resource constraints - Limited input resources

Limitations - Have own technology - Need to acquire new technology
 Another cake shop...
• ‘Smallcakes’
– Is open to selling the business
– Smaller in size
– Uses slightly different set of ingredients and baking equipment
– Located in different neighborhood with different set of clientele
 Buy and Hold
BigCakes Buys and Holds SmallCakes
Strategy: BigCakes + SmallCakes = BigCakes + SmallCakes
Profit : x + y = x+y
Revenue
Cost

Example: Ford Motors acquisitions of different brands in Europe

 Buy and ‘Copy Paste’
• Can make sense if
– Smallcakes is loss making
– Customers spend the same amount, and their tastes do not differ
much

• A Win-Win game
– Value is created both for the firms as well as for society

• ‘Geographic Roll-up’ M&As

– Target firm may welcome acquirer’s resources and competences
• streamlined processes; economies of scale & scope
• Access to capital,
• National marketing
• Modern technology
– If strong culture is in place, need to introduce new values with care
– Usually goes smoothly, but relative size matters
 Buy and ‘Copy Paste’
BigCakes Buys and Copy Pastes its model to SmallCakes
Strategy: BigCakes + SmallCakes = 2 times BigCakes
Profit : x + (- y) = 2 (x)
Revenue
Cost

Example: HSBC’s acquisition of distressed banks world-wide, and

transforming them.
 Buy and Close
• Assumes BigCakes has sufficient production capacity

• Can meet opposition from regulatory authorities as this reduces

level of competition in the market

• ‘The Overcapacity M&A’

– Older, capital intensive sectors
– Acquirer can close less competitive facilities, eliminate less
effective managers, and rationalize administrative processes
– Eliminate excess capacity, gain market share
– A win-lose game
– Difficult to pull off when acquirer and target are similar in size
 Buy and Close
BigCakes Buys and Closes Down Nearby SmallCakes
Strategy: BigCakes + SmallCakes = BigCakes
Profit : x + (- y) = x+z
Revenue
Cost

Example: Boeing’s acquisition of McDonnell Douglas in Airframe Industry

 Buy and Squeeze
• Take advantages of synergies
– Operational
– Managerial
– Financial
• Economies of Scale
• Economies of Scope
• If resources are not scarce, and entry is not restricted, organic
growth for achieving EoS is also possible
 Buy and Squeeze
BigCakes Buys (Copy-pastes itself to SmallCakes) and Squeezes
SmallCakes
Strategy: BigCakes + Former SmallCakes = BigCakes
Revenue: w + w = 2 (w)
Profit : x + x = > 2 (x)
Variable
Cost
Fixed
Cost

Examples: Acquisitions undertaken by firms in industries with large

infrastructure costs- Telecommunications, Airlines.
 Buy and Squeeze More
BigCakes Buys (Copy-pastes) and Squeezes SmallCakes More
Strategy: BigCakes + Former SmallCakes = BigCakes
Revenue: w + w = 2 (w)
Profit : x + x = >> 2 (x)
Variable
Cost
Fixed
Cost

Example: Proliferation of retail chains, fast food chains through acquisitions

 Buy and Cross Sell
• Sell SmallCakes’ products in BigCakes’ neighborhood and vice-
versa

• Can enhance revenues even if there are no cost savings

• Example:
– Permitting mergers between bank and insurance firms
• Travelers Insurance and Citigroup
 Some other M&A Strategies
• Product or Market extension M&A
– Acquisitions extend a company’s product line or its international
coverage
– Issues
• To know what you are buying
• Cultural distance
• Relative size
• Previous experience

• M&A as R&D
– Build a market position quickly, without in-house R&D
– Issues
• Need to have good evaluation processes in place
• Cultural distance
• Talent must be retained
 Some other M&A Strategies
• The Industry Convergence M&A
– An entrepreneurial move
• Resources are culled from existing industries with eroding
boundaries, and new industry may emerge
• E.g. computers and telecommunication industries

– Issues
• Assimilation is not a priority- no focus on creating a symmetric
organization
• Focus on what to integrate and what to leave out
• Success depends not only on making a good buy and successful
integration, but also on evaluation of industry boundaries
 Not all M&A’s create value!

‘Many managements...are certain their managerial kiss will do

wonders for the profitability of the company T(arget)....We’ve
observed many kisses but very few miracles’
-Warren Buffet, 1981
Thank you