BSCI 371

Mergers Acquisitions & Alliances

SU E5
 Today’s lecture

Content

❖ Mergers & Acquisitions, types and processes

❖ Strategic alliances, types and processes
 Learning outcomes
E5 Mergers, Acquisitions and Alliances
On completion of this study unit you should be able to:

❖ Discuss and apply selected aspects relating to Mergers,

Acquisitions and Alliances.

❖ Discuss and apply the motives and processes relating to

Mergers, Acquisitions and Alliances.

❖ Discuss the different types and nature of mergers, acquisitions

and strategic alliances.

❖ Analyse, contrast and evaluate between mergers, acquisitions

and strategic alliances as business growth strategies.
 Study material
Correia. Financial Management (9th edition)
Chapter 17 (Par 1 only)

Whittington. Exploring Strategy (12th edition)

Chapter 11 (Par 11.1, 11.3 & 11.4)
Mergers and Acquisitions (M&A) activity
Means
Consolidation of Companies

However, there is a significant difference between a Merger and an Acquisition

 Mergers & Acquisitions
Merger:
Two firms of the approximately the same size join forces and evolve into a
new entity with a new configuration of ownership.
→Shares of both companies ceases to exist, and new shares are issued.
1. Merger = Combine
• A merger describes two firms of approximately the same size amalgamating into a new single new entity.
• This is often referred to as a "merger of equals."
• The shares of both firms are surrendered, and shares of the new entity are issued in its place.
Generally, mergers are separated into one of three forms.

• 1. Horizontal merger -- one firm mergers with another that produces and sells
an identical or similar product in the same geographic area
For example, this is done to become larger with more
bargaining power

• 2. Vertical Merger -- One in which involves the coupling of a customer and a supplier.
For example, this is often done to gain better access to end users and better market visibility

• 3. Conglomerate mergers encompass all other combinations, including pure conglomerate transactions
where the merging parties have no evident relationship.
• For example, Internet company merges with a chain of restaurants.
 Mergers & Acquisitions
Acquisition:
One company consumes another, and the identity of the acquiring firm
continues while that of the acquired company ceases to exist.

→ Shares of acquired firm ceases to be traded while the shares of the

acquiring firm continues.
2. Acquisition = Obtain/Take control

• In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm.
• The acquired firm ceases to exist, while the legal status and formal name of the acquiring firm rarely changes.

As in the case of a merger, acquisitions are divisible into Horizontal, Vertical, and Conglomerates.
However, they can be further separated into
• 1. Hostile (not welcome by takeover target)
• 2. Friendly (or invited) (welcome by takeover target)
 Strategic objectives and Potential benefits of M&As?
Revenue growth,
New knowledge and innovative energies
Reduced costs through synergy,
Stronger balance sheet
Greater visibility to customers,
Expanded leverage with suppliers, and/or
Transitioning into new lines of business

M&As can be in fields that are:

Closely related: Strategy – strengthen competitive advantage within strategic group
Somewhat related: Strategy – strengthen competitive advantage by extending beyond current strategic group
Unrelated related: Strategy – strengthen competitive advantage by diversifying into new industries.
 Types of Mergers

(Correia par 1)

Horizontal mergers– 2 firms in the same industry amalgamate, eg

Shoprite & Checkers

Vertical mergers – A firm expands either forward (merges with

customer), or backwards (merges with a supplier).

Conglomerate mergers – Firms in unrelated lines of business merge.

 Mergers & Acquisitions
(Whittington par 11.3.1)
Growth strategies defined as follows;

Merger- a combination of 2 previously separate organizations (often of similar

size) to form a new company, generally with equal status.

Acquisition – An acquirer takes control of another company through

purchasing the majority shares in the target company. Maybe friendly or
hostile. Generally, acquirers are larger that the target company.

M & A are partly regulated by the Companies Act 71 of 2008.

 Mergers & Acquisitions motives
(Whittington par 11.3.3)

Strategy Category Example

Extension Market Penetration. Market Development (increase market share)
Strategic Motives Consolidation Horizontal Intergration (Improve competitive advantage)
Resources & capabilities Improved resouces, skills, Technology, R & D
Financial Efficiency Highly indebted company is acquired & accesses funds
Financial Motives Tax Efficiency Access to tax advantages, eg transferability of tax losses
Asset Unbundling Stripping or unbundling underlying assets of target company
Personal Ambition Managers'personal profile enhancements
Managerial Motives Bandwagon Effects Pressure on managers to join the acquisition bandwagon
 Mergers & Acquisitions processes
(Whittington par 11.3.4)
There are 2 main criteria to apply;
Strategic fit – Does target firm strengthens and compliments acquiring firm’s
strategy, objectives, synergy, etc.

Organisational fit – Is there a match between the 2 firms with regards to

management practices, cultural practices, staff characteristics. Mismatches may
cause integration problems.
 Mergers & Acquisitions processes
(Whittington par 11.3.4)
Negotiation in M&A
❖ Negotiation process is critical

❖ Agreement is key

❖ Offer too little … not deal

❖ Offer too much … likely to make a loss on the acquisition

 Mergers & Acquisitions processes
(Whittington par 11.3.4)
Integration in M&A
❖ Value extractions on the acquisition depends on integration

❖ Challenges
❖ Culture
❖ Systems

❖ Most suitable approach depends on two criteria

❖ The extent of strategic independence
❖ The need for organisational autonomy

For purposes of this study unit, figure 11.3, the five integration approaches and par
11.3.5 are excluded.
Strategic Alliances are
different from M&As.

But how?
 Strategic Alliances
Are:
➔ Formal relationships between two or more corporations
with a mutual set of goals.

➔ They offer Competing companies' unique opportunities to

prosper through collaborative efforts rather than competing
activities.
 COLLABORATIVE vs. COMPETITIVE

Strategic Alliances
Three most common Strategic Alliances are:
(1) Licensing arrangements: greatest individuality
(2) Joint ventures: more closely align the two firms
(3) Cross-holding arrangements (CHAs): most complex
[with CHAs, each company takes equity stakes]

Strategic Alliances do not transform either company into a new

company. Each firm remains completely independent.
 STRATEGIC ALLIANCES
Whittington Par 11.4

❖ Where 2 or more organisations share resources and activities to

pursue a common strategy.

❖ To gain market share, competitive advantage, pool resources or

establish economies of scale.

❖ Eg, the strategic alliance between Spotify and Uber allows Uber
users to connect to Spotify and stream their favourite music while
on ride.

❖ Heineken entered into a strategic alliance with SA Breweries that

they licences SAB to manufacture and market their products, such
as Amstel Lager because it was expensive and time consuming for
Heineken to create their marketing channel.
 Types of Strategic Alliances
Whittington Par 11.4.1

• Equity Alliance – eg, 2 partners form a joint venture with 50/50%

ownership.

• IBM, Hewlett-Packard, Toshiba & Samsung jointly formed a

research consortium - Sematech to research on the latest
technologies.

• Non-Equity Alliances – often based on contract without the

commitment implied by ownership.

• Eg, Franchising, where the franchisor gives the franchisee the right
to sell the franchisor’s products / services in a particular location in
return for a fee or royalty.
Strategic Alliances Motives
Whittington Par 11.4.2
 Strategic Alliances Motives
Whittington Par 11.4.2

Scale Alliances – Combine to achieve necessary scale. A & B are similar, but
together they achieve what they could not manage on their own, like economies of
scale, and sharing risks.

Access Alliances – To access required capabilities of another organisation. B

is critical to A’s ability to, for example, sell its products.

Complementary Alliances – Organisations combine their distinctive

resources to bolster each partner’s particular gaps or weaknesses. A’s strengths
match with B’s weaknesses, and vice versa. Eg Nissan-Renault Alliance.

Collusive Alliances – Organisations collude together into cartels for market

power or reduced competition. May be illegal, hence no formal agreements between
A & B.
Strategic Alliances Processes
Whittington Par 11.4.3
 Strategic Alliances Processes
Whittington Par 11.4.3

In alliances, neither party is in control, therefore the importance of 2

principles;

Co-evolution- Realignment & flexibility, as, partners, strategies, capabilities and

environments constantly change.

Trust – Reliability & integrity.

The strategic Alliance Evolution

Courtship – Willingness of each partner is required. Each partner to consider
their strategic fit and organisational fit.

Negotiations – Negotiate mutual roles, proportions of ownership, profit sharing,

managerial responsibilities, dispute resolutions, etc.
 Strategic Alliances Processes
Whittington Par 11.4.3
The strategic Alliance Evolution (continues)

Start-up – Very critical. Agreements are put to test, & adjustments may be made.

Maintenance – Maintain cooperative relations necessary for day to day working of

the alliance. Allow for changing external circumstances

Termination – Amicable when the time span has been reached, or the purpose
has been achieved. Extended when successfully completed, and new agreements,
and new terms are agreed upon. Divorce when there are disagreements.
Any questions ??