MANAGING

ORGANIZATIONAL
CHANGE (II):
M&A, Strategic Alliances
and Restructuring
The Issues

 Definitions of M&A and Alliances

 Reasons and Risks of M&A
 Attributes of Successful M&A
 Strategic Alliance
 Reasons of Strategic Alliance
 Restructuring Strategies

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Some Statistics (M&A)

 1980s
 Over 55,000 cases
 Total value of $1.3 trillion
 1990s
 Total values of $11 trillion
 2000 (peaked)
 $3.4 trillion
 Total value of deals is decreasing but the
number of cases is increasing.

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Currently Common Changes:
Mergers, Acquisitions & Alliances

 Merger
 Two firms agree to integrate their operations on a
relatively co-equal basis

 Acquisition
 One firm buys a controlling interest in another firm
with the intent of making the acquired firm a
subsidiary business or integrated part of its own
portfolio
 Horizontal/Vertical/Conglomerate M&As

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Currently Common Changes:
Mergers, Acquisitions & Alliances

 Takeover
 A special type of an acquisition strategy in which
the target firm did not solicit the acquiring firm’s
bid
 Strategic Alliance
 Firms work together without shared ownership or
management

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Economic Reason for M&As

 Efficiency theory
 When the management of firm A is more efficient
than the management of firm B, after firm A
acquires firm B, the efficiency of firm B is brought
up to the level of efficiency of firm A.
 When there is a potential for synergy.
 Inefficient Management theory
 When the management of firm A may be not
performing to its potential, the management will be
replaced.

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Other Reasons for M&As

Learn and develop

new capabilities
Increase Reshape firm’s
market power competitive scope

Overcome Acquisitions Increase

entry barriers diversification

Risk & Cost of new

product development Agency problems
Increase speed
to market
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Reasons for Making Acquisitions:
Increased Market Power

 Factors increasing market power

 When a firm is able to sell its goods or services
above competitive levels.
 When the costs of its primary or support activities
are below those of its competitors.
 Usually is derived from the size of the firm and its
resources and capabilities to compete.
 Market power is increased by
 Horizontal acquisitions
 Vertical acquisitions
 Related acquisitions

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Reasons for Making Acquisitions:
Overcome Barriers to Entry

 Barriers to entry include

 Economies of scale in established competitors.
 Differentiated products by competitors.
 Enduring relationships with customers that create
product loyalties with competitors.
 Acquisition of an established company
 May be more effective than entering the market as a
competitor offering an unfamiliar good or service
that is unfamiliar to current buyers.
 Provides a new entrant with immediate market
access.
 Cross-border acquisitions
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Reasons for Making Acquisitions:
Risk & Cost of New Product Development and Speed to
Market

 Significant investments of a firm’s resources are

required to
 Develop new products internally.
 Introduce new products into the marketplace.
 Acquisition of a competitor may result in
 More predictable returns.
 Faster market entry.
 Rapid access to new capabilities.
 Therefore, managers may view acquisitions as
lowering risk.

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Reasons for Making Acquisitions:
Agency problems

 Agency problems
 Occur when professional managers pursue their
own interests at the expense of shareholders.
 Take-over may mitigate agency problems.
 When a firm is mismanaged by self-interest
seeking managers, the firm doesn’t reach its
potential.
 Managers are motivated to increase firm size.
 Firm size is closely related with pay level.
 The more diversified a firm is, the lower the
employment risk is.
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Reasons for Making Acquisitions:
Increased Diversification

 It may be easier to develop and introduce new

products in markets currently served by the
firm.
 It may be difficult to develop new products for
markets in which a firm lacks experience.
 It is uncommon for a firm to develop new products
internally to diversify its product lines.
 Acquisitions are the quickest and easiest way to
diversify a firm and change its portfolio of business.

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Reasons for Making Acquisitions:
Reshaping the Firms’ Competitive Scope

 Firms may use acquisitions to reduce their dependence

on one or more products or markets.
 Reducing a company’s dependence on specific markets
alters the firm’s competitive scope.

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Reasons for Making Acquisitions:
Learning and Developing New Capabilities

 Acquisitions may gain capabilities that the firm

does not possess.
 Acquisitions may be used to
 Acquire a special technological capability.
 Broaden a firm’s knowledge base.
 Reduce inertia.

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Valuation of M&A Deals

Change in
Maximum Value to
Value of Value added Buyer if
= Value to Seller + +
Target Firm to by Buyer Target Firm
Buyer acquired by
competitor

Target Firm’s
Stock Price Acquisition
Price Paid = Before
+
Premium
Announcement

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Acquisition Premium

 The difference between the trading price of the

target’s stock before the announcement of the
acquisition and the price per share paid by the
acquiring firm
 On average, 50%
 Overpayment
 Frequently occurring in 67% of the acquisitions
 May be the reason for the generally disappointing
post-merger performance that cause bankruptcy
 Campeau paid a 124% to acquire Federated
Department Store and declared bankruptcy one
year after
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Common Problems With
Mergers & Acquisitions

Integration
difficulties

Inadequate Resulting firm is too

evaluation of target large

Acquisitions
Large or Managers overly
extraordinary debt focused on acquisitions

Inability to Too much

achieve synergy diversification

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Problems With Acquisitions:
Integration Difficulties

 Integration challenges include

 Melding two disparate corporate cultures.
 Linking different financial and control systems.
 Building effective working relationships.
(particularly when management styles differ)
 Resolving problems regarding the status of the
newly acquired firm’s executives.
 Loss of key personnel weakens the acquired firm’s
capabilities and reduces its value.

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Problems With Acquisitions:
Inadequate Evaluation of Target

 Evaluation requires that hundreds of issues be

closely examined, including
 Financing for the intended transaction.
 Differences in cultures between the acquiring and
target firm.
 Tax consequences of the transaction.
 Actions that would be necessary to successfully
meld the two workforces.
 Ineffective due-diligence process may
 Result in paying excessive premium for the target
company.
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Problems With Acquisitions:
Large or Extraordinary Debt

 Firm may take on significant debt to acquire a

company.
 High debt can
 Increase the likelihood of bankruptcy.
 Lead to a downgrade in the firm’s credit rating.
 Preclude needed investment in activities that
contribute to the firm’s long-term success.

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Problems With Acquisitions
Inability to Achieve Synergy

 Synergy exists when assets are worth more

when used in conjunction with each other than
when they are used separately.
 Firms experience transaction costs when they
use acquisition strategies to create synergy.
 Firms tend to underestimate indirect costs
when evaluating a potential acquisition.

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Problems With Acquisitions:
Too Much Diversification

 Diversified firms must process more

information of greater diversity.
 Scope created by diversification may cause
managers to rely too much on financial rather
than strategic controls to evaluate business
units’ performances.
 Acquisitions may become substitutes for
innovation.

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Problems With Acquisitions:
Managers Overly Focused on Acquisitions

 Managers in target firms may operate in a state

of virtual suspended animation during an
acquisition.
 Executives may become hesitant to make
decisions with long-term consequences until
negotiations have been completed.
 Acquisition process can create a short-term
perspective and a greater aversion to risk
among top-level executives in a target firm.

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Problems With Acquisitions:
Too Large

 Additional costs may exceed the benefits of the

economies of scale and additional market
power.
 Larger size may lead to more bureaucratic
controls.
 Formalized controls often lead to relatively
rigid and standardized managerial behavior.
 Firm may produce less innovation.

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Attributes of Successful
Acquisitions

 Acquired firm has assets and/or resources

complimentary to acquiring firm’s core business.
 Higher probability of positive synergy and maintaining
strengths.
 Friendly acquisition.
 Faster, more effective integration, lower premiums.
 Careful target selection/negotiations.
 strongest complementarities are acquired and
overpayment is avoided.
 Financial slack.
 Financing easier to get and less costly.

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Attributes of Successful
Acquisitions

 Merged firm maintains low-moderate debt

position.
 Lower financing costs and lower risks.
 Acquiring firm has experience with change & is
flexible and adaptable.
 Faster, more effective integration; facilitates
achievement of synergies.
 Sustained & consistent emphasis on R&D and
Innovation.
 Maintains L-T competitive advantage in markets.

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Strategic Alliance

 Strategic alliance
 Two or more firms combine competitive
capabilities to operate a business without
sharing ownership or general
management.
 20,000 strategic alliances form among U.S.
firms between 1988 and 1992.
 A strategic alliance involves
 Exchange and sharing of resources and
capabilities.
 Co-development or distribution of goods or
services.
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Strategic Alliance

Firm A Firm B

Resources Resources
Capabilities Capabilities
Core Competencies Core Competencies
Combined
Resources
Capabilities
Core Competencies

Mutual interests in designing, manufacturing,

or distributing goods or services
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Reasons for Strategic Alliances

MARKET REASON

Standard Cycle • Gain market power (reduce industry

overcapacity)
• Gain access to complementary resources
• Establish economies of scale
• Overcome trade barriers
• Meet competitive challenges from other
competitors
• Pool resources for very large capital
projects
• Learn new business techniques

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Reasons for Strategic Alliances

MARKET REASON

Slow Cycle • Gain access to a restricted market

• Establish a franchise in a new market
• Maintain market stability (e.g., establishing
standards)

Fast Cycle • Speed up development of new goods or service

• Speed up new market entry
• Maintain market leadership
• Form an industry technology standard
• Share risky R&D expenses
• Overcome uncertainty

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Risks of Strategic Alliances

 Inadequate contracts.
 Misrepresentation of competencies.
 Partners fail to use their complementary
recourses.
 Holding alliance partner’s specific investments
hostage.
 Risk Management Approaches.
 Detailed contracts and monitoring.
 Developing trusting relationships.

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Types of Strategic Alliances

 Joint venture
 Two or more firms create an independent company by
combining parts of their assets.
 Equity strategic alliance
 Cooperative contracts supplemented by equity
investments by one partner in the other partner.
 Sometimes these investments are reciprocated.
 Non-equity strategic alliances
 Cooperation between firms is managed directly through
contract without cross-equity holdings or an
independent firm being created.

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Restructuring Strategy

 Changes in the composition of a firm’s set of

businesses, financial structure, or
organizational/operating structure.
 Response to acquisition failure.
 Response to changes in internal & external
environment.
 Management Fashion.

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Types of Restructuring
Strategies

 Downsizing
 Reduction in the number of employees and/or
sometimes in the number of operating units.
 Downscoping (=refocusing)
 Divestiture, spin-off, or some other means of
elimination of business that are unrelated to a
firm’s core business.
 Spin-offs
 A separate new legal entity is formed with its
shares distributed to existing shareholders of the
parent company in the same proportions as in the
parent company.
 Divestiture
 A sale of a portion of the firm to an outside party.
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Types of Restructuring
Strategies

 Leveraged Buy Outs (LBOs)

 A special type of restructuring whereby a party
buys all of a firm’s assets in order to take the firm
private.
 Management Buy Outs (MBOs)

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Common Impacts of Downsizing

 Organizational dysfunction
 Ineffectiveness
 Lack of improvement
 Lack of development of quality culture

36
Survivor Syndrome

 Symptoms
 Insecure about job
 Fear of the unknown
 Mistrust of management
 Uncertain of skills and abilities
 Lack of loyalty
 High stress levels
 Low self-esteem
 Dependent on the organization
 Behaviors
 Narrow-minded
 Aversion to risk
 Low productivity
 Depressed
 Increased absenteeism
 Low morale
 Loss of pride in the organization
 Increased resistance to change
 Acts of sabotage

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Better Practices in Downsizing

 Implemented top down and initiated from

bottom up.
 Organizational redesign.
 Let the right people pick which jobs are eliminated.
 Across-the-board downsizing sent message to
stakeholders, but selective downsizing
enhanced effectiveness.
 Successful downsizing involved managing the
transition for those who lost jobs and managing
the transition for survivors.
 Survivor syndrome.
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Better Practices in Downsizing

 Focused on internal efficiency barriers and

relationships outside the organization.
 Focused on creating small, semiautonomous
units within large integrated organizations.
 Downsizing was “means to end,” not just end in
itself.

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Downsizing and Change
Management

 Downsizing involves significant organizational

change.
 Successful downsizing requires effective change
management.
 Change issues to consider
 What forces are driving downsizing?
 How will people react and why?
 How can the change process be managed
well?

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The Issues

 Definitions of M&A and Alliances

 Reasons and Risks of M&A
 Attributes of Successful M&A
 Strategic Alliance
 Reasons of Strategic Alliance
 Restructuring Strategies

41
MANAGING
ORGANIZATIONAL
CHANGE (II):
M&A, Strategic Alliances
and Restructuring

42
Rubbermaid Opportunity?

 Common denominator of Newell’s Businesses

 The businesses are quite similar.
 This makes it possible for senior level managers to
understand what is going on and apply common
systems and metrics to the business.
 Doe the Newell’s strategy create corporate advantage?
 Probably, Yes. Look at their numbers.
 What makes a good acquisition target for Newell?
What does success in “Newellization” depend on?
 Good targets would be businesses that have the same
characteristics as Newell’s existing business.
 In terms of scale, it should be small enough that the
processes of newellization can be employed effectively.
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Rubbermaid Opportunity?

 On the basis of your understanding of Newell’s

strategy and of the newellization process, does
Rubbermaid look like a good merger prospect?
 Looks quite similar to a Newell business, but some
important differences can be identified.
 Rubbermaid is in a variety of end markets, some of
which appear to have significant components of
taste, design, innovation, and seasonality.
 Also, it faces severe competition.
 Plastic resin costs were increasing, suggesting
vulnerability to crunch between product cost and
price resistance from powerful buyers.
 It is $2.4 billion revenue monster.
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Rubbermaid Opportunity?

 Are the projected benefits of the merger

credible? Is the price reasonable?
 It is extraordinarily expensive. The only way it
would make sense is to assume high growth rates
for the combined company. However, high growth
is not a feature of either business.
 Rubbermaid is just too big and too different.
 Newellization is unlikely to be completed in two- or
three-year time horizon.
 Newell is stepping away from the formula that has
given it consistent succces in the past.

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Newell Rubbermaid

 On March 24, 1999, Newell completed the Rubbermaid

merger.
 Early in the fall of 1999, the new Newell Rubbermaid
announced that earnings would not meet projections.
 The share prices promptly fell from slightly over $40 to
less than $30.
 For 1999, Newell Rubbermaid reported net earnings of
$95.4 million ($.34 per share compared to $2.38 for 1998)
 It continued to struggle in 2000. The share price dipped
as low as $19 in 2000 but recovered to $24 by year end.
 In late 2000, the company announced the resignation of
CEO and COO.
46
Shinhan Bank

 Why did SFG want to buy CHB?

 Was resistance inevitable from CHB? What
tactics could SFG use to handle the unions?
 What are the components of SFG’s cultural
integration?
 How do you assess the speed?
 What are SFG’s next stops?

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