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Strategic Alliances and M&A: Session IX
Strategic Alliances and M&A: Session IX
Strategic Alliances and M&A: Session IX
which provide the capital more profitable than either later grows to become one
and marketing needed to of its parents. of the world’s leading
introduce new Cetus producers of photocopiers
technology
Internal Humana develops a full line 3M consistently gets more Anheuser-Busch attempts
Development of health care services, than 25% of its revenues to open up new markets
vertically integrating across from products it has by taking Budweiser, its
insurance, hospitals, and developed within the last flagship product into
follow-up treatment services five years Britain
Sushil/IITD/2021 2
Evaluating Reasons to Diversify
Capitalizing
Capitalizing
Reducing Maintain
Maintain Balancing Sharing
Sharing Increasing
on
on Core
Core
Risk Growth
Growth Cash Flows Infrastructure Market Power
Competencies
Competencies
Not Recommended
Recommended as a Reason
as a Reason to Diversity
to Diversify
Sushil/IITD/2021 3
Critical Elements for Shared Opportunities to be
Meaningful
Sushil/IITD/2021 4
GE: Strategic Circles
In 1981, John E. Welch Jr., Chairman and CEO of General Electric
designed the company’s operations on the basis of three `strategic
circles’:
• Core manufacturing units such as lighting and locomotives
• Technology -intensive businesses services
• To achieve the first or second position in the global market for each of
its businesses: By 1986, this strategic orientation had taken shape with
14 distinct businesses, including aircraft engines, medical systems,
engineering plastics, major appliances, television and financial
services.
Sushil/IITD/2021 5
IBM’s Partners
Sushil/IITD/2021 6
IBM’s Partners
Novell 1991 Sells IBM’s PCs and RS/6000 workstations under its
own name
1991 IBM sells Novell networking software
Sushil/IITD/2021 7
Reebok’s Outsourcing
Its main function is marketing with a current staff strength of 35 in India. The
other activities are outsourced as given below:
• Apparel design National Institute of Fashion Technology
• Warehouse managementBakshi Associates
• Logistics Nexus Logistics
• Retailing Phoenix
• Advertising Hindustan Thompson
• Store design and execution Aakar
• Sports management 21st Century
• Gymnasium A private firm
• Manufacturing Shoes: Phoenix, Aero, Lakhani
• ApparelViniyoga and six others
• Selection Prospects Sushil/IITD/2021 8
Major Elements in a Successful International
Strategic Alliances
• Complementary skills: which can contribute to the strength of the
venture.
Sushil/IITD/2021 9
Different Types of Strategic Alliances
Contd….
Alliance Types Examples
• Collaborative American Express and Toys R Us (cooperative efforts for television
advertising advertising and promotion)
• R&D partnerships Cytel and Sumitomo chemicals (alliance to develop the next
generation of biotechnology drugs)
• Lease service Cigna and United Motor Works (arrangement to provide financing for
agreements non-US firms and governments)
• Shared distribution Nissan and Volkswagen (Nissan sells Volkswagens in Europe and
Volkswagen distributes Nissan’s cards also in Europe)
• Technology transfer IBM and Apple Computers (arrangement to develop the next
generation of operating system software)
• Cooperative bidding
Boeing, General Dynamics and Lockheed (cooperated together in
winning the contract for an advanced tactical fighter)
Sushil/IITD/2021 10
Different Types of Strategic Alliances
Alliance Types Examples
Cross -manufacturing Ford and Mazda (design and build similar cars on the same
manufacturing/assembly line)
Resource venturing
Swift Chemical Co., Texasgulf, RTZ and US Borax
Government and (Canadian-based mining natural resources venture)
industry partnering DuPont and National Cancer Institute (DuPont worked with
NCI in the first phase of the clinical cancer trial on IL)
Internal spin-offs Cummins engine and Toshiba Corporation (created a new
company to develop/market silicon nitride products)
Cross-licensing Hoffman-LaRoche and Glaxo (HL and Glaxo agreed for BHL
to sell Zantac, an anti-ulcer drug in the United States)
SUSHIL/IIT DELHI/2021 11
Stages of an Alliance
• Strategy development The focus is on development of resource strategies for
production, technology and manpower. This has to be aligned to the
objectives of corporate strategy alliances.
• Partner assessment The attempt to assess the strengths and weaknesses of a
partner and understand a partner’s motives for alliance formation.
• Contract negotiations It is necessary to have realistic objectives, defining
each partner’s contributions and rewards. It is also necessary to incorporation
termination clauses, penalties for poor performance and arbitration
procedures.
• Alliance operations This is concerned with the management’s commitment,
and linking of budgets and resources with priorities.
Sushil/IITD/2021 12
British Airways
• The alliance between British Airways and American Airlines was
announced in June 1996. BA and American together control 60 per cent
of the flights between the UK and the US, 70 per cent of the traffic
between London and New York, 90 per cent between London and
Chicago, and all flights between London and Dallas.
SUSHIL/IIT DELHI/2021 13
British Airways
Contd...
• BA has a partnership with US Air in which it has a 24.6 per cent stake. The
US government has not granted anti-trust immunity to the alliance to
coordinate their operations more closely. Therefore, BA and American are
asking for anti-trust immunity and requesting their governments to
negotiate a new, liberalized aviation agreement.
Sushil/IITD/2021 14
Modes of Cooperation
• Joint ventures and research corporations Combinations of at least two firms into a
`distinct’ firm with shared equity investments. Profits and losses accrue on the basis
of investment.
• Joint R&D Joint research agreements to establish joint undertaking of R&D projects
with shared resources.
• Technology exchange agreement Technology sharing agreements, cross-licensing
and mutual second-souring of existing technologies.
• Equity investment Large firms partnering with a smaller high tech company with a
minority sharing coupled with research contracts.
• Customer-supplier relationships There can be many forms such as co-production
contracts, co-marketing relationships, and research contracts.
• Unilateral technology flows Second-sourcing and licensing agreements (Hagedoorn
and Schakenraad, 1994)
Sushil/IITD/2021 15
Samsung Group
• A joint venture with Texas Instruments to manufacture semiconductors - they are building a
semiconductor plant in Portugal.
• Cooperation with General Instrument in developing high definition televisions (HDTV).
• The sharing of technology for flash memory devices with Toshiba.
• Co-developing computer workstations with Hewlett Packard-they have a joint venture,
Samsung -Hewlett Packard-which markets the American company’s products in Korea.
• Supply of memory chip technology to Oki Electric.
• Partnership with General Electric in high-tech medical equipment.
• Lockheed for F-16 jet fighters (local assembly)
• Pratt and Whitney for jet engines (supplies components)
• Amoco for textile raw materials
• Corning for TV glass and building plants in China and Malaysia
• Mitsui Petrochemical for petrochemicals
SUSHIL/IIT DELHI/2021 16
Toshiba
• An agreement with Apple Computers for new technology creation for
multimedia.
Sushil/IITD/2021 17
Toshiba
Contd….
Sushil/IITD/2021 18
Hitachi
• An R&D agreement with Texas Instruments to develop a next-generation
computer memory chip.
• Providing chip manufacturing technology to Goldstar Electron of Korea.
• Supplying mainframe computers to Germany’s Comparex and Italy’s Olivetti.
• A joint venture with GE to sell lighting products in Japan.
• Joint development of a new RISC computer chip with Hewlett Packard.
• Joint development of medical equipment with Boehringer-Mannheim of
Germany
• Research cooperation between Hitachi Cambridge Laboratory and Cambridge
University for developing a single electron memory device.
SUSHIL/IIT DELHI/2021 19
Mergers
• A transaction that forms one economic unit from two or more previous ones.
• Horizontal Merger
– Involves two firms operating in same kind of business activity (e.g. steel)
• Vertical Merger
– Involves difference stages of production operations.
(e.g. oil industry - exploration, refinery, marketing)
• Conglomerate Merger
– Involves firms engaged in unrelated types of business activity.
– Product extension mergers: broaden the product lines of firms.
(Mobil - Ward - retailing operation of Ward as an extension of retail petroleum product marketing
experience of Mobil)
– Geographic market - extension merger: two firms whose operations had been conducted in non-
overlapping geographic areas.
– Pure conglomerate merger: unrelated business activities that would not qualify as previous two
categories.
Sushil/IITD/2021
20
Acquisitions
Tender Offers
• One party -seeking a controlling interest in another corporation - asks the stock
holders of the firm to submit, or tender, their shares of stock in the firm.
Bear Hug
• Company mails a letter to the directors of the takeover target announcing the
acquisition proposed to make a quick decision on the bid.
• If stockholder respond favourably - gain control and have the power to replace the
directors (hostile takeover)
Sushil/IITD/2021 21
Acquisitions
Contd….
Sushil/IITD/2021 22
Sell - Offs
Spin - off
• Creates a separate new legal entity; its shares are distributed on a pro - rata basis to
the existing shareholders of the parent company.
– same proportion of ownership in the new entity.
– no cash is received by the parent company.
Split - up
• The entire firm is broken up in a series of split-offs, so that the parent no longer exists
and only the offsprings survive. 23
Sushil/IITD/2021
Corporate Control
Premium by - backs
• Repurchase of a substantial stockholder’s ownership interest at a premium above the
market price.
Standstill agreement
• A voluntary contract in which the stockholder who is bought out agrees not to make
further attempts to takeover the company in future.
• Without a buy-back - the substantial stockholder simply agrees not to increase
ownership which presumably would put in an effective control position.
Anti - takeover amendments
• Changes in corporate by laws to make an acquisition more difficult or expensive.
• supermajority voting provisions requiring a high percentage (80% of stock holder to
approve a merger)
Sushil/IITD/2021 24
Corporate Control
Contd….
• Staggered terms of directors which can delay change of control for a number
of years.
• Golden parachutes which award large termination payments to existing
management if control of the firm is changed and management is terminated.
Proxy Contest
• An outside group seeks to obtain representation on the firm’s board of
directors.
• Outsiders - “dissidents” or “insurgents” - seek to reduce the control position
of “incumbents” or existing board of directors.
Sushil/IITD/2021 25
Changes in Ownership Structure
Exchange offers
Sushil/IITD/2021 26
Theories Of M & A
EFFICIENCY
Differential Efficiency
• A particular firm performs better.
• A particular firm has a management system that another firm would like to be able to
understand better and to copy
(American Stores buy out Lucky Stores for effective management system in the retail
grocery market).
Operating Synergy
• Advantages of scale, scope and organizational learning.
• Scale - economies of spreading fixed costs over as large number of units
• Scope - Combining activities such that one activity makes other activity more efficient
Sushil/IITD/2021 27
Theories of M & A
Contd …
AT & T
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Theories of M & A
Contd….
Diversification
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Under Valuation
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Information - Signaling
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Agency Problems
Control Device
• Takeovers represent a control mechanism to unseat inefficient managements.
Managerialism
• Managers engage in acquisition activity to build larger firms for the sake of
size (Napoleonic Complex) - managerial compensation based on sales not
profit.
Hubris theory
• Takeovers occur because of overoptimistic expectations of buyers.
Sushil/IITD/2021 32
Tax Considerations
MARKET POWER
Sushil/IITD/2021 33
Johnson & Johnson – Growth through Acquisitions
Strategy
Johnson & Johnson is a manufacturer and marketer of a wide range of health care products. Over
the period 1995-2005, the company engineered over 50 acquisitions as part of its growth through
acquisitions strategy. This strategy is similar to that pursued by companies in other rapidly
changing, innovation-filled industries such as the computer software industry. Rather than
internally try to be on the forefront of every major area of innovation, Johnson & Johnson, a $55
billion company, has sought to pursue those companies who had developed successful products.
In doing so they do not waste time with unsuccessful internal development attempts and only go
after those products and companies that have demonstrated success. However, the company has
to pay a premium for such details. This strategy has sometimes simply meant that Johnson &
Johnson would buy its competitors rather then try to surpass them using internal growth. For
example, in 1996 it acquired Cordis in the medical stent business for $1.8 billion. When this deal
failed to place J&J in the lead in this market segment, Johnson & Johnson resorted to M&A again
by its $25.4 billion bid (initial bid) for market leader Guidant. This acquisition would have been
the largest deal in Johnson & Johnson’s long history of M&A. However, it lowered its bid when
Guidant’s litigation liabilities became known and then was outbid by Boston Scientific.
Following the collapse of the Guidant deal, the cash rich J&J acquired Pfizer’s Consumer
products division for $16 billion.
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Sushil/IITD/2021
International Diversification in the Automobile
Industry
Over the past two decades, many of the major automobile companies have engaged in a pattern of
cross-border acquisition as they have sought to exploit markets outside of their own borders. Indeed
this form of expansion has been going on much longer than the past couple of decades. However,
when the pace of M&As from two of the largest merger waves took hold, the automobile industry
responded like so many others and pursued their own deals.
As we look back on many of these deals, we see that many were major disappointments. Probably
the most notable flop was Daimler’s 1998 takeover of Chrysler. Chrysler was profitable at the time it
was acquired by Daimler, but the market was changing around that time, and following the deal,
sales of many of its profitable cars and SUVs declined as consumer tastes changed, Led by its
hubris-filled CEO, Jurgen Schremp, Daimler Chrysler would never admit the deal was a failure even
as it generated staggering losses in 2001. the distracted Daimler worked to fix the problems at
Chrysler, which it did, but only at the expense of “taking their eye off the ball” at Mercedes, their
highly successful luxury brand. Quality problems began to emerge in various Mercedes autos, such
as the E and M class sedans, and Mercedes began to lose ground to its chief rival –BMW Indeed
Daimler’s losing deal with Chrysler was not its only flop. Its investment in Mitsubishi was also
fraught with problems.
(Contd.)
Sushil/IITD/2021 35
International Diversification in the Automobile
Industry
Daimler was not the only auto company to lose from its international deals.
General Motors pursued a number of international acquisitions as it sought to
expand is its presence throughout the world. Many of these were major losers.
Perhaps the most embarrassing for GM was its investment in Fiat, which gave the
troubled Italian automaker the right to require GM to pay $2 billion to Fiat if GM
wanted to end their alliance. As Fiat’s financial problems mounted, GM was
forced to pay $2 billion at a time it was experiencing many other financial
problems. In addition, other GM global deals were also troubled. Its investment
in the Russian auto market were fraught with difficulties.
Ford experienced its share of M&A woes. It acquired targets in Europe so as to
expand its presence in that market white also providing the number-two U.S. auto
maker with luxury brands such as jaguar.
Sushil/IITD/2021 36
Sushil/IIT Delhi/2021