Welcome to Class 8

Corporate Mergers & Acquisitions:

Why Corporate Directors need to be concerned!
What is the difference between a Merger and an Acquisition?

and
Where do Strategic Alliances fit in the picture of STRATEGY?
Before we
begin…
• Study for test one
• However, DO NOT FORGET TO
BRING YOUR LAPTOP computer
to the class following the test!
• This is EXTREMELY IMPORTANT
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.
Stock of both companies ceases to exist, and a new stock is 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 stock of both firms is surrendered, and stock of the new entity is 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 the that of the acquired company ceases to exist.

 Stock of acquired firm ceases to be traded while the stock 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.
 However -- M&As have a disappointing history

Despite the potential benefits of M&As, they fail at a staggering rate

In fact, a recent study concluded that merger and acquisition events have
failed to achieve stated objectives at an astonishing rate of almost 80% of the time.
The extraordinarily high failure rate of M&As can translate into billions of
dollars in lost value to companies and shareholders.
Even a cursory review of high-profile M&A collapses from recent decades
reveals the magnitude of potential risks hubristic CEO often take with their firms.
Examples of significant failures:
 2020 Merger Attempts gone wrong:

Cigna and Anthem

• Cigna Corp. and Anthem, Inc. attempted a $48 Billion merger deal
• Disagreements emerged
• Cigna sued Anthem for $14.7 plus a $1.8 Billion breakup fee
• Anthem countersued Cigna for $21.1 Billion
 Why do they do it?
If the failure rate is so significant, why do CEO’s
champion M&A Activity?
Shareholder
Research suggests there are three (3) primary motivators: Interest

M&A
Personal
Hubris or Desires
Ego
 CEO Motivations for promoting M&As
(1) CEO’s “personal values” motivate a desire to deliver maximum value to shareholders.
– for example, counsel is pursued, due diligence is performed, and the final decision is vetted
by the CFO and the Corporate Board of Directors. (CEO does not seek unfettered Discretion)

(2) CEO’s “personal values” motivate a desire to serve personal interests.

– for example – enriching compensation or by empire building. (CEO seeks unfettered Discretion)

(3) CEO’s “personal values” motivate a desire to feed an oversized ego. CEO is excessively self-confident,
hubristic, and demonstrates a sense of personal “infallibility” (CEO seeks unfettered Discretion)
– for example: “It’s my idea so it cannot go wrong, there is little need for discussion.”

What can go wrong in Corporate structures that facilitate unfettered CEO discretion?
 Do Corporate Boards enable FOOLISH CEO decisions?

Go ahead
FOOL!
How can CEO discretion be moderated?

Two primary moderators of CEO discretion

1. Proactive Corporate Board of Directors (BoD)
Responsibility:
Oversight of CEO proposed strategies

2. Proactive Chief Financial Officer (CFO)

Responsibility:
Protect the firm from unreasonable financial risks
 What is the benefit of CEO “discretion moderators?”

When Corporate Boards and CFOs: Chief Financial Officers are PROACTIVE and
exercise due diligence in assessing CEO M&A Proposals –
Performance is likely to improve

The following video demonstrates M&A Activity with poor Board oversight
 The Future of M&A Activity
Corporations that empower hubristic CEOs to unilaterally execute
dangerous M&A activities without oversight and due diligence are inviting
financial disaster.
The performance consequences are likely to frighten
employees, shareholders, customers, and communities.

Consequence of Unfettered CEO Discretion

With proactive oversight by Corporate Boards and the proactive involvement of CFOs, M&As
can be a valuable component of corporate strategies.
When both CFOs and Boards play key roles in identifying M&A opportunities that align with
the firm’s vision and mission and fits synergistically into the firm financially, culturally, and
operationally, the probability of success is enhanced.
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.
 What motivates companies to enter into
strategic alliances or cooperative arrangements?
•  to expedite the development of promising new technologies or
products.

•  to bring together the personnel and expertise needed to create

desirable new skill sets and capabilities to improve supply chain
efficiency, and/or gain economies of scale in production and/or marketing.

•  to acquire or improve market access through joint marketing

agreements.

•  to help win the race against rivals for global market leadership.
 End Session 8:
Corporate Mergers & Acquisitions
& Strategic Alliances

Study for test one

However, DO NOT FORGET TO BRING THINK – REMEMBER!
YOUR LAPTOP computer to the class
following the test!

This is EXTREMELY IMPORTANT