Chapter 10

Studying Mergers and

Acquisitions
OBJECTIVES

1 Explain the motivations behind acquisitions and

show how they’ve changed over time

2 Explain why mergers and acquisitions are important

vehicles of corporate strategy

3 Identify the various types of acquisitions

4 Understand how the pricing of acquisitions affects

the realization of synergies

5 Outline the alternative ways to integrate acquisition

and explain the implementation process

6 Discuss the characteristics of acquisitions in

different industry contexts

2
THE eBAY-PAYPAL ACQUISITION

The partnership made sense … … but would it work?

 Rely on transaction-based Can we recoup the $250 million

revenue premium we paid with savings
and revenue growth?
 No inventory or warehousing
 No sales force

3
MERGER VS. ACQUISITION

A B C
The consolidation
or combination
Merger
of one firm with
another

A B A
The purchase of
one firm by another
Acquisition
so that ownership
transfers

The “merger”
of Daimler with Chrysler
in 1997 is considered by many
to have been an acquisition
in disguise
4
MOTIVES FOR MERGERS AND ACQUISITIONS
Managerial self-interest
Sometimes termed
“Managerialism”, manager
can conceivably make
acquisitions-and even
willingly overpay for them-to
maximize their own
interests at the expense of
shareholder wealth
Hubris
Managers may make mis-
taken valuation and have
unwarranted confidence in
their valuation and in their
ability to create value
because of pride, over-
confidence, or arrogance
Synergy
Managers may believe that
the value of the firms
combined can be greater
than the sum of the two
independently
• Reduced threats
• Increased market power
and access
• Realized cost savings
• Increased financial
strength
• Sharing and leveraging
capabilities
5
M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND

M&A and the Strategy Diamond

While mergers and acquisition are
explicitly vehicles of strategy, they
have major implications for arenas
staging, and economic logic as well Arenas

Economic
Staging Vehicles
logic

Differentiators

Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59 6
US ACQUISITION ACTIVITY
Value of transactions ($, 2003)

Number of transactions

Value of transactions
No. of transactions ($, 2003)
12,000 $2,000,000

$1,800,000
10,000
$1,600,000

8,000 $1,400,000

$1,200,000
6,000
$1,000,000

4,000 $800,000

$600,000
2,000
$400,000

0 $200,000
1990 91 92 93 94 95 96 97 98 99 2000 01 02 2003
Source: Data compiled from SDC Platinum, a product of Thompson Financial 7
UPs AND DOWNs AT SNAPPLE

In 1972, brothers-in- Cadbury Schweppes buys Snapple from Triarc

law Leonard Marsh for $1.45 billion. Snapple is now part of the
and Hyman Golden very successful America’s Beverage division,
and Arnold Greenberg, After sizzling success, which includes 7up, Dr. Pepper, Mystic, and
Marsh’s childhood Snapple is sold to Quaker Mott’s juices, among other brands. Has
friend, founded a for $1.8 billion Snapple found its home?
business called the
Unadulterated Food
Corporation and began
selling juice in
Queens.
1`
The name Snapple
1972 1994 1997 2000
was coined while
trying to develop an
apple soda. In 1987,
Snapple introduced
iced teas with fun
names and flavors and Fewer than three years later, Quaker
enlisted (2) throws in the towel and sells Snapple
controversial radio for $300 million to Triarc
personalities, Howard
Stern and Rush
Limbaugh, to promote
them 8
THE FLIP SIDE OF ACQUISTIONS

“…the sale preparation process

rarely gets the same attention as
the acquisition process.”
– McPhee and Heckler

9
BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT

• Move expensive
• Inherit adjunct businesses
• Cannot spread commitment over several
years (one-time, all-or-nothing decision)
• Potential for organizational conflict
• Speed
• Critical Mass
• Access to complementary assets
• Reduced competition

10
CLASSIFICATION OF ACQUISITIONS

Product/
Overcapacity Market Industry
M&A Roll-up-M&A Extension M&A as R&D Convergence

Example DaimlerChrysler Service Pepsi’s Intel’s dozens of AOL’s acquisition

merger Corporation acquisition of acquisitions of Time-Warner
International more Gatorade small high tech
than 100 companies
acquisitions of
funeral homes
Objectives Eliminating Efficiency of Synergy of similar Short cut Anticipation of
capacity, gaining larger operations but expanded innovation by new industry
market share, and (e.g., economies product lines of buying it from emerging; culling
increasing of scale, superior geographic small companies resources from
efficiency management) markets firms in multiple
industries whose
boundaries are
eroding
Percent of
all M&A
deals 37% 9% 36% 1% 4%

Source: J.L. bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101 11
THE SYNERGY TRAP

Acquisition premiums Create two problems for managers

Premiums increase The longer it takes

the level of returns to implement
the combined performance
businesses must improvements, the
extract more likely the
acquisition will fail

12
THE ACQUISITION PROCESS

A process perspective

Results

Acquisition
integration
Justification
due diligence,
negotiation

Idea

Decision-making Integration process problems

process problems

Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New
York Free Press, 1991), 42 13
ACQUISITION SCREENING
“Soft-fit” acquisition screening by Cisco systems
Screening criteria
Offer both short- and
long-term win-wins for
Cisco acquired company
Share a common vision
and chemistry with Cisco
Be located (preferably) in
Silicon Valley or near one
of Cisco’s remote sites
Means of achieving criteria
• Have complementary technology that fills a need in
Cisco’s core product space
• Have a technology that can be delivered through Cisco’s
existing distribution channels
• Have a technology and products that can be supported
by Cisco's support organization
• Is able to leverage Cisco’s existing infrastructure and
resource base to increase its overall value
• Have a similar understanding and vision of the market
• Have a similar culture
• Have a similar risk-taking style
• Have a company headquarters and most manufacturing
facilities close to one of Cisco's main sites
14
ABSORPTION

Need for strategic interdependence

Low High

High Preservation Symbiosis

Need for
organizational
autonomy
Low Holding Absorption

Acquiring company completely absorbs the target

company. If the target company is large, this can take time
(e.g., Franklin Quest’s acquisition of the Covey Leadership
Center to create Franklin Covey)

15
PRESERVATION

Need for strategic interdependence

Low High

High Preservation Symbiosis

Need for
organizational
autonomy
Low Holding Absorption

The acquiring company makes very few changes to the

target , and instead learned from it in preparation for future
growth (e.g., many of Wal-Mart’s early international
acquisitions)

16
HOLDING

Need for strategic interdependence

Low High

High Preservation Symbiosis

Need for
organizational
autonomy
Low Holding Absorption

The acquiring company allows little autonomy - yet does

not integrate the target into its businesses (e.g., Bank
One’s acquisitions of local banks )

17
SYMBIOSIS

Need for strategic interdependence

Low High

High Preservation Symbiosis

Need for
organizational
autonomy
Low Holding Absorption

The acquiring company integrates the target in order to

achieve synergies - but allows for autonomy, for example
to retain and motivate employees. This is possibly the
most difficult to implement (e.g., Cisco's acquisitions which
cost the firm $1 million per employee on average)
18
KEY LESSONS FOR IMPLEMENTING M & As

It’s a continual process, not an event

Start the integration process long before the deal is closed

Integration management is a full-time job

Many successful acquirers appoint an “integration manager” because
integration is too much work for acting managers to add to their workloads

Key decisions should be made swiftly

Speed is of the essence because of the cost and time value of money

Integration should address technical and cultural issues

Most managers focus on technical issues only. This is a mistake

19
TIPS FROM PERRY AND HERD

1 Firms must study failed M&As as

much as successes.

2 Traditional due diligence is no longer

sufficient. With M&A deals
increasingly risky, there is more need
for pre-deal planning.

20
DUE DILIGENCE PAYS

Due Diligence

Penalties

21
M&As AND INDUSTRY LIFE CYCLE

Introduction Growth Maturity

M&As tend to be M&As tend to be for M&As primarily for

R&D and product- acquiring products dealing with over
related that are proven and capacity in the
gaining acceptance industry

22
M&As IN DYNAMIC CONTEXTS

Technological Cisco and Microsoft both use acquisitions to ensure

change they maintain their strong competitive positions

When the Tribune Company merged with Times-Mirror in 2000,

Demographic it acquired Spanish-language “Hoy” to target the growing U.S
change Hispanic market

Geopolitical IBM divested its PC division to a Chinese company as that

change country emerges

Trade Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA

liberalization

AT&T divested local operations into “Baby Bells” and set off a
Deregulation
state of almost constant M&A
23