Mergers

and
Acquisitions

Merger
A strategy through which two firms agree to integrate their
operations on a relatively co-equal basis

Acquisition
A strategy through which one firm buys a controlling, or 100%
interest in another firm with the intent of making the acquired firm
a subsidiary business within its portfolio

Takeover
A special type of acquisition when the target firm did not solicit the
acquiring firms bid for outright ownership

Analysis
Target
Due
Identification
Diligence

Deal
Negotiation Closing
Announcement

Post Merger
Integration

 Elements

of CS

Growth
Turnaround
M&A
Restructuring
Innovation

Cost new product

development/increased
speed to market

Increased
diversification
Acquisitions

Increased
market power

Overcoming
entry barriers

Avoiding excessive
competition

Lower risk
compared to
developing new
products

Learning and
developing new
capabilities

Factors increasing market power

When there is the ability to sell goods or services above

competitive levels

When costs of primary or support activities are below those of

competitors

When a firms size, resources and capabilities gives it a superior

ability to compete

Acquisitions intended to increase market power are

subject to:

Regulatory review

Analysis by financial markets

 Market

power is increased by:

Horizontal acquisitions
Vertical acquisitions
Related acquisitions

Horizontal
Acquisition
s

Acquisition of a company in the

same industry in which the
acquiring firm competes
increases a firms market power
by exploiting:
Cost-based synergies
Revenue-based synergies
Acquisitions with similar
characteristics result in higher
performance than those with
dissimilar characteristics

Horizontal
Acquisition
s
Vertical
Acquisition
s

Acquisition of a supplier or
distributor of one or more of
the firms goods or services
Increases a firms market
power by controlling
additional parts of the
value chain

Horizontal
Acquisition
s
Vertical
Acquisition
s
Related
Acquisition
s

Acquisition of a company
in a highly related industry
Because of the difficulty
in implementing
synergy, related
acquisitions are often
difficult to implement

 Factors

associated with the market or with

the firms currently operating in it that

increase the expense and difficulty faced by
new ventures trying to enter that market
Economies of scale
Differentiated products
Cross-Border

Acquisitions

Internal development of new products is

often perceived as high-risk activity
Acquisitions allow a firm to gain access to new
and current products that are new to the firm
Returns are more predictable because of the
acquired firms experience with the products

An acquisitions outcomes can be estimated

more easily and accurately than the outcomes
of an internal product development process

Managers may view acquisitions as lowering

risk

Using acquisitions to diversify a firm is the quickest

and easiest way to change its portfolio of businesses

Both

related

diversification

diversification
strategies

can

and
be

unrelated

implemented

through acquisitions

The more related the acquired firm is to the

acquiring firm, the greater is the probability that the
acquisition will be successful

 An

acquisition can:

Reduce the negative effect of an intense

rivalry on a firms financial performance
Reduce a firms dependence on one or more
products or markets
Reducing

specific

a companys dependence on
markets

competitive scope

alters

the

firms

An acquiring firm can gain capabilities that the firm does

not currently possess:
Special technological capability
Broaden a firms knowledge base
Reduce inertia

Firms should acquire other firms with different but related

and complementary capabilities in order to build their
own knowledge base

It is the magic force that allows for enhanced cost

efficiencies of the new business. It leads to revenue
enhancement and cost savings. The companies benefit
from the following:

Staff Reductions

Economies of Scale

Acquiring new technology

Improved market reach and industry visibility

Too large

Acquisitions

Too much
diversification

Integration
difficulties

Inadequate
evaluation of target

Managers overly
focused on
acquisitions

Large or
extraordinary debt

Inability to
achieve synergy

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 firms

executives

Loss of key personnel weakens the acquired firms capabilities and

reduces its value

Due Diligence
The process of evaluating a target firm for acquisition
Ineffective due diligence may result in paying an excessive
premium for the target company

Evaluation requires examining:

Financing of the intended transaction
Differences in culture between the firms
Tax consequences of the transaction
Actions necessary to meld the two workforces

 High

debt can:

Increase the likelihood of bankruptcy

Lead to a downgrade of the firms credit rating
Preclude investment in activities that contribute
to the firms long-term success such as:
Research and development
Human resource training
Marketing

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

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

Managers

invest

substantial

time

and

energy

in

acquisition strategies in:

Searching for viable acquisition candidates
Completing effective due-diligence processes
Preparing for negotiations
Managing the integration process after the acquisition
is completed

Friendly merger: Offer made through the targets board of

directors.

Hostile merger: Offer made directly to the target shareholders

Managers in target firms 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

The acquisition process can create a short-term perspective

and a greater aversion to risk among executives in the
target firm

Additional costs of controls 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

A strategy through which a firm changes its set of

businesses or financial structure
Failure of an acquisition strategy often precedes a
restructuring strategy
Restructuring may occur because of changes in the
external or internal environments

Restructuring strategies:
Downsizing
Leveraged buyouts

Stock market
Activist shareholders
Pension funds

Increasing competition
Global
Technological

Change in regulation

Information gap

Slightly modified from the

McKinsey book.

Operating
improvement
Incentives
management with VBM

Divestiture
activity

Financial engineering: leverage,

dual class stock, carve outs,
tracking stock, employee
ownership, debt restructuring

Asset restructuring: These are the activities that are going to be done within
the legal structure of the firm. Could entail the details of the corporate
structure: divisions, subsidiaries, etc. In particular, acquisitions that are
diversification oriented are moving the corporation into new industries, etc.

Divestitures/spin off of divisions of a corporation alter the different businesses

the firm owns and operates in.

These activities operate in the work flow that go into the production of finished
products and services that can either be done within the corporation or can be
contracted

with

third

parties.

Examples:

outsourcing HR, licensing arrangements, etc.

Acquisitions
Divestitures
Spin offs
Corporate downsizing
Outsourcing

franchising vs.

ownership,