IB Summary

Summary:

One plus one makes three: this equation is the special alchemy of a merger or an

acquisition. Although they are often uttered in the same breath and used as though they

were synonymous, the terms merger and acquisition mean slightly different things. “The

New M&A Playbook,” written by Harvard Business School Professor Clayton

Christensen, Andrew Waldeck, who is a partner at Innosight the consulting firm

founded by Christensen, Richard Alton, senior researcher at the Forum for Growth and

Innovation at Harvard Business School, and Curtis Rising, managing director of Harvard

Square Partners, provides a new framework based on business models that enables

executives to predict with greater accuracy whether a company on offer is a dream deal

or a debacle.

The article explores the implications of this framework to better guide executives

in selecting, pricing, and integrating acquisitions and thus dramatically increase their

success rate. Two companies together are more valuable than two separate companies

- at least, that's the reasoning behind M&A. The key principle behind acquiring a

company is to boost the company’s current performance and also to reinvent the

business model and thereby fundamentally redirect the company.

Why you should pay top dollar for a “killer deal”-and other new rules for making acquisitions

By Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck

The New M&A Playbook

The success or failure of an acquisition lies in the nuts and bolts of integration.

The article talks about the how integration can achieve the two goals i.e. improving

current performance and reinventing a business model.

The article breaks down deals into two fundamental types: “leverage my

business model” (LBM) and “reinvent my business model” (RBM.) LBM deals —

acquiring companies to strengthen your business model — can boost performance but

will rarely change the trajectory of a company because investors anticipate and

therefore discount the performance improvements. CEOs are often unrealistic about

how much of a boost to expect, pay too much for the acquisition, and face challenges in

integrating the businesses appropriately. RBM deals — acquiring companies to reinvent

a business model – are the key to transformative growth. Few executives understand

how to identify the best targets, determine the right price to pay and integrate RBM

acquisitions in the best way.

The article also talk about the general manager first task is to deliver the short

term results investors except through the effective operation of the business and second

task is to lay the groundwork for long term growth by creating new ways of doing

business. So companies turn to LBM acquisitions to improve the output of their profit

formulas. A successful LBM acquisition enables the parent either to command higher

prices or to reduce costs. Current performance through LBM deals aimed at acquiring

new customers. The article also talks about the most effective ways to use RBM an

acquisition is as a defense against commoditization.

Executives often believe they can achieve extraordinary returns by acquiring

another firm’s resources and so pay far too much. Alternatively, they walk away from

potentially transformative deals in the mistaken belief that the acquisition is overpriced,

or they destroy the value of a high-growth business model by trying to integrate it into

their own….Sounds like a mess--and it has been a mess. But it need not be.”

Critical review:

In the starting of the article author mention that acquisitions are fall short of

expectations because executives incorrectly match candidates to the strategic purpose

of the deal. But according to me there are several other reasons which turn into the

failure of the acquisitions such as ignorance ,no common vision ,nasty surprises

resulting from poor due diligence, poor communication, poor programme management,

poor governance ,weak leadership and so on .As a result, companies too often pay the

wrong price and integrate the acquisition in the wrong way. The success or failure of an

acquisition lies in the nuts and bolts of integration.

In one of those cases, a manager's looking to improve the performance of their

current business model consists of four interdependent elements .The first is the

customer value proposition that helps customers do an important job more effectively,

conveniently, or affordably than the alternatives. The second element is the profit

formula, made up of a revenue model and a cost structure that specify how the

company generates profit and the cash required to sustain operations.

The third element is the resources—such as employees, products, facilities, and

cash—companies use to deliver the customer value proposition. The fourth is

processes such as manufacturing, R&D, budgeting, and sales. So to achieve this two

models are used as described in the article are leverage my model and reinvent my

model and the reason it was important to call out these two different circumstances is

because they actually drive fundamentally different behavior. And so the type of a deal

that would target for leverage my model transaction is fundamentally different than what

would do in a reinvent my model transaction.

In 2003, Apple introduced the iPod with the iTunes store, revolutionizing portable

entertainment, creating a new market, and transforming the company. In just three

years, the iPod/iTunes combination became a nearly $10 billion product, accounting for

almost 50% of Apple’s revenue. Apple’s market capitalization catapulted from around $1

billion in early 2003 to over $150 billion by late 2007. Apple did something far smarter

than take a good technology and wraps it in a snazzy design. It took a good technology

and wrapped it in a great business model. Apple’s true innovation was to make

downloading digital music easy and convenient.

To do that, the company built a groundbreaking business model that combined

hardware, software, and service. That model defined value in a new way and provided

game-changing convenience to the consumer. A 2005 survey by the Economist

Intelligence Unit reported that over 50% of executives believe business model

innovation will become even more important for success than product or service

innovation as did by Apples manager. This shows how this model help to achieve the

market share in the industry. That's different than what you see in leverage my model

acquisitions where fundamentally what it have is a company acquiring a set of

resources that further strengthen its existing model.

This happens mostly in pharmaceutical industry, where the big pharmacy companies

acquiring new technologies, new drugs, new therapies that they can then put into their

sales force that then maximizes the value of that existing model that they have. Not

every management team should be pursuing a reinvent my model type of deal. In many

cases, where they should be focusing is on strengthening that core business first before

they try to actually transform the existing model that they have.

Here is the example of leveraging my business model. Ranbaxy Laboratories is

the most aggressive overseas acquirer from Indian pharmaceutical sector with 11

acquisition deals spread across 10 countries. The company was early to recognize the

imperative of TRIPS regime and inadequacy of its process development capabilities

accumulated under an inward-looking development strategy. Apart from undertaking

necessary reorientation of its in-house research activities to include product

development, Ranbaxy has used acquisition as a strategy to simultaneously access

new products and new markets.

In September 1995, it has acquired Ohm Laboratories with the basic objective of

accessing latter’s advanced manufacturing capabilities and technological

processes to create quality branded and generic OTC products.

In April 2000, Ranbaxy Laboratories has acquired Bayer's German generic

business portfolio that includes 20 marketed generic products with all their

formulations.

The acquisition of the fully automated manufacturing and packaging line facility

with state-of-the-art testing and quality assurance capabilities from New York

based Signature Pharmaceuticals Inc. in July 2002.

‘Signature’s acquisition provides strategic platform to Ranbaxy’s US operations

vis-à-vis liquid dosage forms” is what Dr. Brian

Tempest, President, Pharmaceuticals, Ranbaxy Laboratories commented upon

this acquisition.

In continuation of its acquisition strategy, Ranbaxy Laboratories entered into an

agreement to buy France-based RPG (Aventis) SA along with its fully owned

subsidiary, OPIHSARL, in December 2003.

Clearly, the foregoing brief reviews on the experience of selected Indian

pharmaceutical companies do indicate that they are using overseas acquisitions to

expand their global market presence in addition to getting access to new products,

marketing and managerial skills, and quality standards. With this newly gained

knowledge they are expected to overcome their existing innovation barrier such as

small size of their product portfolio primarily nurtured through process technological

activities in the home country.

Conclusions:

To be successful, companies must address both financial and social integration issues

involved in mergers and acquisitions. Such holistic integration planning should begin

early in the M&A process. Instead of putting all personnel development processes on

hold, organizations should proactively plan and launch mentoring initiatives that target

all critical personnel for retention. Utilizing a web-based approach, organizations can

launch both large, self-directed initiatives and smaller, targeted initiatives that enable

positive cultural integration, help form strong social networks, and facilitate the sharing

of core tacit knowledge across the combined enterprise, all of which are critical factors

in M&A success. In short, instead of a fear-based approach that dictates the cutting or

postponement of personnel development processes during an M&A, mentoring should

be proactively planned and promoted as a core enabling mechanism to ensure

successful integration and increased enterprise value.

Companies rightly turn to acquisitions to meet goals they can’t achieve internally. But

there is no magic in buying company. Companies can make acquisitions that allow them

to command higher prices, but only in the same way they could have raised prices all

along by improving products that are not yet good enough for the majority of their

customers. Similarly they can make acquisitions to cut costs by using excess capacity in

their resources and processes to serve new customers but again, only in the same way

they could have by finding new customers on their own. And companies can acquire

new business models to serve as platforms for transformative growth—just as they

could if they developed new business model in house. At the end of the day, the

decision to acquire is a question of whether it is faster and more economical to buy

something that you could, given enough time and resources, make yourself. For M&As

to succeed, three issues need to be addressed proactively in the integration process:

1. Integrating and unifying culture.

2. Building relationships and networks across the enterprise.

3. Transferring tacit knowledge (the critical skills, competencies and understanding

necessary for long-term enterprise success).

Enhancing profitability because a combination of two or more companies may

result in more than average profitability due to cost reduction and efficient utilization of

resources. This may happen because of increase in economies of scale, tax

advantages, and increases liquidity for owners, gaining access to funds, growth,

diversification, synergetic benefits, for the welfare of the company and etc.

References:

http://hbr.org/2008/12/reinventing-your-business-model/ar/1

http://blogbschool.com/2010/10/27/8-specific-motives-for-mergers-and-

acquisitions/

http://www.3creek.com/research/Mergers_Acquisitions.pdf

http://blogs.hbr.org/ideacast/2011/02/getting-smarter-about-mergers.html

http://isites.harvard.edu/fs/docs/icb.topic957120.files/Articles-By%20Chapter/Chapter

%201%20Readings/Big%20Idea_%20C.Christensen.1.pdf

http://blog.crmboost.com/?p=166

http://www.investopedia.com/university/mergers/mergers1.asp#axzz2GWfUAw88

http://business.gov.in/growing_business/mergers_acq.php

http://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/1

http://blogs.hbr.org/ideacast/2011/02/getting-smarter-about-mergers.html