Topic 11 - Alliances, Mergers and acquisitions

BN 926 Strategy and Management of Change

Mergers, Acquisitions, Strategic Alliances

and the Boundaries of the Firm

Professor Julian Lowe

Aims

To highlight corporate considerations in strategy

To examine diversification as a strategyTo understand the nature of the firm and its

limitationsTo assess where mergers, or acquisitions or

alliances are most appropriateTo assess the impact and importance of

scale, scope and transaction costs on the size, scope and nature of the firm

Questions

What determines the scale and scope of your organisation? How does it differ from its competitors?

What is diversification and why diversify?

Why do mergers fail? Why has there been a boom in

alliances? What are the dangers? Are alliances and partnerships different

in Asia/Europe/N. America?

Wesfarmers

Why did Wesfarmers diversify? What sort of diversification strategy

did it follow? How does it manage diversification?

Diversification

Define corporate strategy and its importance to the diversified firm

Explain why firms move from a single business strategy to a multi business strategy?

How do diversified firms create value? Related/unrelated?

What incentives and resources help manage diversified businesses

Why do diversified businesses go wrong?

Company Name Net Profit ($000)

Return on Revenue (%)

1 Wesfarmers 100,079 8.3

2 SouthCorp 91,548 9.7

3 Howard Smith 61,955 6.2

4 Pacific Dunlop 60,700 3.3

5 Smorgan Steel 40,005 5.0

6 Futuris Corporation 30,888 1.9

7 Austrim Nylex 30,756 9.0

8 Email 24,028 3.6

9 GWA International 21,618 10.7

10 Pacifica Group 17,867 5.7

11 Hills Industries 8,962 8.0

12 McPherson’s 6,959 5.7

13 Steamships Trading 6,889 11.8

14 Coventry Group 3,958 3.8

15 Hancock & Gore 3,488 11.5

Australian Diversified Industrials

Levels of diversification

Single business – 95% of revenue comes from a single business

Dominant – 70 – 95% from a single business

Related - < 70% from a single business but these have strong links

Unrelated - < 70% and no strong links

Examples in each category?

Motives, Incentives and Resources for Diversification

That enhance strategic competitiveness?

Neutral to strategic competitiveness? Managerial motives?

Motives, Incentives and resources for Diversification

Motives to enhance strategic competitiveness Economies of scope (related diversification)

Sharing activitiesTransferring core competencies

Market power (related diversification)Blocking competitors through multi-point competitionVertical integration

Financial economies (unrelated diversification)Efficient internal capital allocationBusiness restructuring

Incentives and resources with neutral effects on strategic competitiveness

Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources Managerial motives (value reduction) Diversifying managerial employment risk Increasing managerial compensation

Related Diversification

Operational relatedness? Corporate relatedness? Market power?

Unrelated diversification

Financial economies Efficient internal capital market

allocation Restructuring and sell - off

Value-creating strategies of diversification: Operational and corporate relatedness

Value

Related constrained diversification

Vertical integration(market power)

Both operational and corporate relatedness

(rare capability and can

create diseconomies of scope)

Unrelated diversification

(financial economies)

Related linked diversification

(economies of scope)

High

Low

Low High

Corporate relatedness: Transferring skills into businesses through corporate headquarters

Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p203

Sharing: Operationa

l relatedness

between businesses

Incentives for diversification

Low performance Uncertain future cash flows Firm risk reduction

Resources required for diversification

Tangible Intangible

Mergers and Acquisitions (M&A)

Current scope of mergers? Why are M&A popular? Why M&A and not internal growth? Conflict between M&A and

competitive strategy? Attributes of M&A that influence

competitive success? The nature of restructuring?

Extent?

1999 – US$3.4 trillion world – wide

Why? – internet, cross border/wto, fad

Result- 1999 KPMG report – 83% failed to increase shareholder wealth in acquiring firms. 53% significantly reduced shareholder wealth.

KPMG 2005 survey The biennial survey, which was undertaken

in conjunction with an independent research company, is the third in the series and looks at major global deals completed during 2000/20001. The survey shows that a higher proportion of deals now enhance value for the acquirer’s shareholders. At 34 percent the figure is double that in our 1999 survey, and for the first time it exceeds the proportion reducing value. Indeed, if the measure is restricted to post-acquisition performance only, then 52 percent of deals can be said to enhance value, up from 36 percent in 2001.

Reasons for acquisitions and problems in achieving successSource: Hanson, Dowling, Hitt, Ireland & Hoskisson p243

Reasons for acquisitions Problems in achieving success

Increased market power

Overcome entry barriers

Cost of new product development

Increased speed to market

Lower risk compared to developing new products

Increased diversification

Avoid excess competition

Integration difficulties

Inadequate evaluation of target

Large or extraordinary

debt

Inability to achieve synergy

Too much diversification

Managers overly focused on acquisitions

Too large

Acquisitions

Attributes Results

1 Acquired firm has assets or resources that are complementary to the acquiring firm’s core business

High probability of synergy and competitive advantage by maintaining strengths

2 Acquisition is friendly Faster and more effective integration; possibly lower premiums

3 Acquiring firm selects target firms and conducts negotiations carefully and deliberately

Firms with strongest complementarities and acquired and overpayment is avoided

4 Acquiring firm has financial slack (cash or a favourable debt position)

Financing (debt or equity) is easier and less costly to obtain

5 Merged firm maintains low to moderate debt position

Lower financing cost, lower risk (eg of bankruptcy) and avoidance of trade-offs associated with high debt)

6 Has experience with change and is flexible and adaptable

Faster and more effective integration

7 Sustained and consistent emphasis on R & D and innovation

Maintain long-term competitive advantage in markets


Attributes of successful acquisitions

Alternatives Short-term outcomes Long-term outcomes

Downsizing

Downscoping

Leveraged buyout

Reduced labour costs

Reduced debt costs

High debt costs

Emphasis on strategic controls

Loss of human capital

Lower performance

Higher risk

Higher performance


Restructuring and outcomes

Some Diagnostics

IPR and complementary

assets

strategic impact/relative competences

control v. risk

Boundaries of the firm

Examine why we have firms How they can be improved The value of strategic alliances

Quote – Day, J., & Wendler, J.C. (1998) ‘The New Economics of Organisation’ McKinsey Quarterly No. 1. Pp 5 – 18.

In their present forms, markets motivate and hierarchies coordinate

Have we learned to combine the best of both

Two challenges for the corporation of the future: Entrepreneurialism and knowledge

Problems With Modern Corporation

Central control Costly consensus building Lack of entrepreneurship/motivation Extensive path dependencies Can disaggregation help?

Internal – but corrupted and planning interventions

External – loss of control and potential synergy

Alliance v. Acquisition

Alliancev.

Acquisitions

Infeasibility

Indigestibility

Investment in options

Information asymmetry

Relational Forms

Market

Relational forms

Hierarchy

External disaggregation

Internal disaggregation

Personal initiative

Enforced cooperation and coordination

Relational forms – making coordinated moves in a more entrepreneurial environment

Strategic Alliances: Definitions and Distinctions

Collaboration Networks Partnerships Alliances Joint Ventures Consortia Constellations

…… vertical and/or horizontal

School of Strategic Management, Bristol Business School

Traditional Competition

single firms

Collective Competition

group

triad

pair

Theoretical Perspectives

Transaction costs Scale Risk Control Agency Synergy Knowledge transfer

Alliances and Constellations

Alliance incomplete or open contract between

separate firms, involving shared control Constellation

set of firms linked through alliances alternative to a single firm as a way to

control a set of capabilities needed to compete in a given context

Strategic Alliances: Rationales

INCREASING ATTRACTIVENESS OF

STRATEGIC ALLIANCES

Increasing Development

Costs

Shorter Product Life-

cycles

Increasing Cost

Pressures

Globalisation

Building new businesses or introducing

new products

Improving economics of

existing business

New generation of product technology

SpeedNPD

Develop upstream technology

Achieve market penetration

Fill product line gaps

Exploit economies of

scale

Increase capacity utilisation

Small Firm : Large Firm Issues

Large Firms Growth and sales Partners R & D Additional

resources Preempt comp’n

Small Firms Exploit

technology Access foreign

markets Access

reputation and expertise

Access finance Share risk

Some Diagnostics

IPR and complementary

assets

strategic impact/relative competences

control v. risk

Strategic Alliances: Pitfalls

Transaction costs

Diffusion of Strategic Assets

Appropriation of Competitive Advantage

Effect on Competitiveness and Innovation


Strategic Alliances: Reasons for Failure

Not enough attention paid to detail Different strategic goals Lack of top executive commitment Mutual trust failed to develop Organisational culture differences Change in partner objectives


Strategic Alliances: The Problem of Fit


stra

teg

ic

fit

cultural fit- +

+

-

Collaborative Advantage if

Cultural Adjustment

Optimal Collaborative Advantage

No Compatibility

or Collaborative Advantage

Compatible but no

Collaborative Advantage


Strategic Alliances: The Network Organisation

DESIGN

MARKETING & DISTRIBUTION

BROKER

PRODUCTION

SUPPLY DESIGN

MARKETING & DISTRIBUTION

BROKER

PRODUCTION

SUPPLY

DISTRIBUTORS

STABLE NETWORK

SUPPLIERS

CORE FIRM


Strategic Alliances: New Managerial Roles

Move to boundary spanning roles More emphasis on (less) human resources New control strategies Acceptance of organisation as an open

network system Politics and conflicts Organising learning processes Incongruence and divergence between

authority and responsibility Changing labour relations


Strategic Alliances: Design and Management Issues

Goal congruence and strategic compatibility

Trust and mutual interaction Structural and cultural compatibility Communication and systems

compatibility Interaction and transaction costs Flexibility within strategic control


Strategic Alliances: The View From a Guru

Individual excellence Importance Interdependence Investment Information Integration Institutionalisation Integrity

strategictacticaloperationalinterpersonalcultural

Strategic Issues Pre and Post Alliance

Capture value : Ownership of assets that are scarce and complementary brand supply chain technology

Control of ‘stickiness’ facilitate transfer and absorption but guard

against loss of critical knowledge

Maintain large surface area of contact disaggregation provide more access points for

knowledge management

Control costs of coordination disaggregation can go too far

The Future

No one way Innovative forms of joint ownership Further growth through growth of

connectivity Trust v. Contract v. Guanxi Focus on the strategic

Questions

How do transaction costs influence the scale and scope of an enterprise?

Does the failure of many mergers mean we will see fewer of them?

What impact on scale and scope of the firm and alliances will we see from capital markets, technology change, and globalisation?

Topic 11 - Alliances, Mergers and acquisitions

Documents

diversification motives

strategies of diversification

corporate strategy

single business strategy

diversified firm

multi business strategy

competitive strategy

strategic alliances