Corporate Strategy: Organizc vs Inorganic Growth

-> Chanes in product scope  or geographical scope can be made by:

• INTERNAL (ORGANIC) GROWTH: company invests to develop internally (by buing assets and hiring people) the resources and competences needed to launch nes products or enter in a new geographical market;
• EXTERNAL GROWTH: company modifies its boundaries by acquiring existing companies (M&A);

Types:

Advantages of Acquisitions:

-> Once company has decided to change corporate scope => Acquisitions have three advanteges:

• Faster fo accomplish than international development, because the company acquired is typically “up and running”;
• More information are available;
• The company that is acquired does not need to pay for any of faileures along the way

Approaching the Deal:

-> Corporate acquisition transactions, either as buyer or seller, in each case they face a number of alternative choices:

• BUYING SIDE:can go for friendly or for hostile deal;

-> Can offer to pay the consideration in cash or in shares (or a combination of the two);

-> Can seek total ownership (100% of shares) or simple majority;

• SALE SIDE: can run an auction or pursue a specific buyer;

-> Can sell the SBU’s management (usually backed up by financial investor);

-> Can distribuitte the shares in the SBU ot the shareholders (“spin off”);

Four Critical Decisions:

-> There are four critical decisions that make or break a deal:

1. How should you pick your targets?
2. Which deals should you close?
3. Where do you really need to integrate?
4. What should you do when the deal goes off track?

📌D. Harding & S. Rovit, Mastering the Merger, Harvard Business School Press, September 2004

Reason for Acquisition:

1.Increased Market Power:

-> Factor increasing market power:

• when a firm is able to sell its goods or services above competitive levels, or
• when the costs of its primary or support activities are below those of its competitors;
• usually it is derived from the size of the firm and its resources and capabilities to compete.

-> Market Power is increased by:

• horizontal acquisitions;
• vertical acquisitions;
• related acquisitions.

2.Overcame Barriers to Entry:

-> They include:

• economies of scale in established competitors;
• differentiated products by competitors;
• enduring relationships with customers that create product loyalties with competitors.

-> Acquistiion may be more effective than entering the market as competitor offering an unfamiliar good or service that is unfamiliar to current buyers.

-> Cross-Border Acquisitions: control of assets and operations is transferred from a local to a foreign company.

3.Cost of New Product Development

-> Significant investments of a firm’s resources are required to:

• Develop new products internally;
• Introduce new products into the marketplace;

-> Acquisition of a competitor may result in:

• lower risk compared to developing new products – increased diversification;
• Reshaping the firm’s competitive scope;
• Learning and developing new capabilities;
• Faster market entry;
• Rapid access to new capabilities.

4.Lower Sirk Compared to Developing New Products:

-> Acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process;

• Managers may view acquisition as lowering risk.

5.Increased Diversification:

-> It’s easier develop and introduce new products in markets currently served by the firm;

-> Colud be difficult to develop new products form markets in which a firm laks of experience:

• Uncommon to develop new products internlally to diversity its product lines;
• Acquisitions are quikest and easiest way to diversify a firm and change its portfolio of business.

6.Reshaping the Firms’ Competitive Scope:

-> A reduces dependence of firms on products or markets.

• This alters firm’s competitive scope;

-> After change corporate scope the advantage of acquisitions are:

• Faster to accomplish than internal development (firm acquired is “up and running”);
• More information are available to the prospective acquirer to evaluate the move.

7.Learning and Developing New Capabilities:

-> Acquisitions may gain capabilities that the firm does not possess;

-> Acquisitions may be used to:

• Acquire a special technological capability;
• Broaden a firm’s knowledge base;
• Reduce intertia.

Value Creation in Acquisition:

-> Company engage M&A in order to creating value for their shareholders..

-> Value can be geneerate through stand–alone improvements and synergies;

• Majority of acquisitions fail to create value (mani destroy shareholder value);

Types of Synergies:

COST SAVING: come from eliminating jobs, facilities and related expenses that are no longer needed when functions are consolidated, or they come from economies of scale in purchasing.

• Most commong type of synnergy;
• Aka hard synergies.

REVENUE ENHANCEMENTS: sometimes possible for an Acquirer and its Target to achieve higher level of sales growth together than either company could do on its own.

• Described ad soft synergies.
• Aka soft synergyes;

PROCESS IMPROVEMENTS: occur when managers transfer best practices and core competencies from one company to the other.

• It’s result in cost savings and revenue enhancements;
• Transfer of best practices can flow in either direction;

FINANCIAL ENGINEERING: for example when a transaction allows acquirer to refinance Target’s debt without negatively affecting acquirer’s credit rating.

Synergies:

-> Synergies play a role in valueation, negotiation, integration;

-> S. between Acquirer and Target are specific to each Acquirer.

-> The value of synergies is normally slit between the two as part of the price negotiation.

-> Qualification of synergies is part of the valuation process;

-> Synergies can materialise only through a successful integration.

Problems:

1.Inegration Difficulties:

-> Integration challenges include:

• Melding two disparate corporate cultures;
• Linking different financial and control systems;
• Building affective working relationships (particularly when management styles differ);
• Resolving problems regarding the status of the newly acquired firm’s executives;
• Loss of key personnel weakens the acquired firm’s capabilities and reduces its value.

2.Inadequate Evaluation of Target:

-> Evaluation requires that hundreds of issues be closely examined, including:

• financing for the intended transaction;
• differences in cultures between the acquiring and target firm;
• tax consequences of the transaction;
• actions that would be necessary to successfully melt the two workforces.

-> Ineffective due-diligence process may result in paying excessive premium for the target company.

3.Large or Extraordinary Debt:

-> Firm may take on significant debt to acquire a company.

-> High debt can:

• increase the likelihood of bankruptcy;
• lead to a downgrade in the firm’s credit rating;
• preclude needed investment in activities that contribute to the firm’s long-term success.

4.Inability to Achieve Synergie:

-> Synergies exist when assets are worth more when used in conjunction with each other than when they are used separately.

-> Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create synergies. Firms tend to underestimate indirect costs of integration when evaluating a potential acquisition.

5.Too Much Diversification:

-> 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.

6.Managers Overly Focused in Acquisition

-> Managers in Target firms may 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.

-> Acquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a Target firm.

7.Tobo Large:

-> Additional costs 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.