corporate level strategy

how corporate level strategy should create value

it should create value such that the value of the corporate whole increases, the businesses forming the corporate whole are worth more than they would be under independent ownership and that equity owners can’t create themselves through portfolio investing

two forms of organizing transactions

economic exchanges can take place through market or hierarchical forms

what is vertical integration

a strategy when a firm moves backwards or forwards along its supply chain

what’s the difference between forward & backward vertical integration

backward integration is when a firm moves into its supplier’s industry, forward integration is when a firm moves into its buyer’s industry

issues in vertical integration

is the company satisfied with the value provided? Are there profit opportunities? Are firm capabilities being leveraged? How does this affect flexibility of the firm? Does it affect firm stakeholders?

what are transaction specific investments & how may they increase opportunism in vertical integration

an investment in an exchange that has significantly more value in the current exchange than it does in other exchanges, may affect either cost or ability to find a partner

what is diversification

product diversification focuses on the scope of the markets and industries a firm competes in, degree of relatedness can affect the value of the strategy

different types of diversification

related-constrained, related-linked, unrelated

related-constrained

all businesses are related on most dimensions

related-linked

some businesses are related on some dimensions

unrelated

a highly diversified firm where the different businesses are not related (often called conglomerates)

how diversification adds value to the firm

economies of scope-sharing activities or spreading core competencies, market power-negotiating power, subsidizing losses and multipoint competition, financial-internal capital market and risk reduction

how do managers incentives in a way that may not create value for the firm through diversification

through compensations and risk reduction

what are horizontal integration strategies & why are they attractive

acquiring or merging with other companies in the same industry to increase market share and streamline operations

what are mergers

a strategy where two firms agree to integrate their operations on a relatively co-equal basis

what are acquisitions

a strategy where one firm purchase an interest in another firm

what are takeovers

a type of acquisition when the firm purchased does not solicit a bid from the firm acquiring it

how may the FTC and SEC get involved

they categorize mergers and acquisition & the things they have to do in order to get the deal done (antitrust issues)

why financial results on M&As are disappointing and where does the wealth go

takeover premiums are high, firms can copy advantages, managers make poor decisions, integration issues

how can both firms maximize value in M&A activity during the bidding process (while doing the deal)

for firm acquiring: search for rare economies of scope, limit information to other buyers & the target, avoid bidding wars, close the deal quickly, seek thinly traded markets

for firm being acquired: seek information from bidders, invite others to join bidding, delay NOT stop acquisition

what is the management response to a takeover that can reduce value

greenmail, standstill agreements, poison pills

what is greenmail

offering to buy back the chunk of stock at a premium (overpyaing to regain equity)

standstill agreement

they delay then stop the acquisition

poison pills

corporate bylaws/policies that are used to make acquisitions more expensive

what is the management response to a takeover that can increase value

search for white knights, creation of bidding auction, golden parachutes

search for white knights

finding firms that are more preferable to acquire your firm

golden parachutes

a large payout to management at the point of acquisition

what is the management response to a takeover that can have no effect on value

shark repellents, pac-man defense, crown jewel sale, lawsuits

shark repellents

governance changes to make the acquisition more difficult

pac-man defense

one firm makes a takeover bid for the other, the target of the bid turns around and acquires the company trying to A it

crown jewel sale

the company that is the target of a takeover sells the valuable piece to the company that made the bid

lawsuits

the target company suing the company trying to A it

what are the integration issues of M&A activity

control systems, reward systems, cultural blending, financial control systems, building good working relationships

strategies for getting smaller

restructuring/downsizing/downscoping, spin-off, diverstiture, and liquidation

what is downsizing

reduction of the size of the firm’s operations, done by laying off employees

what is downscoping

selling off part of a firm’s operations, used to eliminate businesses unrelated to the core business (spin-off, diverstiture, or liquidation)

what is spin-off

creating a new company whose stock is owned by same investors (pizza hut being owned by pepsi)

what is diverstiture

taking a business unit and selling it to someone else (best case scenario)

what is liquidation

shutting down the business unit

what is the conglomerate discount

underperformance of stock, undervaluing of shares (businesses are worth less together than they would be apart)

how does the conglomerate discount affect the value of the firm

it allows a better focus on the businesses that remain within the corp

what is a leveraged buyout

company buys the firm assets in order to take it private

how does a leveraged buyout affect value

best case it fixes everything, worst case is it fails and the firm goes bankrupt

three types of strategic alliances

non-equity, equity, & joint venture

how is a non-equity used

contractual relationship to share resources and capabilities

how is equity used

alliance where partners own stakes in each other

how is a joint venture used

two or more orgs contribute to the creation of a new entity

how may alliances create value for firms

exploiting economies of scale, learning from partners, risk and cost sharing

exploiting EoS

combining may allow firms to reach minimum efficient scale

learning from partners

observe each other and transfer skill across firms

risk & cost sharing

most valuable when projects are risky and expensive

3 determinants of the ability to learn in alliances

intent to learn, transparency of business partners, receptivity to learning

how may cheating come about

adverse selection, moral hazard, holdup

how can adverse selection threaten the creation of value

firms misrepresent the value of resources

how can moral hazard threaten the creation of value

firms don’t provide resources promised

how can hold-up threaten the creation of value

exploiting transaction-specific investments

what are transaction specific investments

an investment that has tremendous value in the current exchange and no value in any other application

how can transaction specific investments affect cheating in alliances

if one firm has to spend a lot of money in order to operate within the alliance, the partner may exploit that knowledge and use it to hold them up (threatening to provide less of a resource)

how can governance reduce threats to value creation

explicit contracts (legal sanctions for cheating), equity investments (cheating has indirect financial impact), joint ventures (cheating has direct financial impact), trust, threat to reputation

what is collocation

goods/services offered under different brands are located close to each other

how can collocation be positive

it attracts a bigger set of customers collectively than the sum of individual locations