Chapter 9 - Mergers & Acquisitions

Strategic Management Framework

• Key Components:

  • Mission

  • Objectives

  • External Analysis

  • Internal Analysis

  • Strategic Choice

  • Strategy Implementation

  • Competitive Advantage

  • Corporate Level Strategy

    • Vertical Integration

    • Diversification

    • Mode of Entry (Mergers & Acquisitions)

Logic of Corporate Level Strategy

• Value Creation:

  • Corporate level strategy should create value.

  • Combined businesses are worth more together than individually.

  • Equity holders cannot replicate this through portfolio investing.

Increasing Corporate Value

• Focus on increasing the overall value of the corporation.

Definitions of Mergers & Acquisitions

• Mergers:

  • Two firms combined on a relatively co-equal basis.

• Acquisitions:

  • One firm buys another firm; typically involves a controlling share.

• Common Terminology Issues:

  • Mergers and acquisitions are often used interchangeably but have distinct meanings.

  • "Merger" suggests an amicable joining of firms.

Characteristics of Mergers & Acquisitions

• Parent stocks may be retired; new stock issued.

• Name may combine elements of parent firms.

• M&A can be friendly or hostile; often involves tender offers.

• Explores dominant management from one parent firm.

Value Creation Logic in M&A

Unrelated M&A Activity

• No expected value creation due to lack of synergies.

  • Possible efficiencies may emerge from internal capital markets.

  • Exploitation of conglomerate discount by corporate raiders.

Related M&A Activity

• Expected value creation due to synergies:

  • Economies of scale

  • Economies of scope

  • Transferring competencies

  • Sharing infrastructure

Empirical Evidence on Value Creation

• Market Reaction Analysis:

  • Assessment of expected value from M&A based on stock price movements.

  • Studies focus on stock price reactions post-announcement of M&A.

Findings

• M&A success varies:

  • Related M&A creates more value than unrelated M&A.

  • Typically, target firms capture value generated.

Prevalence of M&A Activity

Reasons for Continued Activity

• Survival & Competitive Position:

  • Cash generation: To avoid competitive disadvantages.

• Agency Problems:

  • Managers may benefit from increase in size or diversification.

  • Overconfidence in success rates (managerial hubris).

• Above Normal Profits:

  • Potential for economies not seen by market.

  • Some M&A can generate long-term operational profits.

Competitive Advantage through M&A

Managerial Abilities

• Potential to generate sustainable competitive advantage depends on managers' abilities:

  • Identifying and exploiting economies of scale.

  • Negotiating effectively in M&A deals.

Deal Perspectives

• Bidding Firm:

  • Search for rare economies and limit information to other bidders.

  • Aim to close deals efficiently and quickly.

• Target Firm:

  • Encourage bidding wars, but manage delays in acquisition process.

Implementation Issues in M&A

Structural Considerations

• Typically employ m-form structures.

• Management controls and compensation policies relate to those in diversification strategies.

• Autonomy levels of target firm vary from full integration to partial autonomy.

Cultural Integration Challenges

• Merging corporate cultures presents challenges:

  • Create a hybrid culture or replace one with another.

Summary of M&A Insights

• M&A can create long-term value for acquirers.

• Targets generally capture economic value at the announcement of M&A activity.

• M&A strategies must align with corporate level strategy logic.

• Serves as a method of entry for vertical integration and diversification.