Mergers & Acquisitions and Alliances

Question 1

What is the point of M&A and Alliances?

Answer 1

Enables businesses to develop and grow through three methods of development:
1) Organic (based on internal resources)
2) Mergers and acquisitions
3) Strategic alliances.

Question 2

What are the Key success factors for M&A and Aliiances?

Answer 2

• Strategic fit
• Organisational fit
• Correct valuation
• Integration
• Co-evolution
• Appropriate exit strategies

Question 3

What is organic development?

Answer 3

building on and developing an organisation’s own capabilities. This is the ‘do it yourself’ (DIY) method.

Question 4

Adv/Dis-adv of Organic development method to grow a business

Answer 4

Advantages of organic development include:
* Knowledge and learning can be enhanced
* Spreading investment over time – easier to finance
* No availability constraints – no need to search for suitable partners or acquisition targets
* Strategic independence – less need to make compromises or accept strategic constraints
* Culture management – new activities with less risk of a culture clash

Disadvantages include:
* slow
* expensive
* risky

Question 5

What kinds of acquisition can there be?

Answer 5

• ‘Friendly’ acquisitions are where the target’s management recommend accepting the acquirer’s deal

*‘Hostile’ acquisitions are where the target’s management oppose the acquirer’s offer. Here the acquirer appeals directly to the shareholders

Question 6

How do you decide between whether to pursue Organic development, Strategic Alliance or an acquisition?

Answer 6

Three factors:

1) Urgency: organic development is usually slowest, alliances accelerate the process but acquisitions are often quickest.

2) Uncertainty: an alliance means risks and costs are shared and thus a failure means these costs are shared.

3) Type of resources and capabilities: acquisitions work best with ‘hard’ resources (e.g. production units) rather than ‘soft’ resources (e.g. people). Culture clash is the big issue.

Question 7

Adv/Disadvantages of Strategic Alliances

Answer 7

Adv:
* Share risks
* More bargaining power to suppliers etc
* Partners may have something business is lacking/ enhance capabilities

Dis:
* Partners can be untrustworthy and act opporutnistically etc
* Companies dont evolve together as competition, strategies change
* Failure rates are high

Question 8

Adv/Disadvantages of Acquiring a company

Answer 8

Adv:
* Increase market power
* Tax efficiency
* New product/services/ markets
* Enhancing resources and capabilities

Dis-adv:
* Overpay lead to winners curse where theres no net profit after acquisition
* Companies dont integrate well
* Demanding of a companies time and skills when trying to negotiate and integrate etc.

Question 9

What types of motives are M&A driven by?

Answer 9

• Strategic
• Financial
• Managerial

Question 10

Explain different types of strategic motivation in a M&A process

Answer 10

1) Extension: of the reach of a firm in terms of geography, products or markets. e.g. Walmart’s takeover of Asda

2) Consolidation: increasing scale, efficiency and market power e.g. M&A in the car industry and airline industry

3) Resources and Capabilities: enhancing resources and capabilities e.g. Disney acquisition of Pixar - access to creative and animation technology resources and capabilities.

Question 11

Explain different types of financial motivation in a M&A process

Answer 11

1) Financial efficiency: a company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt)

2) Tax efficiency: reducing the combined tax burden – may be prevented by legal restrictions e.g. Pfizer proposed deal with Allergan

3) Asset stripping or unbundling: selling off business units of the acquired company to maximise asset values. This bargain hunting is sometimes termed ‘asset stripping’.

Question 12

Explain different types of managerial motivation in a M&A process

Answer 12

1) Personal ambition: financial incentives tied to short-term growth or share price targets; boosting personal reputations; giving friends/colleagues greater responsibility or better jobs (for loyalty).

2) Bandwagon effects: managers may be branded as conservative if they don’t follow an M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target.

Question 13

What are the risks for M&A?

Answer 13

1) overpayment
2) synergies oversold
3) don’t understand the acquired firm
4) integration and culture clash,
5) management hubris (managers thinking they can manage better than the current firm)

Question 14

Describe the Acquisition process and explain the key criterias needed

Answer 14

1) Target choice:
* is the firm a good organisation fit (culture, management practices, staff characteristics)
* is the firm a good strategic fit (strengthen or complement the existing firm buying?)

2) Negotiations: agree on price and T&C’s, is there a big premium for control? (above market value to control)

3) Integration:
* Is there a a need for strategic interdependence – the need for transfer or sharing of capabilities and/or resources (knowledge transfer)
* is there a need for organisational autonomy – sometimes the distinctiveness of the acquired company can be an advantage, but sometimes it is problematic.

4) Results

Question 15

What are the five types of integration that can be done after an M&A is complete?

Answer 15

1) Absorption
2) Preservation
3) Symbiosis
4) Intensive care
5) Reorientation acquisitions

Question 16

Describe the Absorption process during integrating a company after M&A (Interdependence? Autonomy?)

Answer 16

• Strong need for interdependence (important knowledge needed from acquired company)
• little need for autonomy (happy to change values, strategies, culture and replace CEO)

Question 17

Describe the Preservation process during integrating a company after M&A (Interdependence? Autonomy?)

Answer 17

• Little interdependence (dont need knowledge transfer)
• High need for autonomy (run by itself, same culture, strategies, CEO retained)

Question 18

Describe the Symbiosis process during integrating a company after M&A (Interdependence? Autonomy?)

Answer 18

• Strong need for interdependence (important knowledge needed from acquired company)
• High need for autonomy (Keeps it culture, strategies and both companies learn from each other initially)

Question 19

Describe the Intensive care process during integrating a company after M&A (Interdependence? Autonomy?)

Answer 19

• Little to be gained by integrating
• Rapid remedial action, CEO replaced if severe.

Question 20

Describe the Reorientation Acquisitions process during integrating a company after M&A (Interdependence? Autonomy?)

Answer 20

• Need to integrate central admin and marketing/sales other than that few internal changes
• new top manager to run

Question 21

Describe the post-acquisition integration matrix (in terms of knowledge transfer and autonomy)

Answer 21

Low knowledge & low autonomy = Intensive care
Low knowledge, high autonomy = Perservation

High knowledge, low autonomy = Absorption
High knowledge, high autonomy = Symbiosis

Question 22

Whats a Strategic Alliance?

Answer 22

A strategic alliance is where two or more organisations share resources and activities to pursue a common strategy.

Question 23

What do strategic alliances offer?

Answer 23

• Mutual gain
• Flexibility
• Risk sharing

Question 24

Whats collective strategy?

Answer 24

how the whole network of alliances, of which an organisation is a member, competes against rival networks of alliances. e.g. in car industry, airline industry

Question 25

What are the types of Strategic Alliances?

Answer 25

1) Equity alliances: involve the creation of a new entity that is owned separately by the partners involved.

2) Non-equity alliances: are typically looser alliances, without ownership and often based on contracts, for example, franchising, licensing or subcontracting.

Non-equity alliances include partnerships for joint activities such (R&D, Marketing etc.) or to access mutually complementary assets or skills.

• Non-equity alliances tend to be more common.

Question 26

Explain the types of Equity Alliances

Answer 26

1) Joint venture: Two organisations remain independent but set up a new organisation jointly owned by the parents.

2) A consortium alliance: Involves several partners setting up a venture together. Typically to collaborate on a significant project.

Question 27

Explain the types of Non-equity Alliances

Answer 27

1) Franchising: where one organisation (the franchisor) gives another organisation (the franchisee) the right to sell the franchisor’s products or services for a fee or royalty. e.g. Subway, McDonald’s

2) Licensing: allowing partners to use intellectual property for a fee. Common in industries where patents, trademarks etc. matter e.g. pharmaceuticals, beer brewing

3) Long-term subcontracting: enable long terms relationships for mutual gain. e.g. Canadian firm Magna assembles vehicle bodies for Honda, Mercedes, Ford

Question 28

Explain the broad motives for Alliances

Answer 28

1) Scale alliances: exploit economies of scale - lower costs, more bargaining power and sharing risks.

2) Access alliances: partners provide needed capabilities (e.g. distribution outlets or licenses to brands).

3) Complementary alliances: bringing together complementary strengths to offset the other partner’s weaknesses.

4) Collusive alliances: to increase market power. Collusion between for-profit businesses might be kept secret to evade competition regulations - such action is generally illegal.

Question 29

Whats needed for a successful alliance?

Answer 29

1) Co-evolution: the need for flexibility and change as the environment, competition and strategies of the partners evolve

2) Trust: partners need to be trustworthy throughout or they may act opportunistically, misrepresent resources or competencies etc.

Question 30

Whats the strategic alliance evolution process?

Answer 30

1) Courtship: finding the right partner.

2) Negotiation: agreeing roles, ownership, profit share and responsibilities and building in options for renegotiation.

3) Start-up: committing resources, establishing systems, making adjustments – risk of failure high at this stage.

4) Maintenance: ongoing investment and operations. Evolving with changing context.

5) Termination: finding an exit strategy (sometimes friendly but sometimes bitter)