Professional Documents
Culture Documents
METHODS OF GROWTH
STRATEGY IMPLEMENTATION THROUGH: INTERNAL/ ORGANIC GROWTH ACQUISITIONS AND MERGERS JOINT VENTURES STRATEGIC ALLIANCES
Internal Development
Retains control Allows retention of all gains Bears all financial risks Can take much longer than acquisition or alliance
M & A tend to occur in cyclical waves historically reflecting business and stock market cycles NB changes in number and value Distinction between horizontal, diversificatory and vertical mergers & acquisitions Majority in any one year are domestic Increasing importance of large, cross border mergers & acquisitions do they present distinctively different business issues?
Corporate growth; sales & market share growth Horizontal integration, economies of scale & scope, cost reduction Investment demands of fast technological change & shortening product life cycles Acquiring new competences & capabilities Speed of international market entry, building global presence & reach Bid proofing by growing larger
M & A EFFECTIVENESS
Paradox that despite the boom in Mergers and Acquisitions (including international ones) much of the evidence on M & A success is negative Diversificatory mergers generally less successful than horizontal ones (Michael Porter 1987 study found 60% subsequent disposal rate) Much of the evidence on the effectiveness of M & A as growth strategy is from a series of 1980s financial studies.
M & A EFFECTIVENESS
RAVENSCRAFT & SCHERER (1987) AND AUERBACH (1988) Both found a significant deterioration in corporate profitability and share price post merger compared to the combined performance pre merger, but methodology problems include time period studied (only two years after) McKinsey consultants (1990) found only a 57% success rate for cross border M & As
Mergers/Acquisitions Effectiveness
Laurence Caprons (1999) questionnaire survey of 253 cross border manufacturing M & A less than half found that cost savings were achieved in terms of production cost synergies (46%) or input cost savings (40%) but a majority (56%) reported improved results in terms of market share, sales revenue growth and geographical market coverage
Importance of identifying four stages in M & A management: Quality of Pre-acquisition process Choice of M & A integration framework Transition Management Consolidation HASPESLAGH & JEMISON (1991) emphasised that poor pre-acquisition planning and partner selection, and poor post-merger integration were key causes of failure
Pre-Acquisition planning: Need for lengthy planning process Target research, partner selection & screening (possible no target available?) Due diligence and accurate valuation Negotiation of terms/ determining bid price (s) Importance of secrecy Importance of stakeholder support Anti-trust & regulatory issues
Preservation Mode - Keep businesses separate - low synergy - high autonomy preserves existing cultures Absorption Mode - Acquirer dominates and absorbs acquired business into its own operating systems & dominant culture Symbiotic Mode - high autonomy and high interdependency of the two businesses build new hybrid - joint integration - new common culture
Transition Management Costs of acquisition Programme for synergies and cost reduction Integration mechanisms and planning New leadership and interface management New strategic mission and purpose Stakeholder management
Consolidation: Determining final post merger integration structure Cultural issues reconciling (international) cultural differences and possibly building new cultural web for the merged company Managing the human resource issues Setting new strategic and management objectives Monitoring, measurement and control
Competition & anti-trust policies have in limited cases prevented acquisitions or imposed conditions eg EU & Nestle/Perrier & Vodafones forced disposal of Orange to FranceTelecom. 2005/6 New Protectionism UK permitted Telefonica/O2, Santander/ Abbey National, Kraft/Cadbury Acquisitions
A widening of National Strategic Interest appears to be occuring beyond national airlines and defence industries Conflict of UK & US Govts over Dubai Port Authority bid for UK P & O port interests. French promotion of Suez/Gaz de France merger in energy sector to protect against bid for Suez from Italian Enel energy group.
POOR PARTNER SELECTION FAILURE OF DUE DILIGENCE COSTS OF ACQUISITION STRATEGIC MISMATCH FAILURE TO ACHIEVE COST SAVINGS/ INCREASE IN X INEFFICIENCIES CULTURAL DIFFERENCES STAKEHOLDER OPPOSITION
Voluntary arrangements between firms involving exchange, sharing or codevelopment of products, technologies or services Gulati, 1998 Not just for market entry and development but can occur in any part of the value chain SAs usually non-equity based arrangements but not always (note Rover and Hondas cross shareholdings here)
513 alliances involving 204 airlines ONE WORLD ALLIANCE involving BA, QUANTAS, AMERICAN AIRLINES, JAL STAR ALLIANCE involving LUFTHANSA, SAS, UNITED AIRLINES,CANADA, THAI
A JOINT VENTURE BY CONTRAST INVOLVES THE CREATION OF A NEW, JOINTLY OWNED, LEGAL ENTITY, INCORPORATED AS A SEPARATE BUSINESS EG TOYOTA and GENERAL MOTORS NUMMInc. IN CALIFORNIA TO PRODUCE SMALL US CARS EG SONY-ERICSSON MOBILE TELEPHONE JOINT VENTURE
Advantages
Internal Development Keep control Retain all benefits Ready-made products, markets, know-how, organisation. Fast
Disadvantages
Limited to own resources Take all risks. Slow Acquisitions are: difficult to value difficult to integrate Partners goals may conflict Organisational confusion Lose control of know-how and technology
Pool resources and know-how. Fast Spread risk, costs, capital commitment
DETERMINANTS OF METHOD
SPEED AND TIME SCALES COSTS AND RESOURCES CAPABILITY BUILDING CONTROL RISKS INCLUDING DISSEMINATION RISK TRANSACTION COST SAVINGS