3. OBJECTIVES
1 Explain the motivations behind acquisitions and
show how they’ve changed over time
2 Explain why mergers and acquisitions are important
vehicles of corporate strategy
3 Identify the various types of acquisitions
4 Understand how the pricing of acquisitions affects
the realization of synergies
5 Outline the alternative ways to integrate acquisition
and explain the implementation process
6 Discuss the characteristics of acquisitions in
different industry contexts
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 2
6. THE eBAY-PAYPAL ACQUISITION
The partnership made sense … … but would it work?
Rely on transaction-based Can we recoup the $250 million
revenue premium we paid with savings
and revenue growth?
No inventory or warehousing
No sales force
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 5
7. THE eBAY-PAYPAL BUSINESS MODELS
eBay business model PayPal business model
eBay PayPal
Contract and
Seller payment occur Buyer Payer Payee
between buyer
and seller
PayPal’s revenue comes
eBay revenue comes from
from float in the personal
sellers paying auction
accounts and fees for pre-
posting fees
mier and business accounts
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 6
8. OTHER EXAMPLES: ORACLE BUYS SUN
• On April 20, 2009, Sun and Oracle Corporation announced that they
entered into a definitive agreement under which Oracle will acquire Sun
for $7.4 billion. Sun shareholders approved the acquisition on July 16,
2009. As of November 2009 the acquisition is pending regulatory
approvals.
• On November 6, in its 10-Q filing for the 1st quarter of the 2010 fiscal year,
Sun announced 25% total revenue decrease, compared to the 1st
quarter of the previous year, due to "economic downturn, the uncertainty
associated with our proposed acquisition by Oracle, increased competition
and delays in customer purchasing decisions".
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 7
11. MERGER VS. ACQUISITION
A B C
The consolidation
or combination
Merger
of one firm with
another
A B A
The purchase of
one firm by another
Acquisition
so that ownership
transfers
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 10
12. WHAT‘S ABOUT THE ORANGE / SUNRISE DEAL?
France Telecom and Denmark’s TDC are set to merge their Swiss
operations — Orange Switzerland and Sunrise, respectively — in a
move that would create a powerful rival to the market leader –
Swisscom. France Telecom said it will pay 1.5 billion EUR to TDC to
become a 75% shareholder in the combined entity, while TDC will hold
the remaining 25%.
The new firm will have approximately 3.4 million mobile and 1.1 million
fixed and broadband customers, accounting for a 38% share of the
Swiss mobile market and 13% of the fixed broadband connections. At
the same time, the merger is expected to generate synergies to the
tune of 2.1 billion EUR.
According to France Telecom’s Gervais Pellissier: “The planned
merger of Sunrise and Orange Switzerland marks a new significant
step in the long-term investment by France Telecom-Orange in
Switzerland. Following the UK joint venture between Orange and T-
Mobile (NYSE: DT), France Telecom completes another major in-
market consolidation, consistent with its M&A policy.”
At the moment, Swisscom dominates the Swiss mobile market with an
estimated 62% marketshare (5.5 million connections) in Q3 2009.
Sunrise holds the second position with 1.9 million users (a 21% market
share), while Orange is third with 1.6 million users (18%).
http://www.sunrise.ch/medienmitteilungenatt.htm?mediaattid=6110&filename=PR_Switzerland_Orange_Sunrise_251109_EN.pdf
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 11
13. MOTIVES FOR MERGERS AND ACQUISITIONS
Managerial self-interest Hubris Synergy
Sometimes termed Managers may make mis- Managers may believe that
“Managerialism”, manager taken valuation and have the value of the firms
can conceivably make unwarranted confidence in combined can be greater
acquisitions-and even their valuation and in their than the sum of the two
willingly overpay for them-to ability to create value independently
maximize their own because of pride, over-
• Reduced threats
interests at the expense of confidence, or arrogance
shareholder wealth • Increased market power
and access
• Realized cost savings
• Increased financial
strength
• Sharing and leveraging
capabilities
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 12
14. M&A – A VEHICLE THAT IMPACTS ALL ELEMENTS OF THE STRATEGY DIAMOND
M&A and the Strategy Diamond
While mergers and acquisition are
explicitly vehicles of strategy, they
have major implications for arenas
staging, and economic logic as well Arenas
Economic
Staging Vehicles
logic
Differentiators
Source: Adapted from Hambrick and Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15:4 (2001) 48-59
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 13
15. TOP DEALS 2008 BY VALUE IN SWITZERLAND
Source: http://www.kpmg.ch/docs/KPMG_MA_Yearbook09.pdf
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 15
16. UPs AND DOWNs AT SNAPPLE
In 1972, brothers-in- Cadbury Schweppes buys Snapple from Triarc
law Leonard Marsh for $1.45 billion. Snapple is now part of the
and Hyman Golden very successful America’s Beverage division,
and Arnold Greenberg, After sizzling success, which includes 7up, Dr. Pepper, Mystic, and
Marsh’s childhood Snapple is sold to Quaker Mott’s juices, among other brands. Has
friend, founded a for $1.8 billion Snapple found its home?
business called the
Unadulterated Food
Corporation and began
selling juice in Queens.
The name Snapple
1`
was coined while trying
1972 1994 1997 2000
to develop an apple
soda. In 1987, Snapple
introduced iced teas
with fun names and
flavors and enlisted (2)
controversial radio Fewer than three years later, Quaker
personalities, Howard throws in the towel and sells Snapple
Stern and Rush for $300 million to Triarc
Limbaugh, to promote
them
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 16
17. BENEFITS AND DRAWBACK OF ACQUISITIONS OVER INTERNAL DEVELOPMENT
• Move expensive
• Inherit adjunct businesses
• Cannot spread commitment over several
years (one-time, all-or-nothing decision)
• Potential for organizational conflict
• Speed
• Critical Mass
• Access to complementary
assets
• Reduced competition
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 18
18. CLASSIFICATION OF ACQUISITIONS
Product/
Overcapacity Market Industry
M&A Roll-up-M&A Extension M&A as R&D Convergence
Example DaimlerChrysler Service Pepsi’s Intel’s dozens of AOL’s acquisition
merger Corporation acquisition of acquisitions of Time-Warner
International more Gatorade small high tech
than 100 companies
acquisitions of
funeral homes
Objectives Eliminating Efficiency of Synergy of similar Short cut Anticipation of
capacity, gaining larger operations but expanded innovation by new industry
market share, and (e.g., economies product lines of buying it from emerging; culling
increasing of scale, superior geographic small companies resources from
efficiency management) markets firms in multiple
industries whose
boundaries are
eroding
Percent of
all M&A
deals 37% 9% 36% 1% 4%
Source: J.L. Bower, “ Not All M&As Are Alike – and That Matters,” Harvard Business Review 79:3 (2001), 92-101
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 19
19. THE SYNERGY TRAP
Acquisition premiums Create two problems for managers
Premiums increase The longer it takes
the level of returns to implement
the combined performance
businesses must improvements, the
extract more likely the
acquisition will fail
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20. HOW WOULD YOU DO THAT? – PAYPAL ACQUISITION
Years until Cost of capital
synergies are
implemented 10% 15% 20%
• “How much
eBay paid 0 0.100 0.150 0.200 incremental net
a $250 million income must you
premium for 1 0.110 0.173 0.240 generate if you
PayPal, now implement synergies
they must earn 2 0.121 0.198 0.288 in two years?
that premium
back 3 0.133 0.228 0.346 • What if they take five
years to implement?
4 0.146 0.262 0.415
5 0.161 0.302 0.498
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 21
21. THE ACQUISITION PROCESS
A process perspective
Results
Acquisition
integration
Justification
due diligence,
negotiation
Idea
Decision-making Integration process problems
process problems
Source: Adapted from P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York Free Press, 1991), 42
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 22
22. ACQUISITION SCREENING
“Soft-fit” acquisition screening by Cisco systems
Screening criteria Means of achieving criteria
Offer both short- and • Have complementary technology that fills a need in
long-term win-wins for Cisco’s core product space
Cisco acquired company • Have a technology that can be delivered through Cisco’s
existing distribution channels
• Have a technology and products that can be supported
by Cisco's support organization
• Is able to leverage Cisco’s existing infrastructure and
resource base to increase its overall value
Share a common vision • Have a similar understanding and vision of the market
and chemistry with Cisco • Have a similar culture
• Have a similar risk-taking style
Be located (preferably) in • Have a company headquarters and most manufacturing
Silicon Valley or near one facilities close to one of Cisco's main sites
of Cisco’s remote sites
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 23
23. ABSORPTION
Need for strategic interdependence
Low High
High Preservation Symbiosis
Need for
organizational
autonomy
Low Holding Absorption
Acquiring company completely absorbs the target
company. If the target company is large, this can take time
(e.g., Franklin Quest’s acquisition of the Covey Leadership
Center to create Franklin Covey)
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 24
24. PRESERVATION
Need for strategic interdependence
Low High
High Preservation Symbiosis
Need for
organizational
autonomy
Low Holding Absorption
The acquiring company makes very few changes to the
target , and instead learned from it in preparation for future
growth (e.g., many of Wal-Mart’s early international
acquisitions)
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 25
25. HOLDING
Need for strategic interdependence
Low High
High Preservation Symbiosis
Need for
organizational
autonomy
Low Holding Absorption
The acquiring company allows little autonomy - yet does
not integrate the target into its businesses (e.g., Bank
One’s acquisitions of local banks )
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 26
26. SYMBIOSIS
Need for strategic interdependence
Low High
High Preservation Symbiosis
Need for
organizational
autonomy
Low Holding Absorption
The acquiring company integrates the target in order to
achieve synergies - but allows for autonomy, for example
to retain and motivate employees. This is possibly the
most difficult to implement (e.g., Cisco's acquisitions which
cost the firm $1 million per employee on average)
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 27
27. TIPS FROM PERRY AND HERD
1 Firms must study failed M&As as
much as successes.
2 Traditional due diligence is no longer
sufficient. With M&A deals
increasingly risky, there is more need
for pre-deal planning.
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 29
28. M&As AND INDUSTRY LIFE CYCLE
Introduction Growth Maturity
M&As tend to be M&As tend to be for M&As primarily for
R&D and product- acquiring products dealing with over
related that are proven and capacity in the
gaining acceptance industry
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 31
29. M&As IN DYNAMIC CONTEXTS
Technological Cisco and Microsoft both use acquisitions to ensure
change they maintain their strong competitive positions
When the Tribune Company merged with Times-Mirror in 2000,
Demographic it acquired Spanish-language “Hoy” to target the growing U.S
change Hispanic market
Geopolitical IBM divested its PC division to a Chinese company as that
change country emerges
Trade
liberalization Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA
AT&T divested local operations into “Baby Bells” and set off a
Deregulation
state of almost constant M&A
MSE - Business Strategy Dec. 1th 2010 Prof. Rolf Jufer 32
30. REVIEW QUESTIONS
1. What is an acquisition?
2. Why would firms use acquisitions rather than create a new business
internally?
3. What are the possible motives for acquisitions?
4. What are the ways in which synergies can be created in acquisitions?
?
5. How easy or difficult is it to achieve the alternative types of synergies?
6. What are the various types of acquisitions?
7. How do market-extension acquisitions and geographic rollups differ?
8. Give examples of product extension, overcapacity, and R&D
acquisitions?
9. What is an acquisition premium?
10.How can you calculate the synergies that must be extracted from an
acquisition with a given premium?
11.How do acquisitions tend to be used in different stages of the industry
life cycle?
33
31. GROUP ACTIVITY
Pick a firm of interest to your group. Identify potential
acquisition candidates. Explain why these companies would
make sense as an acquisition target. Evaluate and describe
possible implementation barriers to this acquisition.
34
32. GROUP ACTIVITY
Pick a firm of interest and peruse its annual reports over a
5- to 10-year period. Assess the information presented on
M&As in the annual reports.
Do you see any explicit mention of the link between strategy
formulation and implementation with respect to the
acquisition mentioned in the annual reports? (As a starting
place, see the chairman’s letter to the shareholders.)
What are the before-and-after scenarios that you find
regarding the M&As?
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