This document provides an overview of 5 types of M&A deals: overcapacity, geographic roll-up, product or market expansion, R&D, and industry convergence. It describes the strategic objective and value hypothesis for each type. It then provides examples and analyses of specific deals that fall under each category, such as Daimler-Chrysler (overcapacity), Marionnaud (geographic roll-up), and Diageo/Ketel One and Diageo/Seagrams (product expansion).

1. M&A TOOLKIT
Strategic Fit:
5 Types of Deal
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2. Each type of M&A has a different rationale
Strategic Objective Value Hypothesis Examples
OVERCAPACITY Eliminate overcapacity and Reduce costs of operations Daimler/Chrysler
achieve lowest cost and overhead Mittal/Arcelor
position
GEOGRAPHIC ROLL- Grow regionally Increase revenues and reduce Marionnaud
UP costs by bringing efficient
processes to new company
PRODUCT OR MARKET Enter into new markets Increase revenues through Quaker Oats/Snapple
EXPANSION or product lines cross-selling Diageo/Seagrams
Diageo/Ketel One
ASWatson/Spektre
R&D Gain a leading position Increase revenues through Cisco
in a new technology applications of the new Google
technology through your
processes
INDUSTRY Establish a dominant Increase revenues through AOL/TimeWarner
CONVERGENCE position in an emerging creating new products and Sony/Columbia
industry services
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3. Daimler-Benz/Chrysler was an unsuccessful
overcapacity deal
DESCRIPTION: • Cross-border merger deal between Daimler-Benz and Chrysler in 1998, with
Chrysler valued at US$36billion. Started as merger of equals, but Germans
were really in charge
STRATEGIC OBJECTIVE: • Reduce industry capacity and create the leanest automobile manufacturing
company in the world
WHAT WAS BOUGHT? • Resources – plants, products and market share
VALUE HYPOTHESIS: • Reduce cost in procurement, manufacturing, distribution and overhead by $x
billion
ISSUES: • Ability to achieve plant closures and cost savings
• Huge integration job – both mature companies with completely different
processes and values, both deeply rooted
• Engineering-driven vs sales and marketing-driven culture clash
ALTERNATIVES? • Long term Alliance, co-sourcing, capacity and technology sharing
RESULT: • In 2007, Cerberus private equity acquires 80% equity interest in Chrysler; Net
cash outflow of EUR 0.5 billion for Daimler
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4. Marionnaud was built up through geographic roll-up,
consolidating independent perfumiers
DESCRIPTION: • Between 1993 and 2002, Marionnaud, a French perfumery chain, grew from 50
stores to over 600, with most of this growth achieved by buying out
independents with less than 20 stores
STRATEGIC OBJECTIVE: • Achieve market share leadership in selective retail in France by penetrating
every region and town
WHAT WAS BOUGHT? • Resources and Values (customer service and proximity)
VALUE HYPOTHESIS: • Marionnaud’s cheaper procurement will increase margins by 5-10%, achieving
cash payback in 5 years on all stores bought
ISSUES: • Cosmetic rebranding left every store with a different “footprint”
• World class retail processes (e.g. supply chain) were never developed or rolled
out
• After France is saturated, what is the competitive advantage?
ALTERNATIVES? • Buying Group/syndicate
RESULT: • Marionnaud sold to A.S.Watson in 2004 in distress sale after unsuccessfully
repeating this strategy outside France
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5. Diageo has done product extension deals that create
a new growth platform
DESCRIPTION: • In 2008, Diageo bought 50% of Ketel One, a US
• Premium vodka ($22/bottle) with sales of $220m
• for US$900m
STRATEGIC OBJECTIVE: • Extend Diageo product line to premium vodka, a segment Diageo has
unsuccessfully tried three times to penetrate organically
WHAT WAS BOUGHT? • Resources Processes and Values
VALUE HYPOTHESIS: • Plug Ketel One into Diageo’s global distribution network, more than tripling
growth from 6% to 20% per year
ISSUES: • JV arrangement increases management complexity, but protects Ketel One
processes and values
ALTERNATIVES? • Distribution agreement without equity stake
RESULT: • TBD
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6. Diageo has also done “in-fill” product extension deals
DESCRIPTION: •In 2000, Diageo and Pernod-Ricard acquired
•Seagrams for US$8.2billion, and shared the
•brands between them
STRATEGIC OBJECTIVE: •Achieve a competitive advantage in distribution and lowest distribution cost
position in the USA
WHAT WAS BOUGHT? •Strictly Resources only – the brands
VALUE HYPOTHESIS: •Increase growth by 2% per annum and increase our margin by 1% by creating a
proprietary salesforce within distributors
ISSUES: •Very easy integration
•Restructuring distribution was a 2 year project, but was needed in any case
•Pleasant surprise – quality of people gained – selected best 10% of Seagrams
staff
ALTERNATIVES? •Impossible to structure with direct competitor
RESULT: •Diageo’s US business has grown at double digits 2002-2007
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7. Best Buy’s acquisition of Five-Star was a
market extension deal
DESCRIPTION: • Best Buy bought 51% of Jiangsu 5-Star, a
• Nanjing-based electronics retailer with
• 134 stores, in 2006 for US$180m
STRATEGIC OBJECTIVE: • Enter the Chinese retail electronics market, estimated to reach $100 billion by
2010
WHAT WAS BOUGHT? • Mostly Processes and Values
VALUE HYPOTHESIS: • Avoid expensive sub-scale learning curve in China; eventually achieve synergy
through Best Buy processes and global buying
ISSUES: • Jiangsu 5-star left alone by Best Buy; Best Buy continues to build its own mega-
stores under its own brand; little short-term synergy
ALTERNATIVES? • 100% stake?
RESULT: • Completed buy-out in 2009
• All 9 organic Best Buy stores closed in 2011 to enable focus on Five-Star
• Stores expanded from 134 in 2006 to 170 in 2011; now accelerating growth
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8. Time Warner/AOL was a huge Industry Convergence
deal – unsuccessful, like most of these deals
DESCRIPTION: • AOL purchased Time-Warner for US$164b at the peak of the dot com
boom in 2000
STRATEGIC OBJECTIVE: • Dominate the emerging new media industry, as media entertainment
converges with digital technology
WHAT WAS BOUGHT? • Resources, Processes and Values
VALUE HYPOTHESIS: • Increase revenues by bringing Time-Warner’s content to AOL’s internet
customer-base
ISSUES: • AOL’s shares hugely over-valued
• Culture clash between dot com and old media
• Convergence has not happened – internet just another channel
ALTERNATIVES? • Contractual agreement to exploit content?
RESULT: • AOL Time Warner reported a loss of $99 billion in 2002, mostly due to the
goodwill write-off on the deal
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9. WHAT TYPE OF DEAL IS THIS?
Selling acquirer’s
What is the Selling target’s
Market products to main cross- products to Product
target’s selling acquirer’s
Expansion
Start
Expansion customers direction? customers
Y Industry
Will the main
Do the Convergence
Is it a local N synergy come Y synergy
business? from increased
products N
exist today?
revenue?
N Is the
Y target in
N the same
industry?
Y
Geographic Overcapacity
roll-up R&D
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