Transcript Knowledge Objectives

Knowledge Objectives
• Build on our understanding of
related/unrelated diversification
• Understand the rationales, risks and
rewards of acquisitions
• Understand strategic alliance types,
rationales, and governance
– Vertical and horizontal alliances
– Skill sharing, cost sharing, market entry
1
Mergers and Acquisitions
(some terminology)
• Merger: a strategy through which two firms
agree to integrate their operations on a
relatively co-equal basis
• Acquisition: a strategy through which one
firm buys a controlling interest in another firm
with the intent of making the acquired firm a
subsidiary business within its own portfolio
• Takeover: a special type of an acquisition
strategy wherein the target firm did not solicit
the acquiring firm’s bid
2
Rationales for Acquisitions &
Mergers?
• Industry Lifecycle
(e.g., Whirlpool, Maytag)
• Technological Trajectories
(e.g., Google, YouTube)
3
Some notable acquisitions
• AOL acquired Time Warner for $164B
(2003)
• eBay acquired Skype for $2.6B (2005)
• Newscorp acquired MySpace.com for
$580M (2005)
4
• Siemens AG (NYSE:SI) announced Tuesday it
will acquire a 28% stake in Archimede Solar
Energy S.p.A. Siemens indicated it may seek
a majority stake in the Italian company. The
deal expands the German industrial giant's
presence in the solar power sector, where is
the market leader in steam turbine generators
for solar thermal power plants.
• ASE's technology made it an attractive target.
The company is the sole producer of solar
receivers that use molten salt rather than oil
as the heat transfer fluid. Siemens says it can
create more efficient solar thermal power
plants by combining that technology with its
own, positioning for what it believes will be
heated demand for solar power over the next
decade
5
Source: Deal.com 3/25/09
Acquisitions
Google bought YouTube ($1.65B in 2006)
Why?
• Google bought a rival.
• YouTube had four times as many hits as
Google Video
• YouTube streamed nine times as many
clips as Google Video.
• Google’s choice to buy rather than build
marked a big strategic change.
(Economist, 10/14/06, p82).
6
Google Acquires YouTube ??
• 1st – what industry is Google in?
• 2nd – what is the Google “system”
• 3rd – logic of the acquisition?
– YouTube=45% of video users
7
Acquisitions
Acquisitions = alternatives …
•
•
•
•
to internal development of resources and
capabilities
PROBLEM: there is “no market” to price
resources and capabilities – value depends on
combination of acquirer and target; difficult to
evaluate in advance (Barney, 1986).
Acquirers pay large premiums over the
eventual value of the targeted capabilities –
though shareholders of targeted firms gain
Acquiring firms fail to achieve strategic and
financial objectives in a majority of cases.
Difficulties in integrating distinct organizations
and cultures frequently result in the destruction
of the targeted capabilities (Madhok, 1997).8
Reasons for Making Acquisitions
Learn and develop
new capabilities
Increase
market power
Overcome
entry barriers
Cost of new
product development
Acquisitions
Increase speed
to market
Reshape firm’s
competitive scope
Increase
diversification
Lower risk compared
to developing new
products
9
Google Industry
10
Reasons for Making Acquisitions:
Increase Market Power
• Factors increasing market power
– Enables firm to sell goods or services above
competitive levels of value;
– Lowers costs of primary or support
activities below those of its competitors
– derived from how the size of the firm
augments resources and capabilities
• Market power is increased by
– horizontal acquisitions
– vertical acquisitions
– related acquisitions
11
Reasons for Making Acquisitions:
Overcome Entry Barriers
• Barriers include
– economies of scale (established competitors)
– differentiated products
– LT customer relationships that create product
loyalties with competitors
• acquisition of an established company
– Can be more effective than entering the
market de novo, i.e., offering an unfamiliar
good or service
– provides a new entrant with immediate
market access
12
Reasons for Making Acquisitions:
Product Cost & Speed to Market
• Significant investments of a firm’s
resources are required to
– Develop new products internally
– introduce new products into the marketplace
• Acquisition of a competitor may result in
– more predictable returns (near term)
– faster market entry
– rapid access to new capabilities
13
Reasons for Making Acquisitions:
Accelerate product development
• Acquisitions to improve ST product
portfolios are more easily valued, vs.
those of LT product development
• Managers may view acquisitions as
lowering risk in this area – why?
14
Reasons for Making Acquisitions:
Diversification
• easier to develop and introduce new
products in the firm’s current markets
(shared resources)
• Lack of market/product knowledge
makes “organic” development difficult
– uncommon for many firms to use internal
development for new products to diversify in
high tech.
– acquisitions are quick and easy way to
diversify a firm and change its
product/market portfolio
15
Reasons for Making Acquisitions:
Competitive Scope
• use acquisitions to reduce dependence
on one or more products or markets
(become a “generalist firm”)
• i.e., reducing a company’s dependence
on specific markets alters the firm’s
competitive scope
16
Reasons for Making Acquisitions:
Exploration
• Acquisitions may enable a firm to learn
– to gain capabilities currently
unavailable to the firm
• Acquisitions may be used to
– acquire a special technological capability
– broaden a firm’s knowledge base
– Overcome knowledge-based inertia (i.e.,
local search)
17
Problems With Acquisitions
Integration
difficulties
Inadequate
evaluation of target
Resulting firm
is too large
Acquisitions
Large or
extraordinary debt
Target firms preoccupied
with acquisitions
Overdiversification
Inability to
achieve synergy
18
Problems With Acquisitions
Integration Difficulties
– melding disparate corporate cultures
– linking different financial and control
systems
– building effective relationships (when
management styles differ)
– resolving status of acquired firm’s
executives
– losing key personnel weakens firm’s
capabilities and reduces value of acquisition
19
Problems With Acquisitions
Inadequate Target Evaluation
• Due diligence requires hundreds of
issues be closely examined, including
– financing the intended transaction
– Cultural differences between acquirer and
target
– tax consequences
– Organizational and incentive actions
necessary to integrate human resources
• Ineffective due-diligence
– Results in excessive premiums for the
target company
20
Problems With Acquisitions
Large Debt
• Firm may take on significant debt to
acquire a company (LBO)
• High debt
– increases likelihood of bankruptcy
– downgrades the firm’s credit rating
– Creates opportunity costs - precludes
investment in activities that contribute to
value creation
21
Problems With Acquisitions
Inability to Achieve Synergy
• Synergy exists when assets are worth
more when used in conjunction with
each other than when they are used
separately
• transaction costs (i.e., aligning incentive
systems) attend acquisition strategies
• Firms underestimate indirect costs
when evaluating a potential acquisition
22
Problems With Acquisitions
Overdiversification
• Increased diversification requires more
complex structures to interpret &
integrate information
• Increased scope created can cause
reliance on financial rather than
strategic controls to evaluate BU
performance and potential
• Acquisitions may become substitutes for
innovation (good or bad?)
23
Problems With Acquisitions
Acquisition Uncertainties
• Target firms may slow down or operate
in “suspended animation” during an
acquisition
• Executives may hesitate to make
decisions with long-term consequences
until negotiations have been completed
• Acquisition process can create a shortterm perspective and a greater aversion
to risk among top-level executives in a
target firm
24
Problems With Acquisitions
Too Large
• Additional bureaucratic costs can
exceed the benefits of the economies of
scale and additional market power
• Integrating larger targets = more
bureaucratic controls
• controls can lead to rigid behavior /
reduced adaptation, sacrificing
innovation and responsiveness
25
Attributes of Effective
Acquisitions
Attributes
Results
Complementary
Assets or Resources
Buying firms with assets that meet current
needs to build competitiveness
Friendly
Acquisitions
Friendly deals make integration go more
smoothly
Careful Selection
Process
Deliberate evaluation and negotiations are
more likely to lead to easy integration and
building synergies
Maintain Financial
Slack
Provide enough additional financial
resources so that profitable projects would
not be foregone
26
Attributes of Effective Acquisitions
Attributes
Results
Low-to-Moderate
Debt
Merged firm maintains financial flexibility
Sustain Emphasis
on Innovation
Continue to invest in R&D as part of the
firm’s overall strategy
Flexibility
Has experience at managing change and is
flexible and adaptable
27
Technology Trajectory as
an S-Curve (Foster, 1986)
• Slow initial
innovation
rate
• Accelerates
until it
reaches
diminishing
returns
28
Over time, Standard Architectures
Destroy Value

Reduce choice
 mass
production reduces variety (e.g., any
color as long as it is black)

Diminish innovativeness
 innovations
confined to modular types as
“systemic” change is difficult to coordinate
 standards make it hard to collect rent from
innovation

Enable monopoly rents (e.g., MS)
29
Technical Standards for Personal
Computers
30
TECHNOLOGICAL CHANGE AND
INDUSTRY STRUCTURE:
NICHE
COMPETITORS
INTEGRAL PRODUCT
VERTICAL INDUSTRY
MODULAR PRODUCT
HORIZONTAL INDUSTRY
TECHNICAL ADVANCES
HIGHDIMENSIONAL
COMPLEXITY
ORGANIZATIONAL
RIGIDITIES
SUPPLIER
MARKET POWER
PRESSURE TO
DIS-INTEGRATE
PRESSURE TO
INTEGRATE
PROPRIETARY SYSTEM
PROFITABILITY
Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
31
Double helix view: communications industry (MIT CFP
program)
32
Modularity, innovation, and
Organizational Effects
Redesign
Components
Refine
Automobile
cruise
control
Electric
seats
Stable
Adapted from Henderson & Clark, 1990
Hybrid
Autos
FWD vs. RWD
vs. All WD
Changed
Component links
33
Alternative to Acquisitions:
Cooperative Strategy
• Cooperative strategy is a strategy in
which firms
– work together
– to achieve a shared objective
• Cooperating with other firms is a
strategy that
– creates value for a customer
– exceeds the cost of constructing customer
value in other ways
– establishes a favorable position relative to
competition
34
Strategic Alliance
• A strategic alliance is a cooperative
strategy in which
– firms combine some of their resources and
capabilities to create a competitive
advantage
• A strategic alliance involves
– exchange and sharing of resources and
capabilities
– co-development or distribution of goods or
services
– Independent firms
35
Strategic Alliance
Firm A
Resources
Capabilities
Core Competencies
Firm B
Resources
Capabilities
Core Competencies
Combined
Resources
Capabilities
Core Competencies
Mutual interests in designing, manufacturing,
or distributing goods or services
36
Types of Cooperative
Strategies
• Joint venture: two or more firms create
an independent company by combining
parts of their assets
• Equity strategic alliance: partners who
own different percentages of equity in a
new venture
• Nonequity strategic alliances:
contractual agreements given to a
company to supply, produce, or
distribute a firm’s goods or services
37
without equity sharing
Business-Level Cooperative
Strategies:
Complementary
Alliances
• complementary strategic alliances
are designed to take advantage of
market opportunities by combining
partner firms’ assets in
complementary ways to create new
value
– these include distribution, supplier
or outsourcing alliances where
firms rely on upstream or
downstream partners to build
competitive advantage
38
Business-Level Cooperative
Strategies:
Marketing & Sales
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
Service
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
• vertical complementary
strategic alliance is formed
between firms that agree to
use their skills and
capabilities in different stages
of the value chain to create
value for both firms
• outsourcing is one example
of this type of alliance
Service
Marketing & Sales
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Supplier
Support Activities
Vertical Alliance
Buyer
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
39
Business-Level Cooperative
Strategies:
Buyer
Buyer
Horizontal Alliance
Primary Activities
Service
Marketing & Sales
Procurement
Inbound Logistics
Technological Development
Operations
Human Resource Mgmt.
Outbound Logistics
Firm Infrastructure
Marketing & Sales
Support Activities
Service
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
Potential Competitors
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
• horizontal complementary strategic alliance is formed
between partners who agree to combine their resources and
skills to create value in the same stage of the value chain
• focus on long-term product development and distribution
opportunities
• the partners may become competitors
• requires a great deal of trust between the partners
40
Business-Level Cooperative
Strategies:
Complementary
Alliances
Competition
Response Alliances
• competition response strategic
alliances occur when firms join
forces to respond to a strategic
action of another competitor
• because they can be difficult to
reverse and expensive to operate,
competition response strategic
alliances are primarily formed to
respond to strategic rather than
tactical actions
41
Business-Level Cooperative
Strategies:
Complementary
Alliances
Competition
Response Alliances
Uncertainty
Reducing Alliances
• uncertainty reducing strategic
alliances are used to hedge against
risk and uncertainty
• these alliances are most noticed in
fast-cycle markets
• alliance may be formed to reduce
the uncertainty associated with
developing new product or
technology standards (i.e., share the
risk of uncertain R&D investments)
42
Business-Level Cooperative
Strategies:
Complementary
Alliances
Competition
Response Alliances
Uncertainty
Reducing Alliances
Competition Reducing
Alliances
• competition reducing strategic
alliances may be created to avoid
destructive or excessive competition
• explicit collusion exists when firms
directly negotiate production output
and pricing agreements in order to
reduce competition (illegal)
• tacit collusion exists when several
firms in an industry indirectly
coordinate their production and
pricing decisions by observing each
other’s competitive actions and
responses
43
Business-Level Cooperative
Strategies:
Complementary
Alliances
Competition
Response Alliances
Uncertainty
Reducing Alliances
• mutual forbearance is a form of tacit
collusion in which firms avoid
competitive attacks against those
rivals they meet in multiple markets
• competition reducing strategic
alliances may require governments
to find ways to permit collaboration
among rivals without violating
antitrust laws
Competition Reducing
Alliances
44
Corporate-Level Cooperative
Strategies
• Corporate-level cooperative strategies are
designed to facilitate product and/or
market diversification
- diversifying strategic alliance
- synergistic strategic alliance
- franchising
• Diversifying alliances and synergistic
alliances allow firms
- to grow and diversify their operations
- through a means other than a merger or
acquisition
45
Corporate-Level Cooperative
Strategies:
Diversifying
Alliances
• diversifying strategic alliance
allows a firm to expand into new
product or market areas without
completing a merger or an
acquisition
• provides some of the potential
synergistic benefits of a merger or
acquisition, but with less risk and
greater levels of flexibility
• permits a “test” of whether a future
merger between the partners would
benefit both parties
46
Corporate-Level Cooperative
Strategies:
Synergistic Alliances
Diversifying
Alliances
Synergistic
Alliances
• synergistic strategic alliances create
joint economies of scope between
two or more firms
• create synergy across multiple
functions or multiple businesses
between partner firms
47
International Cooperative
Strategies
• Cross-border strategic alliance
– an international cooperative strategy in
which firms with headquarters in different
nations combine some of their resources and
capabilities to create a competitive
advantage
– a firm may form cross-border strategic
alliances to leverage core competencies that
are the foundation of its domestic success to
expand into international markets
48
Network Cooperative Strategies:
Stable Alliance Network
Stable Alliance
Network
• long term relationships that often
appear in mature industries where
demand is relatively constant and
predictable
• stable networks are built for
exploitation of the economies
available between firms
49
Technological/market similarity and
alliance governance
50
Competitive Risks with
Cooperative Strategies
Competitive
Risks
• Partner may act opportunistically
• Misrepresentation of competencies brought to the
partnership
• Partner fails to make committed resources and
capabilities available to its partners
• Firm may make investments that are specific to the
alliance while its partner does not
51
Approaches for Managing
Cooperative Strategies
• cost minimization
– formal contracts specify how the
cooperative strategy is to be monitored and
how partner behavior is to be controlled
• opportunity maximization
– maximize partnership’s value-creation
opportunities
– partners take advantage of unexpected
opportunities to learn from each other and
to explore additional marketplace
possibilities
52
– fewer formal, limiting, contracts