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18-6-21

International M&A Strategy for POPULARITY  OF  MERGER  AND  


NUCB Global Leadership MBA Program  
ACQUISITION  STRATEGIES  
•  M&A  is  a  source  of  firm  growth  and  above-­‐average  returns  
 

•  Cross-­‐border  acquisiJons  heighten  during  currency  


STRATEGIC ACQUISITION AND imbalances,  from  strong  currency  countries  to  weaker  
RESTRUCTURING currency  countries  
•  Can  be  used  because  of  uncertainty  in  the  compeJJve  
landscape  
DR.  WIBOON  KITTILAKSANAWONG   –  Increase  market  power  because  of  compeJJve  threat  
wiboon@nucba.ac.jp –  Spread  risk  due  to  uncertain  environment  
  –  ShiP  core  business  into  different  markets  
SPRING  2018   •  Manage  industry  and  regulatory  changes  
•  Historically,  returns  are  close  to  zero  so  it  rarely  works  as  
planned  

POPULARITY  
    OF  MERGER  AND   MERGERS,  ACQUISITIONS,  AND  TAKEOVERS:  
WHAT  ARE  THE  DIFFERENCES?  
ACQUISITION  
  STRATEGIES  
           MERGER  
 Two  firms  agree  to  integrate  their  operaJons  on    a  relaJvely  co-­‐
•  M&A  value  creaJon  is  challenging  
equal  basis  
•  GOOD  NEWS:  Shareholders  of  ACQUIRED  firms  oPen  earn    F There  are  few  TRUE  mergers  because  one  firm  usually  dominates  
above-­‐average  returns  from  acquisiJons   in  terms  of  market  share,  size,  or  asset  value  

•  BAD  NEWS:  Shareholders  of  ACQUIRING  firms  earn  returns              ACQUISITION  


 One  firm  buys  a  controlling,  100  percent  interest  in  another  firm  with  
that  are  close  to  zero:  In    2/3  of  all  acquisiJons,  the  
the  intent  of  making  the  acquired  firm  a  subsidiary  business  within  
acquiring  firm’s  stock  price  fell  immediately  aPer  the   its  porXolio  
intended  transacJon  was  announced  
         TAKEOVER  
•  This  negaJve  response  reflects  investors’  skepJcism  about   Special  type  of  acquisiJon  strategy  wherein  the  target  firm  did  not  
projected  synergies  being  captured   solicit  the  acquiring  firm's  bid  
   HosJle  Takeover  is  unfriendly  takeover  that    is  undesired  by  the  
target  firm      
 

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REASONS  FOR  ACQUISITIONS  

Increased  Market  Power  


● The  ability  to  sell  goods  or  services  above  compeJJve  levels  
● Costs  of  primary  or  support  acJviJes  are  below  those  of  compeJtors  
REASONS  FOR   ● Size  of  the  firm,  resources,  and  capabiliJes  to  compete  in  the  market  
and  share  of  the  market  
ACQUISITIONS  AND   ● Purchase  of  a  compeJtor,  a  supplier,  a  distributor,  or  a  business  in  a  
highly  related  industry  
PROBLEMS  IN  
ACHIEVING  SUCCESS   Market  power  is  increased  by:  
 ●Horizontal  acquisiJons:  other  firms  in  the  same  industry  
●VerJcal  acquisiJons:  suppliers  or  distributors  of  the  acquiring  firm    
●Related  acquisiJons:  firms  in  related  industries  
AcquisiJons  intended  to  increase  market  power  are  
subject  to:    
Regulatory  review  and  Analysis  by  financial  markets  
 
 
 
 

REASONS  FOR  ACQUISITIONS   REASONS  FOR  ACQUISITIONS  


Increased  Market  Power   Increased  Market  Power  
   
•  Acquirer  and  acquired  
companies  compete  in  the   •  AcquisiJon  of  a  supplier  
Horizontal   same  industry   Horizontal  
AcquisiJons   AcquisiJons   or  distributor  of  one  or  
•  Firm’s  market  power  is   more  of  the  firm’s  goods  
increased  by  exploiJng:   or  services  
Ø Cost-­‐based  synergies   VerJcal   Ø Increases  a  firm’s  
               Similar  characterisJcs:   AcquisiJons   market  power  by  
•   Strategy   Ø Revenue-­‐based  synergies  
•   Managerial  styles   controlling  addiJonal  
•   Resource  allocaJon   •  AcquisiJons  with  similar   parts  of  the  value  chain  
pa]erns   characterisJcs  result  in  higher  
•   Previous  alliance  
management  experience  
performance  than  those  with  
dissimilar  characterisJcs  

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REASONS  FOR  ACQUISITIONS  


REASONS  FOR  ACQUISITIONS  
Overcoming  Entry  Barriers  
Increased  Market  Power   Entry  Barriers  
 

•  AcquisiJon  of  a  company  in  a   •  Factors  associated  with  the  market  or  with  the  firms  
highly  related  industry   operaJng  in  it  that  increase  the  expense  and  difficulty  
Horizontal   faced  by  new  ventures  trying  to  enter  that  market  
AcquisiJons   •   Value  creaJon  takes  place   •  Economies  of  scale  
through  the  synergy  that  is   •  DifferenJated  products  
generated  by  integraJng  
VerJcal  
resources  and  capabiliJes  
Cross-­‐Border  AcquisiJons  
AcquisiJons   •  AcquisiJons  made  between  companies  with  headquarters  
Ø Because  of  the  difficulty  in   in  different  countries  
implemenJng  synergy,   •  Are  ocen  made  to  overcome  entry  barriers  
Related   related  acquisiJons  are   •  Can  be  difficult  to  negoJate  and  operate  because  of  the  differences  
AcquisiJons   ocen  difficult  to  implement   in  foreign  cultures  
Increasing  number  of  cross-­‐border  acquisiJons  by  
Chinese,  Indian,  and    Brazilian  corporaJons  
 

REASONS  FOR  ACQUISITIONS   REASONS  FOR  ACQUISITIONS  


Cost  of  New  Product  Development  and  Increased   Increased  DiversificaJon  
Speed  to  Market   •  Using  acquisiJons  to  diversify  a  firm  is  the  quickest  and  easiest  way  to  
•  Internal  development  of  new  products  is  ocen  perceived  as  high-­‐risk  acJvity.   change  its  porXolio  of  businesses.  
•  AcquisiJons  allow  a  firm  to  gain  access  to  new  and  current  products  that  are  
new  to  the  firm.   •  Both  related  diversificaJon  and  unrelated  diversificaJon  strategies  can  be  
•  Compared  with  internal  product  development,  acquisiJons:   implemented  through  acquisiJons.  
•   Are  less  costly  
•   Have  faster  market  penetraJon   •  The  more  related  the  acquired  firm  is  to  the  acquiring  firm,  the  greater  is  
•   Have  more  predictable  returns  due  to  the  acquired  firms’  experience  with   the  probability  that  the  acquisiJon  will  be  successful.  
the  products    
 

Lower  Risk  Compared  to  Developing  New  Products   Reshaping  the  Firm’s  CompeJJve  Scope  
•  Outcomes  for  an  acquisiJon  can  be  more  easily  and  accurately  esJmated  than  
the  outcomes  of  an  internal  product  development  process.   An  acquisiJon  can:  
•  AcquisiJon  strategies  are  a  common  means  of  avoiding  risky  internal  ventures   •  Reduce  the  negaJve  effect  of  an  intense  rivalry  on  a  firm’s  financial  
and  risky  R&D  investments.   performance.  
•  AcquisiJons  may  become  a  subsJtute  for  innovaJon,  and  thus  should  always   •  Reduce  a  firm’s  dependence  on  one  or  more  products  or  markets.  
be  strategic  rather  than  defensive  in  nature.    
Reducing  a  company’s  dependence  on  specific  markets  alters  the  firm’s  
compeJJve  scope  
 
 

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REASONS  FOR  ACQUISITIONS   PROBLEMS  IN  ACHIEVING  ACQUISITION  


SUCCESS  
Learning  and  Developing  New  CapabiliJes  
IntegraJon  
An  acquiring  firm  can  gain  capabiliJes  that  the  firm   DifficulJes  

does  not  currently  possess:   Too  Large  


Inadequate  
Target  EvaluaJon  
•  Special  technological  capability  
•  A  broader  knowledge  base   PROBLEMS  WITH    
Managers     ACQUISITIONS  
Overly  Focused  on   Large  or  
•  Reduced  inerJa   AcquisiJons   Extraordinary  Debt  

 Firms  should  acquire  other  firms  with  different  but  


related  and  complementary  capabiliJes  in  order  to   Too  Much  
DiversificaJon  
Inability  to  
Achieve  Synergy  
build  their  own  knowledge  base  
 

PROBLEMS  IN  ACHIEVING   PROBLEMS  IN  ACHIEVING  


ACQUISITION  SUCCESS   ACQUISITION  SUCCESS  
● Research  suggests:   IntegraJon  DifficulJes  
 20%  of  all  mergers  and  acquisiJons  are  successful    
 60%  produce  disappoinJng  results   •  Melding  two  disparate  corporate  cultures  
 20%  are  clear  failures,  with  technology  acquisiJons  reporJng  even   •  Linking  different  financial  and  control  systems  
higher  failure  rates  
 
•  Building  effecJve  working  relaJonships  (parJcularly  when  
●  Greater  acquisiJon  success  accrues  to       management  styles  differ)  
firms  able  to:   •  Resolving  problems  regarding  the  status  of  the  newly  acquired  
       1.  select  the  “right”  target    
       2.  avoid  paying  too  high  a  premium  (by  doing  appropriate  due   firm’s  execuJves  
diligence)  
       3.  integrate  the  operaJons  of  the  acquiring  and  target  firm     •  Loss  of  key  personnel  weakening  the  acquired  firm’s  
effecJvely     capabiliJes  and  reducing  its  value  
       4.  retain  the  target  firm’s  human  capital    
 
   

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PROBLEMS  IN  ACHIEVING   PROBLEMS  IN  ACHIEVING  


ACQUISITION  SUCCESS   ACQUISITION  SUCCESS  
Inadequate  EvaluaJon  of  Target   Large  or  Extraordinary  Debt  
Due  Diligence   •  Junk  bonds:  Financing  opJon  whereby  risky  acquisiJons  are  
•  The  process  of  evaluaJng  a  target  firm  for  acquisiJon   financed  with  money  (debt)  that  provides  a  large  potenJal  return  
•  IneffecJve  due  diligence  may  result  in  paying  an  excessive   to  lenders  (bondholders)  
premium  for  the  target  company   •  High  debt  (e.g.,  junk  bonds)  can:  
EvaluaJon  requires  examining:   •  Increase  the  likelihood  of  bankruptcy  
•  The  financing  of  the  intended  transacJon   •  Lead  to  a  downgrade  of  the  firm’s  credit  raJng  
•  The  differences  in  culture  between  the  firms   •  Preclude  investment  in  acJviJes  that  contribute  to  the  firm’s  
•  The  tax  consequences  of  the  transacJon   long-­‐term  success  such  as:  
•  AcJons  necessary  to  meld  the  two  workforces   •  Research  and  development  
•  BOTH  the  accuracy  of  the  financial  posiJon  and  accounJng   •  Human  resource  training  
standards  used  AND  the  quality  of  the  strategic  fit  and  the   •  MarkeJng  
ability  of  the  acquiring  firm  to  effecJvely  integrate  the  target  
 
 
 

PROBLEMS  IN  ACHIEVING   PROBLEMS  IN  ACHIEVING  


ACQUISITION  SUCCESS   ACQUISITION  SUCCESS  
Inability  to  Achieve  Synergy   Inability  to  Achieve  Synergy  
Synergy:  when  assets  are  worth  more  when  used  in  
conjuncJon  with  each  other  than  when  they  are  used   Private  synergy:  when  the  combinaJon  and  integraJon  of  
separately   the  acquiring  and  acquired  firms’  assets  yields  capabiliJes  
•  Synergy  is  created  by  the  efficiencies  derived  from   and  core  competencies  that  could  not  be  developed  by  
economies  of  scale  and  economies  of  scope  and  by   combining  and  integraJng  either  firm’s  assets  with  another  
sharing  resources  (e.g.,  human  capital  and  knowledge)   company  
across  the  businesses  in  the  merged  firm.  
•  Advantage:  It  is  difficult  for  compeJtors  to  understand  
•  Firms  experience  transacJon  costs  when  they  use   and  imitate  
acquisiJon  strategies  to  create  synergy  
•  Disadvantage:  It  is  also  difficult  to  create  
•  Firms  tend  to  underesJmate  indirect  costs  when  
evaluaJng  a  potenJal  acquisiJon    
 

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PROBLEMS  IN  ACHIEVING   PROBLEMS  IN  ACHIEVING  


ACQUISITION  SUCCESS   ACQUISITION  SUCCESS  
Too  Much  DiversificaJon   Managers  Overly  Focused  on  AcquisiJons  
Diversified  firms  must  process  more  informaJon   WHY:  MORE  FUN  TO  MAKE  THE  DEALS  THAN  TO  
of  greater  diversity.   RUN  THE  COMPANY  
•  Increased  operaJonal  scope  created  by   •  Managers  invest  substanJal  Jme  and  energy  in  
acquisiJon  strategies  in:  
diversificaJon  may  cause  managers  to  rely  too  much  
on  financial  rather  than  strategic  controls  to   •  Searching  for  viable  acquisiJon  candidates  
evaluate  business  units’  performances   •  CompleJng  effecJve  due-­‐diligence  processes  

•  Strategic  focus  shiPs  to  short-­‐term  performance   •  Preparing  for  negoJaJons  


•  Managing  the  integraJon  process  aPer  the  acquisiJon  is  
•  AcquisiJons  may  become  subsJtutes  for  innovaJon   completed  
 

PROBLEMS  IN  ACHIEVING   EFFECTIVE     ACQUISITIONS  


ACQUISITION  SUCCESS  

Too  Large  
•  AddiJonal  costs  and  complexity  of  management  may  
exceed  the  benefits  of  the  economies  of  scale  and  
addiJonal  market  power,  creaJng  diseconomies  of  scope  
•  More  bureaucraJc  controls  result  from  size:  
•  Formal  rules  and  policies  ensure  consistency  of  
decisions  and  acJons  
•  Formalized  controls  ocen  lead  to  relaJvely  rigid  and  
standardized  managerial  behavior  
•  The  firm  may  produce  less  innovaJon