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Strategic Alliances & Joint

Ventures, M & As
Prof A K Mitra

Alliances
Cooperative / collaborative arrangements between two
or more firms (who could be potential or actual
competitors) could be :

Strategic Alliances
JV
R&D partnerships, Manufacturing / Marketing agreements
Licensing, Franchising
Consortia
Value Chain Partners

SA /JVs constitute multiple paths to value enhancement


along with internal growth, as well as M&As
Surge in Alliance activities reflected a change in antitrust
legislation and policies of regulatory agencies. Initially,
the aim was to encourage joint research and development
activities, but later extended to production.

Alliances involve technology transfers, licensing


agreements, cross-manufacturing agreements,
outsourcing
Globalization, heightened global competition,
de-regulation ,emergence of competitive
industries from newly industrialized countries,
need for short product and business
development cycles are resulting in trend towards
greater cooperation
Loci of global business battles shifting towards
emerging markets like China, India, Brazil has
also led to growth of alliances

Illustrative SA &JVs VS M&A : 1985 -2002

(Transactions per Year) SA/JV


Coca-Cola
5
Dow Chemicals
7
Exxon/Exxon Mobil
3
Ford
10
GE
11
GM
13
Intel
16
Microsoft
46
Merck
5
P&G
5

M&A
14
16
17
20
67
30
12
12
4
12

Strategic Alliances
A Strategic Alliance is a relationship between
firms that allows firms to create more value than
they could individually. Commitment to cooperate in some form of relationship.
The firms come to attain agreed upon goals, while
maintaining the independence
The term strategic alliances has been used to
describe relationships among companies that are
something short of establishing a JV entity.
Firms enter Strategic Alliances with their
competitors, suppliers, and customers
GM and Toyota to assemble automobiles
Siemens and Philips to develop new semiconductor
technologies

Motives for Strategic Alliances


SAs enable firms to manage risk, gain
knowledge, increase expertise, and learn about
new technologies
SA enable firms to design new products, minimize
costs, enter new markets, preempt competitors,
and generate high revenues.
Enables transfer of technology and further
organizational learning. SA Opens avenues to new
opportunities for partners, can improve a firms
strategic positioning in the market, and sometimes
even transform a company.

SA for entry into new markets- Motorola with


Toshiba in 1980s. Motorola was finding it
difficult to get entry into Japan for cellular phones.
Motorola entered into alliance with Toshiba to
build microprocessor. Toshiba provided Motorola
marketing help
SA to share costs & risk associated with new
products or processes
SA to combine skills & assets that neither can
develop on their own. In 1990, AT&T entered into
alliance with NEC corporation to trade technology
skill / core competency; AT&T gave NEC CAD
technology and NEC gave advanced computer
chip.

Some US-Japanese Strategic Alliances


Toshiba IBM : Sharing $ 1b cost to develop 64
mb and 256 mb memory chip factory
Cannon-HP: While these two organizations
compete fiercely with end products, they share
laser technology, and HP buys printer engines
from Cannon. Cannon holds 40% world share in
printer engines
Toyota GM : GMs Delphi parts division
supplies components to Toyota. GM even
participates in Toyota Keiretsu strategy meetings.

Types of Strategic Alliances


Bleeke & Ernst classified SAs into SIX types,
according to power of companies that enter into
alliance and the possibility that the alliance might
end in the sale of one or more of the participants
Collisions between two partners (strong & direct competitors)
Evolution to a sale (strong & initially compatible partners)
Alliances of complementary equals ( lives beyond 7years
average life span of for alliances)

Disguised sale ( between a weak & a strong company)


Bootstrap alliances ( weak company may improve its competencies)
Alliances of the weak

Another classification of Strategic Alliance


Doz & Hamels classification of Strategic
Alliances into 3 types of SA
Alliance between potential competitors to
neutralize rivalry (Airbus consortium by
government of EU countries vs Boeing)
Alliance between companies that have separate
specialized resources ( Hitachi with GE for gas
turbines, AT&T and NEC)
Alliance which involves acquisition of new
knowledge by working together or observing
each other. Eg; Toyota & GM ( learning
Toyotas lean manufacturing & GMs superior
design)

Partner Selection in Strategic Alliances..


The success of an Alliance depends on three main
factors:
Partner selection : should share strategic goals & purpose for
alliance. Should not have altogether different agendas. Should not
exploit the alliance for selfish ends only.

Putting an appropriate Alliance structure: ownership,


mix of finance, technology , control, sharing of activities etc should
be clarified. Mechanisms to maximize value for partners, resolve
conflicts, walling off sensitive technology / know how, avoid risk
of opportunism.

Managing the alliance : build trust and learn from each


other and build interpersonal relationship between the
firms managers. Ability to learn often limits gains from
alliance. Most learning takes place at lower levels.

Benefits Of Str Alliances vs industry types


It appears that that SA represents a form of
exploratory learning. SAs have potential to evolve
in directions not initially planned.
In high-tech industries, where turbulence &
change dominate, strategic alliances are used to
scan market entry possibilities, to monitor new
technological developments and reduce the risks
and costs of developing new products and
processes.
As industries mature, learning and flexibility
becomes less important, so integration through
M& A is more likely.
The hypothesis that larger firms use their strategic
technology alliances to take over their smaller
partners is not validated by some studies.

Robinson (2002) found that alliances are positively


related to industry risk, industry growth, and with
number of acquisition targets in an industry.
He also found support for views that alliances
cluster in R&D intensive industries.
He observed that alliances are more common than
mergers when the parent firm is less risky and the
alliance or target activity is more risky.
Among multi-division firms, alliance activities
tend to take place in the relatively more risky
segments.

Observations of Hamel, Doz & Prahalad

A strategic alliance can strengthen both partners


against outsiders even as it weakens one partner
vis--vis the other. Alliances between Asian
companies and Western rivals seem to work
against western partners
Success of Alliance should not be judged by its
longevity but by the shifts in competitive
strength on each side. How companies
collaboration to enhance their internal skills &
technologies while guarding against transferring
competitive advantages to ambitious partners

Collaboration is competition in a different form


partners may be out to disarm them. Both enter
alliances with clear strategic objectives, they also
understand how their partners objectives will
affect their success.
Cooperation has limits. Companies must defend
against competitive compromise
Learning from partners is paramount : successful
companies view each alliance as a window on their
partners broad capabilities.
Harmony is not the most important measure of
success.

Japanese company had made greater effort to learn


Strategic intent is an essential ingredient in the
commitment to learning.
Western companies, on the other hand, often
entered alliances to avoid investments. They are
more interested in reducing the costs & risks of
entering new business or markets than in
acquiring new skills. The US companies had no
ambition beyond avoidance
Many so-called alliances between Western & Asian
rivals are little more than sophisticated outsourcing
arrangements. The traffic is almost entirely one
sided. Western companies become dependent on
the partner.

When both partners are equally intent on


internalizing the others skills, distrust & conflict
may spoil the alliance. Reason why alliances
between Koreans & Japanese have been very few &
short.
Alliances seem to run most smoothly when one
partner is intent on learning and the other is intent on
avoidance.
But running smoothly is not the point; the point is
for a company to emerge from an alliance more
competitive than when it entered in it.

Some research findings


A study of 119 strategic alliances for the period
1987-91 ( published in 1998) showed
Technology alliances consisted of R &D,
Technology transfer/ licensing, manufacture
Marketing alliances included distribution, mktng /
promotion, & customer servicing
The researchers argued that the market perceives
technological alliances as having greater positive
impact on future income streams.
In technological alliances, larger firms depend on
their smaller partners for resources ( technology)

The stronger bargaining power of smaller partners


is associated with significantly higher returns than
those of the larger partners.
In another study, published in 2002, showed that
firms with greater alliance experience, which
create a dedicated alliance function, recorded
higher cumulated average returns and higher
success rate.
Such firms are likely to codify alliancemanagement knowledge by creating guidelines &
manuals covering partner selection, alliance
negotiation, alliance contracts, alliance
termination etc., develop alliance metrics to
monitor alliance performance on an ongoing basis

First, SA must have well defined strategic


themes

Joint Ventures

JVs are cooperative agreements between two or


more firms that want to attain similar objectives,
creating a new corporate entity
JV allows allows partners to own a stake and play a
role in the management of the joint operation.
Participating firms also benefit by having access to
external capital.
Most of the time, a JV represents a potential source
of growth of an organization.
JVs are the only way in some countries for a
foreign company to set up operations.
Equity JVs are contractual agreements with equal
partners. Non-equity ventures are ones where one
partner has a greater stake.

Rationale for Joint Ventures


Strategic Planning : JVs are used in combination
with internal developments, mergers, acquisitions ,
and so on as a time phased program in formulating
& executing a firms long term strategy for value
increasing growth (increasing market power).
Sharing investment : A company with adequate
cash may enter into JV with a smaller company with
technical expertise but lacking funds.
Risk reduction /sharing or withstanding long
gestation period before returns start flowing, may
also be a rationale. For example exploration of
petroleum
Knowledge Acquisition: The expressed purpose of
50% of all JVs is knowledge acquisition. The
complexity of the knowledge to be transferred is a
key factor in determining the contractual
relationship between partners.

When knowledge to be transferred is complex or


embedded in a complex set of technological or
organizational processes, learning by doing and
teaching by doing is the most appropriate means of
transfer. JV seems to be an most appropriate
vehicle.
Gaining approval from government authorities:
Possibility of JVs getting approval from antitrust
authorities is greater than mergers (?)
JVs help in a acquiring complementary
technological or management resources at lower
cost, or to derive benefits from economies of scale,
critical mass and learning experience.
Tax advantages: JVs in many circumstances may
bring tax advantages

International aspects: JVs can be used to reduce


the risk of expanding into a foreign environment.
In some countries legally require a local joint
venturer. International JVs might bring advantage
of favorable tax treatment or political incentives.
JVs can facilitate different types of
restructuring activities for either or both
participating firms in the JV. ( Philips Appliances
division Whirlpool JV in 1989) ( Buyer can use
the JV experience to better determine the value of
brands, distribution systems, and personnel while
minimizing the risk of making early mistakes).

Reasons for the failure of JVs.


JVs are a form of legal contract. Like all contracts,
they are subjected to difficulties.
As circumstances change in the future, the contract
might be too inflexible to permit the required
adjustments to be made.
In many JVs, idea of joint activity is very novel
early on, but participants do not spend sufficient
time & effort to layout a program for
implementing the JV.
McKinsey and Coopers &Lybrand (1986) found
that 70% of JVs fell short of expectations or were
abandoned. Other studies ( Berg, Duncan &
Friedman,82) suggest that JVs do not last half the
term stated in the JV agreement.

The JV contract too inflexible to permit future


adjustments
Lack of commitment of time & effort in
implementation
The hoped for technology could never be developed
Lack of adequate pre-planning
Failure to reach agreement on alternative approaches
to achieve the basic objectives of the JV
Refusal of managers in one company to share
expertise with their counterparts
Inability of partner companies to compromise /
share on difficult issues
Clash may arise on some point of time with public
policy or long term strategies of one of the firm

Requirements for successful JVs include the


following:
Each participant has some thing of value to bring to
the activity.
Participants should engage in careful pre-planning
The resulting agreement or contract should provide
for flexibility in the future as required
The planning should include provisions for
termination arrangements, including provisions for
buy back by one of the participants
Key executives must be assigned to implement the
JV
It is likely that an organization structure would be
needed with the authority for negotiating and
making decisions.

JVs in India Press Note 18 & Press Note I(2005)


Press Note 18 was introduced by Government in
mid 1990s for JVs or technical collaboration
between a foreign partner & an Indian company.
Objective : to protect the Indian partner who
may have invested substantially in the JV / Tech
collaboration against opportunistic behavior of
the Foreign partner
It made mandatory for a foreign partner to seek
NOC from the domestic partner, if it wanted to
start a new venture on its own or with some
other part in the same or similar field
This provision was misused by some Indian firms
to block FDI in an illogical manner

Press Note 18, put in some cases, the foreign


partner at mercy of the local partner ( even when
the said JV has turned dead or sick and proposed
new venture are for an economic activity different
from that of the existing JV).
The new Press Note I ( of 2005) has substantially
revised and simplified the provisions of the Press
Note 18, to make it fair to ensure FDI at the same
time safeguard local business from unfair
competition from its JV partners or technology
partners.

Under Press Note I, mandatory consent from local


partner is limited to starting new business in the
same field ( word similar removed)
Provisions of PN I is also required only for
existing JVs or Technical agreements. New JVs /
collaborations will have to be based on the free
will of partners ( governed by the contract entered
by them) without any government interference.
Press Note I will also not be applicable in existing
JVs / technical collaborations for:

Investments made by venture capital funds


Where the existing JV is clearly defunct or sick
Where FDI stake is less than 3%

Mergers & Acquisitions


Mergers can be defined as the integration of two or more
firms on co-equal basis. The concerned firms pool all their
resources to create a sustainable competitive advantage.
An acquisition refers to the process of gaining partial or
complete control of one company by another for some
strategic reasons.
Unlike mergers, acquisitions can sometimes be unfriendly
hostile takeover
M&A have become very popular strategy in the last two
decades
M&A played a crucial role in restructuring of the US and
European companies during 1980s & 1990s

Historical Perspective merger activity can be seen as a


reaction to changing business environment , changes in
technology etc
First merger wave: 1897-1904; mainly horizontal mergers
Second wave: 1920-1929- vertical & conglomerate mergers
railroads and utilities
Third wave: 65-75- emphasis on economies of scale in
consumer goods
Fourth Wave : 84-87-empasis on creating synergies.
Technology played important role, Large number of
mergers in Europe
Fifth wave: 95 onwards impact of globalization and
deregulation
In late 90s, mergers common in industries where markets
are global in nature like Automobiles, Pharma and in
industries deregulation & liberalization were effected (
Telecom, Utilities)

Rationale for M &A


Increased Market Power :Companies target
competitors, suppliers, distributors, or businesses
in related industries.
Horizontal mergers: purpose could be economies of
scale; share resources, skills and to derive synergy.
Government sometimes regulate to prevent monoplistic
conditions. eg; EU stopped GE & Honeywell merger
proposal.
Vertical mergers: firms in same industry but in different
stages of the value chain. Reduction of costs of
coordination, communication, better planning for
inventory & production ( HLL & Tata Tea buying Tea
gardens in Assam)

Conglomerate mergers
Product extension merger
Geographical extension mergers
Pure conglomerate merger

Financial conglomerates

Overcoming entry barriers : economy of scale ,


product loyalty, high advertisement expenses could
be entry barriers
Cost of new product development: developing &
successfully marketing new products takes a long
time, 88% new products fail to achieve expected
results, 60% innovative products get copied within
four years. Firms prefer M&A to avoid internal
cost & risk of new products

Increased speed to market : M& As are quicker


route to new markets and new capabilities. New
capabilities can be put introduce new products in
new markets
Lower Risk compared to new products
Increased Diversification de-risking
Reshaping competitive scope
M&A as mode to enter / quickly gain market in
Foreign countries: In India Whirlpool acquiring
Kelvinator, Electrolux acquiring Maharaja
International, Intron.

Efficiency Theories of Merger..


Mechanism for more efficient use of capital, increased
productivity through economies of scale, have potential
for social benefits:
Differential Efficiency Theory: Acquiring companies
management more efficient to extract potential of target
company. Managerial synergy hypothesis is an extension
of differential theory, where acquiring management
compliments the management of acquired company, has
experience in the line of business of acquired company.
Managerial synergy theory most applicable for Horizontal
mergers ( not to conglomerate mergers).
Inefficient Management theory: target companys
management is incompetent in the complete sense.
Another control group is in a position to manage the assets
of the firm better.

Synergy ( means 2+2=5)


Financial synergy : positive impact on cost of capital to
acquiring / combined firm. This may occurs due to
lower costs of internal financing versus external
financing. A combination of firms with different cash
flows and investment opportunities may produce a
financial synergy effect.
Operating synergy (Hindalco Indal deal synergy):
economies of scale are most in businesses with high
Overhead expenses.

Pure Diversification: benefits managers,


employees, owners and the firm itself. Reduces the
risk by spreading. Financial synergy & tax benefits

Strategic Alignment to Changing Environments


: much rapidly adjustment to changes . Achieving
economies of scale or using underutilized
managerial capacity of the firm. Acquire
management skills needed for increase in its
present capabilities. Major forces:
Regulatory change : Deregulation in financial services,
telecom, media reducing artificial barriers. This helped
M&A to achieve operating efficiency.
Technological changes:Large firms often look to M &
A as the fast and inexpensive way to acquire new
technologies and knowledge generated through
creativity and speed of smaller firms . Shorter innovation
cycle. ( Eg CISCO)

Undervaluation: Undervaluation of the


target companies can also be one of the
motivating factors leading to mergers &
acquisitions. Undervaluation may be
because of the underperformance of the
management.

Information and Signaling


Information Theory suggests that the share price
of target firm is revalued upwards after a tender
offer whether it is successful or not. The tender
offer generates new information and revaluation is
generally permanent. The offer also motivates the
management of the target company to implement a
more efficient business strategy on its own.
Signaling theory suggests that a tender offer is in
itself a signal to the market that the firm possesses
unrecognized additional values or that the future
cash flow stream would be increasing in the near
future.

Hubris Hypothesis: implies that managers look


for acquisition of firms for their own potential
motives and that the economic gains are not the
only motive.
The urge to win the game in tender offer often
results in the winners curse ( firm which
overestimates the value of target mostly wins the
contest). Desire to avoid a loss of face, media
praise, urge to project as an aggressive firm,
inexperience, overestimation of synergies, over
enthusiasm of investment bankers add to the
issue.

Valuation of the Target Company..


Discounted Cash Flow Method :PV of the expected value
of the stream of future cash flows discounted for time &
risk. Most valid from theoretical stand point, it is needs lot
of assumptions to be made.
Comparable companies method: based on premise that
firms in the same industry provide benchmark for
valuation. Target company is valued vis-s-vis its
competitors on several parameters
Book value Method : Discover the worth of the target
company based on its Net Asset Value.
Market Value Method: This method is used to value listed
companies based on stock market capitalization.

Acquirer rarely relies on a single method for


valuation.
Normally the target companies are valued by
various methods. Different weights are assigned to
the values computed by various methods.
The weighted average valuation helps to reduce
errors that may creep in if a single method is relied
upon.
Often a range for the probable valuation is arrived
at.

The Merger Acquisition Process.

M&A process can be divided into a


Planning Stage : development of the business &
acquisition plans
Implementation stage : consists of search,
screening, contacting the target, negotiation,
integration and evaluation activities

Develop a strategic plan for the business


Develop an acquisition plan related to the strategic plan (
Acquisition plan)
Search candidates for acquisitions (search)
Screen & prioritize potential candidates ( Screen)
Initiate contact with the target ( First contact)
Refine valuation, structure the deal, perform Due
Diligence, and develop financing plan ( Negotiation)
Develop plan for integrating the acquired business (
integration plan)
Obtain approvals, resolve post closing issues (closing)
Implement post- closing integration ( Integration)
Conduct the post-closing evaluation of acquisition
(Evaluation)

Due Diligence process


Due Diligence, with reference to M&As, is the process of
examining all aspects of the company, including
manufacturing, financial, commercial, legal, tax, IT
systems, regulatory issues, as well as undertaking issues
related to IPR, environment and other factors. It is done to
investigate and evaluate if it is worth pursuing a target ( and
at what price). It also aids in checking/validating the
information on the target company on all important
aspects, as disclosed by it to the acquirer.
The process of due diligence helps in valuing and
negotiating deals in an effective manner. It minimizes to
a great extent, risk of adverse surprises for the acquiring
company , post acquisition of the target company.

Industry Life Cycle and Merger Types


Introduction stage : Newly created small firms are
bought out ( are targets) by large firms, who
themselves may be in mature or declining industry.
These result in related or conglomerate mergers. The
smaller firm may not have financial capacity to
grow the business or the capability to handle the
increased scale. Horizontal mergers between
smaller firms may also occur, to pool management /
capital resources.
Exploitation / Growth stage: Nature of mergers are
similar to those during introductory stage. The
impetus is reinforced by more visible indications of
prospective growth & profit and higher capital
requirements.

Maturity stage: mergers are for economies


of scale in production, marketing , R&D to
match low cost / price performance of other
domestic or global firms
Decline Stage: Horizontal mergers are
undertaken for survival, vertical mergers
are taken to increase efficiency / profit.
Concentric mergers provides opportunities
for synergy and carry over

LBO ( Leveraged buyout) one method of


financing acquistions
Leveraged buyout means mobilizing borrowed funds
based on the security of assets and cash flows of the
target company ( before its takeover) and using those
funds to acquire the target company.
Four typical steps in a LBO are:
a.

b.

c.

Incorporation of a private /wholly owned company to act as a


Special Purpose Vehicle ( SPV) for acquisition of a target
company
Mobilization of borrowed funds in the SPV, based on the
security of assets and cash flows of the target company ( before
its take over)
Acquisition of the entire or near entire share capital of the target
company.

Use of LBO by Indian companies


For domestic Acquisitions in India, LBOs are not practiced,
since Indian banks are reluctant to lend money for LBO.
Indian companies have successfully resorted to LBO for
overseas Acquisitions.
The first major LBO was the acquisition of Tetley of UK
by Tata Tea in early 2000. Acquisition of Corus Plc by
Tata Steel was also a case of LBO.

Management Buyout
When the professional management or non-promoter of a
company carries out leveraged buyout of the company from
its promoters.

d. Finally, merger of the target company into the


SPV immediately or after sometime. This last
step in the Leveraged buyout has two effects
It brings the assets of the target company and the
loan taken by the SPV into one balance sheet by
which the lenders security no more remains a third
party security
It makes the target company go private i.e., the
target company gets unlisted.

Reasons for cross border mergers & acquisitions


Growth invest in faster growing economy, get scale
Technology to exploit its technology or get access
Government Policy environmental & other
regulations can delay build new facilities

Differential labour costs, productivity


Source of raw materials / inputs helps vertical
mergers

Learning
Cross border M&A most in automobiles, oil,
Telecom, FMCG, Pharma, banking, entertainment
etc.

Blue Print for Integrating Acquisition..


Integration is a crucial part of success of a
Mergers & Acquisitions.
Study by Booz-Allen Hamilton found that success
of M&A has the maximum dependence on the
firms pre- and post-integration strategy and the
ability to act quickly.
An efficient integration brings unification of the
strategies, policies & procedures of merging
companies. An inefficient integration strategy
leads to inefficient operations, communication
gaps, clashes in culture and leadership that prevent
the merging companies from realizing full
potential.

At the early stages of negotiations most attention


needs to be paid to the business portfolio but as
the deal advances strong focus on people &
processes must be paid.
Once the deal closes, the new the new entity must
settle the uncertainty about who is going to report
to whom and who is responsible for what.
Once an acquisition has been announced, the firm
must try to have the management structure
completely laid out. The work of integration
should really start when the firm is planning the
acquisition.

Once deal closes, new management team &


structure must be put in place and
announced , to minimize risk of loss key
employees and other stake holders.
Loss of employee focus on external aspects
should be avoided.
Right people should be appointed in the
new management structure. A capable
manager should be made in charge of the
over all integration process.

Strategic Reasons for M&A Value Creation


Sales growth, operating profit margins, working
capital , fixed capital investments, and cost of
capital can be value drivers. These can be related
to Porters generic strategies.
Value created through a merger depends on the
nature of the deal that has been struck as well as the
integration process.
A wrongly conceived merger will fail, no matter
how good the integration process; similarly a deal
based on sound logic might result in failure if the
integration process is poor.
Often financial & legal aspects of M&A is given
due attention but human sides are not given
adequate timely attention.

Reasons for M&As failing to achieve objectives


Reasons could be one or more combination of
factors such as
Payment of high price: dilutes future earnings
Overestimated synergies :synergies of cost reduction,
working capital reduction, increasing revenue, investment
intensity may be over estimated
Inconsistent strategy: Inaccurate assessment of strategic
benefits of merger may lead to its failure
Inadequate due diligence: can cause buyer to inherit
financial & business risks that may be very damaging
Clash of corporate cultures: lack of proper
communication, differing expectations, conflicting
management styles
Improper business fit :When product or services does
not naturally fit into acquirers sales / distribution system
resulting in delays in integration

Over Leverage : Acquirer financing through too


much debt. A well planned capital structure is
critical for successful merger.
Boardroom split / tussle: When target companys
representation is substantial, compatibility of
directors following the merger is important
Regulatory delay: Announcement of a merger is a
dislocating event for employees, customers /
suppliers of one or both companies. It is crucial to
have detailed plans to deal with potential problems
immediately following announcement. Regulatory
delays increase risk of substantial deterioration
of business operations.

HP and Compaq Merger


Reason for merger : economies of scale in PCs,
$2.5 b in cost synergies
Price Reaction at Announcement: HP share
declined by 19%, Compaq declined by 10%
Merger Process
Private Activity:
CEOs have initial discussion (6/2001),
Extensive business due diligence (6/2001), McKinsey
Accenture retained by HP Compaq
Retain financial advisers (7/2001), Goldman Sachs Salomon
Smith Barney appointed by HP Compaq
Board approves merger ( 9/2001)

Public Activity:

Joint Press release ( 9/3/2001)


Walter Hewlett opposes (11/5/2001)
Packard Foundation opposes (12/8/2001)
Approval from FTC (3/7/2002)
Compaq holders approve (//002
HP holders formally approve 5//20002)

Motives for Divestiture..


A divestiture is a sale of a part or a division of a
company to a third party for cash or securities or
both. Two main reasons for divestitures are
The assets to be divested are worth more as part of the
buyers organization than as part of the sellers
The assets are a drag on other profitable operations of
the seller

Divestitures will not yield any gains unless the


assets are sold for more than its present value.
However, in certain circumstances it may be
advisable to divest even without direct monetary
gain.

Some of the main reasons for divesting are


Efficiency gains & Refocus
Declining profitability of some business /
getting rid of unprofitable business
Information Effects : announcement of
divestiture is seen as a change in investment
strategy or in operating efficiency
Wealth transfer
Tax reasons