Mergers and

Acquisitions

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 10-1

 The Strategic Management Process
External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Which Businesses
Internal to Enter?
Analysis
Corporate Level • Vertical Integration
Strategy • Diversification
Mode of Entry?
• Strategic Alliances
• Mergers &
Acquisitions
 Mergers & Acquisitions Defined

Mergers Acquisitions

• two firms are combined on • one firm buys another

a relatively co-equal basis firm

• the words are often used interchangeably even

though they mean something very different

• merger sounds more amicable, less threatening

 Mergers & Acquisitions Defined
Mergers
• parent stocks are usually
retired and new stock issued
• name may be one of the
parents’ or a combination
• one of the parents usually
emerges as the dominant
management
Acquisitions
• can be a controlling
share, a majority, or
all of the target firm’s
stock
• can be friendly or
hostile
• usually done through
a tender offer
Do Mergers and Acquisitions Create Value?
The Logic

Unrelated M&A Activity

• there would be no expectation of value creation

due to the lack of synergies between businesses

• there might be value creation due to efficiencies

from an internal capital market

• there might be value creation due to the exploitation

of a conglomerate discount

• a corporate raider who buys and restructures firms

 Mergers & Acquisitions Defined
Types of M&A Activity

Vertical » suppliers or customers

Horizontal » competitors
Related
Product Extension » complementary products

Market Extension » complementary markets

Unrelated Conglomerate » everything else

Do Mergers and Acquisitions Create Value?
The Logic
Related M&A Activity

• value creation would be expected due to

synergies between divisions

• economies of scale

• economies of scope
• transferring competencies
• sharing infrastructure, etc.
Do Mergers and Acquisitions Create Value?
The Empirical Evidence

Research is based on stock market reaction to the

announcement of M&A activity

• this reflects the market’s assessment of the

expected value of the merger or acquisition

• these studies look at what happens to the price

of both the acquirer’s stock and the target’s stock

• thus, we can see who is capturing any expected

value that may be created
Do Mergers and Acquisitions Create Value?
The Empirical Evidence
M&A Activity creates value, on average, as follows:

Acquiring Target
Firms Firms

• no value created • value increases by

about 25%
• related M&A activity creates more value than
unrelated M&A activity

M&A activity creates value, but target firms capture it

Do Mergers and Acquisitions Create Value?
Expected versus Operational Value
April 2000: Wells Fargo offers to acquire First Security Bank
for about $3 billion

Expected Operational
The Deal:
Stock values were: Stock Price Market Cap.
Wells Fargo: $43.69 12/1999 $40.44 $65.7 B
First Security: $15.50 12/2000 $56.69 $95.2 B
.355 shares of WF for each 12/2001 $43.60 $74.0 B
share of FS stock 12/2002 $46.87 $82.0 B
Wells Fargo: down $0.25 to $39.50 12/2003 $58.89 $100.0 B
12/2004 $62.15 $105.0 B
First Security: up $1.19 to $13.38
Why is M&A Activity So Prevalent?
If managers know that acquiring firms do not
capture any value from M&A’s, why do they
continue to merge and acquire?

• avoid competitive disadvantage

Survival
• avoid scale disadvantages

Free Cash • cash generating, normal return investment

Flow
Why is M&A Activity So Prevalent?
If managers know that acquiring firms do not
capture any value from M&A’s, why do they
continue to merge and acquire?

Agency • managers benefit from increases in size

Problems • managers benefit from diversification

Managerial
• managers believe they can beat the odds
Hubris
Why is M&A Activity So Prevalent?
If managers know that acquiring firms do not
capture any value from M&A’s, why do they
continue to merge and acquire?

• some M&A activity does generate

above normal profits (expected and
operational over the long run)
Above Normal • proposed M&A activity may satisfy
Profits the logic of corporate level strategy

• managers may see economies that

the market can’t see
Competitive Advantage

Recognizing and Exploiting Economies of Scope

Private Economies

• Firm C’s recognized

Firm A $12 value is $10,000
,000

Firm C • Firm A sees value

,0 00 of $12,000 in Firm C
$ 10
Firm B • Firm A can earn a
profit of $2,000
only if the economy
Bidders Target remains private
Competitive Advantage

Recognizing and Exploiting Economies of Scope

Costly-to-Imitate
Economies
Firm A $12 • if the economy
, 000
between A & C
Firm C is costly to imitate,
,0 00 it doesn’t matter
$ 10
if other firms know
Firm B
• Firm A can still earn
a $2,000 profit
Bidders Target
Competitive Advantage

Recognizing and Exploiting Economies of Scope

Unexpected
Economies

Firm A $10
• Firm C has a market
,000 value of $10,000
$12
,000
Firm C • Firm A buys Firm C
,0 00 for $10,000
$10
Firm B • Firm C turns out to be
worth $12,000
Bidders Target
Competitive Advantage
Doing the Deal
Search for
Rare Economies

Seek Thinly Limit Information

Traded Markets to Other Bidders
Bidding Firm’s
Perspective
Close the Limit Information
Deal Quickly to the Target

Avoid Bidding
Wars
Competitive Advantage
Doing the Deal
Seek Information
from Bidders

Target Firm’s Invite Other Bidders to

Perspective Join in Bidding Contest

Delay, But Do Not

Stop the Acquisition
Implementation Issues
Structure, Control, and Compensation
M&A activity requires responses to these issues:

• m-form structure is typically used

• management controls & compensation policies

are similar to those used in diversification strategies

Managers must decide on the level of integration:

• target firm may remain somewhat autonomous

• target firm may be completely integrated
Implementation Issues
Cultural Differences
• high levels of integration require greater cultural
blending

• cultural blending may be a matter of:

• combining elements of both cultures
• essentially replacing one culture with the other
• integration may be very costly, often unanticipated

• the ability to integrate efficiently may be a source

of competitive advantage