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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 14

External Growth Strategies:

Mergers, Acquisitions, and Alliances

  • Mergers and Acquisitions
  • Strategic Alliances

External Growth Strategies:

Mergers, Acquisitions, and Alliances

2

Copyright © 2019 John Wiley & Sons, Inc..

OUTLINE

27

Global M&A

1998-2018

*

Chart1

1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Vodafone—Mannesman $183bn. Aol—Time Warner $165bn. Pfizer—Warner Lambert $90bn. Glaxo—Smith Kline Beecham $76bn. SBC—Ameritech $70bn.
Exxon—Mobil $85bn. Citicorp—Travelers $70bn.
Dow Chemical—DuPont $130bn. Royal Dutch Shell—BG $81bn. Charter Communication— Time Warner Cable $78bn. Dell—EMC $67bn. H.J. Heinz—Kraft Foods $54bn.
RBS/Santander/Fortis—ABN AMBRO $81bn. Enel—Endesa $60bn. Procter & Gamble—Gillette $57bn.
Royal Dutch Petroleum—Shell $75bn. Sanofi—Aventis $60bn. JPMorgan Chase—BancOne $59bn.
Gaz de France—Suez $75bn. Pfizer—Wyeth $68bn. Novartis—Alcom $52bn.
AT&T—BellSouth $73bn.
Comcast—AT&T Broadband $72bn.
Bell Atlantic—GTE $71bn. Pfizer—Pharmacia $60bn.
InBev—Anheuser-Busch $52bn. Bank of America —Merrill Lynch $50bn. .
Verizon Communication— Verizon Wireless $130bn. .
Actavis—Allergan $71bn. .
AT&T—Time Warner $85bn. Bayer—Monsanto $66bn. BAT—Reynolds $58bn.
CVS—Aetna $70bn. Cigna—Express Scripts $67bn. AT&T—Time Warner $109bn. Walt Disney—Fox $85bn.
Value of M&A deals (S millions)
2288
3034
3167
1530
1058
1210
1721
2531
3371
4191
2531
1757
2117
2655
2700
2800
4802
4660
3850
3522
3458

Sheet1

Value of M&A deals (S millions)
1998 2288
1999 3034
2000 3167
2001 1530
2002 1058
2003 1210
2004 1721
2005 2531
2006 3371
2007 4191
2008 2531
2009 1757
2010 2117
2011 2655
2012 2700
2013 2800
2014 4802
2015 4660
2016 3850
2017 3522
2018 3458

Are Mergers Successful?

  • Evidence from Shareholder Returns:
  • Small increase in the combined value of the 2 companies involved
  • Gains flow (almost) entirely to shareholders of acquired companies
  • Returns to shareholders of acquiring companies negative on average
  • Evidence from Accounting Profits
  • Diverse findings: “…the results from these accounting-based studies are all over the map”
  • Key problem: separating the effects of the merger from the many other factors that influence firms’ profitability
  • Diversity of M&A
  • Lack of consistent findings reflects the vast diversity in types of mergers and characteristics of the firms involved
  • Even when mergers categorized (e.g. horizontal, vertical, conglomerate) no consistent performance differences

Copyright © 2019 John Wiley & Sons, Inc.

MERGERS AND ACQUISITIONS

Success and Failure among

Mergers and Acquisitions

Copyright © 2019 John Wiley & Sons, Inc.

MERGERS AND ACQUISITIONS

Successes Failures
Exxon – Mobil Daimler - Chrysler
Procter & Gamble – Gillette AOL-Time Warner
Walt Disney Co. – Pixar Royal Bank of Scotland - ABN AMRO
Tata Motor – Jaguar Land Rover Hewlett Packard - Autonomy
Sirius – XM Radio Bank of America – Countrywide
Cemex – RMC Alcatel – Lucent
Bank of America – Merrill Lynch Sprint - Nextel
Heinz–Kraft Foods Sears – K Mart
Geely–Volvo Microsoft–Nokia
Dell–EMC News Corp.–MySpace

*

Motives for Mergers and Acquisitions

Managerial Motives

  • Top management remuneration depends more on firm size than profitability
  • Psychological rewards--M&As project power, confer CEO celebrity status
  • Imitation: the fear of not participating in an industry’s merger wave

Financial Motives

  • Stock market inefficiencies—acquire undervalued companies (Berkshire Hathaway-Heinz): use overvalued equity to acquire (AOL-Time Warner)
  • Quest for tax savings—cross-border acquisitions to relocate to lower tax regime (Burger King-Tim Horton)
  • Financial re-engineering: debt-financed acquisitions that reduce the acquired company’s cost of capital (KKR-RJR Nabisco)

Strategic Motives

  • Horizontal M&A—economies of scale and market power (A-B Inbev-SAB Miller)
  • Geographical extension M&A—to enter overseas market (Geely-Volvo)
  • Vertical M&A—to acquire supplier or customer (Gencore-Xstrata)
  • Diversifying M&A—to enter a new area of business (Amazon-Whole Foods)

MERGERS AND ACQUISITIONS

Copyright © 2019 John Wiley & Sons, Inc.

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Managing Mergers and Acquisitions

Challenges of Pre-merger Planning

  • Careful identification of the goals of M&A
  • Difficulties in estimating the benefits of M&A: on average cost savings overestimated by 25%, revenue increases by 70%

Challenges of Post-Merger integration

  • Problems of integration: incompatible management systems; clash of cultures; adjustment difficulties by employees of acquired company
  • Building acquisition capability—managing the learning process to ensure that acquisition experience builds capability
  • Marching post-merger management to the strategic goals of the merger: leveraging the firm’s existing business model (e.g. Walt Disney and Pixar) vs. reinventing the business model (e.g. HP and Autonomy)

MERGERS AND ACQUISITIONS

Copyright © 2019 John Wiley & Sons, Inc.

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Types of Strategic Alliance

Copyright © 2019 John Wiley & Sons, Inc.

Strategic Alliances:

Collaborative arrangements between two or more firms to pursue common goals

Alliance goals: technological, marketing and distribution, operational, standard setting, lobbying…

Formal (contractual agreements, written understandings) or Informal

Equity (partners take equity stakes in one another) or non-equity

Bilateral alliances (two partners), multilateral alliances (many partners), networks of alliances (Toyota supplier network; Apple “ecosystem”)

  • Joint Ventures:
  • Partners form a jointly-owned enterprise to pursue the goals of the alliance

STRATEGIC ALLIANCES

17

SiRF Technology Holdings Inc

Kia Motors Corp

Uni-Pixel Inc

Ube Industries Ltd

Robert Bosch Stiftung GmbH

Sala Enterprises

Bglobal PLC

Universal Display Corp

IBM Corp

SAP AG

ARM Holdings PLC

Global Foundries Singapore

Panasonic Corp

NTT

NEC Corp

Thomson SA

KT Corp

Dreamworks Animation SKG Inc

Singapore

Telstra Corp Ltd

Intel Corp

Hynix Semiconductor Inc

Nanosys Inc

TLC Corp

SIP State Property Holding

Juniper Networks Inc

Infineon Technologies AG

Reactrix Systems Inc

Quintiles Transnational Corp

Sumitomo Chemical Co Ltd

Huawei Technologies Co Ltd

Russia

Samsung Electronics

Fujitsu Ltd

Source: Prof. Andrew Shipilov

Samsung Electronics’ Alliances, 2014

STRATEGIC ALLIANCES

ISUZU

SUZUKI

TOYOTA

IBC (built vans in the UK, 1989-98)

GM

NUMMI

(produced cars in

the US, 1984-2009)

Production JV; 10% ownership

40% owned

60%

owned

50% owned

50%

owned

SAAB

50% owned 1989-2000

FIAT

Technical collaboration, joint purch-asing & 20% ownership, 2000-6

FAW

JV producing light trucks in China

DAEWOO

50.9% owned; technical &

production collaboration

AVTOVAZ

JV produces

cars in Russia

SAIC

Production JVs in China

Indonesia, India

PEUGEOT

Joint development

& purchasing

HINDUSTAN MOTORS

Production JV in India, 1994-99

NISSAN

Product sourcing

General Motors’ International Alliances

STRATEGIC ALLIANCES

Copyright © 2019 John Wiley & Sons, Inc.

*

18

Management Issues

Copyright © 2019 John Wiley & Sons, Inc.

Motives:

To exploit complementarities among the resources and capabilities of different companies, e.g. airline alliances allow access to members’ route networks; Bulgari and Marriott combine to operate luxury hotels

These benefits include: Economizing on investment, Speed, Risk sharing, Learning (capability acquisition)

Challenges:

Need for relational capability: building trust, developing knowledge-sharing and coordination mechanisms

Managing the relationship: greatest benefits often involve greatest management challenges—e.g. cross-border alliances

Sharing of benefits: determined by

strategic intent of the partners (Which partner is clearer about what it wants from the alliance?)

appropriability of the contribution (Which partner’s resources and capabilities are easier to capture)

absorptive capacity (Which partner is the faster learner?

STRATEGIC ALLIANCES

17

Do the firm’s resources and capabilities fit the needs of the current strategy?

YES

INTERNAL DEVELOPMENT

NO

Contract or inter-firm combination?

  • Parties’ level of agreement over the value of the required resources

HIGH

LOW

Alliance or acquisition?

  • Desired closeness with resource provider

CONTRACT

HIGH

LOW

ALLIANCE

ACQUISITION

STRATEGIC ALLIANCES

Choosing the Right Growth Path

Copyright © 2019 John Wiley & Sons, Inc.

*

CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 15

Current Trends in

Strategic Management

The New Environment of Business

New Directions in Strategic Thinking

Redesigning Organizations

The Changing Role of Managers

Current Trends in

Strategic Management

Copyright © 2019 John Wiley & Sons, Inc.

OUTLINE

The Turbulent 21st Century

2000: Collapse of “New Economy”

  • Dot.com bubble bursts
  • March 2000 NASDAQ

at all-time peak

Terrorism

  • Attacks of September 11, 2001
  • Invasion of Afghanistan

& Iraq

Volatile Markets

E.g. Brent crude June ’09 $148; Dec. ‘09 $38

Decline of US

world influence

--emergence of a

multi-polar world

Globalization reverses

The rise of economic nationalism

2008-9:

Financial crisis

The Third Industrial Revolution:

  • Digital technologies
  • Intelligent systems
  • Disintermediation of human beings

Demands of society

  • Social & environmental responsibility
  • Ethics & fairness
  • Quest for meaning

Natural Disasters

Hurricanes, earthquakes, fires

2011:

Arab Spring

THE NEW ENVIRONMENT OF BUSINESS

Copyright © 2019 John Wiley & Sons, Inc.

The New Politics

  • The decline of liberalism
  • The rise of demogogues
  • The politics of identity

Digital Technology

  • Destruction of industries: travel agencies, bookstores, broadcast TV
  • Rise of new industries: e-commerce, ride-share services, audio & video streaming, shared ownership,
  • Transformation of industries: financial services, communications, dating

Social Forces and the Crisis of Capitalism

  • Twin pillars of Western civilization—liberal democracy & market capitalism—undermined by inequality, intolerance, decline of rationalism

Competition

  • Rise of dominant firms: in mature sectors (A-B Inbev, Starbucks, Boeing, Walmart; in new industries (Alphabet, Apple, Alibaba, Amazon, Facebook, Tencent)
  • New competitors from emerging markets (Huawei, Haier, Infosys, Embraer)

Systemic Risk

  • In interconnected world,initiasl disturbances are amplified and transmitted: e.g. Financial crisis of 2008-9, Arab Spring, Islamic State

Forces Shaping the Business Environment

THE NEW ENVIRONMENT OF BUSINESS

Copyright © 2019 John Wiley & Sons, Inc.

Ratio of average CEO compensation to

that of the average worker, USA 1965-2016

THE NEW ENVIRONMENT OF BUSINESS

Chart1

1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2016
Ratio of CEO pay to that of average worker
20
22
25
32
51
62
123
384
335
278
286
271

Sheet1

Ratio of CEO pay to that of average worker
1965 20
1970 22
1975 25
1980 32
1985 51
1990 62
1995 123
2000 384
2005 335
2010 278
2015 286
2016 271

NEW DIRECTIONS IN STRATEGIC THINKING

Managing Options

  • Turbulence increases option values
  • Strategies to create options: lower

financial leverage, experimentation,

exploratory R&D, alliances,

product platforms

Seeking

More Complex Sources

of Competitive Advantage

  • Multiple layers of competitive advantage
  • Exploiting cross-business linkages
  • Emphasis on innovation and new

business development

Understanding

Strategic Fit

  • Complementarity of management

practices

  • The implications of complexity
  • Contextuality of linkages

Reorienting

Corporate Objectives

  • Emphasis on stakeholder goals

and societal role of firms

  • Focus on profit drivers rather

than stock market valuation

Rethinking Strategy

© 2019 Robert M. Grant

www.contemporarystrategyanalysis.com

Strategy

in a Digital World

  • See next slide

4

4

The strategic characteristics of digital industries

Industry

structure

Importance of

complementary products

Network externalities

Complex industry

Structures (“ecosystems”)

Potential for complex and innovative business models

Competitive

advantage

Fast cycle innovation and product development

Swift erosion of competitive advantage (unless supported by network dominance)—hence need for speed

Ease of imitation of successful strategies

Critical importance of timing: strategic windows of short duration

Platform competition and winner-take-all markets)

Strategic characteristics

Strategy implications

Fungibility of IT resources

Ease of diversification between technology-based industries

NEW DIRECTIONS IN STRATEGIC THINKING

Copyright © 2019 John Wiley & Sons, Inc.

The New Environment of Business

Multidimensional

structures

Informal

organization

REDESIGNING ORGANIZATIONS

The Emerging Shape of the Business Enterprise

New Directions in Strategic Thinking

Self-

organization

Permeable

Boundaries

Copyright © 2019 John Wiley & Sons, Inc.

4

4

THE REQUIRED

COMPETENCIES OF

BUSINESS LEADERS

  • motivating colleagues
  • cultivating sense of purpose
  • cross-cultural flexibility
  • self-awareness
  • resolve
  • proactivity
  • problem-solving
  • relationship building
  • vision

THE LEADERSHIP

NEEDS OF

ORGANIZATIONS

The ability to:

build confidence

build enthusiasm

cooperate

deliver results

form networks

influence others

use information

New Models of Leadership

Copyright © 2019 John Wiley & Sons, Inc.

THE CHANGING ROLEOF MANAGERS

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