SM Lecture Eight - Mergers, Acquisitions and Alliances

Strategic Management BUSM 3200

These Lecture Slides summarize the key points covered in the respective chapters in your
recommended text; these slides do NOT substitute, at all, the required reading of the assigned
chapter from the text. These slides also may contain additional supplementary material extracted
from other texts and sources outside your text book.

BUSM 3200- Strategic Management (Jan 2013) GDS 1-1

Learning outcomes
Establish the potential role of organic (‘do it
yourself’) strategies.
Identify key issues in the successful management
of mergers and acquisitions.
Identify the key issues in the successful
management of strategic alliances.
Determine the appropriate choices between
organic development, mergers and acquisitions
and strategic alliances.
Compare key success factors in mergers,
acquisitions and alliances.

BUSM 3200- Strategic Management (Jan 2013) GDS
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Three Strategy Methods

Figure 10.1 Three strategy methods

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Organic development

Organic development is where a strategy is
pursued by building on and developing an
organisation’s own capabilities. This is
essentially the ‘do it yourself’ method.

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Advantages of organic development

Knowledge and learning can be enhanced.
Spreading investment over time – easier to
finance.
No availability constraints – no need to search
for suitable partners or acquisition targets.
Strategic independence – less need to make
compromises or accept strategic constraints.

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Corporate entrepreneurship

Corporate entrepreneurship refers to radical
change in the organisation’s business, driven
principally by the organisation’s own capabilities.

For example, Amazon’s development of Kindle
using its own in house development .

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Mergers and acquisitions
 A merger is the combination of two previously
separate organisations, typically as more or
less equal partners.

 An acquisition involves one firm taking over
the ownership (‘equity’) of another, hence the
alternative term ‘takeover’.

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Strategic motives for M&A

Strategic motives can be categorised in three
ways:
 Extension – of scope in terms of geography,

products or markets.
 Consolidation – increasing scale, efficiency and

market power.
 Capabilities – enhancing technological know-how

(or other competences).

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Financial motives for M&A

There are three main financial motives:
 Financial efficiency – a company with a strong

balance sheet (cash rich) may acquire/merge with
a company with a weak balance sheet (high debt).
 Tax efficiency – reducing the combined tax

burden.
 Asset stripping or unbundling – selling off bits of the

acquired company to maximise asset values.

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Managerial motives for M&A
M&A may serve managerial self-interest for two
reasons:
 Personal ambition – financial incentives tied to

short-term growth or share-price targets; boosting
personal reputations; giving friends and colleagues
greater responsibility or better jobs.
 Bandwagon effects – managers may be branded as

conservative if they don’t follow a M&A trend;
shareholder pressure to merge or acquire; the
company may itself become a takeover target.

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Target choice in M&A
Two main criteria apply:
Strategic fit – does the target firm strengthen
or complement the acquiring firm’s strategy?
(N.B. It is easy to over-estimate this potential
synergy).
Organisational fit – is there a match between
the management practices, cultural practices
and staff characteristics of the target and the
acquiring firm?

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Strategic Outcomes for Horizontal
Mergers and Acquisitions
♦ Increasing the firm‟s scale of operations and
market share.
♦ Expanding a firm‟s geographic coverage.
♦ Extending the firm‟s business into new product
categories.
♦ Gaining quick access to new technologies or
complementary resources and capabilities.
♦ Leading the convergence of industries whose
boundaries are being blurred by changing
technologies and new market opportunities.

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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 6–12

Why Mergers and Acquisitions Sometimes
Fail to Produce Anticipated Results
♦ Strategic Issues:
● Cost savings may prove smaller than expected.
● Gains in competitive capabilities take longer to realize or
never materialize at all.
♦ Organizational Issues
● Corporate cultures, operating systems and management
styles fail to mesh due to resistance to change from
organization members.
● Loss of key employees at the acquired firm.
● The managers overseeing the integration make mistakes
in melding the acquired firm into their own.

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Valuation in M&A

Getting the offer price correct is essential:
 Offer the target too little, and the bid will be
unsuccessful.
 Pay too much and the acquisition is unlikely to
make a profit net of the original acquisition price.
(‘the winner’s curse’).
 Acquirers do not simply pay the current market
value of the target, but also pay a ‘premium for
control’.

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Integration in M&A

Figure 10.2 Acquisition integration matrix
Source: P. Haspeslagh and D. Jemison, Managing Acquisitions, Free Press, 1991

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Integration in M&A
Approaches to integration:
 Absorption – strong strategic interdependence and little
need for organisational autonomy. Rapid adjustment of
the acquired company’s strategies, culture and systems.
 Preservation – little interdependence and a high need for
autonomy. Old strategies, cultures and systems can be
continued much as before.
 Symbiosis – strong strategic interdependence, but a high
need for autonomy. Both the acquired firm and acquiring
firm learn and adopt the best qualities from each other.
 Holding – a residual category – with little to gain by
integration. The acquisition will be ‘held’ temporarily
before being sold on, so the acquired unit is left largely
alone.
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Strategic alliances
A strategic alliance is where two or more
organisations share resources and activities to
pursue a strategy.
Collective strategy is about how the whole
network of alliances of which an organisation is
a member competes against rival networks of
alliances.
Collaborative advantage is about managing
alliances better than competitors.

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Types of strategic alliance

There are two main kinds of ownership in
strategic alliances:
 Equity alliances involve the creation of a
new entity that is owned separately by the
partners involved.
 Non-equity alliances are typically looser,
without the commitment implied by
ownership.

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Equity alliances

The most common form of equity alliance is
the joint venture, where two organisations
remain independent but set up a new
organisation jointly owned by the parents.
A consortium alliance involves several
partners setting up a venture together.

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Non-equity alliances

Non-equity alliances are often
based on contracts.
Three common forms of non-
equity alliance:
 Franchising.

 Licensing.

 Long-term subcontracting.

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Benefits of Strategic Alliances and Partnerships

♦ Minimizes the problems associated with vertical
integration, outsourcing, and mergers and acquisitions.
♦ Useful in extending to extend the scope of operations
via international expansion and diversification strategies.
♦ Reduces the need to be independent and self-sufficient
when strengthening the firm‟s competitive position.
♦ Offers greater flexibility should a firm‟s resource
requirements or goals change over time.
♦ Are useful when industries are experiencing high-
velocity technological advances simultaneously.

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Reasons for Entering into Strategic Alliances

♦ When seeking global market leadership:
● Enter into critical country markets quickly.
● Gain inside knowledge about unfamiliar markets and cultures
through alliances with local partners.
● Provide access to valuable skills and competencies
concentrated in particular geographic locations.
♦ When staking out a strong industry position:
● Establish a stronger beachhead in target industry.
● Master new technologies and build expertise and
competencies.
● Open up broader opportunities in the target industry.

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Capturing the Benefits of Strategic Alliances

Being sensitive
to cultural
differences
Recognizing that
Picking a good the alliance must
partner benefit both sides

Strategic
Alliance Factors

Ensuring both Adjusting the
parties keep their agreement over
commitments time to fit new
Structuring the circumstances
decision-making
process for swift
actions

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Factors That Make an Alliance “Strategic”

♦ It helps build, sustain, or enhance a core
competence or competitive advantage.
♦ It helps block a competitive threat.
♦ It increases the bargaining power of alliance
members over suppliers or buyers.
♦ It helps open up important new market
opportunities.
♦ It mitigates a significant risk to a firm‟s business.

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Motives for alliances
Scale alliances – lower costs, more bargaining
power and sharing risks.
Access alliances – partners provide needed
capabilities (e.g. distribution outlets or
licenses to brands)
Complementary alliances – bringing together
complementary strengths to offset the other
partner’s weaknesses.
Collusive alliances – to increase market power.
Usually kept secret to evade competition
regulations.

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Strategic alliance motives

Figure 10.3 Strategic alliance motives

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Strategic alliance processes

Two themes are vital to success in
alliances:
Co-evolution – the need for flexibility
and change as the environment,
competition and strategies of the
partners evolve.
Trust – partners need to behave in a
trustworthy fashion throughout the
alliance.
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Alliance evolution

Figure 10.4 Alliance evolution
Source: Adapted from E. Murray and J. Mahon (1993), „Strategic alliances: gateway to the new Europe‟, Long Range Planning, vol. 26, p. 109. www.sciencedirect.com/science/journal

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The Drawbacks of Strategic Alliances
and Partnerships

♦ Culture clash and integration problems due to different
management styles and business practices.
♦ Anticipated gains do not materialize due to an overly
optimistic view of the synergies or a poor fit of partners‟
resources and capabilities.
♦ Risk of becoming dependent on partner firms for
essential expertise and capabilities.
♦ Protection of proprietary technologies, knowledge
bases, or trade secrets from partners who are rivals.

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Principle Advantages of Strategic Alliances

♦ They lower investment costs and risks for each
partner by facilitating resource pooling and risk
sharing.
♦ They are more flexible organizational forms and
allow for a more adaptive response to changing
conditions.
♦ They are more rapidly deployed—a critical
factor when speed is of the essence.

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Strategic Alliances Versus Outsourcing

♦ Key Advantages of Strategic Alliances:
● The increased ability to exercise control
over the partners‟ activities.
● A greater commitment and willingness of
the partners to make relationship-specific
investments as opposed to arm‟s-length
outsourcing transactions.

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How to Make Strategic Alliances Work

♦ Create a system for managing the alliance.
♦ Build trusting relationships with partners.
♦ Set up safeguards to protect from the threat
of opportunism by partners.
♦ Make commitments to partners and see that
partners do the same.
♦ Make learning a routine part of the
management process.

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Comparing acquisitions, alliances and organic
development

Figure 10.5 Buy, ally or DIY matrix

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Comparing acquisitions, alliances and organic
development

Four key factors in choosing the method of strategy
development :
 Urgency – internal development may be too slow,
alliances can accelerate the process but acquisitions are
quickest.
 Uncertainty – an alliance means risks are shared and
thus a failure does not mean the full cost is lost.
 Type of capabilities – acquisitions work best with
‘hard’ resources (e.g. production units) rather than ‘soft’
resources (e.g. people). Culture clash is the big issue.
 Modularity of capabilities – if the needed capabilities
can be clearly separated from the rest of the
organisation an alliance may be best.
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Key success factors

Figure 10.6 Key success factors in mergers, acquisitions and alliances

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Summary (1)
There are three broad methods for pursuing
strategy: mergers and acquisitions, strategic
alliances and organic development.
Organic development can be either continuous
or radical. Radical organic development is
termed corporate entrepreneurship.
Acquisitions can be hostile or friendly. Motives
for mergers and acquisitions can be strategic,
financial or managerial.

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Summary (2)
The acquisition process includes target choice,
valuation and integration.
Strategic alliances can be equity or non-equity.
Key motives for strategic alliances include scale,
access, complementarity and collusion.
The strategic alliance process relies on co-
evolution and trust.
The choice between acquisition, alliance and
organic methods is influenced by four key factors:
urgency, uncertainty, type of capabilities and
modularity of capabilities.
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PRACTICE ESSAY QUESTIONS
IMPORTANT NOTE: →
 These questions are provided for your reference only – they are only
INDICATIVE of the standard of questions you might expect in the final exam.
 DO NOT use these questions to “spot”
 The RMIT examiner will post advice on the exam on the Learning Hub closer
to the exam; you are required to pay attention to that advise
 The questions here show the range of topics that could be tested from this
lecture; they are NOT exhaustive
 To score a high grade it is important to LINK the theory to applications and
examples. Where from?
 You have been assigned specific cases to read from the text. Each case

study will show you the kinds of strategic decisions the case company
needs to make. You can draw from these examples.
 You have selected a case company for your project; you may use

examples from there.
 You are supposed to read widely from the business press about local,

regional and international companies strategies. You can use examples
from there as well.

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Sample essay question
1. Discuss the main catalysts for diversification.
Examine the risks and advantages of joint
ventures, mergers and strategic alliances using
examples from two of the cases studied during
this course.
2. Mergers and acquisitions (M&A) is an important
method for strategy development. In the case
of SABMiller’s proposed acquisition of Foster’s,
discuss the major motive for SABMiller and
elaborate how well Foster’s may fit SABMiller
strategically and organisationally.

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Sample essay question
3. What are the differences in a merger, joint
venture and strategic alliance? What are
the advantages and risks of each of these
diversification strategies? Give examples
from the XYZ case study to support your
answer.

XYZ : this means that you may be asked
to comment on one or more of the
assigned cases that are identified in your
course schedule.

8-40

SM Lecture Eight - Mergers, Acquisitions and Alliances

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