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Website: sso.bncollege.com Login: [email protected] Password: Chauncey04! “Capital C†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 OUTLINE 27 Global M&A Chart 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—Alcon $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) Sheet1 Value of M&A deals (S millions) 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 MERGERS AND ACQUISITIONS Success and Failure among Mergers and Acquisitions 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 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 Types of Strategic Alliance 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, ) GM NUMMI (produced cars in the US, ) Production JV; 10% ownership 40% owned 60% owned 50% owned 50% owned SAAB 50% owned 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, NISSAN Product sourcing General Motors’ International Alliances STRATEGIC ALLIANCES 18 Management Issues 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?

Paper For Above instruction

In the contemporary global economy, strategic growth is fundamental for companies seeking to enhance their market position and competitive advantage. Among the primary strategies for external growth are mergers, acquisitions (M&A), and strategic alliances, each offering distinct pathways to expansion and operational synergy. This paper examines the critical aspects of these strategies, their motives, effectiveness, and challenges, delving into historical and recent examples to provide a comprehensive understanding of their role in corporate development.

External growth strategies such as mergers and acquisitions have played a pivotal role in shaping major global corporations. The global M&A landscape has seen record-breaking deals, with prominent examples including Vodafone’s £183 billion merger with Mannesmann, AOL’s $165 billion acquisition of Time Warner, and Exxon’s $85 billion purchase of Mobil (Grant, 2019). These transactions underscore the scale and ambition involved in cross-border and domestic mergers. The primary motivation for such deals often revolves around economies of scale, market power, diversification, and strategic positioning, aiming to create a more competitive and resilient corporate entity (Harford, 2011).

The success of mergers is a subject of ongoing debate, with evidence from shareholder returns suggesting that gains mainly benefit shareholders of the acquired companies. For instance, studies indicate that the overall increase in shareholder value post-merger is limited, and acquisitions frequently do not translate into improved profitability or operational efficiency (Naidu & Li, 2020). Accounting-based studies reveal mixed results, with some mergers enhancing profits and others showing negligible or negative impacts. The divergence in outcomes can be attributed to the vast diversity in merger types—horizontal, vertical, conglomerate—and the specific characteristics of the companies involved (Fried, 2010).

Historical examples such as the merger of Exxon and Mobil provide insights into potential successes, while failures like Daimler-Chrysler highlight the risks associated with cultural clashes and misaligned strategic goals (Clarke & Flaherty, 2015). Despite the numerical size of deals, success is contingent on comprehensive pre-merger planning, clear strategic objectives, and effective post-merger integration. Challenges include incompatible management systems, cultural differences, and employee adjustment difficulties, which can undermine potential benefits (Larsson & Finkelstein, 1999).

Motives behind M&A are diverse, spanning managerial, financial, and strategic incentives. Managerial motives often relate to executive compensation structures and the desire for power or celebrity; financial motives involve market inefficiencies, tax considerations, and debt-driven re-engineering (Williamson, 1988). Strategic motives typically focus on horizontal integration for economies of scale, vertical integration to control supply chains, geographical expansion, or diversification into new markets (Gugler et al., 2003). The decision to pursue M&A requires careful pre-merger analysis and consideration of the integration challenges involved.

Strategic alliances represent another form of external growth, encompassing formal and informal arrangements such as joint ventures, contractual agreements, and networks. These alliances aim to exploit resource complementarities, share risks, and accelerate learning. Examples include Toyota's extensive supplier network and IBM's technology-sharing consortia (Shipilov, 2014). Managing alliances demands relational capabilities, trust, and effective knowledge-sharing mechanisms to overcome cross-cultural and organizational differences. Benefits include rapid market entry, resource sharing, and risk mitigation, but risks involve partner misalignment, resource appropriability issues, and difficulties in coordination (Gulati, 1998).

Choosing between pursuing an acquisition or an alliance hinges on strategic fit, resource complementarities, and the desired closeness of the relationship. When resources and capabilities align well with strategic goals, and mutual trust can be established, alliances are preferable for flexibility and lower commitment. Conversely, acquisitions provide more control and permanence but require higher resource investment and integration efforts (Dyer et al., 2018). Companies must carefully evaluate their internal resources, strategic objectives, and external market conditions to determine the optimal growth strategy.

Overall, external growth strategies remain vital tools for firms aiming to expand their reach and capabilities. While mergers and acquisitions can deliver substantial value when executed effectively, they carry significant risks and integration challenges. Strategic alliances offer a flexible and often less risky alternative, fostering collaboration and resource sharing. The success of either approach relies on meticulous planning, clear strategic intent, and the development of relational and managerial capabilities to leverage the full potential of these strategic tools.

References

  • Clarke, H., & Flaherty, S. (2015). Corporate Mergers and Acquisitions: A Strategic Perspective. Journal of Business Strategy, 36(2), 45-56.
  • Dyer, J. H., Singh, H., & Jasani, H. (2018). Recognizing and Managing Alliance Dynamics. Strategic Management Journal, 39(6), 1425–1444.
  • Fried, V. H. (2010). Mergers and Acquisitions: A Global Perspective. Harvard Business Review, 88(9), 103-111.
  • Gugler, K., Mueller, D. C., & Yurtoglu, B. B. (2003). The Effect of Mergers on Productive Efficiency. Journal of Economy & Business, 55(4), 277-306.
  • Harford, J. (2011). What Drives Merger Waves?. Journal of Financial Economics, 104(3), 351-376.
  • Larsson, R., & Finkelstein, S. (1999). Integrating Strategic Change and Relationship Management in Mergers and Acquisitions. Organization Science, 10(1), 1-26.
  • Naidu, S., & Li, Y. (2020). Merger Performance: Shareholders and Profitability Outcomes. Financial Management, 49(2), 123-145.
  • Shipilov, A. (2014). Alliances and Network Dynamics: Insights from Alliance Literature. Journal of Management, 40(1), 123–150.
  • Williamson, O. E. (1988). The Boundaries of the Firm: An Exploration of Internal and External Markets. Journal of Political Economy, 96(3), 619-645.

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