Slide1: Mergers and Acquisitions Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm


The value of M&A strategies: The value of Mandamp;A strategies NPV(A) = net present value of firm A as a stand-alone entity NPV(B) = net present value of firm B as a stand-alone entity NPV(A+B) = net present value of firms A and B as a combined entity P = NPV(A+B) – NPV(A) any price for a target (i.e., B) less than P will be a source of an above-normal economic profits for the bidding firm (A).


Potential sources of strategic relatedness between bidding and target firms: Potential sources of strategic relatedness between bidding and target firms Synergies: NPV(A+B)andgt;NPV(A)+NPV(B) Technical economies: physical processes inside a firm are altered so that the same amounts of input produce higher quantity of outputs. Pecuniary economies: the ability of firms to dictate prices by exerting market power Diversification economies: lowering risks relative to its performance.


Possible motivations to engage in M&As: Possible motivations to engage in Mandamp;As Overcome Barriers to Entry (over capacity) Lower Cost and Risk of New Product Development Speedy entry Reduce dependence on a few input or product markets Increase market power Diversification Free cash flow Agency problems Managerial hubris (unrealistic relief held by managers in bidding firms that they can manage the target firms more efficiently than can the target’s current management).


Rules of bidding firm managers: Rules of bidding firm managers Search for synergies Keep information away from other bidders Keep information away from targets Avoid winning bidding wars


Slide6: Problems with Acquisitions Example: Marks and Spencer’s acquisition of Brooks Brothers Example: AgriBioTech’s acquisition of dozens of small seed firms


Slide7: Example: Quaker Oats and Snapple Example: GE--prior to selling businesses and refocusing Problems with Acquisitions


Slide8: Attributes of Effective Acquisitions


Slide9: Attributes of Effective Acquisitions


Slide10: Example: Procter andamp; Gamble’s cutting of its worldwide workforce by 15,000 jobs Restructuring Activities Example: Disney’s selling of Fairchild Publications


Slide11: Leveraged Buyout (LBO) A party buys a firm’s entire assets in order to take the firm private. Example: Forsmann Little’s buyout of Dr. Pepper Restructuring Activities


Slide12: High Debt Costs Emphasis on Strategic Controls Downscoping Leveraged Buyout Reduced Debt Costs Higher Performance Higher Risk Downsizing Reduced Labor Costs Loss of Human Capital Lower Performance Alternatives Short-Term Outcomes Long-Term Outcomes Restructuring and Outcomes