Chapter 12
Mergers and Acquisitions
as Vehicles
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LEARNING OBJECTIVES
1. Know the difference between a merger and an acquisition.
2. Know why mergers and acquisitions occur.
3. Explain the role of due diligence when performing a merger or
acquisition.
4. Identify the ten main terms considered when structuring a deal and
describe why they matter.
5. Explain what an integration manager does.
6. Describe the six major areas to look for leverage when integrating
operations of two companies.
7. Discuss the characteristics of acquisitions in different industry contexts.
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Introduction - MERGER VS. ACQUISITION
A
B
C
The consolidation
or combination
of two or more
companies
Merger
A
B
A
One company
acquires another
through stock
purchase or
exchange
Acquisition
The “merger”
of Daimler with Chrysler
is considered by many
to have been an acquisition
in disguise
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Introduction
WHY MERGERS AND ACQUISITIONS HAPPEN
• Mergers and acquisitions are motivated by the same reasons
that motivate alliances such as joint ventures and contractual
arrangements.
• Additional value created by an M&A derived from synergies
due to increased revenue and decreased cost that come
from combination of the two companies.
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Introduction
• M&As allow company to grow the business faster than is
possible with organic growth.
• M&As attractive when management unable to negotiate a
contract in which benefits exceed costs of the business
relationship, management feels need for greater control over
operations, and management seeks to control risk exposure.
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Introduction
• Personal factors can enter into an M&A decision, such as
opportunistic behaviour by top executives.
• Increasing size of company can increase personal
compensation and enhance personal power.
• Executive’s employment risk is reduced.
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Introduction
Why Mergers and Acquisitions Fail?
1. poor strategic rationale
2. a mismatch of cultures
3. difficulties communicating and leading the
organization poorly
4. integration planning and execution
5. paying too much for the target company.
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The Merger & Acquisition Process
1. IDENTIFYING CANDIDATES
•
The strategic rationale for using M&As informs what is
wanted in the potential candidates.
• Setting up criteria on this basis means that the
targets will fit the strategy and capabilities of the
company.
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The Merger & Acquisition Process
2. PRELIMINARY TALKS
•
The few companies that are identified as attractive
candidates are approached and asked about
their interest in a merger or an acquisition.
• The talks can initially involve exploratory talks
between chief executive officers about their
interest in a possible combination.
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The Merger & Acquisition Process
3. ASSESSING FIT OF THE POTENTIAL
CANDIDATE
•
Having agreed on the possibility of a merger or acquisition,
it is time to assess the fit of the targeted company. This
includes external and internal analysis.
• External analysis involves understanding the driving
forces in the macro-environment that will affect the
industry and the business in terms of its size, growth,
and profitability.
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The Merger & Acquisition Process
•
Internal analysis involves learning enough about
the other party so that the potential deal can be
appropriately valued, the representations and
warranties of the other side tested, full disclosure
can be made to investors, and post-merger
integration can be planned.
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The Merger & Acquisition Process
4. NEGOTIATING TERMS
•
When the two sides are sufficiently in agreement
over the general terms of the deal, they may
commit their understanding to a term sheet
and/or a letter of intent.
• This confirms the growing level of commitment to
the deal and guides lawyers who are drafting the
definitive agreement.
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The Merger & Acquisition Process
• Price
• Form of Payment
• Financing
• Timing and Deadlines
• Commitments
• Control and Governance
• Risk Management
• Form of the Transaction
• Social Issues
• Social Welfare and Community Issues
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The Merger & Acquisition Process
5. DEAL SIGNING THROUGH APPROVAL
•
Before the CEOs sign the definitive agreement,
a vote by the target’s board of directors and
possibly by the buyer’s board as well is required.
• If a vote by the shareholders is required, the
target’s board can recommend whether they
approve the deal.
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The Merger & Acquisition Process
6. INTEGRATING THE ACQUISITION
•
Ideally, planning for integrating the two companies
begins while due diligence is being conducted.
• At this stage, plans will be general and then
specified in greater detail when more information
is available after the deal is completed.
• Otherwise, the plans will have to be prepared
after the deal is completed and this will slow down
integration.
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The Merger & Acquisition Process
• Senior management team looks for areas where integration
can lever the performance of the business. There are six
areas that have significant potential:
1. Customer Strategy and Branding
2. Capabilities
3. Corporate Culture
4. Business Logic
5. Staffing
6. Information Technology
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Acquisition Capability
• Companies using M&As as a vehicle for growth
have developed core capabilities that give them
a competitive advantage at this activity.
• These capabilities are associated with an
experienced team performing the M&As, a
standard methodology for doing M&As, and
putting an integration manager in charge of
pulling the two companies together after the
deal is completed.
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Acquisition Capability
•
Companies that have performed many integration
exercises have learned the value of having
an integration manager.
• A special set of skills is required to be an effective
integration manager. The person has to
have a deep knowledge of the acquiring company,
have a flexible managerial style, be comfortable
with chaos, be self-confident, be independently
responsible, and be emotionally and culturally
intelligent.
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Acquisitions in Different Industry Contexts - M&As AND INDUSTRY LIFE CYCLE
Introduction
M&As tend to be
R&D and productrelated
Growth
M&As tend to be for
acquiring products
that are proven and
gaining acceptance
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Maturity
M&As primarily for
dealing with over
capacity in the
industry
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Acquisitions in Different Industry Contexts - M&As IN DYNAMIC CONTEXTS
Technological
change
RIM and Open Text both use acquisitions to ensure
they maintain their strong competitive positions
Demographic
change
Recognizing the increasing number of languages and cultures
immigrating to Canada, Rogers Communications purchased the
multi-cultural channel OMNI 1 in 1986
Geopolitical
change
IBM divested its PC division to a Chinese company as that
country emerges
Trade
liberalization
Wal-Mart acquired Mexican retail giant, Cifra, in wake of NAFTA
Deregulation
BCE, the parent to Bell Canada, was allowed to operate as a
monopoly until 1992 when the CRTC opened the doors to long
distance competition for the first time in Canada
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M & As and Coevolution
• As with alliances, use of acquisitions in dynamic contexts
fits into coevolution model of corporate strategy.
• Coevolution is the orchestration of a web of shifting
linkages among evolving businesses.
• Acquisitions can enable a company to absorb the
capabilities of their targets to develop specific dynamic
capabilities in concert with the best resources and
capabilities available on the market.
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