MANAGING ORGANIZATIONAL CHANGE (II):M&A, Strategic Alliances and Restructuring

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The Issues

Definitions of M&A and Alliances Reasons and Risks of M&A Attributes of Successful M&A Strategic Alliance Reasons of Strategic Alliance Restructuring Strategies

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Some Statistics (M&A)

1980s Over 55,000 cases Total value of $1.3 trillion

1990s Total values of $11 trillion

2000 (peaked) $3.4 trillion

Total value of deals is decreasing but the number of cases is increasing.

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Merger Two firms agree to integrate their operations on a

relatively co-equal basis

Acquisition One firm buys a controlling interest in another firm

with the intent of making the acquired firm a subsidiary business or integrated part of its own portfolio

Horizontal/Vertical/Conglomerate M&As

Currently Common Changes:Mergers, Acquisitions & Alliances

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Takeover A special type of an acquisition strategy in which

the target firm did not solicit the acquiring firm’s bid

Strategic Alliance Firms work together without shared ownership or

management

Currently Common Changes:Mergers, Acquisitions & Alliances

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Economic Reason for M&As

Efficiency theory When the management of firm A is more efficient

than the management of firm B, after firm A acquires firm B, the efficiency of firm B is brought up to the level of efficiency of firm A.

When there is a potential for synergy. Inefficient Management theory

When the management of firm A may be not performing to its potential, the management will be replaced.

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AcquisitionsAcquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Risk & Cost of newRisk & Cost of newproduct developmentproduct development

Increase speedIncrease speedto marketto market

IncreaseIncreasediversificationdiversification

Agency problemsAgency problems

Learn and developLearn and developnew capabilitiesnew capabilities

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Other Reasons for M&As

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Factors increasing market power When a firm is able to sell its goods or services

above competitive levels. When the costs of its primary or support activities

are below those of its competitors. Usually is derived from the size of the firm and its

resources and capabilities to compete. Market power is increased by

Horizontal acquisitions Vertical acquisitions Related acquisitions

Reasons for Making Acquisitions:Increased Market Power

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Barriers to entry include Economies of scale in established competitors. Differentiated products by competitors. Enduring relationships with customers that create

product loyalties with competitors. Acquisition of an established company

May be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyers.

Provides a new entrant with immediate market access. Cross-border acquisitions

Reasons for Making Acquisitions:Overcome Barriers to Entry

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Significant investments of a firm’s resources are required to Develop new products internally. Introduce new products into the marketplace.

Acquisition of a competitor may result in More predictable returns. Faster market entry. Rapid access to new capabilities.

Therefore, managers may view acquisitions as lowering risk.

Reasons for Making Acquisitions:Risk & Cost of New Product Development and Speed to Market

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Reasons for Making Acquisitions:Agency problems

Agency problems Occur when professional managers pursue their

own interests at the expense of shareholders. Take-over may mitigate agency

problems. When a firm is mismanaged by self-interest seeking

managers, the firm doesn’t reach its potential. Managers are motivated to increase

firm size. Firm size is closely related with pay level. The more diversified a firm is, the lower the

employment risk is.

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It may be easier to develop and introduce new products in markets currently served by the firm.

It may be difficult to develop new products for markets in which a firm lacks experience. It is uncommon for a firm to develop new products

internally to diversify its product lines. Acquisitions are the quickest and easiest way to

diversify a firm and change its portfolio of business.

Reasons for Making Acquisitions:Increased Diversification

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Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or dependence on one or more products or markets.markets.

Reducing a company’s dependence on Reducing a company’s dependence on specific markets alters the firm’s specific markets alters the firm’s competitive scope.competitive scope.

Reasons for Making Acquisitions:Reshaping the Firms’ Competitive Scope

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Acquisitions may gain capabilities that the firm does not possess.

Acquisitions may be used to Acquire a special technological capability. Broaden a firm’s knowledge base. Reduce inertia.

Reasons for Making Acquisitions:Learning and Developing New Capabilities

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Valuation of M&A Deals

Maximum Value of

Target Firm to Buyer

Value to SellerValue added

by Buyer

Change in Value to Buyer if

Target Firm acquired by competitor

= + +

Price Paid

Target Firm’s Stock Price

Before Announcement

Acquisition Premium

= +

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Acquisition Premium

The difference between the trading price of the target’s stock before the announcement of the acquisition and the price per share paid by the acquiring firm

On average, 50% Overpayment

Frequently occurring in 67% of the acquisitions May be the reason for the generally disappointing

post-merger performance that cause bankruptcy Campeau paid a 124% to acquire Federated

Department Store and declared bankruptcy one year after

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AcquisitionsAcquisitions

IntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Too muchToo muchdiversificationdiversification

Resulting firm is too Resulting firm is too largelarge

Common Problems WithMergers & Acquisitions

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Integration challenges include Melding two disparate corporate cultures. Linking different financial and control systems. Building effective working relationships.

(particularly when management styles differ) Resolving problems regarding the status of the

newly acquired firm’s executives. Loss of key personnel weakens the acquired firm’s

capabilities and reduces its value.

Problems With Acquisitions:Integration Difficulties

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Evaluation requires that hundreds of issues be closely examined, including Financing for the intended transaction. Differences in cultures between the acquiring and

target firm. Tax consequences of the transaction. Actions that would be necessary to successfully meld

the two workforces. Ineffective due-diligence process may

Result in paying excessive premium for the target company.

Problems With Acquisitions:Inadequate Evaluation of Target

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Firm may take on significant debt to acquire a company.

High debt can Increase the likelihood of bankruptcy.

Lead to a downgrade in the firm’s credit rating. Preclude needed investment in activities that

contribute to the firm’s long-term success.

Problems With Acquisitions:Large or Extraordinary Debt

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Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately.

Firms experience transaction costs when they use acquisition strategies to create synergy.

Firms tend to underestimate indirect costs when evaluating a potential acquisition.

Problems With AcquisitionsInability to Achieve Synergy

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Diversified firms must process more information of greater diversity.

Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances.

Acquisitions may become substitutes for innovation.

Problems With Acquisitions:Too Much Diversification

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Managers in target firms may operate in a state of virtual suspended animation during an acquisition.

Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed.

Acquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a target firm.

Problems With Acquisitions: Managers Overly Focused on Acquisitions

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Additional costs may exceed the benefits of the economies of scale and additional market power.

Larger size may lead to more bureaucratic controls.

Formalized controls often lead to relatively rigid and standardized managerial behavior.

Firm may produce less innovation.

Problems With Acquisitions:Too Large

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Attributes of Successful Acquisitions

Acquired firm has assets and/or resources complimentary to acquiring firm’s core business. Higher probability of positive synergy and maintaining

strengths. Friendly acquisition.

Faster, more effective integration, lower premiums. Careful target selection/negotiations.

strongest complementarities are acquired and overpayment is avoided.

Financial slack. Financing easier to get and less costly.

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Attributes of Successful Acquisitions

Merged firm maintains low-moderate debt position. Lower financing costs and lower risks.

Acquiring firm has experience with change & is flexible and adaptable. Faster, more effective integration; facilitates

achievement of synergies. Sustained & consistent emphasis

on R&D and Innovation. Maintains L-T competitive advantage in markets.

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Strategic Alliance

Strategic alliance Two or more firms combine competitive

capabilities to operate a business without sharing ownership or general management.

20,000 strategic alliances form among U.S. firms between 1988 and 1992.

A strategic alliance involves Exchange and sharing of resources and

capabilities. Co-development or distribution of goods or

services.

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CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Strategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

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MARKETMARKET REASONREASON

Standard Cycle • Gain market power (reduce industry overcapacity)

• Gain access to complementary resources

• Establish economies of scale• Overcome trade barriers• Meet competitive challenges

from other competitors• Pool resources for very large

capital projects• Learn new business techniques

Reasons for Strategic Alliances

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MARKET REASON

Slow Cycle • Gain access to a restricted market• Establish a franchise in a new market• Maintain market stability (e.g.,

establishing standards)

Reasons for Strategic Alliances

Fast Cycle • Speed up development of new goods or service

• Speed up new market entry• Maintain market leadership• Form an industry technology standard• Share risky R&D expenses• Overcome uncertainty

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Risks of Strategic Alliances

Inadequate contracts. Misrepresentation of competencies. Partners fail to use their

complementary recourses. Holding alliance partner’s specific

investments hostage. Risk Management Approaches.

Detailed contracts and monitoring. Developing trusting relationships.

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Joint venture Two or more firms create an independent company by

combining parts of their assets.

Equity strategic alliance Cooperative contracts supplemented by equity

investments by one partner in the other partner. Sometimes these investments are reciprocated.

Non-equity strategic alliances Cooperation between firms is managed directly through

contract without cross-equity holdings or an independent firm being created.

Types of Strategic Alliances

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Restructuring Strategy

Changes in the composition of a firm’s set of businesses, financial structure, or organizational/operating structure. Response to acquisition failure. Response to changes in internal & external

environment. Management Fashion.

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Types of Restructuring Strategies

Downsizing Reduction in the number of employees and/or

sometimes in the number of operating units. Downscoping (=refocusing)

Divestiture, spin-off, or some other means of elimination of business that are unrelated to a firm’s core business.

Spin-offs A separate new legal entity is formed with its

shares distributed to existing shareholders of the parent company in the same proportions as in the parent company.

Divestiture A sale of a portion of the firm to an outside party.

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Types of Restructuring Strategies

Leveraged Buy Outs (LBOs) A special type of restructuring whereby a party

buys all of a firm’s assets in order to take the firm private.

Management Buy Outs (MBOs)

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Common Impacts of Downsizing

Organizational dysfunction Ineffectiveness Lack of improvement Lack of development of quality

culture

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Survivor Syndrome

Symptoms Insecure about job Fear of the unknown Mistrust of management Uncertain of skills and abilities Lack of loyalty High stress levels Low self-esteem Dependent on the organization

Behaviors Narrow-minded Aversion to risk Low productivity Depressed Increased absenteeism Low morale Loss of pride in the organization Increased resistance to change Acts of sabotage

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Implemented top down and initiated from bottom up. Organizational redesign. Let the right people pick which jobs are eliminated.

Across-the-board downsizing sent message to stakeholders, but selective downsizing enhanced effectiveness.

Successful downsizing involved managing the transition for those who lost jobs and managing the transition for survivors. Survivor syndrome.

Better Practices in Downsizing

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Focused on internal efficiency barriers and relationships outside the organization.

Focused on creating small, semiautonomous units within large integrated organizations.

Downsizing was “means to end,” not just end in itself.

Better Practices in Downsizing

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Downsizing and Change Management

Downsizing involves significant organizational change.

Successful downsizing requires effective change management.

Change issues to consider What forces are driving downsizing? How will people react and why? How can the change process be managed

well?

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The Issues

Definitions of M&A and Alliances Reasons and Risks of M&A Attributes of Successful M&A Strategic Alliance Reasons of Strategic Alliance Restructuring Strategies

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MANAGING ORGANIZATIONAL CHANGE (II):M&A, Strategic Alliances and Restructuring

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Rubbermaid Opportunity?

Common denominator of Newell’s Businesses The businesses are quite similar. This makes it possible for senior level managers to

understand what is going on and apply common systems and metrics to the business.

Doe the Newell’s strategy create corporate advantage? Probably, Yes. Look at their numbers.

What makes a good acquisition target for Newell? What does success in “Newellization” depend on? Good targets would be businesses that have the same

characteristics as Newell’s existing business. In terms of scale, it should be small enough that the

processes of newellization can be employed effectively.

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Rubbermaid Opportunity?

On the basis of your understanding of Newell’s strategy and of the newellization process, does Rubbermaid look like a good merger prospect? Looks quite similar to a Newell business, but some

important differences can be identified. Rubbermaid is in a variety of end markets, some of

which appear to have significant components of taste, design, innovation, and seasonality.

Also, it faces severe competition. Plastic resin costs were increasing, suggesting

vulnerability to crunch between product cost and price resistance from powerful buyers.

It is $2.4 billion revenue monster.

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Rubbermaid Opportunity?

Are the projected benefits of the merger credible? Is the price reasonable? It is extraordinarily expensive. The only way it

would make sense is to assume high growth rates for the combined company. However, high growth is not a feature of either business.

Rubbermaid is just too big and too different. Newellization is unlikely to be completed in two- or

three-year time horizon. Newell is stepping away from the formula that has

given it consistent succces in the past.

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Newell Rubbermaid

On March 24, 1999, Newell completed the Rubbermaid merger.

Early in the fall of 1999, the new Newell Rubbermaid announced that earnings would not meet projections. The share prices promptly fell from slightly over $40 to less than

$30. For 1999, Newell Rubbermaid reported net

earnings of $95.4 million ($.34 per share compared to $2.38 for 1998)

It continued to struggle in 2000. The share price dipped as low as $19 in 2000 but recovered to $24 by year end.

In late 2000, the company announced the resignation of CEO and COO.

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Shinhan Bank

Why did SFG want to buy CHB? Was resistance inevitable from

CHB? What tactics could SFG use to handle the unions?

What are the components of SFG’s cultural integration?

How do you assess the speed? What are SFG’s next stops?