MGMT 481 Ch 9

M&A -Instagram, Oculus, Zappos, Zipcar... IPO -Groupon, Fitbit, Twitter....

"Exit" Strategies

A. joint venture B. takeover *C. merger* D. cartel (A merger describes the joining of two independent companies to form a combined entity. Mergers tend to be friendly; in mergers, the target firm would like to be acquired.)

A _____ describes the process of joining of two independent companies with their consent to form a combined entity on a permanent basis.

*A. acquisition.* B. affiliate leadership. C. joint venture. D. cartel. (This transaction is an example of an acquisition. When large, incumbent firms such as the Tata Group, GE, or Microsoft buy startup companies, the transaction is generally described as an acquisition.)

GreyWing Products Inc., a large conglomerate, took over a small startup company that had made some breakthrough innovations in the field of telecommunications. This purchase would help GreyWing Products to gain access to the startup company's superior technology and human capital. This transaction is an example of a(n):

• A merger describes the joining of two independent companies to form a combined entity. • An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile. • Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term "mergers and acquisitions," or M&A. • Firms can use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability.

LO 9-1 / Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

• Horizontal integration is the process of merging with competitors, leading to industry consolidation. • As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, and (3) increase differentiation.

LO 9-2 / Define horizontal integration and evaluate the advantages and disadvantages of this corporate-level strategy.

• Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures. • Exhibit 9.2 presents the pros and cons of each alliance governance mechanism.

LO 9-6 / Describe three alliance governance mechanisms and evaluate their pros and cons.

Many M&As actually destroy shareholder value! -When there is value, it often goes to the acquiree. -Acquirers tend to pay a premium. Why still desire M&As? -Principal-agent problems (bad!) -Overcome competitive disadvantage -Superior acquisition and integration capability (e.g. Cisco)

Mergers & Acquisitions

The usual frameworks apply of course: • 5 Forces: Which industry to enter? To enter or not? • PESTEL: What external environmental factors to be aware of? • VRIO: What are your companies' VRIO capabilities that will bring sustainable competitive advantage? • Cost vs. Value Drivers: How to position your product/service? • Industry Life Cycle & Innovation: Which cycle is the industry in? Where is the disruption coming from?

Other Strategic Decisions for Entrepreneurship

Situation in which an agent performing activities on behalf of a principal pursues his or her own interests

Principal-Agent Problem

*Strengthen competitive position* -Apple allying with publishers to fight Amazon Kindle *Enter new markets* -Local partner for global growth -Microsoft partners with Yahoo on search *Hedge against uncertainty* -Real options approach -invest in company then buy company later *Access critical complementary assets* -Pixar partners with Disney *Learn new capabilities* -GM & Toyota (NUMMI) -formed in 1984

Strategic Alliances

*Non-equity alliances* -Based on contracts -E.g. Microsoft-IBM, Genentech-Eli Lilly *Equity alliances* -One firm takes partial ownership in the other -E.g. Renault-Nissan *Joint ventures* -Standalone organization owned by 2 or more firms -E.g. Hulu, Dow Corning

Types of Alliances

*A. hostile takeover* B. strategic commitment C. cartel arrangement D. joint venture (Acquisitions can be friendly or unfriendly. When a target firm does not want to be acquired, the acquisition is considered a hostile takeover.)

When a target firm does not want to be acquired, the acquisition is considered a _____.

Partnership based on contracts between firms. The most frequent forms are supply agreements, distribution agreements, and licensing agreements.

non-equity alliance

Approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information in pre-determined stages.

real-options perspective

Situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary; the firm that accomplishes its goal more quickly has an incentive to exit the alliance or reduce its knowledge sharing.

learning races

A form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.

managerial hubris

*A. it is easy to initiate and terminate.* B. it produces the strongest ties between alliance partners. C. it is based on partial ownership. D. it is least flexible. (The most common type of alliance is a non-equity alliance, which is based on contracts between firms. Because of their contractual nature, non-equity alliances are flexible and easy to initiate and terminate.)

A non-equity alliance is the most common type of strategic alliance because:

• Firms engage in acquisitions to (1) access new markets and distributions channels (2) gain access to a new capability or competency (3) preempt rivals.

LO 9-3 / Explain why firms engage in acquisitions.

• Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize. • If there is any value creation in M&A, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company. • Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons: (1) because of principal-agent problems (2) the desire to overcome competitive disadvantage (3) the quest for superior acquisition and integration capability.

LO 9-4 / Evaluate whether mergers and acquisitions lead to competitive advantage.

• Strategic alliances have the goal of sharing knowledge, resources, and capabilities in order to develop processes, products, or services. • An alliance qualifies as strategic if it has the potential to affect a firm's competitive advantage by increasing value and/or lowering costs. • The most common reasons why firms enter alliances are to (1) strengthen competitive position, (2) enter new markets, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities.

LO 9-5 / Define strategic alliances, and explain why they are important corporate strategy vehicles and why firms enter into them.

An alliance management capability can be a source of competitive advantage. An alliance management capability consists of a firm's ability to effectively manage three alliance-related tasks concurrently: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management. Firms build a superior alliance management capability through "learning-by-doing" and by establishing a dedicated alliance function.

LO 9-7 / Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

• The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy). • Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage.

LO 9-8 / Apply the build-borrow-or-buy framework to guide corporate strategy.

A. GD Group Inc., a large conglomerate, taking over a startup company against its will B. The electronics subsidiary unit of East Goods Inc. deploying a few of its human resources to the automobile subsidiary of the company *C. Saturn Pharma Inc. teaming up with a research company to invent and market breakthrough vaccines* D. Serene Apparel Inc. taking over one of its fabric suppliers in a less developed nation (Saturn Pharma teaming up with a research company to invent and market breakthrough vaccines best illustrates a strategic alliance. Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.)

Which of the following best illustrates a strategic alliance?

A. Ignited Autos Inc. sets up its own component part manufacturing units to have strong control over production. B. Skin Love Inc. sets up its own retail stores to directly sell its products, rather than selling them through large departmental stores. *C. B9 Electronics Inc. acquires its competitor, Virtue Electronics Inc., to gain access to its core competencies.* D. Polka Couture Inc. outsources its production to contract manufacturers in labor-intensive countries. (B9 Electronics acquiring its competitor, Virtue Electronics, to gain access to its core competencies best illustrates horizontal integration. Horizontal integration is the process of merging with a competitor at the same stage of the value chain.)

Which of the following best illustrates horizontal integration?

A. The creative ability of a manager to recognize potential business opportunities *B. The findings of a research published in a scientific journal* C. The decision-making capability that is intrinsic to an employee D. The entrepreneurial skills of a manager (Explicit knowledge is knowledge that can be codified. Patents, user manuals, fact sheets, and scientific publications are all ways to capture explicit knowledge, which concerns the notion of knowing about a certain process or product.)

Which of the following is an example of explicit knowledge?

A. To shift the industry structure from oligopoly to perfect competition B. To move up a learning curve C. To standardize their product and service offerings and reduce the levels of differentiation *D. To gain access to a new capability or competency* (Firms make acquisitions for two main reasons: to gain access to a new capability or competency and to preempt rivals.)

Which of the following is one of the reasons that firms make acquisitions?

A. The approach obligates the incumbent firm to make continued investments when demanded by its partner. B. The approach fails to provide the incumbent firm a hedge against uncertainty. C. The approach involves making large investments at the end of a project, irrespective of whether the project is successful or not. *D. The approach allows the incumbent firm to obtain additional information at predetermined stages.* (At each stage, after new information is revealed, the firm evaluates whether or not to make further investments.)

Which of the following statements is true of the real-options perspective?

A. Self-actualization B. Managerial myopia C. Self-efficacy *D. Managerial hubris* (Managerial hubris is a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.)

_____ is best described as a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.

A. Backward integration B. Forward integration *C. Horizontal integration* D. Taper integration (Horizontal integration is the process of merging with a competitor at the same stage of the value chain. Horizontal integration is a type of corporate strategy that can improve a firm's strategic position in a single industry.)

_____ is best described as the process of merging with a competitor at the same stage of the value chain.

Knowledge that can be codified (e.g., information, facts, instructions, recipes); concerns knowing about a process or product.

explicit knowledge

The process of merging with competitors, leading to industry consolidation.

horizontal integration

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage.

strategic alliances

Knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task.

tacit knowledge