Exam II Review: Transaction Costs, Vertical Integration, Diversification, Alliances, M&A

M&A and Competitive Advantage

Most M&As do not create competitive advantage, realize synergies, or add shareholder value

Forward Vertical Integration

Owning activities in industries closer to the end customer

Backward Vertical Integration

Owning activities in industries further from the end customer

Fully Vertically Integrated

Participating in every stage of the industry value chain

Acquisition Integration

Post-deal work includes asset rationalization, activity integration, and acculturation for success

Tradability

Refers to ease of obtaining and using resources from another firm, influencing alliance type

Restructuring

Reorganizing and divesting to refocus a company's core competencies

Integration

Resource provider integration conditions: low relevancy, tradability, high need for closeness, and integration ability

Desired Closeness to Resource Provider

Achieved through equity alliances or joint ventures, impacting resource integration

BCG Growth-Share Matrix

An old-school technique for guiding restructuring decisions

Core Competence-Market Matrix

Assessing how core competencies can be leveraged into new markets

How to do M&A right?

Critical self-assessment, willingness to walk away, rigorous post-acquisition reviews, independence from bankers' advice

Synergy Value

Difference between expected benefits and acquisition price; includes cost savings and revenue enhancements

Why so many M&As?

Driven by miscalculations, irrational exuberance, commitment escalation, principal-agent problems

Diversification

Entering new businesses not in the existing business's industry value chain

Product-Resource Matrix

Evaluating resource-market match using the VRIO framework

Build-Borrow-or-Buy Framework

Factors considered: internal resource relevance, tradability, closeness to resource partner, integration ability

Acquisitions: Benefits and Costs

Fast access to resources, competitor removal are benefits; premium, integration challenges are costs

Vertical Integration

Firm's ownership of production inputs or distribution channels in value chain

Make, Borrow, or Buy Continuum

Firms achieve growth through Build (organic), Buy (acquisitions), Borrow (partnerships)

Vertically Disintegrated

Focusing only on the core stage of the value chain, outsourcing the rest

Relevance

Internal resources are relevant if similar or superior to competitors; determines internal development or external growth

Managing Alliances

Involves creating value, governance, and sharing value; requires trust, defined roles, and resource investment

Types of Alliances

Long-term contracts, Equity Alliances, Joint Ventures differ in ownership and structure

Mergers and Acquisitions

Merger joins two firms forming a new entity; Acquisition involves purchasing another firm, can be friendly or hostile

Diversification Mode

Modes firms use to diversify: Internal Development, Alliances, Non-Equity, Equity, Joint Venture, M&A

External Transaction Costs

Costs between a firm and other entities, like negotiating contracts

Internal Transaction Costs

Costs within a firm, like monitoring employee performance

Taper Integration

Vertical integration with reliance on outside firms for supplies or distribution

Strategic Alliances

Voluntary arrangements sharing knowledge, resources, capabilities to develop processes, products, services

Miscalculations in M&As

Common overestimations of synergy, integration ability, and underestimations of post-merger challenges

Alliance vs. Acquisition: The Four I's Framework

Compares investment in alliances vs. acquisitions based on feasibility, information asymmetry, indigestibility, and inflexibility

Transaction Costs

Costs associated with economic exchanges, like recruitment or acquisitions