8. organizational change ii
TRANSCRIPT
MANAGING ORGANIZATIONAL CHANGE (II):M&A, Strategic Alliances and Restructuring
2
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
3
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.
4
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
5
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
6
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.
7
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
8
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
9
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
10
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
11
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.
12
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
13
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
14
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
15
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
= +
16
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
17
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
18
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
19
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
20
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
21
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
22
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
23
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
24
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
25
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.
26
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.
27
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.
28
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
29
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
30
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
31
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.
32
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
33
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.
34
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.
35
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)
36
Common Impacts of Downsizing
Organizational dysfunction Ineffectiveness Lack of improvement Lack of development of quality
culture
37
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
38
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
39
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
40
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?
41
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
42
MANAGING ORGANIZATIONAL CHANGE (II):M&A, Strategic Alliances and Restructuring
43
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.
44
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.
45
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.
46
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.
47
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?