mergers & acquisitions lec 1 27th jan
TRANSCRIPT
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Mergers & Acquisitions
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THE CHANGE FORCES
The increased pace of M&A activity in
recent years has reflected powerfulchange forces in the world economy.
Ten change forces are identified
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Ten change forces are identified:
The forms, sources, and intensity of
competition have expanded.
New industries have emerged.
While regulations have increased in
some areas, deregulation has takenplace in other industries.
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Ten change forces are identified:
Favorable economic and financial
environments have persisted from 1982
to 1990 and from 1992 to mid-2000.
Within a general environment of strong
economic growth, problems have
developed in individual economies and
industries.
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Overriding all are technological changes,
which include personal computers,
computer services, software, servers, and
the many advances in information
systems, including the Internet.
Improvements in communication and
transportation have created a globaleconomy. Nations have adoptedinternational agreements such as theGeneral Agreement on Tariffs and Trade(GATT) that have resulted in freer trade.
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Operating Efficiency
The next set of factors relates to efficiency
of operations. Economies of scale spread
the large fixed cost of investing in
machinery or computer systems over a
larger number of units.
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Economies of Scope
Economies of scope refer to cost reductions from
operations in related activities.
In the information industry, these wouldrepresent economies of activities in personal
computer (PC) hardware, PC software, server
hardware, server software, the Internet, and
other related activities.
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Combining Complementary
Activities
Another efficiency gain is achieved by
combining complementary activities, for
example, combining a company strong in
research with one strong in marketing.
Mergers to catch up technologically are
illustrated by the series of acquisitions by
AT&T.
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Restructuring Organization
Another major force stimulating M&A and
restructuring activities comprises changes in
industry organization.
An example is the shift in the computer industry
from vertically integrated firms to a horizontal
chain of independent activities.
Dell Computers, for example, has been very successful concentratingon PC sales with only limited activities in the many other segments ofthe value chain of the information industry.
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The economic and financial environments
have also been favorable for deal making.
Strong economic growth, rising stock
prices, and relatively low interest rates
have favored internal growth as well as a
range of M&A activities.
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Individual entrepreneurship has
responded to opportunities and, in turn,
created further dynamism in industrial
activities.
Examples are Bill Gates at Microsoft, AndrewGrove at Intel, Jack Welch at General Electric,
John Chambers at Cisco Systems, and BernieEbbers at MCI WorldCom, among the many.
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CONSEQUENCES OF THE CHANGEFORCES
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MERGER MOVEMENTS
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MERGER MOVEMENTS
The foregoing describes M&A activities beginning in1993,the fifth major merger movementthe era of strategicmegamergers.
This M&A activity exists worldwide, not just in the U.S.
economy. The forces in Europe have been similar to thefactors in the earlier merger movements in the United
States. The four previous merger movements in theUnited States can be briefly summarized:
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First Merger Movement1893 to 1904
The merger movement at the turn of the century was associated
with the completion of the transcontinental railroad system.
It created the first common market. Europe is experiencing
similar forces from its effort at integration.
In relation to the gross domestic product (GDP), this merger
movement in the United States has thus far been of greater
magnitude than any others, so the merger forces in Europe
are very strong. In the United States, major horizontal mergerstook place in steel, oil, telephone, and the basic manufacturing
industries at the time.
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Second Merger Movement1920s
This period was characterized by an
increase in vertical mergers.. Vertical
mergers enabled manufacturers to
control distribution channels more
effectively.
These were associated with the development of the radio, which made
national advertising possible, and the automobile, which permitted more
effective geographic sales and distribution organizations.
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Third Merger Movement1960s
The conglomerate mergers of the 1960srepresented in part an adjustment to the
slowdown in defense expenditures. In every
sample of conglomerates, at least one-halfof the companies were aerospace or natural
resourcedepleting companies (oil,forest).
Also at this time, industries like the food industries, hoping to avoid
their growth being tied down to population growth, diversified.
Much of the diversification at this time was ill advised as companies
moved away from their core competencies.
Also influencing this was the idea that a good manager, with the new
planning literature, could manage anything.
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Fourth Merger Movement1980s
Financial innovations, junk bonds, made all firmsvulnerable to a takeover bid.
Any company that was not performing up to itspotential could be taken over. Chemical Bank andDisney were both almost taken over.
So the availability of high-risk financing stronglypropelled the 1980s and there was somedismantling of the diversification of the 1960s.
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Each of the merger movements in the United States was
driven by a different set of economic and development forces.
But these movements did not occur randomly. A distinct group
of change factors propelled each movement. In the fifth mergermovement described above, more than 50 percent of the M&A
activity in a given year has been accounted for by five or six
industries. However, the identity of the industries has varied at
different time periods.
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The industry characteristics related to
strong M&A pressures can be summarized
as follows:
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1. Telecommunications. Technological
change and deregulation in the United
States and abroad (particularly Europe)
have stimulated efforts to develop a global
presence.
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1. Telecommunications. Technological
change and deregulation in the United
States and abroad (particularly Europe)
have stimulated efforts to develop a global
presence.
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2. Media (movies, records, magazines,
newpapers). Technological changes have
impacted the relationship between the
content and delivery segments.
There is potential overlap in the content of different media outlets. It is anattractive and glamorous industry (attracted Japanese investorsbeginning in late 1980s).
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3. Financial (investment banks, commercial
banks, insurance companies).
Globalization of industries and firms
requires financial services firms to go
global to serve their clients.
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5.Autos, oil and gas, industrial machinery.
All face unique difficulties that give
advantages to size, stimulating M&As to
achieve critical mass. Autos face globalexcess capacity. Oil faces the uncertainty
of price and supply instability due to
actions of the OPEC cartel.
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7. Food, retailing. It is hampered by slow
growth. Food consumption will only grow
at the rate of population growth.
Expanding internationally offersopportunities to grow in new markets.
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8. Natural resources, timber. Both face
exhausting sources of supply. Problems
exist in matching raw material supplies
with manufacturing capacity.
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