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Strategic ChoiceStrategic options (1)
Acquisitions/mergers
William Meaney MBA BSc. ACMA 1
Strategic Choice Growth options
Porters
Generic
Strategies
Ansoff’s
Matrix
Acquisitions
MergerLicence
Franchise
Joint Ventures
Strategic Alliances
Divestment
Sub contracting
Contract Manufacture.
Outsourcing
MBO etc.
Suitable
Appropriate
Feasibility
Financial
Decisional
Models• Pro forma
accounts
• Capital budgeting
• Capital
Investment
appraisal
• NPV etc.
• Decision trees
• (EMV) Expected
Monetary Values
Basis Means Options
Generation of Options Evaluation of
optionsSelection of Strategy
Own and
control
Shared
ownership
and control
Have use of
William Meaney MBA BSc. ACMA 2
Learning outcomes
After completing this topic you should be able to
• Understand what Acquisition/mergers involve
• The benefits of acquisition and merger to the acquirer and the acquired
• The process involved
• Give some examples of acquisition/mergers
• Assess the financial and non financial benefits
• Understand some of the challenges in integrating organisations
William Meaney MBA BSc. ACMA 3
Acquisitions/Mergers
On completion of this topic you should be able to
• Have an understanding of the nature of mergers and acquisitions
• Be able to see the practical benefits from selection of recent mergers
• Be able to critically assess M&A as a growth strategy.
William Meaney MBA BSc. ACMA 4
Acquisition/mergers - what and why
• Acquisition –A transaction where one firm
buys another firm with the intent of more
effectively using a core competence by
making the acquired firm a subsidiary
within its portfolio of businesses
• Merger – A transaction where two firms
agree to integrate their operations on a
relatively coequal basis because they
have resources and capabilities that
together may create a stronger
competitive advantage
Reasons for Acquisition/merger
• Acquire additional capacity
• Synergy in purchasing
• Acquire management talent
• Enter new markets
• Increase market share
• Counter competition
• Asset stripping
• Acquire new technology
William Meaney MBA BSc. ACMA 5
Why are Mergers/Acquisitions popular?
Optimistic view of Mergers and Acquisitions
• Rapid means of corporate growth
• Creation of new synergies-economies of scale/scope
• Increased market share and market power
• Internalisation of crucial upstream or downstream
value chain activities
• Transfer of assets to more effective management
• Means of gaining new competencies/knowledge
William Meaney MBA BSc. ACMA 6
Selecting an Acquisition Target
Factors to consider
• Strategic objectives
• Shareholder value
• Acquisition objectives
• Performance criteria
• Company characteristics
• Management
• Industry sector dynamics
Large global mergers
• Kraft Foods and Cadbury
• Daimler and Chrysler
• AOL and Time Warner
• HP and Compaq
William Meaney MBA BSc. ACMA 7
The Process and the challenges
William Meaney MBA BSc. ACMA 8
Selecting an Acquisition Target
Performance criteria
Company characteristics
Management
Industry sector characteristics
• Return on capital employed
• Sales margins
• Sales growth
• Market share
• Net present values
• Size of company
• Geographical locations
• Product range, R&D etc..
Quality of the management
Management style
Compatibility between the firms
Stage of industry evolution
Competitive dynamics
William Meaney MBA BSc. ACMA 9
William Meaney MBA BSc. ACMA 10
Daimler/Chrysler: 'Marriage made in heaven’?
• Good strategic fit?
• Do synergies exist?
• What does each party bring to the merger?
• Was a merger needed to exploit these synergies?
• What potential problems with integration should they have foreseen?
William Meaney MBA BSc. ACMA 11
Example
• Kraft – Cadbury
• Benefits?
William Meaney MBA BSc. ACMA 12
Considerations prior to Merger/Acquisition
Non financial
• Good strategic fit
• ?
• ?
• ?
Financial
• ?
• ?
• ?
• ?
William Meaney MBA BSc. ACMA 13
But the researchers say……
• Strong evidence that at least half
of all M&As fail, and only a small
fraction are truly successful.
• A bad gamble: most M&A
transactions involve a premium of
35%-50%
• Synergies often fail to materialise
• Integration is rarely as smooth as
expected
• M&As make more sense when:
• Speed to market is crucial
• Industry growth is slow, making
increases in capacity undesirable
• Missing resources cannot be
developed internally
William Meaney MBA BSc. ACMA 14
But the researchers say……
• Fraction are truly successful.
• A bad gamble: most M&A transactions involve a premium of 35%-50%
• Synergies often fail to materialise
• Integration is rarely as smooth as expected
• Strong evidence that at least half of all M&As fail, and only a small
William Meaney MBA BSc. ACMA 15
Requirements to succeed
• Demonstrate a clear fit with your firm’s overall corporate strategy
• Be cautious and thorough in due diligence
– Guilty until proven innocent, not innocent until proven guilty.
– Begin thinking about integration before thinking about valuation.
• M&As are a poor substitute for innovation but well managed can
provide best of both worlds.
William Meaney MBA BSc. ACMA 16
How will this be useful in your exam?
• It may be a requirement to assess and integrate two organisation as a part of Q1
• Having knowledge of the process and the challenges will help develop a strategic perspective
William Meaney MBA BSc. ACMA 17