Chapter 10 Mission Objectives External Analysis Internal Analysis Strategic Choice Strategy Implementation Competitive Advantage The Strategic Management Process Corporate Level Strategy Which Businesses to Enter? ? Vertical Integration ? Diversification ? Strategic Alliances Mode of Entry? ? Mergers & Acquisitions Mergers & Acquisitions Defined Mergers Acquisitions ? two firms are combined on a relatively co-equal basis ? one firm buys another firm ? the words are often used interchangeably even though they mean something very different ? merger sounds more amicable, less threatening PS1: In each of these scenarios, assume that firms do not face significant capital constraints. (a) A bidding firm, A, is worth $27,000 as a stand alone entity. A target firm, B, is worth $12,000 as a stand alone entity, but $18,000 if it is acquired and integrated with Firm A. Several other firms are interested in acquiring Firm B, and Firm B is also worth $18,000 if it is acquired by these other firms. 1) If A acquired B, would this acquisition create value? If yes, how much? 2) How much of this value would the equity holders of A receive? 3) How much would the equity holders of B receive? PS1 Value Equity holders of A (Bidder) Equity holders of B (Target) a) 18K b) 12K c) 16K (b) The same scenario as in a, except that the value of B if it is acquired by the other firms interested in it is only $12,000. (c) The same scenario as in a, except that the value of B if it is acquired by the other firms interested in it is $16,000. Value of Corporate-level Strategy (Partially reproduced from Chapters 6 & 7) Business X Business Y Business Z Independent ownership: equity holder could buy shares of each firm Value Division X Division Y Division Z Business XYZ Extra value created by economies of scale and scope + + Corporate whole: equity holder buys shares in one firm Merger Economics The Empirical Evidence: Stock market reaction Acquiring firm value unchanged Target firm value up by 25% M&A Activity creates value, on average, as follows: ? related M&As create more value than unrelated M&As M&A activity creates value, but target firms capture it Why is M&A Activity So Prevalent Then? 1) Survival 2) Free Cash Flow ? Avoid competitive disadvantage Return as dividend Stock buyback Invest in M&A 3) Agency Problems ? Managers benefit from increase in size ? Managers benefit from diversification Competitive Advantage (Reproduced from chapter 1) Competitive Advantage Disadvantage Parity Advantage Below Average or Normal Average or Normal Above average or Normal Returns ? exceeding expectations ? meeting expectations ? failing expectations Why is M&A Activity So Prevalent Then? 5) Managerial Hubris ? Bidding firm managers believe they can be more efficient than target firm managers 4) Potential for above Normal Profits ? Bidding firm value unchanged ?on average? (not for every bidding firm) Implications for Bidding Firm Managers Bidding Firm?s Perspective Search for rare economies Information away from other bidders Information away from target Avoid winning bidding wars Close deal quickly Seek ?thinly traded? markets Implications for Target Firm Managers Target Firm?s Perspective Seek information from bidders Invite other bidders to join in bidding competition Delay, but do not stop acquisition Other Target Firm Responses (Research Made Relevant) Greenmail Standstill agreements Poison pills Implementation Issues Cultural Differences ? high levels of integration require greater cultural blending ? integration may be very costly, often unanticipated ? the ability to integrate efficiently may be a source of competitive advantage Why care about SOM 498? What do recruiters look for in graduating MBAs? TWSJ Sept 22 2004 Here is the percentage of recruiters who said each attribute is "very important." 89% Communication and interpersonal skills 87% Ability to work well within a team 85% Personal ethics and integrity 84% Analytical and problem-solving skills 74% Success with past hires 73% Leadership potential 72% Fit with the corporate culture 68% Strategic thinking 64% Likelihood of recruiting "stars" 54% Well-rounded 50% Willingness of the school's students to relocate Can you think strategically? If you had bought $ 1,000 worth of Nortel stock one year ago, it would now be worth $49. With Enron, you would have about $ 16.50 of the original $ 1,000. With Worldcom, you would have less than $ 5 left. If you had bought $ 1,000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 5 cent deposit, you would have $107. Strategic thinking at its WORST ! Drink heavily And recycle
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