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A CASE of a MERGER and ACQUISITION MEGA BLIND SPOT

for the ACADEMY OF MARKETING STUDIES Dr. J.D. Williams Kutztown University

ABSTRACT
M&A mania-- The world has seemed fixated on

growth through M&A as evidenced by the thousands of mergers that have taken place over this past decade. This paper has uncovered a flaw in the M&A process that has blinded the financial and managerial sectors. While determining the M&A cost-benefits of the joint relationship, the role of marketing has been diffused or just left out.

INTRODUCTION & PURPOSE


Total worldwide value of M&As topped

$2.7 trillion in 2005 [M&A Blind Spot: Ettenson & Knowles, 2007] Consider the potential losses if only 20% of the M&As were conducted without marketing due diligence [Ettenson & Knowles] Include marketing analysis into the traditional M&A models

INTRODUCTION & PURPOSE (cont.)


MARKETING Fresh approach for financial M&A portfolio managers, strategic managers, & asset managers New concept ushers in potentially lucrative & holistic application assessment for the corporate & banking industries Will likely justify itself as highly cost effective tool & potentially offer increased typical R.O.I.

LITERATURE REVIEW M&As- Cartwright, Susan; Schoenberg, Richard (2006). Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities. British Journal of Management. - DePamphilis, Donald (2008). Mergers, Acquisitions, & Other Restructuring Activities. New York: Elsevier, Academic Press. - Ettenson, Richard & Jonathan Knowles (June 16-17, 2007). M&A Blind Spot: When Negotiating a Merger, Leave a Seat at the Table for a Marketing Expert. Wall Street Journal. - Harwood, I. A. (2006). Confidentiality Constraints within Mergers and Acquisitions: gaining insights through a 'bubble' metaphor. British Journal of Management. - Finklestein, Sydney (2007). Cross Border Mergers and Acquisitions. Dartmouth College. - King, D. R.; Slotegraaf, R.; Kesner, I. (2008). Performance Implications of Firm Resource Interactions in the Acquisition of R&Dintensive Firms. Organization Science. - King, D. R., D. R. Dalton, C. M. Daily, & J. G. Covin, (2004). Meta-Analyses of Post-Acquisition Performance: Indications of Unidentified Moderators. Strategic Management Journal. - Lien, Kathy (2005). Mergers And Acquisitions - Another Tool For Traders. Investopedia. - Maddigan, Ruth; Zaima, Janis (1985). The Profitability of Vertical Integration. Managerial and Decision Economics. - Mergers and Acquisitions Lead to Long-Term Management Turmoil. Newswise. - Platt, Gordon (2007). Cross-Border Mergers Show Rising Trend As Global Economy Expands. - Rosenbaum, Joshua; Joshua Pearl (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. - Straub, Thomas (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis. - Vermeulen, Freek (2005). How Acquisitions can Revitalize Companies. MIT Sloan Management Review. - Zax, Igor (2009). Distressed M&A: Some Strategic and Financial Trends and Considerations. - Zollo, Maurizio & D. Meier (2008). What is M&A Performance? The Academy of Management Perspectives. V. 22 No. 2. pp. 5577.

LITERATURE REVIEW Marketing- Anderson, Carol and Julian W. Vincze (2004). Strategic Marketing Management - Berry, Leonard L. (April, 2001). Harvard Business Review. - Burghard, Ed and Lisa Mackay (Dec. 2004). Marketing Management. - Cross, Robert G. and Ashlosh Dixit (2005). Customer-Centric Pricing: The Surprising Secret for Profitability. Business Horizons. - Keller, Kevin Lane and Sanjay Sood (Fall 2003). Brand Equity Dilution. MIT Sloan Management Review. - Kotler, Philip (1972). A Generic Concept of Marketing. Journal of Marketing. - Kotler, Philip (Aug. 1997). The Future of Marketing. Cambridge Marketing College. - Kotler, Philip (2004). A Framework for Marketing Management. Prentice-Hall. - Leon, George H. (Jan./Feb. 2005). You Choose, You Lose. Marketing Management. - Porter, Michael E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. - Reece, Shelly (Jan.-Feb., 1996). The Very Model of a Modern Marketing Plan. Marketing Tools. - Roegner, Eric V., Michael V. Main, and Craig C. Zawada. (Jan./Feb. 2005). Pricing gets Creative. Marketing Management. - Walker, John S. (white paper, 2007). The Marketing Cure to the M&A Blind Spot. Ambassador Financial Group, Inc.

M&A DECISION PROCESS & MARKETING


Business combinations, formed through M&A,

bring together both intangible and tangible resources. - Marketing offers both Operating synergies may take a variety of forms, whether the merger was vertical or horizontal.
- Most horizontal mergers should include marketing components

Reasons why M&As Fail

Biased canopy of knowledge when they focused too much on the financial, accounting and management aspects of a deal and neglect the important marketing particulars (Walker, 2007) Poor results from execution timing relative to market valuation. To acquire a company, one has to pay more than its worth (premium, 10 - 15 percent above market value) (Dalton) A critical question would be what percentage of M&A creates shareholder value? 90% 70 % 40% 20% It turns out that M&A create value only about 20% of the time

Applying Marketing to M&A


Qualitative assesses degrees of synergy realizations, of integration

process efficiency, and of strategic gap reduction Over 50% of marketing is consider soft-side performance criteria (i.e. perceptions, desires, (mind-share, heart-share), dislikes & personal values) Objective measurement methodologies (e.g., financial and accounting figures) organizational level of analysis (e.g., improvement of the firms competitive position) Marketing also shares quantitative components (i.e. product production costs, break-even analysis, pricing strategies, logistic costs, & promotion cost/benefit analysis) Process level (e.g., quality of the post acquisition plans, magnitude of premium paid, etc.) (Zollo & Meier, 2008) Marketing offers MARKET SHARE for a process or transition level contributor

TABLE 3A - 10 Most Active Industries by Number of Transactions in 2005 Rank Industry No. of Deals % of all M&A Deals 1 Business services 1,295 17.7% 2 Software 647 8.9% 3 Real estate firms 406 5.6% 4 Durable goods wholesaling 256 3.6% 5 Investment & commodities firms 246 3.4% 6 Health services 245 3.4% 7 Measuring, medical & photography 221 3.0% 8 Oil & gas 210 2.9% 9 Insurance 207 2.8% 10 Hotels & casinos 183 2.5% .

Marketing functions

TABLE 3B - 10 Most Active Industries by Dollar Volume in 2005 Rank Industry Value ($billions) % of Total M&A Value 1 Telecommunications 95.5 9.7% 2 Metal & metal products 73.5 7.5% 3 Oil and gas 67.4 6.9% 4 Real estate firms 62.6 6.4% 5 Business services 52.7 5.4% 6 Software 49.4 5.0% 7 Investment & commodity firms 42.4 4.3% 8 Gen. Merchandise & apparel retailing 40.2 4.1% 9 Hotels & casinos 40.1 4.1% 10 Insurance 32.4 3.3% Adopted from Mergers & Acquisitions, February 2006, p.40

Marketing functions

Marketing Elements for M&A Analysis


Strategic Planning External Market Assessment of Opportunities and

Threats Internal Audit of Applied Resources Target Market Profiling Designing the Marketing Mix Element- Product or Service Strategy Designing the Marketing Mix Element- - Place/Logistics Strategy Designing the Marketing Mix Element- Promotion Mix Strategy Designing the Marketing Mix Element- Pricing Strategy Designing the Monitor and Control Systems Marketing Commercialization Market Expansion, Retraction, and New Niche Market Selection

TABLE 5 - Model of M&A Marketing Expectations


Weighted Factor (1-5) 5 3 2 3 2 5 2 4 2 4 2 3 Marketing Element Marketing Leadership (XML) Marketing Strategy (XMS) External Market Assessment (XMA) Internal Audit of Resources (XIA) Target Market Profiling (XTM) Product or Service Strategies (XPS) Place/Logistical Strategy (XL) Promotion Mix Planning (XPM) Pricing Strategies (XP) Monitor & Control Systems (XMC) MKT. Commercialization (XMC) Market Expansion, Retraction, & Niche Market Selection (XNMS) ( poor) 1 Effective/ Acceptance Ranking 2 3 4 5 ( excellent) n n n .

n n n n n n .n n

Weighted Value of a firms M&A Marketing Expectations = YME, where n represents the selected evaluation of the potential merged firms marketing component position.

YME = 5 (XML)n + 3(XMS)n + 2(XMA)n + 3(XIA)n + 2(XTM)n + 5(XPS)n + 2(XL)n + 4(XPM)n + 2(XP)n +4(XMC)n + 2(XMC)n + 3(XNMS)n
Establishing acceptable to unacceptable range 185 - 150 highly acceptable 149 - 130 acceptable 129 100 marginally acceptable 99 70 highly questionable 69 0 unacceptable

CONCLUSION
Typically, the pre-merger discovery process

limits itself to verifying the potential of hard assets such as property, equipment, patents and existing service contracts. A marketer would also look at relational assets that drive cash flow, such as corporate reputation, goodwill and the brand(s) itself/themselves.
(Ettenson, 2007)