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M&A: Mergers/Acquisitions

MBA/ITM Executive Education - Prof. Ravi Kumar

Quiz
1. Why do approximately 85% of M&As fail? 2. Why are Ciscos acquisitions successful? 3. How many internal groups or teams does Cisco use in their acquisitions? 4. What are the names of these Cisco groups or teams? 5. What are Enterprise Teams? Where are they located at?
MBA/ITM Executive Education - Prof. Ravi Kumar
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A Firms Internal and External Growth External Market Strategies


and Other Forces Market/Customer Insights
Commercial Organizational

Corporate And Business Strategies

Value Chain: Core Competencies Identification

Increased Capabilities (Internal Growth)

Increased Performance

Outsourcing (NonCore Competencies) M&A/JVs (External Growth)

Team/Individuals
Technological

MBA/ITM Executive Education - Prof. Ravi Kumar

Mergers and Acquisitions: Three Types


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

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

Takeover
An acquisition where the target firm did not solicit MBA/ITM the bid of the acquiring firmExecutive Education - Prof. Ravi Kumar
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Remember: Approximately 85% Of all M&As are FAILURES!!

(Why?)
MBA/ITM Executive Education - Prof. Ravi Kumar
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Strategic Alliance Model: The Five Most Frequent Types of Alliances/M&A


Competitors
Key Suppliers

Firm
Supply Chain Demand Chain

Retail Store Or Large Preferred Customer Accounts

Consumers

MBA/ITM Executive Education - Prof. Ravi Kumar

Question:In what world region M&As perform well?

North America Asia Pacific Europe


MBA/ITM Executive Education - Prof. Ravi Kumar
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Reasons for Acquisitions


Increased market power Overcome entry barriers

Problems in Achieving Success


Integration Difficulties/Cultures Inadequate evaluation of target

Cost of new product development Increased speed to market


Lower risk compared to developing new products Increased diversification Avoid excessive competition

Large or extraordinary debt

Acquisitions

Inability to achieve synergy


Too much diversification Managers overly focused on acquisitions

MBA/ITM Executive Education - Prof. Ravi Too large Kumar

Reasons for Acquisitions


Increased Market Power
Acquisition intended to reduce the competitive balance of the industry Example: British Petroleums acquisition of U.S. Amoco

Overcome Barriers to Entry


Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive Example: Tata Motors Acquisition of Jaquar & Landrover

Lower Cost and Risk of New Product Development


Buying established businesses reduces risk of start-up ventures MBA/ITM Example: Daichis acquisitionExecutive Education - Prof. Ravi Kumar of Ranbaxy Pharma

Reasons for Acquisitions


Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more timely fashion Example: Kraft Foods acquisition of Boca Burger

Diversification
Quick way to move into businesses when firm currently lacks experience and depth in industry Example: Vendatas acquisition of Cairn Energy

Reshaping Competitive Scope


Firms may use acquisitions to restrict its dependence on a single or a few products or markets
Example: General Electrics acquisition of NBC
MBA/ITM Executive Education - Prof. Ravi Kumar 10

Problems with Acquisitions


Only a financial team assembled and they make the decision (should have two teams: one financial And one organizational where the organizational Team says Yes or No (i.e., Cisco & G.E.) Integration Difficulties
Differing financial and control systems can make integration of firms difficult Example: Intels acquisition of DECs semiconductor division

MBA/ITM Executive Education - Prof. Ravi Kumar

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Problems with Acquisitions


Inadequate Evaluation of Target
Winners Curse bid causes acquirer to overpay for firm Example: Marks and Spencers acquisition of Brooks Brothers

Large or Extraordinary Debt


Costly debt can create onerous burden on cash outflows Example: Suzlon acquistion of REPOWER GVK Powers acquisition of Hankcocks Coal Assets

MBA/ITM Executive Education - Prof. Ravi Kumar

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Problems with Acquisitions


Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits
Example: Jet Airways acquisition of Sahara Airlines Quaker Oats and Snapple

Overly Diversified

Acquirer doesnt have expertise required to manage unrelated businesses Example: GE--prior to selling businesses and refocusing

Managers Overly Focused on Acquisitions


Managers may fail to objectively assess the value of outcomes achieved through the firms acquisition strategy Example: Ford and Jaguar

Too Large
Large bureaucracy reduces innovation and flexibility
MBA/ITM Executive Education - Prof. Ravi Kumar
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Attributes of Effective Acquisitions

+ Complementary Assets or Resources


Buying firms with assets that meet current needs to build competitiveness

+ Friendly Acquisitions
Friendly deals make integration go more smoothly

+ Careful Selection Process


Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies

+ Maintain Financial Slack


Provide enough additional financial resources so that profitable projects would not be foregone
MBA/ITM Executive Education - Prof. Ravi Kumar
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Attributes of Effective Acquisitions

+ +

Low-to-Moderate Debt
Merged firm maintains financial flexibility

Flexibility
Has experience at managing change and is flexible and adaptable

Emphasize Innovation
Continue to invest in R&D as part of the firms overall strategy
MBA/ITM Executive Education - Prof. Ravi Kumar
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Case Example: Jet Airways and Sahara

Jet Airways paid $500 M

ONLY did an accounting/financial assessment No Org./Culture assessment

Outcome: It will take 10 years for them to payback Rule of thumb = 5 years pay back
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
Current Dilemma in Creating Profitable Growth
High Failure Rate of M&A
Tempting to focus on what is wrong with M&A and pass on acquisitions Approximately 85% of all M&As are failures

Organic (internal) growth is hard


Most companies have to grow externally to meet shareholder expectations.

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Questions Managers Should Ask About M&A
What are the common denominators of companies that are successful at M&A? How do successful companies organize and approach M&A? Are these methods transferable to other firms?

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Bain & Co. Study
724 publicly held U.S. firms Measured performance over 15 year period: 1968-2001 Compared firms behavior across 7,476 acquisitions to the excess return they provided to shareholders

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Key Findings of Study
Bank on Experience
Frequent buyers outperform both non-buyers and infrequent buyers

Think Small
Shareholder returns are negatively correlated with deal size Small M&A deals are most successful

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Key Findings contd
Dont assume home runs
Do not put all of your eggs in one basket by only doing a few big M&A deals

Buy in fair and foul weather


Develop a rigorous program of M&A and stick to it Constant buyers are most successful

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Key Findings (contd)
Reinforce M&A commitment
Frequent buyers succeed because they are organized and have institutionalized disciplines

There is no magic in making M&A deal work


Firms that are successful at M&A make it an integral part of their strategies and support M&A just as they would any other core competency

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
How to Succeed at M&A
Get in the game, start small, ramp up
Frequent acquirers outperform other companies Firms that focus on small deals (less than 15% of buyer size) have the highest returns Combining deal frequency (high vs. low) with deal size (big vs. small) forms 5 strategic approaches to M&A

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
5 Approaches to M&A
Mountain Climbing
Frequent acquirers that start with small deals and ramp up to larger ones

Stringing Pearls
Frequent acquirers that focus on small targets

Betting Small
Infrequent acquirers that set their sights on small targets

Rolling the Dice


Infrequent acquirers that make a few big bets

Playing Dead
Firms that do not do M&A
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
5 Approaches to M&A (contd)
The worst strategy is Rolling the Dice
Most firms that make a few big bets, are infrequent acquirers with no M&A experience
Like putting a teenager behind the wheel of an 18wheelerlittle mistakes can be devastating Difficult to integrate with larger targets

The best strategy is Mountain Climbing


Frequent buyers work their way up from small to large firms and gain experience on the way

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
How to Succeed at M&A
Avoid Rookie Mistakes
Acquire companies that best fit your organizations strategy
Do not buy firms just because they are available or look cheap

Consult the frontline managers


These are the people who can best assess the quality of the target and will be responsible for the new firm

Develop a planned process for M&A


Helps avoid deal fever

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
How to Succeed at M&A (contd)
Use Dollar Cost Averaging
Constant Buyersbuy consistently through all economic cycles Recession Buyersincrease frequency of buying during recessions Growth Buyersbuy mainly during economic growth Doldrums Buyersbuy in stable periods between recession and growth
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
How to Succeed at M&A
The most successful strategy is the constant buyer
These firms buy high and they buy low Similar to the way dollar cost averaging is treated in mutual funds Always on the hunt for deals.

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
How to Succeed at M&A (contd)
Get on the Learning Curve
Start with small, low risk deals and build M&A capabilities Institutionalize M&A processes
This helps the firm to quickly recognize strategically fit deals, evaluate them, seal the contact, and integrate the acquired company

Create a feedback loop to learn from mistakes

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
How to Succeed at M&A
Build a Standing Deal Team
Maintain an experienced core M&A team
This team serves as a firms institutional memory bank as members learn lessons from each deal

Deal team members are in charge of the entire purchasefrom screening to due diligence Core deal team should stay involved in integration Company should do post-mortem after every M&A to update deal guidelines and learn from mistakes
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
Deal Teams at Bharthi Airtel Ltd
Bharthi Airtel has a central M&A team at its company headquarters
3 person team that imposes clear criteria for every purchase (Problem!)

Local M&A teams in each of its three major divisions Mobile/Fixed Landline, ISP& DTH
Work with line management to look for and evaluate deals Are in the best position to size up prospects and evaluate synergies according to central team criteria

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
How to Succeed at M&A (contd)
Pull in Line Management Early and Often
These are people that will be responsible for integrating and running the acquired business

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Line Management Involvement at Washington Mutual
6 member core deal team picks and analyzes acquisition prospects Deal team seeks advice and help from business unit leaders who know operations best This collaboration helps ensure that the right decisions are made at the right price Kick starts integration
Early understanding and buy-in from business units
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
How to Succeed at M&A (contd)
Find Ways to Kill Deal Fever
Be prepared to walk away from a bad deal Insist on high-level management approval for all M&A Use a compensation system to ward off illconsidered acquisitions
e.g. Clear Channel ties its M&A teams pay to the contributions that acquisitions make to the firms financial performance

Set a walk-away price

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
CintasSuccessful Frequent Buyer
Cintas has supplemented its internal growth with the acquisition of hundreds of companies Over the last 5 years, the firm has spent $3 billion on more than 250 acquisitions, driving 40% of its topline growth Cintas is the market leader and revenues have risen over 20% per year to $2.3 billion in 2002
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
CintasSuccessful Frequent Buyer
Cintas CEO Robert Kohlepp states: Success depends on three things: top and line management involvement, institutionalizing the process of making acquisitions, and being willing to pass up a bad deal.

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Problems with Acquisitions
Only a financial team assembled and they make the decision
Should have two teams
One financial and one organizationalwhere the organizational team says Yes or No

A firm should maintain a core M&A team to deal with all aspects of a purchase

MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Problems with Acquisitions
Integration Difficulties
Differing financial and control systems can make integration of firms difficult Deal Smarts authors recommend involving line management at an early stage to help with integration Also discuss the need for an integration team to help make the transition smooth
MBA/ITM Executive Education - Prof. Ravi Kumar

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M&A Summary
Problems with Acquisitions (contd)
Inadequate Evaluation of Target
Winners Curse bid causes acquirer to overpay for firm Article recommends developing a structured process for M&A and maintaining an experienced deal team in order to avoid deal fever

Managers Overly Focused on Acquisitions


Managers may fail to objectively assess the value of outcomes achieved through the firms acquisition strategy This can be overcome by requiring high-level management approval for M&A and by tying compensation systems to acquisition performance
MBA/ITM Executive Education - Prof. Ravi Kumar
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M&A Summary
Problems with Acquisitions
Too Large
Large bureaucracy reduces innovation and flexibility The best strategy is mountain climbing
Start with small deals and move up to big ones

The larger the target, the more difficult it will be to integrate

MBA/ITM Executive Education - Prof. Ravi Kumar

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