Advanced Strategic Management PDF

Advanced Strategic Management Organic development – M&A Strategy Methods Level of analysis: Corporate Level Focus: Implementing strategic options 2 Organic development Clarifyng the concepts Organic development is where a strategy is pursued by building on and developing an organisation’s own...

Advanced Strategic Management Organic development – M&A Strategy Methods Level of analysis: Corporate Level Focus: Implementing strategic options 2 Organic development Clarifyng the concepts Organic development is where a strategy is pursued by building on and developing an organisation’s own capabilities. Why? ▪ Knowledge and learning → development and internalisation of knowledge and capabilities related to (a) The specific strategy pursued and (b) Internal development in general ▪ Spreading investment over time → Allows the spreading of investment over the whole time span of the strategy’s development. ▪ No availability constraints. Organic development has the advantage of not being dependent on the availability of suitable acquisition targets or potential alliance partners. ▪ Strategic independence. The independence provided by organic development → does not need to make the compromises of an ally. (i.e.) constraints on marketing activity in their home market. ▪ Control over the process. Lower risk of imitation (as compared to alliances). 3 M&A Clarifyng the concepts MERGERS AND ACQUISTIONS: Mergers and acquisitions are concerned with the combination of two (or more) organisations. An acquisition involves one firm taking A merger is the combination of two over the ownership (‘equity’) of another, previously separate organisations, typically hence the alternative term ‘takeover’. as more or less equal partners However, the two words are often used interchangeably 4 M&A Clarifyng the concepts MERGERS AND ACQUISTIONS: Mergers and acquisitions are concerned with the combination of two (or more) organisations. An acquisition involves one firm taking A merger is the combination of two over the ownership (‘equity’) of another, previously separate organisations, typically hence the alternative term ‘takeover’. as more or less equal partners Friendly → the acquirer and the target Hostile → the acquirer offers a price for the target firm agree the terms together, and the firm’s shares without the agreement of the target’s target’s management recommends management and the outcome is decided by acceptance to its shareholders which side wins the support of shareholders https://www.businessinsider.com/amazon- whole-foods-market-history-2022-8?r=US&IR=T https://www.ft.com/content/1cb06d30-332f-11e1-a51e-00144feabdc0 5 M&A Clarifyng the concepts An acquisition in often conceived as a process, composed by multiple-phases. Origination Selection Negotiation Intergration We are assuming that the process is driven by the acquirer. If the parties reach Often it is the opposite: The target seeks for an agreement acquirer. (es. start-up, divestment, Private equity owned firms) 6 M&A Orgination – why do firms acquire/sell Why do firms engage in M&A; Behavior Strategic al M. M. Financials M. 7 M&A M&A PERFORMANCE YOUR TURN NOW 8 M&A Orgination – STRATEGIC MOTIVATIONS CONSOLIDATE -> used to consolidate the competitors in an industry. (Lower competition, increase market power, economies of scale/scope) DIVERSIFIY (EXTENSION) -> extend the reach of a firm in terms of geography, products or markets in a relatively small amount of time INCREASE COMPANY CAPABILITIES -> Instead of researching a new technology from scratch, they allow entrepreneurial start-ups to prove the idea, and then take over these companies in order to incorporate the technological capability within their own portfolio (Microsoft – OpenAI) PROTECT -> increase pre-emptive power (Google/Motorola case) 9 M&A Orgination – FINANCIAL MOTIVATIONS Financial efficiency -> Bring together a company with a strong balance sheet with another company that has a weak balance sheet (es. Reduce interest rate of high debt firm/strong bargaining power in negotiation) Leverage share overpricing-> A company with a booming share price can purchase other companies very efficiently by offering to pay the target company’s shareholders with its own shares (equity), rather than paying with cash upfront. Tax efficiency -> Transfer profits to a low-taxation country or mitigating taxed by combining high with low profits firms Asset stripping or unbundling. Buying firms Asset value>book value and then divest the asset 10 M&A Orgination – BEHAVIORAL MOTIVATIONS External pressures -> M&A can occur due to pressures for imitation -> Fueled by regulatory or economic shocks these pressures can evolve into industry-spanning M&A in which only first movers tend to systematically exhibit performance gains [BANDWAGON EFFECT] Social comparison ->,underperforming vis à vis the group of peers/aspirational levels. Heuristics. -> cognitive decision-making patterns induce firms to repeat the same types of M&A that they have conducted before., This effect is pronounced if the acquisitions produce positive abnormal returns 11 M&A Orgination – EXECUTIVE CHARACT/GOVERNANCE & OWNERSHIP CEO Characteristics-> CEO Sex, Age, overconfidence, narcissism, hybris, previous expereince but also incentive/compensation structure (recent literature also on top managmenet teams) CEO Social comparison -> M&A decisons are based on CEO peers (es. performance, compensation etc) Board of directors> previous experience, common board member, sex etc Ownership type -> State owned enterprise, family firms etc 12 M&A Selection Strategic Fit Organisational fit Resources and capabilities of the the match between the managerial target strengthen/complements those and cultural practices and staff of the acquirer characteristics WHAT ARE WE ASSUMING HERE? 13 M&A Selection Strategic Fit Organisational fit Resources and capabilities of the the match between the managerial target strengthen/complements those and cultural practices and staff of the acquirer characteristics PERCEIVED EXCHANGE RELATED HAZARD Often retrieving information about the counterpart is difficult/impossible and some of the information are not available. To overcome: selection is based on quality signals, proximity, common ties. 14 M&A Negotiation Managements need to agree on both the price and the terms and conditions in M&A. Valuation methods: payback period, discounted cash flow shareholder value analysis, share price + premium Payment methods, integration plan Acquisitions are liable to the winner’s curse – in order to win acceptance of the bid, the acquirer may pay so much that the original cost can never be earned back. The negative effects of paying too much can be worsened if the acquirer tries to justify the price by cutting back essential investments in order to improve immediate profits.→ vicious circle of overvaluation, over-paying firms can easily undermine the original rationale of the acquisition by imposing savings on exactly the assets that made up the strategic value of the target company in the first place. 15 16 M&A Integration The ability to extract value from an acquisition will depend critically on the approach to integrating the acquired firm with the old. The two key dimension for determining the integration approach: - The extent of strategic interdependence of target and acquirer (es. If acquisition is driven by the need to transfer capabilities or share resources the value can only be extracted through integrating the businesses thoroughly. - The need for organisational autonomy. An acquired firm that has a very distinct culture, or is geographically distant, or is dominated by prima donna professionals or star performers might be better left only loosely or gradually integrated. 17 M&A Integration Absorption → Rapid adjustment of the acquired company’s old strategies to the needs of the new owner, and corresponding changes to the company’s culture and systems. Preservation → Allows old strategies, cultures and systems to continue much as before, with changes confined to the essential minimum such as the financial reporting procedures needed for control. Symbiosis → organisation dependent on the creativity of its staff. both acquired firm and acquiring firm learn the best qualities from the other. Symbiosis takes time and is the most complex of the integration approaches. Intensive care -> when little can be gained by integration. Re-orientation: when the acquired company is in good health and well run but there is a need to integrate central administration and align marketing and sales functions. Distinctive resources of the acquired company are left alone and few changes to internal operations. 18 M&A M&A PERFORMANCE WHAT IS M&A PERFORMANCE? 19 M&A M&A PERFORMANCE TIME HORIZON LEVEL OF ANALYSIS Short-Term Long Term Integration process performance Customer Retention Task Knowledge trasnfer Employee Retention Systems conversion Perceived performance Acquisition Acquisition survival Accounting performance Short-term financial performance LT Financial performance Firm Innovation performance Variation in market share 20 Advanced Strategic Management Sessions 22-23: Strategic alliances 21  Strategic Alliance Definition Strategic alliance is a formal agreement between two or more organization which share resources/capabilities to achieve a certain result. Partners can be heterogeneous (firm, NGOs, Government) Alliance purposes can be heterogenous ranging form competitive to sustainability related motivations (E.g. Multi-stakeholder partnerships) A strategic alliance can also be considered as a co-evolutionary process in which partners, strategies, capabilities and environments change over time. As they change, they need realignment so that they can evolve in harmony →emphasis on flexibility and change. Managing effectively strategic alliances requires the development of collaborative capabilities Firm that rely on strategic alliances tend to form more than one alliance -> Alliance portfolio 22 Strategic Alliance Types of alliances Non equity based Equity based R&D Joint- agreement/ Licensing Franchising Venture out Contractual agreement Contractual agreement Contractual agreement whereby the whereby an whereby an The organisations organization agree on organization (the organization (the involved remain co-develop a specific licensee) is given the franchisee) is given the independent but set task (es. R&D) right to use the right to sell franchisor up a new proprietary technology product and services in organisation jointly (i.e., a patent) of a particular location owned by the another organization parents (the licensor). 23 Strategic Alliance Types of alliances Scale alliances. Organisations combine in order to achieve necessary scale. The capabilities of each partner may be quite similar but together they can achieve advantages that they could not easily manage on their own (es. Increase power in negotiations). ▪ This type of alliance allows the partners to share risk as well. Instead of stretching to find enough resources, partnering can help each partner avoid committing so many resources of its own that failure would jeopardise the existence of the whole organisation. Access alliances. Partnering in order to access the capabilities of another organisation that are required in order to produce or sell its products and services. ▪ In countries such as China and India, a Western company might need to partner with a local distributor in order to access effectively the national market for its products and services. → Access alliances can work in the opposite direction 24 Strategic Alliance Alliance rationales Complementary alliances. By partnering, the two organisations can bring together complementary strengths in order to overcome their individual weaknesses. ▪ Synergistic logic Collusive alliances. Occasionally organisations secretly collude together in order to increase their market power. ▪ Reduce competition in the marketplace 25 Strategic Alliance Alliance development process 26 Strategic Alliance Alliance development process Courtship → courting potential partners. (main resource commitment is managerial time) Same selection criteria of M&A (strategic, organizational fit, lower perceived exchange Related hazard). because alliances do not entail the same degree of control as acquisitions, mutual trust between partners will need to be particularly strong right from the outset. Negotiation -> define the role of the partners involved in the alliance (main resource commitment is managerial time) It is difficult to write complete contracts if the alliance co-evolve over time. Start-up →considerable investment of material and human resources. The initial operation of the alliance puts the original alliance agreements to the test: people from outside the original negotiation team are typically now obliged to work together on a day-to-day basis. 27 Strategic Alliance INTERNAL DEVELOPMENT – ALLIANCE – ACQUISITON HOW DO WE CHOOSE AMONG THESE ALTERNATIVES? 28 Strategic Alliance INTERNAL DEVELOPMENT – ALLIANCE – ACQUISITON Urgency. Acquisitions and alliances can be a relatively short-cut method for pursuing a strategy (Usually alliances are slower than acquistions) Uncertainty. It is often better to choose the alliance route where there is high uncertainty in terms of the markets or technologies involved. On the upside, if the markets or technologies turn out to be a success, it might be possible to turn the alliance into a full acquisition. If the venture turns out a failure, then at least the loss is shared with the alliance partner. 29 Strategic Alliance INTERNAL DEVELOPMENT – ALLIANCE – ACQUISITON Type of capabilities. Acquisitions work best when the desired capabilities (resources or competences) are ‘hard’, for example physical investments in manufacturing facilities. Hard resources are easier to put a value and to control in post-acquisition than people and skills. DIY organic method is typically the most effective with sensitive soft capabilities such as people. Alliances can involve culture clashes between people from the two sides, and it is harder to control. Modularity of capabilities. If the sought-after capabilities are highly modular (they are distributed in clearly distinct sections or divisions of the proposed partners)→an alliance tends to make sense. An acquisition can be problematic if it means buying the whole company 30