International Corporate Strategy 2025 (PDF)

INTERNATIONAL CORPORATE STRATEGY ESCP EUROPE 2025 Louis Mulotte, Tilburg University, NL  Team Project See more guidelines in the course syllabus 2 © Louis Mulotte - 2025  Firm se...

INTERNATIONAL CORPORATE STRATEGY ESCP EUROPE 2025 Louis Mulotte, Tilburg University, NL  Team Project See more guidelines in the course syllabus 2 © Louis Mulotte - 2025  Firm selection 1. Choose a firm. No duplicate 2. go to https://go.uvt.nl/escp2025 3. Check guidelines on syllabus  Deadline for the selection of the firm:  Deadline is Saturday January 18, noon  Select a diversified firm.  Do not select a firm studied during the course:  Ahold, Apple, Danone, Heineken, Honda, LuxotticaEssilor, Microsoft, Newell Rubbermaid, Nestle, PepsiCo, Safran, Stellantis (incl. PSA & FIAT) The picture can't be displayed. 3 What is Corporate Strategy?  Puzzle 4 © Louis Mulotte - 2025  Real examples 5 © Louis Mulotte - 2025  What is corporate strategy about? 6 © Louis Mulotte - 2025 How to create added value across businesses (products & markets) Is there a How to limit to such develop & value organize creation? businesses to maximize such value creation?  And so, what? 7 © Louis Mulotte - 2025 Source: Vanneste 2017 (meta-analysis: 18 samples from 16 studies; N = 225,183 business-year observations – 1974-2013)  What is corporate strategy about? 8 © Louis Mulotte - 2025 Which expansion Which moves? activities or Where? assets? Which corporate Why? benefits? Which expansion How to modes? get them? How?  1. Where? 9 © Louis Mulotte - 2025 Industry A Headphones / Airpods Industry B (Beats) Suppliers Desktops Laptops Phones (iMac) (MacBook) (iPhone) The Firm More of the same New business Buyers Retail (AppleStores)  1. Where? 10 © Louis Mulotte - 2025 Business Horizontal Vertical Development Expansion (HE) Expansion (VE) (BD) Combining extant activities Internal production of with new activities activities formerly More of extant activities Varying levels of outsourced to relatedness specialized firms VW : AUDI, Skoda, SEAT, Porsche, … Mercedes: from cars & Forward VE: Zara: from vans to trucks & busses raw materials to stores Backward VE: Total: from oil distribution to oil exploration  ABC Types 11 © Louis Mulotte - 2025  A. “Italy's Luxottica and France's Essilor have agreed a €46bn deal to create a global powerhouse in the eyewear industry. The deal brings together Luxottica, the world's top spectacles maker with brands such as Oakley and Ray Ban [MS 10%], with Essilor, the world's leading manufacturer of ophthalmic lenses [MS 45% - 80%].”  B. “British American Tobacco [Dunhill, Lucky Strike] has agreed a $50bn takeover of U.S. rival Reynolds American [Newport, Camel, Pall Mall, Kent], creating the world's biggest listed tobacco company.”  C. “French aero engine maker Safran launched a €10bn agreed bid for aircraft seats manufacturer Zodiac Aerospace to create the world's third- largest aerospace supplier.”  2. How? 12 © Louis Mulotte - 2025 Build Blend Buy Greenfields Alliances & JVs Mergers Corporate Equity sharing Acquisitions venturing Technology Takeovers Internal partnerships Development Internal growth Organic growth Adapted from Capron & Mitchell HBR 2012  The ‘corporate expansion matrix’ 13 © Louis Mulotte - 2025 Upstream or New Expansion Same Different Downstream Geographic moves Business Business Activity Market = Where? INTERNATIONAL Build DEVELOPMENT INTEGRATION HORIZONTAL EXPANSION EXPANSION BUSINESS VERTICAL Blend Buy Expansion modes = How?  The ‘corporate expansion matrix’ 14 © Louis Mulotte - 2025 Upstream or New Expansion Same Different Downstream Geographic moves Business Business Activity Market = Where? Toyota : Lexus Apple into Apple into Build AppleStore IPhone Toyota in Europe Toyota Aygo= Toys’R us+ Pepsi+ Peugeot in China Blend Peugeot 107= Amazon Lipton (JV with Proton) Citroen C1 Daihatsu Pixar by Disney Gillette by GM in Germany Buy by Toyota P&G (Opel) Expansion modes = How?  3. Why? 15 © Louis Mulotte - 2025 Lower input (supply) costs Cost synergies Costs[A+B] < Costs[A] + Costs[B] Lower production (operational) costs Value creation Value [A+B] > Value [A] +Value [B] Price Premium Revenue synergies Rev. [A+B] > Rev. [A] + Rev. [B] Sales Premium  The grand challenge! 16 © Louis Mulotte - 2025 Which of the 9 Increased possible growth firm-level Profits strategy?  Logics for Corporate Growth 17 © Louis Mulotte - 2025 Business Horizontal Vertical Development Expansion Expansion Decreased - Increased - 1999: (partial) - Increased bargaining - 1930 Unilever: Merger - -Access to cheaper Total’s expansion inputs from oil bargaining power on power on suppliers of Unie (over market transactions) input cost Acquisition of input suppliers Nissan Lever (soap) shared + Margarine inputs distribution into oil exploration Raw materials - (market failure) by Renault (margarine) (Same supplier) (Same suppliers) - Components - - Financial Private Equity firms, Business resources Groups etc. (market failure) Decreased - Scale economies - Acquisition of Skoda -- KraftHeinz Scope economies (Fixed (combination of Eliminate stages of frictions - Dassault: the between from aircraft value chain to 3D (Fixed cost offsetting cost offsetting logistics on shared – Same tangibles) Design software (integration- production by VW (Same engines, on productive productive resources) - integration-based based economies)economies chassis) cost resources) - Tangibles: machines … - information-based economies - Zara’s vertical expansion - use of UBER techn. - Intangibles: skills … (information-based economies) Increased - Price Premium: - 1996 Merger Boeing + Increased market power - -Price P&G Premium: (beauty) + Gillette (razors) Increased market power - Price effects Premium: - Microsoft’s in Reputational expansion downstream into areas (Increased power) game console, tablets, cell Revenues McDonnell Douglas on output buyers (same buyers = airlines) - IBMUpselling: WTP integration into IT services (integration phone (reputation) WTP) & WTP reputation - Price Premium: Elimination of - Disney into toys (reputation WTP) - Sales premium market failures in downstream - Samsung from chip to - GM X-selling into financing (X-selling) areas smartphone (market failure)  Logics for Corporate Growth 18 © Louis Mulotte - 2025 Business Horizontal Vertical Development Expansion Expansion Decreased - Increased bargaining power on input suppliers - Increased bargaining power on suppliers of shared inputs - Access to cheaper inputs (over market transactions) input cost - Raw materials - Components - Financial resources Decreased - Scale economies (Fixed cost offsetting on - Scope economies (Fixed cost offsetting on shared productive Eliminate costly frictions between stages of the value production productive resources) resources) chain cost - Tangibles: machines … - Intangibles: skills … Increased - Price Premium: Increased market power - Price Premium: Increased market power - Price Premium: Reputational effects in downstream areas Revenues on output buyers Upselling: WTP integration & WTP reputation - Price Premium: Elimination of - Sales premium market failures in downstream X-selling areas  ABC synergies 19 © Louis Mulotte - 2025  A. “Italy's Luxottica and France's Essilor have agreed a €46bn deal to create a global powerhouse in the eyewear industry. The deal brings together Luxottica, the world's top spectacles maker with brands such as Oakley and Ray Ban (Mkt Share 10%), with Essilor, the world's leading manufacturer of ophthalmic lenses (Mkt Share 45% - 80%).”  B. “British American Tobacco [Dunhill, Lucky Strike] has agreed a $49.4bn takeover of U.S. rival Reynolds American [Newport, Camel, Pall Mall, Kent], creating the world's biggest listed tobacco company.”  C. “French aero engine maker Safran launched a €10bn agreed bid for aircraft seats manufacturer Zodiac Aerospace to create the world's third- largest aerospace supplier.”  Horizontal Expansion: Net effect 20 © Louis Mulotte - 2025 Magnitude of the effect Synergistic gains Net effect Coordination costs Number of businesses  Average Number of Businesses 21 © Louis Mulotte - 2025 Diversification in U.S. Public Companies 2020 (Number of businesses) Number of Firms among Forbes Top 500 list 1 2 3 4 5 6 or +6 Median : < 2 Mean: 2.72 146 123 87 60 36 45 Percent of Total 29% 25% 17% 12% 7% 10%  Expansion Performance 22 © Louis Mulotte - 2025 Upstream or New Same Different Downstream Geographic Business Business Activity Market INTERNATIONAL Build DEVELOPMENT INTEGRATION HORIZONTAL often EXPANSION EXPANSION BUSINESS VERTICAL +++ often Blend --- ? Buy  Key takeaways 23 © Louis Mulotte - 2025 Where to expand? Business Development Vertical Expansion Horizontal Expansion Why to How to expand? expand? Lower input cost Build Lower Blend production cost Buy Higher revenues  M&AS AND CORPORATE STRATEGY 2024 Louis Mulotte, Tilburg University, NL  INTERNATIONAL CORPORATE STRATEGY ESCP EUROPE 2025 Louis Mulotte, Tilburg University, NL The picture can't be displayed. 2 Vertical Acquisitions  Terminology 3 © Louis Mulotte - 2025 Backward Vertical Expansion  Inputs obtained from a supplier are now produced Supply internally at a lower cost  The alternative is Backward Outsourcing Production Forward Vertical Expansion  Operations done by a buyer are now undertaken internally at a lower cost Retail  The alternative is Forward Outsourcing  Examples 4 © Louis Mulotte - 2025 Backward Vertical Expansion Forward Vertical Expansion  From production to supply  From supply to production  Vertical Growth: 2020: PSA entry in  Vertical Growth: 2012: Microsoft entry into EV batteries (replacing LG) hardware (Surface tablets)  Vertical Acquisition: 2014: Apple  Vertical Acquisition: 1976: BSN (yoghurt jar) acquisition of Beats acquisition of Gervais-Danone (yoghurt)  From retail to production  From production to retail  Vertical Growth: 1993: Intermarché  Vertical Growth: 2001: Apple entry into retail creates a fishing unit Scapeche (Apple Store)  Vertical Acquisition: 2019: Decathlon  Vertical Acquisition: 2017: LVMH acquisition acquisition of Dita hockey brand of luxury products retailer DFS Group  The ‘corporate expansion matrix’ 5 © Louis Mulotte - 2025 Upstream or New Expansion Same Different Downstream Geographic moves Business Business Activity Market = Where? INTERNATIONAL Build DEVELOPMENT INTEGRATION HORIZONTAL EXPANSION EXPANSION BUSINESS VERTICAL Blend Buy Expansion modes = How?  Logics for Corporate Growth 6 © Louis Mulotte - 2025 Business Horizontal Vertical Development Expansion Expansion Decreased input cost Decreased production cost Increased Revenues  Decreasing input cost via (backward) VE 7 © Louis Mulotte - 2025  Reducing input costs by addressing market failures in the upstream market: VW/Bosch  Market firms can generally achieve scale economies that are absent in VE  Backward VE generally reduces “supplier-side scale”, making inputs more costly to get  Forward VE generally reduces your own scale, increasing costs  Backward VE should be chosen when the upstream market exhibits market failures  costs of internal production < costs of using the ‘failed” market to get the same asset  Examples  VW assembles auto parts produced by Bosch, Continental, etc.  Tesla uses Samsung chips  Apple also uses Samsung chips  Factors driving market failures 8 © Louis Mulotte - 2025  Transaction Cost Economics  Ronald Coase (Nobel Price 1991) & Oliver Williamson (Nobel Price 2009)  Focus on transaction’s Specificity, Uncertainty, Frequency  Market failures occur where:  Monopolistic Risk : The market counterpart possesses excessive market power, resulting from a monopolistic situation (also called specificity-related costs --- assets are specific and create a monopoly)  Market Risk: the market cannot effectively monitor the quality/quantity of the assets exchanged (also called uncertainty-related costs)  Renegotiation Risk: the market contract is susceptible to potential costly renegotiation (also called frequency-related costs)  Printing or not Printing? 9 © Louis Mulotte - 2025  You set up a publishing company ABC Publishing. For the printing, you must choose between:  Vertical expansion (vertical acquisition or vertical growth)  Using the market and transacting with a specialized printer (outsourcing)  Two scenarios 1. Scenario A: You set up a newspaper publisher (e.g., Financial Times) 2. Scenario B: You set up a magazine publisher (e.g., Time)  Setting  Magazine presses are standardized (same paper size, quality, color scheme, etc.) while newspaper presses are highly customized  Newspapers publish breaking news and are printed daily while magazines publish stories and are printed monthly  Best option: Vertical expansion or outsourcing?  Evaluate the risk of a potential market failure between your firm and an independent printer  Market failures 10 © Louis Mulotte - 2025 Printing for Printing for Newspapers Magazines Monopolistic Risk low | medium | high low | medium | high Market Risk low | medium | high low | medium | high Renegotiation Risk low | medium | high low | medium | high High  Vertical Exp High  Vertical Exp Best option Low  outsourcing Low  outsourcing  Inputs also refer to financial resources 11 © Louis Mulotte - 2025  Some firms face difficulties in finding sufficient financial resources (inefficient capital markets)  Joining a capital-rich superordinate firm may be beneficial (even when the firms’ various businesses are unrelated)  Access to an efficient “internal” capital market, to finance operations  Examples  Conglomerates: Japanese Kereitsu, Korean Chaebols, Business groups in India (TATA, Mittal, etc.) … Compensating for inefficient capital markets in emerging countries. Less justified in developed countries: See Toshiba, GE, etc…  This also explains Private Equity & Corporate Venturing Independent start-ups have limited access to financial resources PE or VC helps them access the needed financial resources  Decreasing production cost via VE 12 © Louis Mulotte - 2025  Decreasing production cost via coordination-based cost economies  Elimination of costly frictions between stages of the value chain  Raw material  intermediate goods  Assembly  Sales  Backward VE and forward VE 1. Production Cost Economies from the technical integration of key stages of the value chain  ALCAN (aluminum processing) also owns bauxite mines and power plants  Dassault: from aircraft manufacturing to 3D Design software 2. Production Cost Economies from superior managerial integration and superior communication between key stages of the value chain  Fast fashion: from cotton fields to retail  Fast fashion: Zara, American Apparel, Benetton, etc. 13 © Louis Mulotte - 2025 Better better & greater Scale Higher information available scale Economies profits flows products http://www.youtube.com/watch?v=a2klo8v4_qI  Increasing revenues via VE 14 © Louis Mulotte - 2025 1. Ownership of downstream operations may eliminate market failures 1. Price Premium: VE may help increase prices by eliminating excessive purchasing power of a corporate buyer, 2. Sales Premium: internal sales may be greater than market sales, in monopsony (many suppliers, one buyer)  Forward VE only: 1997: LVMH (seller) acquisition of beauty retailer Sephora (buyer) 2. Reputation may also move along the value chain  Forward VE: End consumers expect a similar experience Price Premium & Sales Premium: Reputation in an upstream market may help sell more & more expensive end-products (than via a market transaction with a corporate buyer) 2012: Microsoft expansion into consumer electronics  Backward VE (rarely): 2014: Apple acquisition of Beat’s headphones (Airpods)  Reputation Microsoft entry in consumer electronics 15 © Louis Mulotte - 2025  From software OS to game consoles, tablets & laptops  Microsoft tablets & laptops are more expensive than similar products sold by competitors  Microsoft is leveraging its reputation gathered in an upstream stage (software) to charge a premium price  Forward VE should not restrict sales to other buyers  HP, Dell, Lenovo should continue to sell Microsoft-based hardware, and not turn to Linux, Android, etc.…  This is due to Microsoft’s “quasi monopolistic” situation in software  When Club Med launched its own travel agencies (forward vertical integration), the leading travel agency, Thomas Cook, ceased selling Club Med holiday packages.  Outsourcing vs vertical integration 16 © Louis Mulotte - 2025 Achieving Increasing Coordination Production Economies Scale Maximizing Eliminating Revenues Market (Forward failures Outsourcing VE) vs Vertical Expansion  Outsourcing vs vertical integration 17 © Louis Mulotte - 2025 You have the power in the market relationship Disagree ------- 0 ------- Agree Market failure A supplier (or buyer) can do the job with sufficient Disagree ------- 0 ------- Agree Quantity & Quality levels, without constant renegotiation Production Integration will reduce the supplier’s production scale Disagree ------- 0 ------- Agree Scale or your own production scale Coordination The market can efficiently manage the stages of the value Disagree ------- 0 ------- Agree Economies chain and facilitate information exchange. Increased Forward Integration only: Reputation cannot be used to Disagree ------- 0 ------- Agree revenues sell more & more expensive products AGREE --> outsourcing Should the activity be vertically integrated? DISAGREE --> In-house (ACQ)  Expansion Performance 18 © Louis Mulotte - 2025 Upstream or New Same Different Downstream Geographic Business Business Activity Market INTERNATIONAL Build DEVELOPMENT INTEGRATION HORIZONTAL often EXPANSION EXPANSION BUSINESS VERTICAL +++ often Blend --- ? Buy  M&AS AND CORPORATE STRATEGY 2024 Louis Mulotte, Tilburg University, NL  INTERNATIONAL CORPORATE STRATEGY ESCP EUROPE 2025 Louis Mulotte, Tilburg University, NL The picture can't be displayed. 2 How to expand? Build Blend Buy  How? 3 © Louis Mulotte - 2025 Build Blend Buy Greenfields Alliances & JVs Mergers Corporate Equity sharing Acquisitions venturing Technology Takeovers Internal partnerships Development Adapted from Capron & Mitchell HBR 2012  Which mode to choose? 4 © Louis Mulotte - 2025 Build Blend Buy #!  BBB: Pros & Cons 5 - © Louis Mulotte - 2025 + Maintain control Slow & risky BUILD Keep all profits Easy integration/cultural fit Large resource requirements Entry barriers / Liab. of newness Increase competition & capacity Exploitation (vs. exploration) Share investments & costs Minimum resources required Complementary strengths Share the profits BLEND Reach minimum efficient scale Clashes with partner Learn & acquire new capabilities Lose control & create dependence Reversible move Knowledge leakages Fast Costly (premium) Full control Information asymmetry No initial resource required Integration problems BUY Acquire additional capabilities Acquisitions may hamper later R&D No market capacity created  Acquisition premium Source: BCG 6 © Louis Mulotte - 2025  Financial Markets Reactions 7 © Louis Mulotte - 2025 The Impact of announcements on stock prices (Cumulative Abnormal Returns) Acquisition by another firm + 16.5% (Agrawal & Jaffe, 1999) E-business announcement + 10.5% (Subramani & Walden, 1999) Divestiture announcement + 3% (Feldman, 2015) Earning announcement + 2.3% (MacKinley, 1997) Alliance announcement + 0.6% (BCG, 2021) Change in firm name + 0.6% (Horsky & Swyngedouw, 1985) New product announcement + 0.3% (Chaney & al., 1985) Layoff announcement - 1.5% (WSJ, 1999) Acquisition of another firm - 1.5% (SDC, 2022)  Short-Term M&A performance Source: BCG 8 © Louis Mulotte - 2025  Long-term M&A performance Source: McKinsey 9 © Louis Mulotte - 2025 The higher the firm’s performance, the greater the value of organic growth (relative to M&As) 7.8 6.1 Sample: 550 large US and European companies  Perceived M&A performance Source: McKinsey 10 © Louis Mulotte - 2025 65% failures (cost side) 82% failures (revenue side) https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong#  Reasons for failures // pitfalls Source: BCG 11 © Louis Mulotte - 2025 Process structure 35.7 Wrong candidate 40.7 Overpaid 49.1 Integration 55.4 Market timing 57.9 Cultural fit 61.1 Low synergies 63.8 Complexity 64.3 Unclear strategic fit 69.1 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 Question asked: how can you explain deal failures? Data: % of responses Source: BCG 2015 Corporate leaders M&A Survey  Reasons for failures // pitfalls Source: BCG 12 © Louis Mulotte - 2025 Before deal Deal After deal % of Failures Poor Poor strategy implementation Poor (Post merger integration) (pre-closing phase) execution (post closing phase) M&A process  Timeline 13 © Louis Mulotte - 2025  Reasons for failures // pitfalls Source: BCG 14 © Louis Mulotte - 2025 Poor Poor Poor strategy implementation execution (pre-closing) (post-closing) Bad strategy NPV= + synergy Chaotic Management fads & – premium – Deal costs post-merger Financial market integration (PMI) pressures Overestimation of the Managerial Hubris and financial impact of Focus on wedding, other CEO biases expected synergies not marriage Use M&A to reduce risk or Poor due diligence, financial Cultural clashes exit declining domains modelling, valuation, Conflict with customers and Wrong synergy suppliers Excessive premium: expectations Cultural misfit and Paying 6 for 2+2=5 Overconfidence incompatibility Valuation issues Superstitious learning “winner’s curse” when multiple bidders Good idea but Emotion & ego bad candidate & bad timing  Which mode to choose? 15 © Louis Mulotte - 2025 Build Blend Buy  Insights from Academic Research 16 © Louis Mulotte - 2025  Resource Gap= [Resource Requirements] – [Resource Endowment]  Low RG = [Build]  Moderate RG = [Blend]  High RG = [Buy]  Empirical evidence  Choosing the mode based on the RG enhances expansion performance by 40% (Capron and Mitchell, 2009)  Choosing the mode based on the RG increases expansion revenues and decreases expansion costs (Castañer, Mulotte, Garrette Dussauge, 2013 https://go.uvt.nl/SMJ)  Key implication: M&As should be viewed as the last option!  [Build]  [Blend]  [Buy]  The “Christmas tree” 17 © Louis Mulotte - 2025 Why Acquiring? Catch-up acquisitions Doing things better Doing better things © Louis Mulotte - 2025 Bold-on Acquisitions Transformation acquisitions  Improving existing activities  Accessing radically new capabilities  BD mostly, marginally HE  new technologies on which novel operations can be built  Decreasing costs and increasing  Access to new practices, which lead revenues of current products the way to firm revitalization  Reducing procurement and  Catalyst for Change production costs  Using the acquisition to redefine the  Increasing market access firm’s mission, strategy, portfolio  Add value-creating features  When transformation via internal  Learn skills that can be used to growth is not possible improve existing production  May harm short-term performance processes  No/few synergies created, except the intended knowledge transfers  Bold-on Acquisitions Doing things better / decreasing cost & increasing revenues 19 © Louis Mulotte - 2025 Microsoft in enterprise communication Nov. 2, 2016, Teams released Nov. 11, 2014, release of 2018-2020: Skype for Skype for Business, Business is phased Jan. 25, 2011, which combines out in favor of Teams Lync released features of Lync and Skype 2023: 280mio user per May 2011: day acquisition of Skype for $8.56bn Before 2010: Live Messenger, (124mio users per “DOING only text, no video. 330mio users per month in 2011) THINGS BETTER” month in 2011  Bolt-on acquisitions 20 © Louis Mulotte - 2025  Decreasing costs  Increasing revenues  Increasing purchasing power via  Increasing market power via consolidation consolidation  Acquisition of Kansas City Southern  Alstom-Bombardier in train by Canadian Pacific Railway (2021) production (2020)  Achieving scale economies via  Leveraging WTP integration by internationalization adding value-creating features to existing products  Opel’s acquisition by PSA (2017)  Harman by Samsung (2017), Webex by Cisco  Leveraging WTP reputation  Tacx (indoor bike trainers) by Garmin  Catch-up Acquisitions: Doing better things / altering a firm’s strategy 21 © Louis Mulotte - 2025 Apple in streaming 2019: Apple TV+ 2015: own Apple Music Movie service streaming 2014: Acquisition Music of Beats Music, the streaming 2000s-2010s: largest acquisition Itunes in Apple’s history Store ($3bn) digital Music streaming 2000s- marketplace 2010s: Mac, “DOING Ipad, BETTER THINGS” Iphone  Transformation acquisitions 22 © Louis Mulotte - 2025  Business Development  Microsoft's Acquisition of LinkedIn for $26.2 billion (2016) From office software to social networking / cloud No real synergies  Vertical expansion  Coca-Cola’s Acquisition of Costa Coffee for $5.1 billion (2019) Expansion in retail No real synergies  Horizontal Expansion  Google's Acquisition of Android Inc for $50 million (2005): development of the Android OS No real synergies  The “Christmas tree” 23 © Louis Mulotte - 2025  M&AS AND CORPORATE STRATEGY 2024 Louis Mulotte, Tilburg University, NL  INTERNATIONAL CORPORATE STRATEGY ESCP EUROPE 2025 Louis Mulotte, Tilburg University, NL The picture can't be displayed. 2 M&A Implementation Post merger integration Learning to undertake acquisitions  Post Merger Integration (PMI) 3 © Louis Mulotte - 2025 Potential for Operational interdependence between Target and Acquirer Potential for synergies (scale & scope economies) Potential for resource sharing Potential for capabilities transfer (operational & general management skills) Need for decision-making autonomy between Target and Acquirer Protect boundaries such that the acquired unit can still use its own capabilities Tampering may destroy key capabilities Particularly important when firm culture contains the key capabilities necessary to create value  Post Merger Integration (PMI) 4 © Louis Mulotte - 2025 High Preservation Symbiosis Need for Decision Making Autonomy Low Holding Absorption Low High Potential for Operational Interdependence  Post Merger Integration (PMI) 5 © Louis Mulotte - 2025  No intention of creating value through anything High other than improving Preservation Symbiosis business-level Need for operational efficiency Decision via the transfer of Making managerial skills Autonomy Low Holding Absorption  Often implies the Holding replacement of the management Low High Potential for Operational Interdependence  More about Holding 6 © Louis Mulotte - 2025 Buy low, sell high PRIVATE Little involvement of the investor, except at the management level Improve the target’s business level efficiency via the transfer of managerial skills EQUITY Mainly, acquisitions of non-listed firms Blackstone, KKR, Apollo, etc. Real option logic CORPORATE Investments in small firms by large firms VENTURE Transfer of managerial skills Ideally, generating synergistic gains CAPITAL Sanofi, Google Ventures, Intel, etc. Internal markets for financial resources, technologies, talents, when the financial INTERNAL market, technology market, labor market are inefficient Business Groups in India, Korea, Japan, etc. MARKETS Industrial conglomerates (General Electric), high tech giants (Samsung, Google) Prevent competitors from accessing key capabilities PRE-EMPTIVE No intention of creating any synergies: MOVE Google’s acquisition of Motorola (against Apple & Microsoft), Facebook’s acquisition of Instagram  Post Merger Integration (PMI) 7 © Louis Mulotte - 2025  Full consolidation of all of High target’s operations Preservation Symbiosis Need for  Combination of input- Decision side activities, to increase Making purchasing power Autonomy  Combination of core operational activities: Low Holding Absorption production-side cost synergies  Combination of output- Low High side activities, to yield revenue synergies Potential for Operational Interdependence Most (successful) acquisitions: Opel by PSA Quaker Oats by PepsiCo in food products (snack-cereals)  Post Merger Integration (PMI) 8 © Louis Mulotte - 2025  Key issue is to keep the source of the benefits or High capabilities intact Preservation Preservation Symbiosis Need for  Manage operations at Decision arms length Making Autonomy  Continued boundary protection Low Holding Absorption  might be the solution for risky acquisitions Also, for cross-border- Low High acquisitions Potential for Operational Interdependence eBay and PayPal (2002 – divested in 2015), Vivendi and Activision Blizzard (2008 – divested in 2008) Google and YouTube (2006), Facebook and WhatsApp (2014),  Post Merger Integration (PMI) 9 © Louis Mulotte - 2025  Most complex High Symbiosis Preservation  Issue is to transfer Need for capabilities but maintain Decision necessary autonomy. Making Autonomy  Start process like a preservation Low Holding Absorption  Shield target from uncontrolled interactions Low High Potential for Operational Interdependence Renault + Nissan (1999-2023) Failure? Air France + KLM (2004); PSA+FIAT+Chrysler (2019) The picture can't be displayed. 10 Expansion Trajectories Learning in corporate development  Puzzle 11 © Louis Mulotte - 2025 Is expansion experience beneficial or detrimental to Does experience subsequent lead firms to expansion repeat prior performance? choices or to switch to something else? Expansion Trajectories  Experiential Learning (also called learning by doing) 12 © Louis Mulotte - 2025  Causal ambiguity can also affect internal processes  Poor understanding of the precise reasons for one’s own performance  Low clarity of cause- effect linkages  Causal ambiguity harms experiential learning  Firms cannot extract valuable lessons about the factors leading to success, or failure  Causal ambiguity 13 © Louis Mulotte - 2025 Low clarity of cause-effect linkages High clarity of cause-effect linkages  Can experience harm performance? 14 © Louis Mulotte - 2025 Low clarity of of CAUSAL cause-effect Overconfidence AMBIGUITY linkages Spurious harms blurs the result in to learning creates subsequent performance false overconfidence DISSIMILAR drivers experiential endeavors of past actions inferences  The ‘Experiential Learning’ Matrix 15 © Louis Mulotte - 2025 Hi Levels of similarity of focal activities Experience has Experience is no impact on (relative to past activities) beneficial to high ne performance performance (replication / no learning) (productive learning) Experience is Experience has detrimental to no impact on performance performance Low (superstitious learning) (new venture / no learning) Low High Clarity of cause-effect linkages in prior activities  Impact of experience in M&As 16 © Louis Mulotte - 2025 1. M&As involve high levels of CA  M&As are very complex, multidimensional, and involve highly interdependent tasks  Outcomes are multifaceted and unclear (short vs long term) 2. M&As involve high levels of Dissimilarity  Different countries, different purposes (BD, VE, HE), different product lines, different people, etc  Requires distinct execution and implementation strategies  M&As = {High CA + high Dissimilarity}  Novice acquirers often achieve better M&A performance than experienced ones, potentially due to a more cautious approach  Philip Morris expansion – Step 1 17 © Louis Mulotte - 2025  1960s: PM heavily invested in its Marlboro brand  Tobacco market was highly fragmented (1963) Reynold’s (34%); American Brands (14%) Numerous minor players (below 10%): 42% Philip Morris: 10%  1. Aggressive marketing First firm to ever use tobacco ads on TV  2. Scale increase via new plants Fixed cost offsetting  1963-80: US Market share rose from 10% to 31%  Philip Morris expansion – Step 2 18 © Louis Mulotte - 2025  1969: PM’s expansion into the beer market (Miller)  The beer market was also highly fragmented Anheuser-Busch (Budweiser): 21% Numerous minor players (below 10%): 75% Miller also had a small market share (4%)  1. Advanced marketing techniques were not widely used PM marketing investments were greater than the sum of investments made by all other US beer producers  2. Scale increase via new plants + buyers are the same as for Tobacco (mass retailers)  Market share rose from 4% to 21% within 15 years  Philip Morris expansion – Step 3 19 © Louis Mulotte - 2025  1978: Entry into soft drinks via the acquisition of 7-Up  Market share was also small (5%)  Similarities with Tobacco & Beer Beverages, also sold by mass retailers Consumer goods  Which actions were taken?  High marketing investments  Scale increase via new plants  Market share stagnated around 7% during 1979-1986  PM acquired 7-UP for $550m in 1978, invested $300m (new plants), and sold it for $350m in 1986!  Quasi bankruptcy. So, what happened?  Philip Morris: So, what happened? 20 © Louis Mulotte - 2025 Tobacco / Beer Soft Drinks Size and number of Numerous small players Two giants, Coke & Pepsi competitors (excl. PM) with limited resources Final consumers Same for both: Male, Kids, families adults Buyers (in the value Big retailers, which have Bottlers, who negotiate chain) the power in the selling conditions with relationship retailers (and incur most fixed costs) Benefits of marketing First firm to even use A necessity, not a source of skills advanced marketing competitive advantage Fixed vs. variable costs High capital intensity: High Low potential for fixed cost (potential for scale- potential for fixed cost offsetting since cost are based cost economies) offsetting mostly variable (dry ingredients)  Misleading experience: PM 21 © Louis Mulotte - 2025 Tobacco & Beer Soft drinks Success in Tobacco & Beer Soft drinks differ from Tobacco & was badly understood: Beer: Dissimilarity Causal ambiguity Competitors were marketing giants PM overestimated the value of (little value of PM marketing skills) its marketing skills Low potential for fixed costs offsetting PM underestimated the (since costs are mostly variable) importance of the balance between fixed vs. variable costs on scale economies Misleading Experience  Value of marketing investments? (Fortunate?) replication  Increased scale (and ensuing Marketing investments + overcapacity) actually harmed increased scale improved performance performance  What does the “PM Case” tell us? 22 © Louis Mulotte - 2025 1. Firms should precisely assess potential synergistic gains before undertaking any expansions 2. Firms tend to overemphasize surface similarities  They often enter markets that appear to be related to their existing businesses, but in fact, are substantially different  They make this mistake when they define relatedness based on product features rather than on market characteristics or firm capabilities 3. When experience is causally-ambiguous, it creates overconfidence that often hurts later performance 1. [BUY]: higher CA levels 2. [BLEND]: Moderate CA levels 3. [BUILD]: Lower CA levels  Learning [Buy] < Learning [Blend] < Learning [Build] The picture can't be displayed. 23 Divestitures  The Corporate Strategy’s missing link 24 © Louis Mulotte - 2025 The Impact of announcements on stock prices (Cumulative Abnormal Returns) Acquisition by another firm + 16.5% (Agrawal & Jaffe, 1999) E-business announcement + 10.5% (Subramani & Walden, 1999) Divestiture announcement + 3% (Feldman, 2015) Earning announcement + 2.3% (MacKinley, 1997) Alliance announcement + 0.6% (BCG, 2021) Change in firm name + 0.6% (Horsky & Swyngedouw, 1985) New product announcement + 0.3% (Chaney & al., 1985) Layoff announcement - 1.5% (WSJ, 1999) Acquisition of another firm - 1.5% (SDC, 2022)  Types of divestitures 25 © Louis Mulotte - 2025 HORIZONTAL DIVESTITURES VERTICAL DIVESTITURES  Refocus strategy  Backward divestitures  Eliminating activities that offer few  When it is cheaper to get inputs on the synergies with remaining activities market than to produce them internally  2012: Mondelez (snacks, chocolate,  Supplier-side scale economies sweets) by Kraft (cheese & meat)  2011: Sony, Toshiba, and Hitachi  2017: Ferrari by Fiat combined their LCD Panel operations into Japan Display Inc.  2015-2020: PSA divestiture of Faurecia  Key objectives (exhaust systems)  Redeployment = Free financial  Forward divestitures resources that can be re-invested in synergy-creating businesses  When “internal distribution” limits sales 1997: PepsiCo divestiture of its FF chains  Release managerial capacity, reduce  complexity, and decrease  1975: Michelin divestitures of Citroen coordination costs  2023: Sanofi & drug distribution (to DHL)  Nestle corporate strategy 26 © Louis Mulotte - 2025  Reuters | December 11, 2019 | 6:48  Nestle has agreed to sell its very profitable US ice cream business to Froneri in a deal valued at $4bn, moving control of brands including Häagen-Dazs.  Froneri is the 2nd largest ice cream firm globally. [The deal] also includes Nestle’s European frozen food business. Froneri was created in 2016 when Nestle spun off its European ice cream business. Forneri later merged with British ice cream producer R&R.  Reuters | December 19, 2019 | 8:31 Nestle had agreed to sell a majority stake in its meat division Herta (charcuterie & sausages) to Spanish company Casa Tarradellas.  Who’s next? Prepared Coffee & Baby Food & Milky 2019 Pet Care dished & Confectionery Water Cocoa health Science products cooking aids Sales 23.2 15.0 13.6 13.3 12.2 7.9 7.4 %total sales 25.1 16.2 14.7 14.4 13.2 8.5 8.0  17 FEBRUARY 2021 Nestlé to divest US water business in $4.3bn deal 27 © Louis Mulotte - 2025  Nestlé has reached an agreement to divest its Nestlé Waters North America (NWNA) brands for $4.3bn to One Rock Capital Partners.  Under the agreement, Nestlé will sell its regional spring water brands, purified water business and beverage delivery service in the US and Canada.  The water brands that are part of the deal include Poland Spring, Deer Park, Ozarka, Ice Mountain, Zephyrhills, Arrowhead, Pure Life and Splash.  Nestlé said that it will retain its international premium water brands including Perrier, San Pellegrino and Aqua Panna.  https://www.nestle.com/media/pressreleases/allpressreleases/a greement-sale-nestle-waters-north-america-brands  Nestle’s core transformation (1905-2013) Source: www.foodandwaterwatch.org 28 © Louis Mulotte - 2025  Divestitures. More examples 29 © Louis Mulotte - 2025  NOV 12 2021 | J&J plans to split into two companies, separating consumer products and pharmaceutical businesses https://www.cnbc.com/2021/11/12/jj-shares-jump-after-ceo-says-health- giant-plans-to-break-up-in-wsj-report.html  NOV 9 2021 | GE to break up into three companies focusing on aviation, health care and energy https://www.cnbc.com/2021/11/09/ge-to-break-up-into-3-companies-focusing-on-aviation-healthcare- and-energy.html  AUG 3 2021 | PepsiCo to sell Tropicana, other juice brands for $3.3 billion https://www.reuters.com/business/retail-consumer/pepsico-sell-majority-stake-juice-business-33-bln-wsj-2021-08-03/  JUN 21 2022 | Kellogg to separate into three companies focusing on snacks, cereal and plant-based foods https://www.cnbc.com/2022/06/21/kellogg-to-split-into-three-independent-companies.html  OCT 27 2023 | Sanofi [plans] to list its consumer healthcare business to focus on its core innovative drugs business. https://www.reuters.com/business/healthcare-pharmaceuticals/sanofi- considering-consumer-unit-listing-late-next-year-2023-10-27/  Legacy divestitures 30 © Louis Mulotte - 2025  Divestitures of the firm’s original business  Reuters | December 15, 2017 | 5:37 PM |  Unilever has agreed to sell its margarine business to private equity firm KKR for $8bn. […] The margarine business has been in decline for years as people eat less bread and margarine, but Unilever has taken steps to stem the decline and the unit is very profitable.”  Why selling this (very profitable) business? (rebranded Upfield)  Other examples  1999: Volvo’s cars (sold to Ford and Geely)  2005: IBM’s PC (laptops & desktops) division  2016: Philips’ lighting division  2020: IBM’s BtB hardware (servers) division  IBM announcement of the divestiture of its server division (2020, Oct 8th) 31 © Louis Mulotte - 2025 The picture can't be displayed. 32 Combining corporate development activities The “Transformation Path” Learning new competencies via Acquisitions © Louis Mulotte - 2025 Internal Divestitures Redeployment Doing better things Doing things better Acquiring novel Gaining synergies Divest operations capabilities Internal use of Increasing efficiency with limited synergies Peapod & Stonyfield acquired capabilities & enhancing Albert.nl & Les 2 Core capabilities revenues have been absorbed Vaches Bol.com & Whitewave Peapod operations & Stonyfield Transformation Bolt-on acquisition acquisition  Performance Source: Bain & Co 34 © Louis Mulotte - 2025  Optimal growth trajectory 35 © Louis Mulotte - 2025 Internal Growth Launch new products using existing resources & capabilities Develop value-adding features Synergistic gains (cost reduction & revenue enhancement) Obtain radically new Improve existing operations capabilities Use Bolt-on Acquisitions & Scale The “Transformation path” Alliances Transformation acquisitions & link Synergistic gains (cost reduction & alliances  redeployment  bolt-on revenue enhancement) acquisitions  divestitures  M&AS AND CORPORATE STRATEGY 2024 Louis Mulotte, Tilburg University, NL