Acquisition, Merger and Alliance Strategies

Introduction: Acquisitions, Mergers & Alliances

An enterprise should consider alternative options to implement its strategic aims, to merge with or acquire (takeover) another enterprise, or to enter one or more mutually beneficial alliances. Alliances: Collaborations between partner enterprises which take many forms characterised by degrees of formality, longevity, complementarity and symmetry. Acquisition: The purchase of one enterprise by another; the acquired enterprise loses some or all of its identity. Merger: The combining of enterprises whose boards and executive managers declare a mutual respect and desire to work together in the interests of both.

Motives for & Strategic Logics of Acquisitions & Mergers

A proactive enterprise has many reasons to consider the option of a merger or acquisition. The strategic motive for a strong enterprise to combine with a same-sector competitor are principally that it increases its dominant market share and coverage.
Learning and knowledge accumulation are particularly strong motives.

Acquisition & Merger Strategies

Motives for & Strategic Logics of Acquisitions & Mergers

Financial motives for mergers and acquisitions anticipate various potential benefits which include: Larger scale enhances the prospects for obtaining new investment funds on better debt or equity terms. One-time profits by rationalising, restructuring, or dismembering a poorly-performing enterprise. Paying for valuable assets with shares. Tax advantages.

Stated Reasons for Merger & Acquisition Activities

Types of Merger & Acquisition

Acquisitions and mergers with intent to reduce competition by increasing sector dominance are strategically rational. Mergers and acquisitions motivated by the intent to diversify create either: a. Vertical combinations of suppliers or customers b. Horizontal combinations that can be related, concentric or unrelated conglomerate diversifications.

Types of Merger & Acquisition

Planning & Executing Acquisitions & Mergers

The key stages of completing an acquisition are to: Identify and select targets consistent with the strategic or financial logic in use. Assess bid tactics while maintaining a high level of secrecy. Decide the offer price and the best mix of cash, shares and debt to finance it. Decide the timing of the offer announcement and how to present it publicly. Engage in post-offer negotiations, further announcements, revised bids and PR activities needed to conclude (or withdraw from) a deal. Complete the financial and legal searches to assess whether published documents and statements accurately represent the assets and capabilities to be acquired (due diligence). Decide the crucial executive appointments before starting to manage subsequent integration. Evaluate post-integration performance and establish new procedures to maximise the mutual learning and adoption of best practices.

Planning & Executing Acquisitions & Mergers

Hostile takeover bids have several consequences which: Polarise opinions and prejudice attitudes among shareholders, employees, commentators and the investing public. Increase the chance of rival bids once targets are in play. Encourage targets to make themselves less attractive. Oblige bidder and target to spend large sums on propaganda advertising to support their positions. Force senior executives in the target enterprise to quit immediately after they have lost the battle.

Challenges of Post-Acquisition Integration

Successful integration requires careful thought about crucial strategic questions, particularly when a new enterprise enters an existing portfolio: How independent are its activities from those of other portfolio members and how independent or interdependent should they be in future? How much managerial autonomy should it retain?

Priorities in Merger Integration

If the enterprise units are essentially independent and will benefit from continued autonomy there is a strong case to retain distinct identities and current boundaries, while exchanging best practice ideas with others, sharing resources and achieving mutually beneficial synergies. Where interdependence is high and the need for autonomy is low, the case for full integration is clear. Absorption means consolidating new enterprise units with one or more existing units and rationalising their operations accordingly. When interdependence is high, there are competing desires to collaborate yet retain distance and autonomy. When interdependence is low, the decision whether to integrate fully must consider the particular circumstances, although full integration probably remains the better option.

Priorities in Merger Integration

When Acquisitions & Mergers Disappoint

Although merger and acquisition strategies aim to achieve growth more rapidly and effectively than internal development strategies, future performance frequently disappoints because:

1. 2. 3. 4.

The strategic logic of integration was weak. The financial logic was poor or compromised. The prior due diligence was inadequate. Internal relationships became hostile, poisonous and vindictive, destroying the prospects of constructive collaborations.

Benefits of Mergers & Acquisitions

Strategies that embrace mergers and acquisitions can achieve indisputable benefits when the parties:
Assemble high quality, complementary assets and skills. Deploy these assets and skills to create, greater sustainable value for their respective shareholders. Work hard to achieve productive integration.

Alliance (Collaboration) Strategies

 Enhanced scale that allows partners to achieve a minimum efficient scale of operation that neither can achieve alone. Scope economies, by eliminating duplication and spreading costs. Allowing partners to contribute complementary resources or technologies. Greater flexibility compared with merger or acquisition. Sharing risks and reducing uncertainties. Opportunities to learn from a partners capabilities when they are clearly superior.

Motives for & Strategic Logics of Collaborative Alliances

Alliance Options & Characteristics

Should a prospective alliance partner seek: Partners with similar interests, ambitions and capabilities, or those that offer complementarities in markets, resources or capabilities? Vertical or horizontal linkages? Relationships in which it would be the dominant partner or would it consider being of equal or subordinate status? Equity cross-holdings (long term) or purely arms-length transactions (generally short-term)? A high degree of mutual trust or accept that pragmatic, opportunistic behaviours will occur?

Types of Alliance
Vertical alliances involve co-ordinated partners in various up or downstream stages of the valueadding supply chain. An already-influential enterprise takes a coordination role. Horizontal alliances involve a collaboration between the enterprise and a competitor in specific areas, strengthening their respective positions against a more dominant competitor. Similar considerations apply to collaborations beyond the sector that parallel those for mergers and acquisitions.

Types of Alliance

Alliance Options & Characteristics

The decision whether to enter an alliance and the precise form it takes will depend on an enterprises history, current circumstances, ethos and identity, the characteristics of prospective partners and the benefits expected. Senior executives and prospective partners are concerned whether: They can tolerate dispersed ownership and control of progressseeking ventures? Relationships between enterprises are expected to be:
Long-term and trusting? Short-term and opportunistic?

Strategic Alliances based on Positive Attitudes to Trust & Shared Control

3 Distinct Forms of Alliance

1. Joint ventures (JVs) 2. Formal, non-JV alliances 3. Less formal, participatory alliances and networks

Joint Venture (JV) Strategic Alliances

Joint Venture (JV): a new enterprise is set up to achieve an agreed strategic purpose which involves shared ownership and high commitment, generally over relatively long time periods. JVs are the most formal and least reversible kind of collaboration between 2 or more partners. The partners invest jointly and accept agreed proportions of its equity, costs and returns. When a JV requires greater investment funds than the partners can provide, they can involve external investors. Although partners share management responsibilities, arrangements vary considerably and the parent enterprises appoint an executive management team.

Joint Venture (JV) Strategic Alliances

Specific JV purposes intent to:
Supply operational or strategically significant inputs to the partners. Provide a distribution channel to provide them with access to downstream demand. Develop and market goods or expert services to extend their repertoires. Provide a diversification vehicle. Fulfil a specific aim.

Non-JV Alliances
A formal alliance that involves less commitment than a JV may be more acceptable, despite featuring similar motives and characteristics. An alliance may be vertical or horizontal which involves non-competing and competing partners, who may be of equivalent status or have a dominant-subordinate relationship.

Horizontal Alliances between Equivalent-Status, Non-Competing Partners

Non-competing partners in horizontal alliances build on complementary assets and resources in 2 main ways.
1. An enterprise uses its partner to perform value-adding activities that directly extend its own capacity or coverage. 2. Partners may cross-license the use of brands, logos and other intellectual property.

Horizontal Alliances between Equivalent-status, Competing Partners

Horizontal alliances also feature among enterprises that compete or have the potential to compete, but find areas to collaborate. Alliances must be carefully crafted and transparent to avoid accusations of intent to restrict competition. Competitor collaborations commonly occur horizontally at an upstream value-adding stage, typically in R&D, sourcing or production.

Horizontal Alliances between NonCompeting Partners of Senior & Junior Status

The crucial factor determining the development of such alliances is their unbalanced power relationship (or unequal status). The dominant partner exercises considerable influence on the operations of its subordinate partner(s). Junior status means that the subordinate has limited influence over key decisions and allows the dominant partner scope to determine how the alliance functions in practice and will develop over time.

Vertical Alliances between Equivalent-Status Partners

Vertical alliances extend enterprises contractual supply chain relationships via the exchange of know-how and commercial information. Suppliers become actively involved in product design and distribution arrangements.

Vertical Alliances between Dominant & Subordinate Partners

Vertical supply chain alliances enable one partner progressively to increase and exploit power differences to maximise its benefits. They become asymmetric power relationships between dominant and subordinate partners. A dominant partner further increases its leverage when it enters parallel alliances with multiple, competing subordinate partners.

Less-Formal Network Alliances

Less-formal, multi-partner alliances may provide benefits for enterprises of all sizes, provided that entry, exit and conduct are not over- formalised. These alliances often have network characteristics. For-profit alliances and networks draw on mutual self-interest. Some offer (and require) forms of commercial commitment, sometimes only membership subscriptions.

Alliance Strategies & Performance

Alliances aim to achieve the following objectives: Defend current positions and mutual interests. Diversify and grow. Enhance efficiency via economies of scale and scope. Exploit strengths, compensate for weaknesses and acquire new capabilities. Enter new markets and operating domains flexibly and cost-effectively. Share investment costs and the risks of new ventures.

Alliance Strategies & Performance

Any proposed alliance requires advance judgements about the prospects of its success. Prospective partners must have clear aims. Alliances tend to have finite life-spans.

Difficulties in Alliances
Difficulties arise in all forms of alliance when one or more of the partners:
Dissents over acceptable performance levels and timeframes. Begins to dominate the other(s). Fails to perform as promised. Acts opportunistically and exploitatively. Pursues parallel strategic changes elsewhere that reduce the importance of the alliance.