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Mergers, acquisitions and alliances are all common methods for achieving growth strategies.
Strategy Methods:
M&A Processes:
1. The search to identify an acquisition target with the best possible fi t. This process may take
years but under some circumstances can be completed very rapidly.
2. Process of negotiating the deal: to agree on terms and conditions and the right price.
3. Decide on the extent to which the new and old businesses will need to be integrated and
this will have significant implications for the amount of time required to create value.
- Three key steps: target choice, negotiation and integration.
- Target Choice:
1. Strategic Fit
The extent to which the target firm strengthens or complements the acquiring fi rms
strategy.
Relates to the original strategic motives for the acquisition: extension, consolidation
and capabilities.
Danger is that potential synergies are often exaggerated to justify high acquisition
prices.
Negative synergies (contagion) involved are easily neglected.
2. Organizational Fit
Refers to the match between the management practices, cultural practices and staff
characteristics between the target and the acquiring firms.
Large mismatches are likely to cause significant integration problems.
International acquisitions can be particularly liable to organizational misfits, because
of cultural and language differences between countries, although the extent to which
there is actual cultural clash will be determined by the extent of integration intended.
A comparison of the two companies cultural web might be helpful to highlight
potential misfit.
The two criteria of strategic and organizational fit are important components of due
diligence a structured investigation of target companies that generally takes place before a
deal is closed.
- Negotiation in M&A:
Negotiation process in M&A is critical to the outcome of friendly deals.
Ways in which the price is established by the acquirer are through the use of various valuation
methods, including financial analysis techniques such as payback period, discounted cash
flow, asset valuation and shareholder value analysis.
Acquirers typically do not simply pay the current market value of the target, but have to pay a
so-called premium for control. This premium is the additional amount that the acquirer has to
pay to win control compared to the ordinary valuation of the targets shares as an independent
company.
It is therefore very important for the acquirer to be disciplined regarding the price that it will
pay. Acquisitions are liable to the winners curse in order to win acceptance of the bid, the
acquirer may pay so much that the original cost can never be earned back.
- Integration in M&A:
The ability to extract value from an acquisition will depend critically on the approach to
integrating the new business with the old.
Integration is frequently challenging because of problems of organisational fit.
Poor integration can cause acquisitions to fail.
The most suitable approach to integration depends on two key criteria:
1) The extent of strategic interdependence: the need for the transfer or sharing of
capabilities or resources
2) The need for organizational autonomy: In some circumstances it is the distinctiveness
of the acquired organization that is valuable to the acquirer. In this case it is best to
learn gradually from the distinct culture, rather than risk spoiling it by hurried or
overly tight integration.
Four integration approaches:
Strategies Alliances:
- Companies also often work together in strategic alliances that involve collaboration with only
partial changes in ownership, or no ownership changes at all as the parent companies remain
distinct.
- A strategic alliance is where two or more organisations share resources and activities to pursue a
common strategy.
- Collective strategy is about how the whole network of alliances, of which an organisation is a
member, competes against rival networks of alliances.
- Collaborative advantage is about managing alliances better than competitors.
- Types of Strategic Alliance:
1. Equity Alliances: the creation of a new entity that is owned separately by the partners
involved. Eg: joint venture (two organizations), consortium alliance (several partners).
2. Non-equity Alliances: typically looser, without the commitment implied by ownership,
often based on contracts (one common form = franchising), Licensing is a similar kind of
contractual alliance, allowing partners to use intellectual property such as patents or
brands in return for a fee, Long-term subcontracting agreements are another form of loose
non-equity alliance.
- Motives for Alliances:
1. Scale Alliances: Combine to achieve necessary scale, together they can achieve advantages
that they could not easily manage on their own, economies of scale, sharing risk.
2. Access Alliances: access the capabilities of another organization that are required in order to
produce or sell its products and services, can be about tangible resources.
3. Complementary Alliances: can be seen as a form of access alliance, but involve organizations
at similar points in the value network combining their distinctive resources so that they
bolster each partners particular gaps or weaknesses.
4. Collusive Alliances: secretly collude together in order to increase their market power. By
combining together into cartels, they reduce competition in the marketplace, enabling them to
extract higher prices from their customers or lower prices from suppliers.
- Strategic Alliance Processes:
Co-evolution: The concept of co-evolution underlines the way in which partners, strategies,
capabilities and environments are constantly changing. As they change, they need
realignment so that they can evolve in harmony. A co-evolutionary perspective on alliances
therefore places the emphasis on flexibility and change.
Trust: Trust in a relationship is something that has to be continuously earned. Trust is often
particularly fragile in alliances between the public and private sectors, where the profit
motive is suspect on one side, and sudden shifts in political agendas are feared on the other.
- Different Stages In The Life Span of a Strategic Alliance:
1. Courtship: initial process of courting potential partners, where the main resource
commitment is managerial time, courtship process should not be rushed, as the
willingness of both partners is required, each partner has to see a strategic fit and
organizational fit.
2. Negotiation: negotiate mutual roles at the outset, it is important to get initial contracts
clear and correct and it is worth spending time working out how disputes during the life
of the alliance will be resolved.
3. Start-Up: involves considerable investment of material and human resources and trust is
very important.
4. Maintenance: refers to the ongoing operation of the strategic alliance, with increasing
resources likely to be committed.
5. Termination: Often an alliance will have had an agreed time span or purpose right from
the start, so termination is a matter of completion rather than failure, Sometimes the
alliance has been so successful that the partners will wish to extend the alliance by
agreeing a new alliance between themselves, committing still more resources.
Comparing Acquisitions, Alliances and Organic Development
- Buy, ally or DIY?
Acquisitions and strategic alliances have high failure rates.
Acquisitions can go wrong because of excessive initial valuations, exaggerated
expectations of strategic fi t, underestimated problems of organisational fit etc.
Alliances also suffer from miscalculations in terms of strategic and organisational fi t,
but, given the lack of control on either side, have their own particular issues of trust and
co-evolution as well.
With these high failure rates, acquisitions and alliances need to be considered cautiously
alongside the default option of organic development (Do-It-Yourself).
The best approach will differ according to circumstances.
Four key factors that can help in choosing between acquisitions, alliances and organic
development:
1. Urgency: acquisitions = rapid method in pursuing strategy, alliances too may
accelerate strategy, DIY = slowest.
2. Uncertainty: often better to choose the alliance route where there is high
uncertainty in terms of the markets or technologies involved.
3. Type of capabilities: Acquisitions work best when the desired capabilities
(resources or competences) are hard, for example physical investments in
manufacturing facilities. Hard resources such as factories are easier to put a value
on in the bidding process than soft resources such as people or brands. Hard
resources are also typically easier to control post-acquisition than people and
skills.
4. Modularity of Capabilities: If the sought-after capabilities are highly modular, in
other words they are distributed in clearly distinct sections or divisions of the
proposed partners, then an alliance tends to make sense. A joint venture linking
just the relevant sections of each partner can be formed, leaving each to run the rest
of its businesses independently.
It is important to weigh up the available options systematic ally and to avoid favoring one
or the other without careful analysis.