What were the possible synergies and forces propelling the merger between P&G and Gillette?
This write-up requires single-spaced, 12-point Times New Roman, and one inch margins. I’ll upload the case reading material and the slides below.
You need to write this essay basis on the slides I uploaded and the following 4 questions:
What were the possible synergies and forces propelling the merger between P&G and Gillette? 2. Compare the valuation analyses in Case Exhibits 6 and 7. Why are they different? Can you support and defend the validity of using each valuation method? Conduct your own research if needed. 3. Was James Kilts’ compensation reasonable? Was the $90million fee paid to investment bankers reasonable? 4. How did international, federal, and state regulators influence the acquisition process? Do you think the involvement of regulators justified?
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Midterm Exam Results
Total: 50 points
Mean: 41.2 (B-)
Median: 41.3 (B-)
S.D.: 6.2
Range: 19.5-50.0
27% 45-50 or “As”
28% 40-45 or “Bs”
34% 35-40 or “Cs”
11% lower than 35
Final exam?
7–1
Scores for Essay/Fill-in-Blank Questions
Out of 15 points total
Mean: 13.0 (B)
Median: 13.5 (B+)
Range: 4.0-15.0
10.5 is a “C” grade
12.5 is a “B” grade
14.0 is a “A” grade
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–2
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Presentation design by Charlie Cook
Chapter 7
Merger and Acquisition Strategies
Part 2 Strategic Actions: Strategy Formulation
3
Mergers, Acquisitions, and Takeovers: What are the Differences?
Merger
Two firms agree to integrate their operations on a relatively co-equal basis.
e.g., Exxon-Mobil, Daimler Benz/Chrysler
Acquisition
One firm buys a controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.
e.g., Facebook’s acquisition of Whatsapp
Takeover
An acquisition in which the target firm did not solicit the acquiring firm’s bid for outright ownership.
e.g., Oracle’s acquisition of PeopleSoft
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–4
4
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–5
Figure 7.1 Reasons for Acquisitions and Problems in Achieving Success
Reasons for Acquisitions
Problems in Achieving Success
5
Reason 1: Increased Market Power
A firm enjoys market power when it can
sell goods or services above competitive levels of price OR reduce the costs of value chain activities better than competitors.
Market power is increased by:
Horizontal acquisitions of other firms in the same industry (e.g., US Airways and American Airlines)
Vertical acquisitions of suppliers or distributors of the acquiring firm (Coke Cola and Coke Cola Bottling)
Related acquisitions of firms in related industries (Oracle’s acquisition of Tekelec and Acme)
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–6
6
Reason 2. Overcoming Entry Barriers
Cross-Border Acquisitions are those made between firms with headquarters in different countries
Are often made to overcome entry barriers.
Can be difficult to negotiate and operate because of the differences in foreign cultures.
e.g., Japan’s Softbank recently acquired Sprint.
Domestic acquisitions can also help firms overcome entry barriers to a different industry or region
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–7
7
Reason 3. Cost of New-Product Development and Increased Speed to Market
Internal development of new products is often perceived as a high-risk activity.
Returns from acquired new products are more predictable because of the acquired firms’ past experience with its products.
Acquisitions allow a firm to gain access to new and current products that are new to the firm within a relatively short period of time.
e.g., Medtronic, Microsoft, Facebook
Acquisitions may discourage or suppress future innovation
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–8
8
Reason 4: Increased Diversification
Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses.
Both related diversification and unrelated diversification strategies can be implemented through acquisitions.
The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–9
9
Reason 5: Reshaping the Firm’s Competitive Scope
An acquisition can:
Reduce the negative effect of an intense rivalry on a firm’s financial performance (e.g., a horizontal acquisition).
Reduce a firm’s dependence on one or more products or markets (e.g., a vertical acquisition).
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–10
10
Reason 6: Learning and Developing New Capabilities
An acquiring firm can gain capabilities that the firm does not currently possess:
Special technological capability
A broader knowledge base
Reduced inertia
e.g., Bristol-Myers Squibb acquired Amylin Pharmaceuticals
Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–11
11
Problem 1: Integration Difficulties
Integration challenges include:
Melding two disparate corporate cultures
Linking different financial and control systems
Building effective working relationships (particularly when management styles differ)
Resolving problems regarding the status of the newly acquired firm’s executives
Loss of key personnel weakens the acquired firm’s capabilities and reduces its value
e.g., UPS: Mail Boxes Etc., Daimler Benz: Chrysler
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–12
12
Problem 2: Inadequate Evaluation of Target
Due Diligence
The process of evaluating a target firm for acquisition
Ineffective due diligence may result in paying an excessive premium for the target company.
Premium averaged at about 50%, and can be over 200%
e.g., Campeau’s acquisition of Federated Department Stores
Evaluation requires examining:
Financing of the intended transaction
Differences in culture between the firms
Tax consequences of the transaction
Actions necessary to meld the two workforces
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–13
13
Problem 3: Large or Extraordinary Debt
High debt (e.g., junk bonds) can:
Increase the likelihood of bankruptcy (e.g., Campeau)
Lead to a downgrade of the firm’s credit rating
Preclude investment in activities that contribute to the firm’s long-term success such as:
Research and development
Human resource training
Marketing
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–14
14
Problem 4: Inability to Achieve Synergy
Synergy
When assets are worth more when used in conjunction with each other than when they are used separately.
Private synergy
When the combination of the acquiring and acquired firms’ assets yields capabilities that could not be developed by combining either firm’s assets with another firm.
Advantage: It is difficult for competitors to understand and imitate.
Disadvantage: It is also difficult to create.
Firms tend to underestimate indirect costs of acquisitions and fail to achieve the expected synergy.
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–15
15
Problem 5: Too Much Diversification
Diversified firms must process more information of greater diversity.
Increased operational scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances.
Strategic focus shifts to short-term performance.
Acquisitions may become substitutes for innovation.
e.g., Tyco International
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–16
16
Problem 6: Acquiring Firm Becomes Too Large
Additional costs of controls may exceed the benefits of the economies of scale and additional market power.
Larger size may lead to more bureaucratic controls.
Formalized controls often lead to relatively rigid and standardized managerial behavior.
The firm may produce less innovation.
e.g., DaimlerChrysler and Mitsubishi, Cisco’s refocusing
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–17
17
Problem 7: Managers Overly Focused on Acquisitions
Managers invest substantial time and energy in acquisition strategies in:
Searching for viable acquisition candidates.
Completing effective due-diligence processes.
Preparing for negotiations.
Managing the integration process after the acquisition is completed.
e.g., Citigroup’s former CEO John Reed and Sanford Weill
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–18
18
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7–19
Table 7.1 Attributes of Successful Acquisitions
| Attributes | Results |
| Acquired firm has assets or resources that are complementary to the acquiring firm’s core business | High probability of synergy and competitive advantage by maintaining strengths |
| Acquisition is friendly | Faster and more effective integration and possibly lower premiums |
| Acquiring firm conducts effective due diligence to select target firms and evaluate the target firm’s health (financial, cultural, and human resources) | Firms with strongest complementarities are acquired and overpayment is avoided |
| Acquiring firm has financial slack (cash or a favorable debt (position) | Financing (debt or equity) is easier and less costly to obtain |
| Merged firm maintains low to moderate debt position | Lower financing cost, lower risk (e.g., of bankruptcy), and avoidance of trade-offs that are associated with high debt |
| Acquiring firm has sustained and consistent emphasis on R&D and innovation | Maintain long-term competitive advantage in markets |
| Acquiring firm manages change well and is flexible and adaptable | Faster and more effective integration facilitates achievement of synergy |
19
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Essay
