What is the future of growth by merger and acquisition in the Post Pandemic World?

What is the future of growth by merger and acquisition in the Post Pandemic World?

1. Perhaps the most important chapter notes and PPT for this paper
will be chapter 7, which is all about mergers and acquisitions. Make
sure you use chapter 7 (as well as 8 and 9 as appropriate) to discuss
the concepts you encounter in the assigned readings on mergers and
acquisitions post pandemic.

2. Your paper should be 1200 words (4 pages). Create a cover page
with the title and your name. Make the title interesting — the name of
the position you’ve taken in th paper.

3. Write an introduction that tells me what you will cover in your
paper and in what order. You are use the assigned readings to make an
argument about the future of mergers and acquisitions given COVID-19.
You’ll need to think about what the authors have to say. What kinds of
businesses will be acquired, for example? Those that prospered during
the recession —- or those that barely hung on?

4. Organize your paper with subheads to identify movement from one
topic to another. Write a conclusion that summarizes the major points in
your paper.

5. Use citations and references. In the body of your paper, when you
are discussing a concept introduced by Jones, your citation will look
like this: (Jones, 2011), If you quote Jones, your citation will look
like this (Jones, 2011, p. 34). References must be fully written out and
arranged in alpha order by last name of author or publisher, if no
author, along the left margin:

Beals, J. (2021). “Mergers and Acquisitions after the Great Recession,” Strategy 45(2): 345-688.

Jones, G. (2011). Organizational Development and Strategy.New York: Cengage.
PAPER RUBRIC

USE OF CONCEPTS – 0 TO 10 PTS

MEETS WORD COUNT AND TITLE PAGE REQUIREMENTS: 0 to 10

MAKES A COHESIVE ARGUMENT: 0 TO 10 PTS

ORGANIZATION WITH SUBHEADS: 0 TO 10 PTS

CITATIONS AND REFERENCES: 0 TO 10 PTS.

NOTES AND REFERENCES FOR THE PAPER FROM MY PROFESSOR:
The two articles needed for reference and research given by my professor:
PWC ARTICLE ON GLOBAL INDUSTRY MERGER AND ACQUISITION TRADES: https://www.pwc.com/gx/en/services/deals/trends.html
WILL COVID-19 TURBO CHARGE M&A and transformation? https://www.ey.com/en_gl/ccb/mergers-acquisitions-strategy-survey-summary
CHAPTER 7 NOTES:
Chapter
7
Acquiring
and Integrating Businesses

Chapter Introduction: Acquisitions
and acquisitions gone wrong comprise a large amount of media attention. This chapter explains the basics of
acquisitions. It covers the reasons for
both effective and ineffective acquisitions, and how a firm can protect itself
from making bad acquisition decisions.
Planned divestitures and divestitures of under-performing acquisitions
are covered.

Lecture notes: Although
acquisitions and divestitures may sound theoretical and distant from students’
lives, the instructor can probably find a student who has a friend or parent
who has experienced an acquisition or divestiture “from the inside.” Acquisitions are more than just a change of
name on the company letterhead. Career
paths are interrupted or ended, or new career paths are opened up. Jobs are lost or changed. New jobs are created. Companies that are being acquired go into
suspended animation as employees worry about their future or jump to other
firms. Employees in both acquiring and
target firms find themselves having to integrate into a new company
culture. Acquisitions are rarely a
non-disruptive, emotionally-neutral event.
Add to this the fact that a number of acquisitions fail resulting in divestitures;
another level of employee disruption is added.

This section
applies to Knowledge Objective 1.

An acquisition
is a transaction in which a firm buys a controlling interest in another
firm with the intention of making it a subsidiary or combining it with its
current business.
An acquisition
strategy is an action plan for acquiring other companies.
An
effective acquisition strategy enables firm growth.
A takeover
is an acquisition in which the target firm does not solicit the acquiring
firm’s offer.
In a hostile
takeover the target firm reacts negatively to the proposed
transaction.
In a merger
the two firms combine on a relatively equal basis.
Acquisitions
are most common, mergers are next common, and takeovers are least common.
Cross-border
acquisitions involve companies in different countries.
Cross-border
acquisitions are increasing as home markets mature.

Focusing on Strategy: What Makes an Acquisition Successful?

This
case applies to Knowledge Objective 2.

This
case focuses on successful acquisitions by Bank of America, J.P. Morgan Chase,
Wachovia, Diageo, and Philip Green. All
these acquisitions are successful for one or more reasons. They create economies of scale by combining
firms’ technology and information systems.
They save costs by cutting overlapping jobs and closing redundant
branches. They increase efficiencies in
distribution and power with distributors.
Each of these acquisitions increases the parent firm’s market power.

Lecture note:
To provide a counterpoint to the “Focusing on Strategy” case, the
instructor may wish to read (and perhaps assign) “What Are Mergers Good For?” The
New York Times Magazine, June 5, 2005.
This article covers the dark side of mergers and is based, in part, on
the book, Deals from Hell, by Robert F. Bruner, a professor of business
administration at the Darden School of Business at the University of Virginia. The concluding paragraph of the article
reads: What might end today’s fever (to
merge)? “Rising interest rates and falling stock markets” could curb mergers,
Bruner says. “And either self-regulatory
systems of accounting and industry watchdogs as well as government regulators
may challenge practices that have grown aggressive through the height of the
boom.” Till then, however, we can count
on more mergers, more money paid to executives and fewer jobs for everyone
else.” If students read this article, or
the instructor raises some issues in this article, an interesting debate could
be generated. Or, this could form the
basis for essay questions or term papers.

FIGURE 7.1
Acquisition
Decision-Making and Business Integration Processes

This figure
applies to all Knowledge Objectives.
This figure is
the framework for the chapter’s discussion of acquisitions and acquisition
strategy.

REASONS FOR ACQUISITIONS

This section
applies to Knowledge Objective 2.

REDUCE
COSTS

·
Economies of scale are achieved through horizontal
acquisitions.
·
Horizontal acquisitions involve the
purchase of a competitor in the same market as the acquiring firm.
·
A vertical acquisition is the purchase
of a supplier or distributor of one or more of the firm’s goods or services.
·
Vertical acquisitions can increase the firm’s
scale and market power.

GAIN MARKET
POWER

·
Market power exists when
o the
firm can sell its products above competitive prices or
o the
firm’s costs are below those of its primary competitors
·
Market power allows the acquiring firm to
eliminate overcapacity in an industry by eliminating duplicate operations.
·
Acquisitions to increase market power raise
antitrust concerns.
·
Firms can pay too much for an acquisition in the
pursuit of market power.

INCREASE
GROWTH

·
In fragmented industries with many small
competitors of equal size, acquisitions can be used to increase a firm’s growth
rate.
·
This strategy raises antitrust concerns.

LEARN TO
BUILD CAPABILITIES

·
Target firms with unique employee skills,
organizational technologies, or superior knowledge are acquisition targets.
·
Pooling the companies’ combined resources and
capabilities may create centers of excellence for specialized products in new
markets.
·
Acquisitions to build capabilities are future
oriented.
·
Acquisitions to reduce costs, gain market power,
and increase growth are focused on current advantages.
·
Capability-building acquisitions are a dominant
reason for 21st century acquisitions.

MANAGE RISK
AND OTHER FINANCIAL OBJECTIVES

·
Acquisitions can diversify operations and reduce
dependence on an intensely competitive market.
·
Diversification acquisitions must give
shareholders more benefit than they can achieve with portfolio diversification.

Learning from Failure,
Understanding Strategy: The Lack of Success in Large Food Company Mergers
Has Produced Caution among Investors Regarding Further Acquisitions

This case applies
to Knowledge Objectives 3 and 5.

Although
General Mills, Campbell Soup, and Heinz are obvious targets for acquisition by
larger food companies, prospective acquirers such as Nestle, Kraft, and
Unilever are not making moves to acquire them.
This case describes how the disappointing results of previous food
industry mergers has made potential acquirers more conscious of the need for
strategic fit and the need for sufficient future financial returns to offset
the purchase price of the target firms.

Critical thinking questions:

1.
Which
of the five pitfalls of mergers are Nestle, Kraft, and Unilever avoiding in not
acquiring General Mills? (Knowledge Objective 5)

Answer:

Nestle
is avoiding becoming overdiversified.
General Mills is not a strategic fit.
Nestle is also avoiding taking on too much debt.
Kraft
is avoiding government antitrust action by not buying General Mills. This is not a listed “pitfall,” but it is
definitely a problem to avoid.
Unilever
is avoiding taking on even more debt.

2.
What
internal organizational process is preventing Nestle, Kraft, and Unilever from
acquiring General Mills? (Knowledge Objective 3)

Answer:

The
proper use of due diligence is preventing the potential acquiring firms from
purchasing a firm that is going to provide inadequate cash flows to support the
purchase price. In addition, due
diligence is raising questions about the synergies to be gained with the merger
for both Nestle and Kraft.

SCREENING, SELECTING,
AND NEGOTIATING WITH TARGET FIRMS

This section
applies to Knowledge Objective 3.

Acquisition
opportunities often come without warning and need to be evaluated quickly.
Firms
must balance need to think strategically with need to react quickly.
Firms
that specialize in financial acquisitions (e.g., leverage buyout firms)
have more experience in evaluation than do ordinary firms.
Key
issues include
what
role top executives will play
a
cooperative relationship with the target firm
inclusion
of government officials in cross-border acquisitions

Table 7:1
Considerations in
Successful Acquisition (Including Cross-Border) Negotiation Processes

This
table applies to Knowledge Objective 3.

The
information in this table supplements the text and provides guidelines for
negotiations in the acquisition process.

Lecture note:
The instructor may wish to draw parallels for effective negotiation of
an acquisition, and many other business negotiations. For instance, patience, lack of emotion,
identifying the potential players in the deal-making process, planning how to
handle potential deal-blockers, etc., are all factors in any negotiation. To some extent, negotiating skills and
processes are transferable across transaction types.

DUE DILIGENCE

This section
applies to Knowledge Objective 3.

Due
diligence is the rational process by which acquiring firms evaluate
target firms.
Due
diligence verifies the strategic and financial soundness of the reason for
the transaction.

WHAT IS THE ACQUIRING FIRM REALLY
BUYING?

·
Due diligence team collects information from
multiple parties.
·
Examines each assumption
·
Studies customers and suppliers
·
Analyzes competitors
·
Assesses the target firm’s capabilities

WHAT IS THE TARGET FIRM’S VALUE?

·
Search for accounting anomalies that may signal
problems and possibly unethical decisions
·
Learn the historical and projected cash flows

WHERE ARE
THE SYNERGIES BETWEEN THE COMBINED FIRMS?

·
Identify
o specific
synergies that might be created
o the
probability of the synergies
o the
time and investment needed for the synergies

WHAT IS THE
ACQUIRING FIRM’S WALK-AWAY OFFER PRICE?

·
To avoid emotional decisions, the acquiring firm
should develop a purchase price it will not exceed.
·
Before final negotiations begin, determine
criteria for the decision and who will make the decision.

Teaching note: The
instructor might ask some of the accounting majors in the class who have had
coursework in mergers and acquisitions, about some of the difficulties and
complications of establishing the value of the target firm. The accounting majors could also discuss the
difficulties of combining the accounting systems of merged companies.

INTEGRATING THE NEWLY
ACQUIRED RESOURCES

This section applies
to Knowledge Objective 4.

Acquisitions succeed or fail based
on how well the two firms integrate their operations.
Integration success is more likely
when an integration team with members from both organizations is given
full responsibility for integration.
Complementary assets enable value
creation.
Mergers of equals are best if a new
identity for the organization is created.

Learning from Success, Understanding Strategy: Hilton Hotels’ Successful Acquisition of
Promus Hotel Corporation

This case
applies to Knowledge Objective 4.

Hilton Hotels’
acquisition of Promus has proved to be highly profitable. The case gives examples of effective
integration of the two companies.

Critical thinking questions:

1.
What
are the sources of value creation resulting from the acquisition of Promus by
Hilton? (Knowledge Objective 4)

Answer:

The
combined firms formed a new asset in their reservations system. This technological improvement included
self-check-in kiosks and a more effective Web site. They developed synergies in cross-selling the
Hilton Brands. They were able to include
the Promus Hotels in the HHonors program, thus enlarging the base of
frequent-stayer customers.

2.
Which
pitfall(s) did the some market analysts fear Hilton was succumbing to when it
acquired Promus? (Knowledge Objective 5)

Answer:
The
two hotel chains did not seem to be a strategic fit because they targeted
different customer bases. In addition, Hilton
had to take on a significant amount of debt to make the purchase.

3.
If
the Promus chain had been a bad fit for Hilton, what options would Hilton have
had? (Knowledge Objective 6)

Answer:

Hilton
could have divested itself of Promus by selling it to another company, spun it
off as a subsidiary, or sold it in a leveraged buyout deal to be restructured.

PITFALLS IN PURSUING
ACQUISITIONS AND THEIR PREVENTION

This section
applies to Knowledge Objective 5.

Critical to retain key executives
and other valuable human capital
Involve key personnel in
integration process to reduce the likelihood of their turnover

INADEQUATE
EVALUATION AND PAYING TOO MUCH

·
Cognitive biases may cause executives of a firm
to spend too much for an acquisition.
o Anchoring
o Overconfidence

EXCESSIVE
DEBT IN THE POSTACQUISITION PERIOD

·
Reduced credit rating results in
o higher
costs to obtain additional financial capital
o firm
perceived as riskier investment
·
Higher debt load
o less
cash for investment

OVERDIVERSIFICATION

·
Firms grow through diversification
·
Growth meets capital market expectations.
·
Top managers’ salaries grow with diversification
and firm size.
·
If firms overdiversify it is difficult for the
firm to manage each acquisition effectively.
·
Overdiversification leads to divestiture.

MANAGERS
WHO ARE OVERLY FOCUSED ON MAKING ACQUISITIONS

·
Opportunity
costs of acquisitions keep managers from other managerial duties.
·
Target firm managers operate in suspended
animation during acquisition.
·
Managers should encourage dissent and “checks
and balances” when evaluating acquisition target.
·
Firm should stick to walk-away price.
·
Acquisition should have strategic fit with the
acquiring firm’s core strengths.

Teaching notes: Students
may be surprised that so much emotion on the part of top management can be
involved in acquisitions. It is very
easy for executives to become personally emotionally “invested” in a deal,
partly because of the excitement and “adrenaline rush,” and partly because they
can come to see it as “my” deal.
Consequently, their thinking may become clouded by the “thrill of the
hunt.” Perhaps students can relate to
this on a personal level in the purchase of a new car. From a rational point of view, cars provide
transportation. But, cars carry many
emotional aspects as well. Have students
ever been tempted to buy a car they “fell in love with” and “had to have”
knowing (in the rational part of their mind) that it is too expensive, or
impractical for their lifestyle, or too expensive to maintain? They start thinking of the car as “my car”
long before it is purchased.

TABLE 7.2
Major Pitfalls of
Acquisitions and Their Prevention

This table applies
to Knowledge Objective 6.

This table
summarizes the pitfalls listed in the text and lists actions that the acquiring
firm may take to prevent falling into these errors. These actions mainly consist of effective
targeting, screening, negotiating, and due diligence.

ACQUISITION FAILURE
AND RESTRUCTURING

This section
applies to Knowledge Objective 6.

Failed
acquisitions are often divested.
Divestiture
is a transaction in which businesses are sold to other firms or spun off
as independent enterprises.
A leveraged
buyout (LBO) is a restructuring strategy in which a party buys all
or part of a firm’s assets in order to take the firm or a part of the firm
private.
significant
amounts of debt are incurred to finance a buyout
assets
are sold to pay off debt and to focus on firm’s core business
purpose
is to resell firm at profit

Lecture note:
Background material from the following may be helpful: “What Are Mergers
Good For?” The New York Times Magazine, June 5, 2005. This article covers the dark side of mergers
and is based, in part, on the book, Deals from Hell, by Robert F.
Bruner, a professor of business administration at the Darden School of Business
at the University
of Virginia.

SUMMARY

KEY TERMS

ANSWERS TO DISCUSSION QUESTIONS

1.
What are the definitions of an acquisition, takeover,
merger, and acquisition strategy? Why
are acquisitions this chapter’s focus? (Knowledge Objective 1)

Answer:

An acquisition is a
transaction in which a firm buys a controlling interest in another firm with
the intention of making it a subsidiary or combining it with its current
business. A takeover is an
acquisition in which the target firm does not solicit the acquiring firm’s
offer. In a merger the two firms
combine on a relatively equal basis. An acquisition strategy is an action
plan for acquiring other companies.
Acquisitions are a popular growth strategy for firms competing in many
industries. Global competition and the
saturation of home markets are making cross-border acquisitions more
common. An understanding of acquisitions
is critical to understanding modern business strategy.

2.
What are the five basic reasons why firms complete
acquisitions? Over the next ten years or
so, do you think any of these reasons will become more important the
others? If so, why? (Knowledge
Objective 2)

Answer:

Firms make acquisitions to a)
reduce costs, b) gain market power, c) increase growth, d) learn to build
capabilities, and e) manage risk and other financial objectives. According to the textbook,
capability-building acquisitions are dominant currently. It may be that increased global competition
has made innovation more important for success, and innovation requires
capability-building.

3.
What are target screening, target selection, target
negotiating and due diligence? In your
opinion, why do some firms fail to successfully complete these activities? (Knowledge
Objective 3)

Answer:

Teaching notes:
These topics are not clearly defined in the text pgs 172-173. The screening definition is in the chapter summary,
page 181,

Target screening is the process of
deciding which of multiple acquisition opportunities are worth close examination. Effective screening enables the acquiring
firm to gain an overall sense of the acquisition opportunities that exist and
helps establish the right price. Target selection focuses the acquiring firm on
one target. Target negotiating takes
place with the executive of the targeting firm.
Due diligence is the rational process by which acquiring firms evaluate
target firms.

Some firms may not successfully
complete these activities because the acquiring firm executives become
emotionally involved in the acquisition and do not make rational
decisions. Or, these managers are
operating on the basis of their own benefit (higher salaries) rather than the
benefit of the firm.

4.
What process should be used to successfully integrate
acquisitions and why is the process important?
(Knowledge Objective 4)

Answer:

The best process for integration
places employees from both the acquiring and target firms on an integration
team which has full responsibility of integrating the two firms. This is especially important when the firms
need to learn from each other where complementary assets are brought together
by the transaction.

5.
What are the four major pitfalls of acquisitions? How can these pitfalls be prevented? (Knowledge
Objective 5)

Answer:

The four major pitfalls are
a) paying
too much
b) taking
on too much debt
c) becoming
overdiversified
d) managers
who are overly focused on acquisitions

These pitfalls can be prevented by
a) proper
due diligence and sticking to a walk-away price
b) ensuring
that the firm has adequate cash and debt capacity to complete the transaction
c) understanding
the synergy in the acquisition and the integration processed needed to achieve
it; ensuring that unrelated transactions are based on strong financial
rationales
d) establishing
checks and balances so that top managers are challenged in their
decision-making by the board and stakeholders

6.
What major restructuring strategies do firms use to
deal with a failed acquisition? What are
the tradeoffs among the restructuring strategies? (Knowledge
Objective 6)

Answer:

Firms use divestiture and
leveraged buyouts to rid themselves of failed acquisitions. Divestitures result in the acquired firm
being bought by another firm or spun off as an independent enterprise. In a leveraged buyout the previously acquired
firm is sold all in part. The new owners
sell off assets to pay off the debt incurred in buying the firm and then
restructure it and resell it in five to ten years. The tradeoffs between divestiture and LBOs
are not specifically addressed in the text.
One difference between the two processes is that the previously acquired
firm is more likely to survive intact in a divestiture. LBOs may result in significant job losses and
the character of the firm may change considerably. From the point of the divesting firm, the
main purpose is to rid itself of the acquired firm and sell it for a high
enough price to offset the initial investment and lost opportunities during the
failed integration attempt.

ENDNOTES

Your Career

This feature
applies to Knowledge Objective 3.

This section
describes a due diligence exercise for students as a way of learning how to do
this kind of analysis. A due diligence
analysis of a company the student wishes to work for is useful preparation for
an interview, even if the company does not use an acquisition strategy.

INSTRUCTORS’ NOTES
FOR STRATEGY TOOLBOX

This exercise
applies to all Knowledge Objectives.

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