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Chapter 4
Planning: Developing Business and
Acquisition Plans—Phases 1 & 2 of the Acquisition Process
4.1 How does planning facilitate the acquisition process?
4.2 What is the difference between a business plan and an acquisition plan?
4.3 What are the advantages and disadvantages of using an acquisition to implement a business strategy as
compared to a joint venture?
4.4 Why is it important to understand the assumptions underlying a business plan or an acquisition plan?
4.5 Why is it important to get senior management heavily involved early in the acquisition process?
4.6 In your judgment, which of the acquisition plan management preferences discussed in this chapter is the most important
and why?
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4.7 After having acquired the OfficeMax superstore chain in 2003, Boise Cascade announced the sale of its core paper and
timber products operations in late 2004 to reduce its dependence on this highly cyclical business. Reflecting its new
emphasis on distribution, the company changed its name to OfficeMax, Inc. How would you describe the OfficeMax
mission and business strategy implicit in these actions.
4.8 Dell Computer is one of the best known global technology companies. In your opinion, who are Dell’s primary customers?
Current and potential competitors? Suppliers? How would you assess Dell’s bargaining power with respect to its customers
and suppliers? What are Dell’s strengths/weaknesses versus it current competitors?
4.9 .Discuss the types of analyses inside GE that may have preceded GE’s 2008 announcement that it would spin-off its
consumer and industrial business to its shareholders.
4.10 Ashland Chemical, the largest U.S. chemical distributor, acquired chemical manufacturer, Hercules Inc., for $3.3 billion in
2008. This move followed Dow Chemical Company’s purchase of Rohm & Haas. The justification for both acquisitions was
to diversify earnings and offset higher oil costs. How will these combinations offset escalating oil costs?
Solutions to Chapter Case Study Questions
Payment Processor Vantiv Goes Global with Worldpay Takeover
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Discussion Questions:
1. Who are Vantiv's customers and what are their needs?
2. How would you describe Vantiv's corporate vision, business strategy, and implementation strategy?
3. What external and internal factors are driving the merger between Vantiv and Worldpay?
4. In the context of M&A, synergy represents the incremental cash flows generated by combining two businesses. Identify the
potential synergies you believe could be realized in combining Vantiv and Worldpay? Speculate as to what might be some of
the challenges limiting the timely realization of these synergies?
5. How would the combined firms be able to better satisfy their customer needs than the competition?
6. Why did Vantiv shares fall and Worldpay's rise immediately following the announcement? Speculate as to why Worldpay's
share price did not rise by the full amount of the premium.
7. What alternative implementation strategies could Vantiv have pursued? Speculate as to why they may have chosen to acquire
rather than an alternative implementation strategy? What are the key risks involved in the takeover of Worldpay?
Examination Questions and Answer
4
1. A planning-based acquisition process consists of both a business plan and acquisition plan, which drive all subsequent
phases of the acquisition process. True or False
2. A business plan articulates a mission or vision for the firm and a strategy for realizing that mission. True or False
3. Determining where a firm should compete starts with deciding who the firm’s current or potential customers are and what
are their needs. True or False
4. Market segmentation involves identifying customers with common characteristics and needs. True or False
5. An analysis of markets should involve current and potential customers, as well as current and potential competitors, but
it should exclude suppliers. True or False
6. A competitive self-assessment involves an analysis of the firm’s absolute strengths and weaknesses. True or False
7. A firm’s core competencies refer to those skills which are required to produce the firm’s primary products but
which have little or no application in producing related products. True or False
8. Core competencies should be defined as narrowly as possible. True or False
9. A corporate mission statement should be defined as broadly as possible since it seeks to describe the corporation’s reason
for being, and it should not exclude the firm from pursuing any significant opportunities. True or False
10. The market targeted by the firm should reflect the fit between the corporation‘s primary strengths and competencies and
its ability to satisfy customer needs better than the competition. True or False
11. Corporate objectives are defined as what is to be accomplished within a specific period. True or False
12. A firm should choose that strategy from among the range of reasonable alternatives that enables it to achieve its stated
objectives in an acceptable time period without regard for resource constraints. True or False
13. A price or cost leader in an industry is usually the firm with the largest market share. True or False
14. The experience curve is most important in analyzing industries with low fixed costs. True or False
15. A cost leadership strategy can be highly destructive to the firm with the largest market share if pursued concurrently by a
number of firms with very different market shares. True or False
16. A differentiation strategy is one in which customers believe that various competitors have significantly different cost
structures. True or False
17. A differentiation strategy is one in which a firm’s products are perceived by customers to be slightly different from other
firms’ products in the same industry. True or False
18. Firms adopting a focus strategy tend to concentrate their efforts by selling a few products to a single market and compete
primarily on price. True or False
19. Firms adopting a focus strategy compete primarily based on their superior understanding of how to satisfy their customers
needs better than the competition. True or False
20. Coca Cola is an example of a company that pursues both a differentiation and cost leadership strategy. True or False
21. The evolution of the growth of a product can be characterized in four stages: embryonic, growth, maturity, and decline.
This description is called a business attractiveness matrix. True or False
22. Strong sales growth and low entry barriers characterize the embryonic and growth stages of a product’s life cycle.
True or False
23. An acquisition plan defines the objectives to be achieved by acquiring another firm, management’s preferences as to how
the acquisition process should be managed, resources required, and the roles and responsibilities of those responsible for
implementing the plan. True or False
24. An acquisition plan is developed if management determines that an acquisition or merger is required to implement the
firm’s business strategy. True or False
25. Resource limitations in developing the acquisition plan include money, borrowing capacity, as well as management time
and skills. True or False
26. Operating risk addresses the ability of the buyer to manage the acquired company. True or False
27. An acquisition is one of many options available for implementing a firm’s business plan. True or False
28. Financial risk refers to the buyer’s willingness and ability to leverage a transaction as well as the willingness of
shareholders to accept near-term earnings per share dilution. True or False
29. Examples of management preferences used in an acquisition plan include their preference for an asset or stock purchase
or openness to partial rather than full ownership of the target firm. True or False
30. While management’s upfront involvement in the acquisition process is crucial, management should largely disengage
from the process until the transaction is completed. True or False
31. Market profiling entails collecting sufficient data to accurately assess and characterize a firm’s competitive environment
within its chosen markets. True or False
32. Potential competitors include firms (both domestic and foreign) in the current market, those in related markets, current
customers, and current suppliers. True or False
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33. The market or markets in which a firm chooses to compete should reflect the fit between the firm’s primary strengths and
its ability to satisfy customers needs better than the competition. True or False
34. A cost leadership strategy is most appropriate when pursued concurrently by a number of firms in the same industry with
approximately the same market share. True or False
35. The joint venture may represent an attractive alternative to a merger or acquisition. True or False
36. Stakeholders only include a firm’s shareholders. True or False
37. The implementation strategy refers to the way in which a firm chooses to implement its business strategy. True or False
38. A merger or acquisition is generally not considered an example of an implementation strategy. True or False
39. Contingency plans are actions that are taken as an alternative to the firm’s current business strategy. True or False
40. Good planning expedites sound decision making. True or False
41. Planning in advance of a merger or an acquisition necessarily slows down decision making. True or False
42. A collection of markets is said to comprise an industry. True or False
43. A corporate mission statement seeks to describe the corporation’s purpose for being and where the corporation hopes to
go. True or False
44. A diversification strategy involves a firm moving into only those businesses which are unrelated to the firm’s current core
business. True or False
45. Management can obtain insight into the firm’s probable future cash requirements and in turn its value by determining its
position in its industry’s product life cycle. True or False
46. Accounting considerations rarely affect the decision to buy another business rather than to build the business internally.
True or False
47. Overpayment risk involves the dilution of EPS or a reduction in its growth rate resulting from paying significantly more
than the economic value of the acquired firm. True or False
48. Acquisition plan objectives should be directly linked to key business plan objectives. True or False
49. The acquisition plan provides the detail needed to implement effectively the firm’s business strategy, True or False
50. The acquisition plan establishes a schedule of milestones to keep the process on track and clearly defines the authority
and responsibilities of the individual charged with managing the acquisition process. True or False
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Circle only one of the options.
1. All of the following represent commonly found components of a well-constructed business plan except for
a. Mission statement
b. Strategy
c. Acquisition plan
d. Objectives
e. Tactical or implementation plans
2. Which of the following represent key components of the acquisition process
a. Business plan
b. Integration plan
c. Search plan
d. Negotiation process
e. All of the above
3. Which of the following best defines market segmentation
a. The identification of customers with common characteristics and needs
b. The identification of customers with heterogeneous characteristics and needs
c. The grouping of customers with different characteristics
d. The process of reducing large markets into smaller markets without regard to customer characteristics
e. The process of identifying the various markets that comprise an industry without regard to customer
characteristics
4. Determining how to compete requires a firm’s management to consider which of the following factors?
a. Factors critical to successfully competing in its targeted markets
b. An external market analysis
c. An evaluation of what criteria customers use to make buying decisions
d. Availability of product substitutes
e. All of the above
5. Determining where a firm should compete requires management to consider which of the following factors?
a. Determining the firm’s current customers only
b. Determining the firm’s potential customers only
c. Determining the needs of current and potential customers, as well as suppliers
d. Determining the needs of potential suppliers only
e. A and D only
6. Market profiling requires an analysis of all of the following factors except for:
a. Customers
b. Suppliers
c. Core competencies
d. Current and potential competitors
e. Product or service substitutes
7. All of the following questions are relevant for conducting a self-assessment or internal analysis of the firm except for
a. What are the firm’s critical strengths and weaknesses as compared to the competition?
b. Can the firm’s critical strengths be easily duplicated and surpassed by the competition?
c. Can the firm’s critical strengths be used to gain strategic advantage in the firm’s chosen market?
d. What are the least important factors customers consider in making purchasing decisions?
e. Can the firm’s key weaknesses be exploited by the competition?
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8. Which of the following examples represents the best application of a firm’s primary core competence?
a. Honda Motors manufactures cars, motorcycles, lawnmowers, and snow blowers
b. IBM provides both software services and manufactures computer hardware
c. PepsiCo manufactures and distributes soft drinks and manages restaurant chains
d. Microsoft sells operating system software and access to the internet through its MSN subscription service
e. McDonalds sells hamburgers and pizza.
9. What is the core competence underlying Honda Corporation product offering?
a. Product distribution
b. Marketing
c. Internal combustion engine design
d. Exterior design
e. Organizational structure
10. In selecting an appropriate business strategy, all of the following are relevant questions except for
a. Does the firm have sufficient resources to implement the strategy?
b. Have all reasonable alternatives available for implementing the strategy been evaluated?
c. What are the key assumptions underlying the various strategic options under consideration?
d. What do the firm’s targeted customers primarily consider in making purchasing decisions?
e. Why might an acquisition be preferred to a joint venture in implementing the business strategy?
11. In a conducting a self-assessment, a firm should consider all of the following except for
a. The degree on government regulation in its targeted markets
b. The effectiveness of its R&D activities
c. Product quality
d. Responsiveness to changing customer needs
e. Brand name recognition
12. A good mission statement should be
a. Very broadly defined
b. Very narrowly defined
c. Reference the firm’s targeted markets, product or service offering, distribution channels and management’s core
operating beliefs
d. Describe only the purpose of the corporation
e. A and C only
13. All of the following represent generic business strategies except for
a. Cost leadership
b. Differentiation
c. Focus
d. Market segmentation
e. A and D
14. All of the following are true about experience curves except for
a. Applicable primarily to differentiation strategies
b. Applicable primarily to cost leadership strategies
c. Reflect declining average unit costs due to increasing accumulated production levels
d. Reflect both economies of scale and the introduction of more efficient production methods as output increases
e. Often found in commodity-type industries
15. All of the following are true about product life cycles except for
a. Strong sales growth and low barriers to entry often characterize the early stages of a product’s introduction
b. New entrants have substantially poorer cost positions, as a result of their small market shares when compared to
earlier entrants.
c. Later phases are characterized by slower market growth rates
d. During the high growth phases, firms usually experience high positive operating cash flow
e. The introduction of product enhancements can extend a firm’s product life cycle
16. An acquisition plan entails all of the following except for
a. Identifies key management objectives for making an acquisition
b. Determines important resource constraints
c. Articulates management’s preferences for acquiring stock or assets or considering competitors as possible targets
d. Constitutes the firm’s business plan
e. Defines roles and responsibilities of those on the acquisition team
17. Which of the following are ways to implement a firm’s business strategy?
a. Merge or acquisition
b. Joint venture
c. Going it alone
d. Asset swap
e. All of the above
18. Which of the following are components of an acquisition plan?
a. Timetable
b. Resource/capability evaluation
c. Management preferences
d. Objectives
e. All of the above
19. Which of the following are components of a business strategy?
a. Mission/vision
b. Objectives
c. Internal analysis
d. External analysis
e. All of the above
20. Stakeholders include which of the following groups?
a. Shareholders
b. Customers
c. Lenders
d. Suppliers
e. All of the above
21. Which of the following are true of real options?
a. Real options give management the ability to delay the implementation of a strategy
b. Real options give management the ability to accelerate the implementation of a strategy
c. Real options give management the ability to abandon a strategy
d. Real options represent the ability of management to change their strategy after the strategy has been
implemented.
e. All of the above
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22. Which of the following are not components of the negotiation phase of the acquisition process?
a. Refining valuation
b. Identifying potential target firms
c. Conducting due diligence
d. Structuring the deal
e. Developing the financing plan
23. Which of the following phases of the acquisition process contains a “feedback” loop?
a. Negotiation phase
b. Search phase
c. Integration phase
d. Post-closing evaluation phase
e. Closing
24. Which of the following are common objectives of an external analysis?
a. Determining where to compete
b. Determining how to compete
c. Identifying core competencies
d. A & B only
e. A, B, & C
25. Examples of corporate level strategies include which of the following:
a. Growth
b. Diversification
c. Operational
d. Financial
e. All of the above
Case Study Short Essay Examination Questions
YAHOO'S FALL FROM GRACE
Case Study Objectives: To illustrate
• The tenuous nature of competitive advantage;
• The connection between ineffective governance and shareholder wealth destruction; and
• How investor impatience can limit management and board options.
________________________________________________________________________________________________________
Nowhere is the impact of creative destruction more apparent than on the internet. We can be sure that the growth of the internet
will continue to spawn new innovations challenging the survivability of current competitors. The process of “creative destruction”
in which current businesses give way to new businesses with new ways of doing things will continue to change the competitive
landscape for years to come. Moreover, the pace of creative destruction is accelerating due to the quickening pace of technological
change. The inescapable conclusion is that factors contributing to a firm’s competitive advantage today may be irrelevant
tomorrow causing firms once dominant in their chosen markets to fall by the wayside. This is the story of one such firm, Yahoo, a
former internet darling that failed to keep pace with the changing realities of the marketplace.
The internet is currently dominated by three behemoths: Amazon.com, Facebook, and Google. Each has satisfied a large and
growing user need in cyberspace. Amazon.com has become the online retailer of choice in a space whose growth is fueled by the
ongoing shift from brick and mortar to online retailing. Facebook dominates the exploding social media space by giving people the
power to share whatever they want, with whomever they want, and whenever they want. Finally, internet search is controlled
largely by Google’s juggernaut search engine as the demand for more timely and relevant information escalates. Notably, all three
firms have rapidly made the shift from offering primarily desktop computer access to their websites to enabling mobile
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communication to make purchasing, socializing, and searching an anywhere, anytime event. At more than 90%, Facebook and
Google make the bulk of their revenue from advertising in news feeds and mobile ads. Amazon.com generates the majority of its
revenue from fees from its partners who sell products through the firm’s websites and from its own branded products and
services.1
It is in the shadow of these three powerhouses that Yahoo has struggled to find its place on the internet. Largely locked out
of selling products and services on the internet because of its diminutive size, the firm derived the bulk of its revenue and profits
from advertising. But with online users flocking to Facebook, Google, and Amazon.com to satisfy their needs, Yahoo became less
attractive for advertisers.
After more than a decade of mismanagement, Yahoo announced that it had reached an agreement on July 25, 2016 to sell its
core internet operating assets to wireless telecom giant Verizon Inc. for $4.8 billion in cash.2 The remaining assets would include
investments in Chinese e-commerce firm Alibaba, Yahoo Japan, and a small patent portfolio. How did a firm that once dominated
internet search and served as an online gateway for millions fall from grace? A look into the past helps to answer this question.
When Yahoo went public in 1996 in an initial public offering, the internet in many ways was still in its infancy. Consumers
were quick to gravitate to Yahoo’s quirky brand and soon became reliant on the firm’s search capability to help them find
interesting and meaningful content. Yahoo also pioneered the “internet portal” concept offering consumers a single site to satisfy
the majority of their online needs. The firm was known for its fierce independence and for a culture that was slow to adapt to
technologies not invented by Yahoo. While still one of the most popular destinations on the internet, it was dwarfed by its major
competitors. The firm’s annual revenue declined from $7.3 billion in 2008 to about $4.3 billion in 2015. While the firm did
receive major cash infusions from the partial sale of its stake in Alibaba, the Chinese mega e-commerce business, its operating
profits have been sliding inexorably lower in recent years. Most of its market value was a result of its investment made years ago
in Alibaba.
The firm appeared directionless, with the board thrashing about trying to develop a successful business strategy. But to what
end? Could the firm deliver the greatest shareholder value by reinvigorating its core assets with new products and services? Or did
it make more sense to break up the firm by spinning off shares in its stakes in Alibaba and Yahoo Japan or specific operating units
to shareholders or returning cash to shareholders by selling operating units and declaring a special cash distribution? Alternatively,
should Yahoo spin off or sell its core operating units and retain its investments in Alibaba and Yahoo Japan?
These are questions best addressed in a coherent planning process, something Yahoo seems to have been lacking for years. The
firm appeared more reactive than proactive to changes in its external environment and to have seriously overestimated its current
core capabilities or its ability to acquire the competences needed to compete in the online environment. More importantly, the firm
seemed almost schizophrenic in its view of the future and what constitutes a range of reasonable strategic options for delivering
value to shareholders. Sometimes it would position the firm as a media business and other times a technology business, while more
recently seeing greater value in breaking itself up and returning cash through special distributions or shares through spinoffs to
shareholders. Not having a clear vision of what the firm should look like in the future made it almost impossible to develop a
sound and consistent business strategy.
Yahoo failed to fully grasp that the internet was in a bubble in the late 1990s, that consumers wanted a highly efficient search
capability, and that the world was shifting from desktop to mobile computing. Caught up in the internet stock market euphoria of
the late 1990s, the firm used its inflated stock price as an acquisition currency resulting in overpaying for a series of acquisitions.
Yahoo also was slow to recognize that consumers did not want a portal but rather an efficient search capability so as not to be
tethered to a single gateway to internet content. Failure to update its search capability to accommodate changing consumer tastes
allowed Google to leapfrog Yahoo. Finally, Yahoo’s bureaucratic infrastructure was slow to move to mobile from desktop access
to internet search and content, while its competitors moved at breakneck speed to accommodate this important trend.
Yahoo’s assets at the end of 2015 consisted of a series of investments in other companies and in wholly owned and operated
businesses. The firm’s most valuable investments included Alibaba and Yahoo Japan. At that time, the value of Yahoo’s stake in
Alibaba was $32.5 billion and its stake in Yahoo Japan was $8.6 billion. The company’s net cash — or cash minus debt — was
1 While all three firms are profitable on a GAAP basis, Google and Facebook display substantially larger profit margins than
Amazon.com.
2 Closing the deal was hampered by the discovery in November 2016 of several hacks of more than one billion Yahoo email users'
private accounts which had occurred in 2013 and 2014 and the potential reduction in the firm's value resulting from these
incidents. Verizon argued the hacks resulted in a material loss of value and attempted to negotiate a lower purchase price. Yahoo
countered that its value was unaffected as it did not experience any loss of email users during the years subsequent to the hacks.
Further complicating the process, the SEC initiated an investigation of Yahoo's failure to make public sooner these potentially
material events in late December 2016. Nonetheless, at the time of this writing, the firms were still negotiating this issue in early
2017 making the timing of the deal (or possible termination) closing uncertain.
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$4.2 billion. This sums to $45.3 billion and compares to the stock market’s then valuation of the firm of $32.5 billion. Investors’
lower valuation of the firm reflected a lack of confidence in the board's ability to enhance the value of its operating units.
The firm’s websites were one of its greatest assets. Yahoo claimed on its website that every day 43 million people come to its
sites for the “best the web has to offer” and they on average return daily.3 The challenge has been to find a way to convert this
traffic into an accelerating (rather than a declining) revenue stream. The Yahoo brand while highly recognizable may have been as
much a hindrance to growing revenue as a boon due to its greater association by millennials with the past rather than the future of
the internet.
Perhaps the greatest factor limiting Yahoo’s turnaround in recent years has been a rapid succession of CEOs and muddled
governance. The firm’s governance issues ranged from the failure to provide consistent leadership at the top, board oversight, lack
of an enduring mission statement and successful business strategy, poor stewardship of the firm’s financial resources, and an
inability to align the firm’s culture with longer-term objectives. Since 2008, the firm changed CEOs five times and experienced an
unsolicited takeover attempt by Microsoft, a proxy contest, several public flare-ups with activist investors, as well as a loss of
board members and key management personnel.
Historically, Yahoo had a reputation as a largely bureaucratic organization that stifled innovation and growth. In an effort to
make the organization more nimble, upon becoming CEO in 2012, Marissa Mayer recruited new people to key posts in the belief
that a new and strong management team with fresh perspectives would breakdown the bureaucratic nature of Yahoo’s culture.
While she has had some successes in updating the firm's website and Yahoo Mail, what stands out to many investors about Marissa
Mayer’s four year tenure as CEO is one thing: spending. Yahoo employees enjoyed perks like free iPhones and food while Mayer
has a penchant for throwing lavish parties that have been widely publicized gimmicks for boosting employee morale. SpringOwl,
an asset management company, estimated in a December 13, 2015 critique that Yahoo's wasteful spending has cost the company
around $450 million in the past four years.4 Presumably these “missteps” were approved by the board casting doubt among
investors about its effectiveness in promoting their interests.
The firm’s board and management had been unable to settle on a clearly defined and credible vision that could be effectively
communicated to consumers and businesses that describes where and how the firm chooses to compete. This has left consumers
and businesses confused about what Yahoo is and why they should be using it. Yahoo in its 2015vision statement viewed itself as
“a guide focused on informing, connecting, and entertaining our users. By creating highly personalized experiences for our users,
we (Yahoo) keep people connected to what matters most to them, across devices and around the world. In turn, we create value for
advertisers by connecting them with the audiences that build their businesses."5 This statement on its face seems to lack the
specificity to provide clear direction for the firm and to forge a unified culture intent on achieving this undertaking. At its worst, it
seems to allow the firm broad sway in making acquisitions and corporate investments.
The lack of a clear and crisp vision has contributed to a muddled business strategy punctuated by a number of time consuming
detours in an effort to turnaround the firm's operating performance. These included an intense focus on media by making big
investments on digital magazines to expensive video deals to a race to compete with Google in search. Another strand of the
strategy was a series of seemingly disjointed acquisitions that appeared aimed more at bringing talent to the firm than
concentrating on a specific objective. Still another aspect of the firm’s hapless strategy has been its emphasis on getting top TV
talent to attract more site visitors, but this appears to have had little success as many of the deals done in 2014 were largely written
off during 2015 due to lack of viability.
During the first two years as CEO, Ms. Mayer had been able to emerge largely unscathed despite these missteps because of
investors’ focus on the firm’s stake in Alibaba. In recent years, much of Mayer’s and the board’s time seems to have been taken up
in 2015 by what to do with the Alibaba investment. Throughout 2015, Yahoo’s board and management were under considerable
pressure to deliver value to shareholders and to do it soon. Or else face the prospect of a proxy fight for control of the board.
Private equity firm, Starboard Value, which has a track record of successfully forcing firms to change management, board
members, and strategies, had been most active in seeking a complete restructure of Yahoo. On November 19, 2015, Starboard
CEO Jeffrey Smith sent a letter to the board and management expressing its displeasure with Yahoo’s performance and that it had
a “dim view of the company’s current strategy.” Smith argued that a change in direction was needed and that changes in the board
were required to end any further shareholder value destruction. In response to growing shareholder pressure, the Yahoo board and
management in early 2016 ceased efforts to sell their investments in Alibaba and Yahoo Japan, which would have generated a
huge tax liability for the firm's shareholders, deciding instead to retain these investments and sell off or spin off its core operating
businesses. However, Yahoo's actions subsequent to the announcement of their new strategy seemed half-hearted, leaving
investors questioning the board's commitment to making it happen. On March 24, 2016, Starboard Value's management lost
3 https://advertising.yahoo.com/yahoo-sites/Homepage/index.htm
4 http://www.wsj.com/public/resources/documents/yahoopresentation.pdf
5Yahoo Announces SEC Filing for Planned Spin-Off of Remaining Stake in Alibaba Group, Press Release, Jul 17, 2015
13
patience with the Yahoo board announcing its intention of submitting its own slate of nine candidates in an effort to oust the entire
Yahoo board, including Marissa Mayer. This forced the Yahoo board to redouble their efforts to sell-off its core operating
businesses.
Looking back, Yahoo’s problems seem to lie in the inability of the board to exercise effective oversight over bloated staffing
levels and frivolous spending, and its approval of underperforming acquisitions. We shall never know if Ms. Mayer’s vision and
strategy for the business could have been successful due to investor impatience. Investors wanted to either see improved operating
performance or to cash out. Activist investors moved aggressively to resolve the firm’s floundering performance. While some
progress had been made with mobile revenues increasing as a share of total revenue and increasing monthly visitors, the firm’s
competitive position relative to Google in search and Facebook in social media worsened. In the end, investors simply lost
confidence in the firm’s ability to compete in markets subject to rapid technological change, viewing the firm as irrelevant in
online advertising, search, social media and commerce.
In the end, frustrated investors forced the dramatic restructuring of the business. What remains of the once revered and growth
oriented internet operating business is a holding company with passive investments in other internet properties and technology
patents. Exiting these investments, without triggering a huge tax liability, represents the next big challenge for the Yahoo board.
With the sale of its operating units, the Yahoo's total market value of $36.4 billion as of the end of July 2016 reflected its 15%
stake in Alibaba Group and its 35.5% investment in joint venture Yahoo Japan. Therefore, considerable restructuring activity
remains before Yahoo is completely liquidated.6
Discussion Questions:
1. How would you describe the Yahoo corporate culture prior to Marissa Mayer becoming CEO? How might this have
slowed her ability to transform the company?
2. How did the culture change after Mayer’s appointment as CEO in 2012? Be specific.
3. Do you believe the expectations for Mayer were excessive when she became CEO in 2012? What would you have done
differently if you were the CEO of Yahoo?
4. What corporate governance issues does Yahoo face? How do these issues impact Yahoo’s strategy?
5. Discuss how Yahoo’s “legacy” investments in Alibaba and Yahoo Japan constrained its ability to revitalize its core
operating businesses. Be specific.
6. Discuss how the Yahoo brand represented both an asset and a potential liability for the firm in implementing new
strategies. Be specific.
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TURMOIL AMONG MEDIA COMPANIES
KEY POINTS
• Industry leaders often have a unique vision of the future of their business and are highly adept at implementing their
business strategies
• Leadership positions can be sustained only if the leading firms continuously “reinvent” themselves to stay ahead of
changing competitive conditions
• Companies imitating others may be successful if they are able to execute their strategies better than the competition
____________________________________________________________________________________________________
Traditional companies are those that tend to conform to the conventional way of doing business. Nontraditional firms are those that
eschew conventional wisdom. What follows is a discussion of two different groups of firms in what could be loosely defined as the
“media” industry and how they react differently to a rapidly changing competitive landscape. Traditional media firms tend to view
the future through a rear view mirror feeling most comfortable with what they know. In contrast, nontraditional firms less
constrained by the past are more inclined to look far into the future to identify the “next big thing.”
Media companies are arguably those which disseminate proprietary and nonproprietary content through multiple distribution
channels generating revenue from subscriber fees and charging businesses to advertise to their subscriber/customer base.
Traditionally media firms have included cable TV, wireless carriers, newspapers, radio, and movie production companies, as well
as blogs and websites. Social networking company, Facebook, and online search behemoth, Google, position themselves as
partners to the traditional media firms giving them access to their huge global audiences.
Far from being just partners, Facebook and Google have become the largest global media companies when measured by
advertising revenues and increasingly represent competitors to traditional media firms. Their focus has been to build a large and
diverse user base which makes them increasingly attractive to business advertisers. Their meteoric growth has catapulted them to
the top of firms ranked by market value. With well over a billion users, each firm has seen their advertising revenue explode,
because they offer by far the largest audience for businesses wishing to get their message out to large but targeted audiences. The
ongoing shift by consumers to accessing content through mobile devices ranging from smartphones to tablets to laptops is allowing
Facebook and Google to capture an ever increasing share of global mobile advertising revenues.
Traditional media companies have been slow to respond to the ongoing shift of customers to accessing content by using a
variety of mobile devices. Telecom companies like Comcast, AT&T, and Verizon were primarily content distributors and not
content providers since they produced relatively little of their own content. The disastrous acquisition of Time Warner
Communications by AOL for $165 billion in 2000 in an attempt to marry content and distribution made telecom firms hesitant to
develop proprietary content. Their concern was that they would compete with their own content producing advertising customers.
Also, as was demonstrated with the AOL-Time Warner tie-up, corporate cultures between content providers and distributors can
be very different, potentially creating an integration nightmare.
While Facebook is not widely considered a content company, it is increasingly looking like one. For example, Facebook’s
Instant Article’s feature introduced in mid-2015 has the potential to change the web if the company can persuade publishers
through revenue sharing to abandon publishing stories on their own websites in favor of publishing them as content on Facebook.
The New York Times, The Guardian, BuzzFeed, and National Geographic were among the first “partners” to sign up for the
Facebook service. Under the terms of the deal, entire news stories from those partners will appear inside Facebook’s mobile app
and be able to be read on the app, as opposed to the traditional practice of news publishers posting an excerpt and a link to their
website.
With parallels to Amazon.com and its partners and Wal-Mart and its vendors, the growing dependence by content providers on
Facebook and Google means that they are ceding bargaining power to potential competitors. What makes this dependence perilous
for media companies is that Facebook and Google are constantly tweaking their algorithms that dictate which items gain
prominence in their search results. Content providers willing to pay more get greater visibility in front of those most likely to be
interested in their content. While still in its infancy, Facebook’s search engine will be able to make its indexing of content more
efficient in the future. Critics argue that Google through its highly regarded search engine has been publishing and prioritizing its
own content for some time on Google search websites over external content. Whether this will pass antitrust muster is another
question.7
Fearing that they are lagging the shift by consumers to mobile devices and that their core businesses are in peril, the large
media companies are resurrecting the strategy adopted by AOL in its ill-fated takeover of Time Warner. Comcast was among the
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first to revive this strategy when it completed its takeover of NBCUniversal by buying the remaining 49% it did not already own
from General Electric in 2013. The total paid for all of NBCUniversal exceeded $30 billion. In 2015, wireless and cable TV giant
AT&T completed its acquisition of DirecTV for $48 billion and cable provider Charter Communications catapulted itself into the
second position in the mature cable industry by acquiring Time Warner Cable for an eye-popping $55 billion.8
The traditional media firms, struggling to protect their mature cable and wireless businesses, see their futures in a remarkably
similar way: as both providers and distributors of premium content. Their strategies are very similar in that they are acquiring or
developing proprietary premium content (including video streaming) that can bundled and sold to their customer base across a
variety of mobile devices. Cable TV and wireless firms also hope to tap into the explosion of advertising on mobile devices. The
firm likely to be most successful among those pursuing “me too” strategies will be the one who can execute the best.
In contrast, nontraditional media companies Google and Facebook seem more willing to continuously redefine themselves:
Google moving well beyond its core search business and Facebook beyond its social networking roots. Both traditional and
nontraditional media firms have spent aggressively in making acquisitions believing that this would be the best way to keep up
with the rapidly changing competitive landscape. The danger to both traditional and non-traditional media firms is that they will
overpay for acquisitions and be unable to earn the financial returns their investors require.
What’s up? Facebook Buys Messaging Startup WhatsApp for $21.8 Billion
Case Study Objectives: To illustrate
• The role of factors external to a firm in developing the firm’s business strategy
• How maintaining competitive advantage is transient especially in businesses subject to rapid technological change
• How overvalued acquirer shares can contribute to overpaying for a target firm.
Talk about a takeover had been underway since early 2012 when Facebook founder and CEO Mark Zuckerberg contacted Jan
Koum cofounder and CEO of mobile messaging company WhatsApp about the possibility of a deal. Koum had long been cool to
the idea of selling his company because that smacked of his losing control of WhatsApp. The discussions continued throughout
that year and into 2013 on an informal basis. Eventually Zuckerberg was able to entice Koum to accept an offer that essentially
made WhatsApp’s 55 employees enormously wealthy seemingly without having to alter their business model in any way. While
the deal clearly transfers ownership to Facebook, it does not at least from the outside appear to cede control. Mark Zuckerberg
refers to the acquisition of WhatsApp as a partnership reinforcing the notion of Jan Koum’s continuing independence.
WhatsApp is a mobile messaging service for Smartphones that lets users chat with their phone contacts, both one on one and in
groups. Unlike Facebook, it allows users to communicate narrowly rather than broadcast information to large numbers of
“friends.” It allows people to send texts, photos, videos, and voice recordings over the Internet without incurring charges for
international text messages and phone calls. Wireless carriers are bypassed and therefore no fees are required. While the first year
is free, each user is required to pay one dollar annually thereafter. Unlike Facebook, WhatsApp has no ads. WhatsApp was
founded in 2009 by Ukrainian born Jan Koum and American Brian Acton.
Fifty-five percent of its users are from Western Europe, Mexico, India, Brazil, and the United States, with the remainder
residing in emerging countries. At the time the deal was announced, WhatsApp had 450 million monthly active users as compared
to Twitter’s 241 million users. WhatsApp’s 450 million users after 4 years compared to Facebook’s 150 million users 4 years after
startup. WhatsApp has seen its users double since 2012 to its current level, making the service more popular than Twitter, which at
the time of Facebook’s acquisition of WhatsApp had a market value of $30 billion. Seventy percent of WhatsApp users log on to
the service at least once a day as compared to 61% of Facebook’s users. WhatsApp at the time of the deal’s announcement was
growing at the rate of 1 million registered users daily.
WhatsApp vision is to make messaging accessible to anyone regardless of what phone they own, where they live or how much
money they make. WhatsApp received $10 million in funding from Sequoia Capital in 2011 and, despite modest annual revenue of
about $20 million in 2013, it is profitable. Jan Koum, CEO and founder, who owns 45% of the startup, picked the name because it
sounded like “whats up.” Having grown up in the Ukraine when it was still part of the now defunct Soviet Union, Koum
8 See Chapter 2 “Inside M&A” and End of Chapter Case Study for a detailed discussion of these deals.
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remembers the country’s repressive secret police and has an understandable aversion to allowing users of his company’s service to
be tracked electronically.
The announcement by Facebook that it had reached an agreement to acquire WhatsApp stunned industry observers and
investors alike as it represented the largest amount paid for an internet firm in history. At $21.8 billion (including $3 billion in
restricted stock units), the deal represented the biggest acquisition Facebook had ever done and represented almost 10% of its
market value. For comparative purposes, Google’s biggest deal was Motorola Mobility for which it paid $12.5 billion (which it
sold less than 3 years after it had acquired the business); in its biggest deal, Microsoft’s paid $8.5 billion for Skype. Apple has
never done a deal valued at more than $1 billion.
The terms of the deal called for all outstanding shares of WhatsApp stock and options to be canceled in exchange for $4 billion
in cash and 183,865,778 shares of Facebook Class A common stock. The Class A common stock was valued at $12 billion based
on the average closing price of the 6 trading days preceding February 18, 2014, of $65.27 per share. In addition, Facebook granted
45,966,444 restricted stock units (RSUs) to WhatsApp employees worth $3 billion based on the same price average price per
share. The RSUs would vest over the 4 years following the closing date. As of February 17, 2014, Facebook had 2,551,654,996
Class A and Class B shares outstanding plus 139 million shares consisting of unvested restricted stock units, which when
converted would count among the firm’s shares outstanding. The increase in Class A shares to pay for the acquisition constituted
7.9% of Facebook’s total outstanding shares, including unvested RSUs. Facebook also agreed to pay a $1 billion breakup fee if the
deal failed to close.
Shocked by the price paid for the deal, Facebook shares fell 5% to $64.70 on the news. Why was Facebook willing to pay so
much for a WhatsApp? The overarching reasons seem to be its spectacular growth potential, the demographic it attracts, and to
preclude others from acquiring it.
Mark Zuckerberg has stated his vision for Facebook is to make the world more open and connected. How? By giving people the
power to share whatever they want and to be connected to whatever they want no matter where they are. This requires building the
best and most ubiquitous mobile product, a platform where every app that is created can support social interaction and enable
people to share, and to build Facebook into one of the world’s most valuable companies.
While Facebook dominates the social network space in which users are able to share everything they want others to know,
Facebook also wants to dominate how people communicate. The acquisition of WhatsApp illustrates Mark Zuckerberg’s
understanding that people want to communicate in different ways: sometimes broadly through Facebook and sometimes narrowly
through WhatsApp’s mobile messaging capability. In the past, Facebook was essentially a website and a mobile app which enabled
users to indulge (at least theoretically) all their online needs. However, Facebook’s efforts to penetrate the mobile messaging
market in recent years have largely failed. Facebook sorely needed a platform to make inroads in the mobile messaging market.
Enter WhatsApp with its frenetic growth.
WhatsApp’s spectacular growth rate is made more attractive due to the demographic it attracts: teenagers and young adults who
are increasingly using WhatsApp for online conversations outside of Facebook. This trend has accelerated as Facebook has
become popular among their parents, grandparents, and even their bosses at work. This deal is a bet on the future as Facebook
seeks to sustain user growth while recovering the young users it has been losing and retaining its current 1.33 billion user base.
CEO Mark Zuckerberg’s philosophy seems to be to attract users first and then worry about profitability later. The presumption
seems to be that rapid growth leads to long-term profitability. While this has been true in some cases, this logic has been disastrous
in other instances. Examples of this logic paying off include Google buying YouTube for $1.6 billion in 2006 when it was widely
criticized; now it has become the dominant video platform on the web. Similarly, when Facebook acquired Instagram for $1 billion
in 2012 it supposedly overpaid, but today Instagram appears to be thriving and beginning to sell advertisement.
But the same reasoning would have applied to the dot.com boom of the late 1990s that become the dot.com bust as firms used
overvalued stock to overpay for growth through acquisition. Because they paid too much they were never able to earn the rates of
return their investors required to remain invested or for new investors to buy their shares. The end result was that many internet
startups saw the value of their shares plummet while many others went bankrupt.
In addition to providing an engine for growth of Facebook and for staunching the loss of young users, the other major justification
for purchasing WhatsApp seems to be to keep it out of the hands of its archrival Google. Reportedly, Google had made a $10
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billion offer to buy WhatsApp in 2013. In an effort to establish a social media monopoly, Facebook seems to be prepared to buy
out competitors it finds threatening.
Facebook has struggled to gain traction in messaging. After being rebuffed by SnapChat, whose messages vanish within
10▒seconds, in 2013 when it offered a reported $3 billion, Facebook turned to develop Facebook messenger, its chat platform,
which is popular with users, but recent attempts to create its own direct messaging service have failed. Facebook Poke, which was
developed to compete with SnapChat, has few users. A new feature added to Instagram in 2013 called Instagram Direct allows
people to message each other on the service, but this seems to have gained few users as well.
Market value per user is a common metric for valuing businesses without significant earnings but which show significant user
growth. The presumption is that sustained user growth will eventually result in future earnings. Using this metric, Facebook paid
about $48 per existing user ($21.8 billion/450 million users) for WhatsApp versus about $33 per user ($1 billion/30 million users)
for Instagram. Like WhatsApp, Instagram has also been a hit with teens helping Facebook to reduce attrition among teenage users.
Facebook can continue to pay such prices to acquire firms as long as it remains solidly profitable and shows substantial and
sustainable growth potential to support its share price. At the time of this deal, Facebook had net income of $523 million on
revenue of $2.6 billion for the fourth quarter of 2013, an approximate after tax margin of 20%. Moreover, with about 49% of the
firm’s ad revenue coming from mobile advertising, the firm seemed positioned to exploit the accelerating shift to mobile
communication.
In an acknowledgment that people are using many different apps to communicate, the 10-year-old Facebook is now pursuing a
“multi-app” strategy. Facebook has become a media conglomerate similar to Disney owning all the best brands and serving all
demographics simultaneously. It plans to operate its brands independently to see which one gets the largest and does not want to
interfere with the formula that has made these brands popular. Especially on mobile phones, the firm intends to splinter into many
smaller, more narrowly focused services, some of which may not even carry Facebook’s brand and may not require a Facebook
account to use. The firm established an internal organization called Creative Labs in 2014 to enable its software engineers to focus
on designing new innovative apps.
WhatsApp brand will be maintained and the business operated largely autonomously from Facebook. Its headquarters will
remain in Mountain View, CA. Jan Koum will join Facebook’s board of directors, WhatsApp’s core messaging product and
Facebook’s existing Messenger app will continue to operate as standalone businesses.
Is WhatsApp’s culture compatible with Facebook? “No ads, no gimmicks, no games” is WhatsApp’s credo. Contrary to
Facebook’s business model, WhatsApp rejects advertising as a means of making money. At least at this point, Facebook has said
that it does not think that advertising is the right way to monetize messaging. Facebook must at some point find a way to create a
more profitable WhatsApp business if it is to recover the huge premium it paid for the business.
Facebook continues to face many challenges. How long can it continue to buy up competitors? It won’t be long before another
competitor arrives on the scene. Line, a WhatsApp competitor popular in Asia, is considering going public through an IPO. Kik
Messenger, another popular mobile messaging company, is often mentioned as a takeover target.
Such startups benefit from the proliferation of web-connected smartphones and the increased availability of such things as
cloud computing which enables young firms to gain access to inexpensive computer server capacity capable of supporting
exploding internet-based communication. For example, the number of mobile messages handled daily by WhatApp’s 35 software
engineers is almost equal to all the messages transmitted by the world’s major telecommunications companies.
With most of WhatsApp users outside the United States, Facebook has an opportunity to reach more people. But this also can
result in increased competition and tension with the world’s largest telecommunications operators such as AT&T in the United
States and Deutsche Telekom in Germany who charge users to send text messages. While Facebook and WhatsApp can
collaborate to get more users from emerging markets, new barrier may arise. In China, Facebook is banned and social messaging is
dominated by WeChat. Line dominates Japan and Akao is the most popular messaging system in South Korea. WhatsApp is
allowed in China but does not rank in the top five social networking applications.
The proliferation of social networking firms is a mixed blessing for the large telecommunication carriers which support the
internet infrastructure. While the carriers need Facebook, Twitter, and YouTube to lure subscribers to their data plans, these
services have begun to collect an increasing share of the money spent on services used by mobile device users. When someone
buys an online game, the money goes to the game’s creator and the app store operator (e.g., Apple). Ad revenue generated by
increased internet traffic goes to Google’s search engine and to Facebook’s social network. Services such as WhatsApp and
Microsoft’s Skype erode a major source of mobile phone company revenue: voice and text messaging. The major carriers are
seeking approval from regulators to allow more cross-border mergers to compete with the global growth of the social network
firms. The carriers also are asking regulators to allow them to charge different rates for different speeds and different levels of
service. Other carriers, such as Royal KPN of the Netherlands, are introducing services similar to WhatsApp.
By operating as a media holding company consisting of popular brands, Facebook is not just diversifying its product portfolio,
it is diversifying its business model by keeping WhatsApp ad free with a nominal $1 per year subscriber fee. In doing so, how will
it make money in the future to support its ever increasing overhead and support infrastructure? How will it realize synergies among
the various brands? Will issues of control arise causing the eventual loss of key talent from Facebook?
Can Facebook’s efforts to design innovative apps though Creative Labs be successful? Its most imaginative engineers with
“game-changing” ideas for apps could be motivated to leave the company to develop these apps on their own in an effort to reap
100% of the resulting rewards. Furthermore, by producing more apps separate from its main app, Facebook could be limiting its
ability to promote new innovative features to its core users who focus primarily on photo sharing and who may not be exposed to
standalone apps.
Whatever the answer is to these questions, we can be sure that the growth of the internet will continue to spawn new
innovations challenging the survivability of current competitors. The process of “creative destruction” in which current businesses
give way to new businesses with new ways of doing things will continue to change the competitive landscape for years to come.
What also appears evident is that the pace of creative destruction is accelerating.
Discussion Questions
1. Do you believe Facebook paid too much for WhatsApp? Why? Why not? Be specific in identifying the assumptions
underlying your argument.
2. How might existing Facebook shareholders be hurt by the deal? What do current shareholders have to assume about future
earnings growth to benefit from the deal?
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3. Given the nature of technology, do you believe it is possible for one firm to dominant the mobile messaging space? Explain
your answer.
4. Do you believe that Facebook is justified in its aggressive acquisition strategy? What are the assumptions implicit in this
strategy? Are they credible? Why? Why not?
5. Describe how Facebook has chosen to deal with cultural differences that may exist between it and the firms it acquires? What
are the advantages and disadvantages of Facebook’s approach to dealing with cultural differences?
6. What alternatives to acquisition did Facebook have in dealing with WhatsApp? Why was acquisition the preferred option?
Consolidation in the Supermarket Industry
Key Points
• Commodity businesses such as groceries compete largely on the basis of price due to the price sensitivity of their
customers.
• Lower prices generally require aggressive cost reduction.
• Cost reduction through economies of scale in operations and purchasing often is achieved through industry consolidation.
