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Chapter 1: Introduction to Mergers, Acquisitions, and Other Restructuring Activities
Answers to End of Chapter Discussion Questions
1.1 Discuss why mergers and acquisitions occur.
Answer: The primary motivations for M&As include an attempt to realize synergy by combining the acquiring
and target firms, diversification, market power, strategic realignment, hubris, buying what are believed to be
undervalued assets, so-called agency problems, managerialism, and tax considerations. Synergy is the notion
that combining two firms results in a valuation of the combined firms that exceeds the sum of the two firms
valued on a standalone basis. Synergy represents the incremental cash flows only achievable by combining the
acquirer and target firms. Synergy is often realized by achieving economies of scale, the spreading of fixed
1.2 What is the role of the investment banker in the M&A process?
Answer: Investment bankers serve as advisors to firms developing business strategies. They also recommend
1.3 In your opinion, what are the motivations for two mergers or acquisitions in the news?
Answer: In 2002, Hewlett Packard announced its interest in acquiring Compaq Computer, a major competitor.
The justification was to achieve cost savings by eliminating duplicate overhead and by closing under-utilized
1.4 What are the arguments for and against corporate diversification through acquisition? Which do you support
and why?
Answer: In discussing diversification, it is important to distinguish between unrelated and related
diversification. Firms often justify unrelated diversification if they believe their current core business is
maturing or is too “cyclical.” By shifting their focus to higher growth areas, management argues they can
1.5 What are the primary differences between operating and financial synergy? Give examples to illustrate your
statements.
Answer: Operating synergy includes economies of scale and scope. Economies of scale may be realized when
two firms with manufacturing facilities operating well below their capacity merge. If such facilities are
own.
1.6 At a time when natural gas and oil prices were at record levels, oil and natural gas producer, Andarko
Petroleum, announced on June 23, 2006 the acquisition of two competitors, Kerr-McGee Corp. and Western
Gas Resources, for $16.4 billion and $4.7 billion in cash, respectively. These purchase prices represent a
substantial 40 percent premium for Kerr-McGee and a 49 percent premium for Western Gas. The acquired
assets strongly complement Andarko’s existing operations, providing the scale and focus necessary to cut
overlapping expenses and to concentrate resources in adjacent properties. What do you believe were the
primary forces driving Andarko’s acquisition? How will greater scale and focus help Andarko to reduce its
costs? Be specific. What are the key assumptions implicit in your argument?
Answer: Given the escalation in oil prices and the increasing difficulty in finding new reserves, Andarko
concluded that it would be cheaper to buy reserves rather than to explore and develop new reserves.
1.7 On September 30, 2000, Mattel, a major toy manufacturer, virtually gave away The Learning Company, a
maker of software for toys, to rid itself of a disastrous foray into software publishing that had cost the firm
literally hundreds of millions of dollars. Mattel, which had paid $3.5 billion for the firm in 1999, sold the unit
to an affiliate of Gores Technology Group for rights to a share of future profits. Was this related or unrelated
diversification for Mattel? How might this have influenced the outcome?
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1.8 In 2000, AOL acquired Time Warner in a deal valued at $160 billion, excluding assumed debt. Time Warner is
the world’s largest media and entertainment company, whose major business segments include cable networks,
magazine publishing, book publishing and direct marketing, recorded music and music publishing, and film and
TV production and broadcasting. AOL viewed itself as the world leader in providing interactive services, Web
brands, Internet technologies, and electronic commerce services. Would you classify this business combination
as a vertical, horizontal, or conglomerate transaction? Explain your answer.
1.9 Pfizer, a leading pharmaceutical company, acquired drug maker Pharmacia for $60 billion. The purchase price
represented a 34 percent premium to Pharmacia’s pre-announcement price. Pfizer is betting that size is what
matters in the new millennium. As the market leader, Pfizer was finding it increasingly difficult to sustain the
double-digit earnings growth demanded by investors. Such growth meant the firm needed to grow revenue by $3-
$5 billion annually while maintaining or improving profit margins. This became more difficult due to the
skyrocketing costs of developing and commercializing new drugs. Expiring patents on a number of so-called
blockbuster drugs intensified pressure to bring new drugs to market. In your judgment, what were the primary
motivations for Pfizer wanting to acquire Pharmacia? Categorize these in terms of the primary motivations for
mergers and acquisitions discussed in this chapter.
1.10 Dow Chemical, a leading chemical manufacturer, announced that it had reached an agreement to acquire in late
2008 Rohm and Haas Company for $15.3 billion. While Dow has competed profitably in the plastics business for
years, this business has proven to have thin margins and to be highly cyclical. By acquiring Rohm and Haas,
Dow will be able to offer less cyclical and higher margin products such as paints, coatings, and electronic
materials. Would you consider this related or unrelated diversification? Explain your answer. Would you
consider this a cost effective way for the Dow shareholders to achieve better diversification of their investment
portfolios?
Solutions to End of Chapter Case Study Questions
Amazon Moves to Conquer the Consumer Retail Business by Acquiring Whole Foods
Discussion Questions:
1. Why does it make sense to include Whole Foods' debt as part of the $13.7 billion purchase price Amazon paid
for Whole Foods?
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2. What is the synergy between Amazon and Whole Foods?
Answer: Synergy is defined as the incremental value that is created by combining the two businesses in excess
of the sum of the standalone value of each business. By combining, the two firms can generate cost savings by
3. What are some of the hurdles Amazon has to overcome to realize this synergy?
Answer: The two firms' have very different cultures and business strategies: Amazon is a price cutter while
Whole Foods sells premium products at premium prices. Also, Whole Foods has a reputation for being
4. What is the motivation for this merger from Amazon's point of view? From Whole Foods shareholders' point
of view? (Hint: Consider those factors discussed in this chapter about why M&As happen)?
Answer: Given the size of the grocery industry, Amazon sees the merger as an opportunity to sell new
products to existing retail customers and to new customers. Therefore, it is a form of diversification. It is
also an attempt to achieve the operating scale and geographic diversification necessary to be competitive in the
5. How does this deal further the realization of Amazon's vision for the future of the firm?
Answer: Amazon's vision can be summarized as becoming a firm whose customers could buy anything they
want at any time and any place. The firm has grown far above its original roots in the book selling business and
Examination Questions and Answers
True/False: Answer True or False to the following questions:
1. A divestiture is the sale of all or substantially all of a company or product line to another party for cash or
securities. True or False
2. The target company is the firm being solicited by the acquiring company. True or False
3. A merger of equals is a merger framework usually applied whenever the merger participants are comparable in
size, competitive position, profitability, and market capitalization. True or False
4. A vertical merger is one in which the merger participants are usually competitors. True or False
5. Joint ventures are cooperative business relationships formed by two or more separate parties to achieve
common strategic objectives True or False
6. Operational restructuring refers to the outright or partial sale of companies or product lines or to downsizing by
closing unprofitable or non-strategic facilities. True or False
7. The primary advantage of a holding company structure is the potential leverage that can be achieved by
gaining effective control of other companies’ assets at a lower overall cost than would be required if the firm
were to acquire 100 percent of the target’s outstanding stock. True or False
8. Holding companies and their shareholders may be subject to triple taxation. True or False
9. Investment bankers offer strategic and tactical advice and acquisition opportunities, screen potential buyers and
sellers, make initial contact with a seller or buyer, and provide negotiation support for their clients.
True or False
10. Large investment banks invariably provide higher quality service and advice than smaller, so-called boutique
investment banks. True or False
11. Financial restructuring generally refers to actions taken by the firm to change total debt and equity structure.
True or False
12. An acquisition occurs when one firm takes a controlling interest in another firm, a legal subsidiary of another
firm, or selected assets of another firm. The acquired firm often remains a subsidiary of the acquiring
company. True or False
13. A leveraged buyout is the purchase of a company using as much equity as possible. True or False
14. In a statutory merger, both the acquiring and target firms survive. True or False
15. In a statutory merger, the acquiring company assumes the assets and liabilities of the target firm in accordance
with the prevailing federal government statutes. True or False
16. In a consolidation, two or more companies join together to form a new firm. True or False
17. A horizontal merger occurs between two companies within the same industry. True or False
18. A conglomerate merger is one in which a firm acquires other firms, which are highly related to its current core
business. True or False
19. The acquisition of a coal mining business by a steel manufacturing company is an example of a vertical
merger. True or False
20. The merger of Exxon Oil Company and Mobil Oil Company was considered a horizontal merger. True or
False
21. Most M&A transactions in the United States are hostile or unfriendly takeover attempts. True or False
22. Holding companies can gain effective control of other companies by owning significantly less than 100% of
their outstanding voting stock. True or False
23. Only interest payments on ESOP loans are tax deductible by the firm sponsoring the ESOP. True or False
24. A joint venture rarely takes the legal form of a corporation. True or False
25. When investment bankers are paid by a firm’s board to evaluate a proposed takeover bid, their opinions are
given in a so-called “fairness letter.” True or False
26. Synergy is the notion that the combination of two or more firms will create value exceeding what either firm
could have achieved if they had remained independent. True or False
27. Operating synergy consists of economies of scale and scope. Economies of scale refer to the spreading of
variable costs over increasing production levels, while economies of scope refer to the use of a specific asset to
produce multiple related products or services. True or False
28. Most empirical studies support the conclusion that unrelated diversification benefits a firm’s shareholders.
True or False
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29. Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed.
True or False
30. Because of hubris, managers of acquiring firms sometimes believe their valuation of a target firm is superior to
the market’s valuation. Under these circumstances, they often end up overpaying for the firm. True and False
31. During periods of high inflation, the market value of assets is often less than their book value. This often
creates an attractive M&A opportunity. True or False
32. Tax benefits, such as tax credits and net operating loss carry-forwards of the target firm, are often considered
the primary reason for the acquisition of that firm. True or False
33. Market power is a theory that suggests that firms merge to improve their ability to set product and service
selling prices. True or False
34. Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring
firm shareholders. True or False
35. Pre-merger returns to target firm shareholders can exceed 30% around the announcement date of the
transaction. True or False
36. Post-merger returns to shareholders often do not meet expectations. However, this is also true of such
alternatives to M&As as joint ventures, alliances, and new product introductions. True or False
37. Overpayment is the leading factor contributing to the failure of M&As to meet expectations. True or False
38. Takeover attempts are likely to increase when the market value of a firm’s assets is more than their
replacement value. True or False
39. Although there is substantial evidence that mergers pay off for target firm shareholders around the time the
takeover is announced, shareholder wealth creation in the 3-5 years following a takeover is often limited.
True or False
40. A statutory merger is a combination of two corporations in which only one corporation survives with the
merged corporation goes out of existence. True or False
41. A subsidiary merger is a merger of two companies where the target company becomes a subsidiary of the
parent. True or False
42. Consolidation occurs when two or more companies join to form a new company. True or False
43. An acquisition is the purchase of an entire company or a controlling interest in a company. True or False
44. A leveraged buyout is the purchase of a company financed primarily by debt. This is a term commonly applied
to a firm going private financed primarily by debt. True or False
45. Growth is often cited as an important factor in acquisitions. The underlying assumption is that that bigger is
better to achieve scale, critical mass, globalization, and integration. True or False
46. The empirical evidence supports the presumption that bigger is always better when it comes to acquisitions.
True or False
47. The empirical evidence shows that unrelated diversification is an effective means of smoothing out the
business cycle. True or False
48. Individual investors can generally diversify their own stock portfolios more efficiently than corporate
managers who diversify the companies they manage. True or False
49. Financial considerations, such as an acquirer believing the target is undervalued, a booming stock market or
falling interest rates, frequently drive surges in the number of acquisitions. True or False
50. Regulatory and political change seldom plays a role in increasing or decreasing the level of M&A activity.
True or False
1. Which of the following are generally considered restructuring activities?
a. A merger
b. An acquisition
c. A divestiture
d. A consolidation
e. All of the above
2. All of the following are considered business alliances except for
a. Joint ventures
b. Mergers
c. Minority investments
d. Franchises
e. Licensing agreements
3. Which of the following is an example of economies of scope?
a. Declining average fixed costs due to increasing levels of capacity utilization
b. A single computer center supports multiple business units
c. Amortization of capitalized software
d. The divestiture of a product line
e. Shifting production from an underutilized facility to another to achieve a higher overall operating rate
and shutting down the first facility
4. A firm may be motivated to purchase another firm whenever
a. The cost to replace the target firm’s assets is less than its market value
b. The replacement cost of the target firm’s assets exceeds its market value
c. When the inflation rate is accelerating
d. The ratio of the target firm’s market value is more than four times its book value
e. The market to book ratio is greater than one and increasing
5. Which of the following is true only of a consolidation?
a. More than two firms are involved in the combination
b. One party to the combination disappears
c. All parties to the combination disappear
d. The entity resulting from the combination assumes ownership of the assets and liabilities of the
acquiring firm only.
e. One company becomes a wholly owned subsidiary of the other.
6. Which one of the following is not an example of a horizontal merger?
a. NationsBank and Bank of America combine
b. U.S. Steel and Marathon Oil combine
c. Exxon and Mobil Oil combine
d. SBC Communications and Ameritech Communications combine
e. Hewlett Packard and Compaq Computer combine
7. Buyers often prefer “friendly” takeovers to hostile ones because of all of the following except for:
a. Can often be consummated at a lower price
b. Avoid an auction environment
c. Facilitate post-merger integration
d. A shareholder vote is seldom required
e. The target firm’s management recommends approval of the takeover to its shareholders
8. Which of the following represent disadvantages of a holding company structure?
a. Potential for triple taxation
b. Significant number of minority shareholders may create contentious environment
c. Managers may have difficulty in making the best investment decisions
d. A, B, and C
e. A and C only
9. Which of the following are not true about ESOPs?
a. An ESOP is a trust
b. Employer contributions to an ESOP are tax deductible
c. ESOPs can never borrow
d. Employees participating in ESOPs are immediately vested
e. C and D
10. ESOPs may be used for which of the following?
a. As an alternative to divestiture
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11. Which of the following represent alternative ways for businesses to reap some or all of the advantages of
M&As?
a. Joint ventures and strategic alliances
b. Strategic alliances, minority investments, and licensing
c. Minority investments, alliances, and licensing
d. Franchises, alliances, joint ventures, and licensing
e. All of the above
12. Which of the following are often participants in the acquisition process?
a. Investment bankers
b. Lawyers
c. Accountants
d. Proxy solicitors
e. All of the above
13. The purpose of a “fairness” opinion from an investment bank is
a. To evaluate for the target’s board of directors the appropriateness of a takeover offer
b. To satisfy Securities and Exchange Commission filing requirements
c. To support the buyer’s negotiation effort
d. To assist acquiring management in the evaluation of takeover targets
e. A and B
14. Arbitrageurs often adopt which of the following strategies in a share for share exchange just before or just after
a merger announcement?
a. Buy the target firm’s stock
b. Buy the target firm’s stock and sell the acquirer’s stock short
c. Buy the acquirer’s stock only
d. Sell the target’s stock short and buy the acquirer’s stock
e. Sell the target stock short
15. Institutional investors in private companies often have considerable influence approving or disapproving
proposed mergers. Which of the following are generally not considered institutional investors?
a. Pension funds
b. Insurance companies
c. Bank trust departments
d. United States Treasury Department
e. Mutual funds
16. Which of the following are generally not considered motives for mergers?
a. Desire to achieve economies of scale
b. Desire to achieve economies of scope
c. Desire to achieve antitrust regulatory approval
d. Strategic realignment
e. Desire to purchase undervalued assets
17. Which of the following are not true about economies of scale?
a. Spreading fixed costs over increasing production levels
b. Improve the overall cost position of the firm
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c. Most common in manufacturing businesses
d. Most common in businesses whose costs are primarily variable
e. Are common to such industries as utilities, steel making, pharmaceutical, chemical and aircraft
manufacturing
18. Which of the following is not true of financial synergy?
a. Tends to reduce the firm’s cost of capital
b. Results from a better matching of investment opportunities available to the firm with internally
generated funds
c. Enables larger firms to experience lower average security underwriting costs than smaller firms
d. Tends to spread the firm’s fixed expenses over increasing levels of production
e. A and B
19. Which of the following is not true of unrelated diversification?
a. Involves buying firms outside of the company’s primary lines of business
b. Involves shifting from a firm’s core product lines into those which are perceived to have higher
growth potential
c. Generally results in higher returns to shareholders
d. Generally requires that the cash flows of acquired businesses are uncorrelated with those of the firm’s
existing businesses
e. A and D only
20. Which of the following is not true of strategic realignment?
a. May be a result of industry deregulation
b. Is rarely a result of technological change
c. Is a common motive for M&As
d. A and C only
e. Is commonly a result of technological change
21. The hubris motive for M&As refers to which of the following?
a. Explains why mergers may happen even if the current market value of the target firm reflects its true
economic value
b. The ratio of the market value of the acquiring firm’s stock exceeds the replacement cost of its assets
c. Agency problems
d. Market power
e. The Q ratio
22. Around the announcement date of a merger or acquisition, abnormal returns to target firm shareholders
during the last several decades have been
a. Trending down
b. Trending up
c. Unchanged
d. Doubling each decade
e. None of the above
23. Around the announcement date of a merger, acquiring firm shareholders of large publicly traded firms
normally earn
a. 30% positive abnormal returns
b. –20% abnormal returns
c. Zero to slightly negative returns
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d. 100% positive abnormal returns
e. 10% positive abnormal returns
24. Which of the following is the most common reason that M&As often fail to meet expectations?
a. Overpayment
b. Form of payment
c. Large size of target firm
d. Inadequate post-merger due diligence
e. Poor post-merger communication
25. Post-merger financial performance of the new firm is often about the same as which of the following?
a. Joint ventures
b. Strategic alliances
c. Licenses
d. Minority investments
e. All of the above
26. Restaurant chain, Camin Holdings, acquired all of the assets and liabilities of Cheesecakes R Us. The
combined firm is known as Camin Holdings and Cheesecakes R Us no longer exists as a separate entity. The
acquisition is best described as a:
a. Merger
b. Consolidation
c. Tender offer
d. Spinoff
e. Divestiture
27. Pacific Surfware acquired Surferdude and as part of the transaction both of the firms ceased to exist in their
form prior to the transaction and combined to create an entirely new entity, Wildly Exotic Surfware. Which
one of the following terms best describes this transaction?
a. Divestiture
b. Tender offer
c. Joint venture
d. Spinoff
e. Consolidation
28. News Corporation of America announced its intention to purchase shares in another national newspaper chain.
Which one of the following terms best describes this announcement?
a. Divestiture
b. Spinoff
c. Consolidation
d. Tender offer
e. Merger proposal
29. Which one of the following statements accurately describes a merger?
a. A merger transforms the target firm into a new entity which necessarily becomes a subsidiary of the
acquiring firm
b. A new firm is created from the assets and liabilities of the acquirer and target firms
c. The acquiring firm absorbs only the assets of the target firm
d. The target firm is absorbed entirely into the acquiring firm and ceases to exist as a separate legal
entity.
13
e. A new firm is created holding the assets and liabilities of the target firm and its former assets only.
30. An investor group borrowed the money necessary to buy all of the stock of a company. Which of the following
terms best describes this transaction?
a. Merger
b. Consolidation
c. Leveraged buyout
d. Tender offer
e. Joint venture
31. A steel maker acquired a coal mining company. Which of the following terms best describes this deal?
a. Vertical
b. Conglomerate
c. Horizontal
d. Obtuse
e. Tender offer
32. Joe’s barber shop buys Jose’s Hair Salon. Which of the following terms best describes this deal?
a. Joint venture
b. Strategic alliance
c. Horizontal
d. Vertical
e. Conglomerate
Case Study Short Essay Examination Questions:
BATTLE OF THE DISCOUNT RETAILERS--DOLLAR TREE ACQUIRES FAMILY DOLLAR
KEY POINTS
• Mergers between competitors offer the greatest potential shareholder value creation, but they also face the greatest
scrutiny from regulators
• Protracted bidding wars and negotiations can weaken operationally both the acquirer and target firms
• Realizing anticipated synergy on a timely basis often is elusive
• Postmerger integration is often the determining factor in the ultimate success or failure of a merger
In an industry in which three major competitors all have the word dollar in their names, it is not surprising that it is
sometimes difficult to keep the players straight. For purposes of clarity, the participants in this transaction are Dollar
Tree (the acquirer), Family Dollar (the target), and Dollar General (the losing bidder). If you can keep that straight, what
follows offers insight into challenges common to many mergers and acquisitions.
Discount retailing in the United States is dominated by Wal-Mart, Dollar General, Family Dollar, Dollar Tree, and
Five Below. While Wal-Mart is the proverbial 800 pound gorilla in the industry, Dollar Tree and Family Dollar, if
While both stores compete as discount retailers, the way in which they market their products is significantly
different. At Dollar Tree, most items actually retail for $1. The firm specializes in buying “going out of business”
merchandise enabling it to pass on savings to its customers and to provide an ever-changing product offering. Dollar
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Tree describes itself as offering a “thrill-of-the-hunt shopping experience.” In contrast, Family Dollar is a dollar store in
name only, with product prices ranging as low as $1 to in excess of $20. The firm tries to maintain similar products in
In the face of both competitive pressure and the threat of a proxy battle for control of the board, Mr. Levine and the
Family Dollar board were ready to negotiate a deal to sell the business. In July 2014, Dollar Tree announced that it had
reached an agreement to acquire Family Dollar for $8.5 billion or $74.50 a share.
When the deal closed in mid-2015, Dollar General, previously the biggest of the three dollar store competitors, faced
approval, and annual revenue of more than $20 billion. By comparison, Dollar General operates 12,000 stores in 43
states. The new Dollar Tree will keep both brands and operate both dollar store business models.
Successfully integrating the two chains has proven to be a major challenge, likely to take several years or more.
Efforts to restore Family Dollar’s profitability negatively impacted consolidated earnings in 2015 and 2016.
Remodeling stores, introducing new merchandise and promotional campaigns, and paying severance expenses to
also disrupt inventory management and restocking operations adding to both employee and customer discontent.
In 2016, Dollar Tree showed some success in increasing both sales and net income as it has added more food shelves
showing healthy sales and profit growth. But drawing this comparison makes some wonder why Dollar Tree bought
Family Dollar at all.
CHARTER COMMUNICATIONS ACQUIRES TIME WARNER CABLE
AMID INDUSTRY TURMOIL
Case Study Objectives: To Illustrate
• The role of changing technologies in forcing rapid industry consolidation
• How the pace of consolidation often is the greatest in industries with high fixed expenses
• Why successful consolidation requires both vision and aggressive cost cutting and
• Why business strategies must change to reflect changing competitive conditions
15
subscriptions to access “bundles” of channels. This model worked for decades, but now cable customers can “cut the
cord” and move to online video.
Online video content usage has exploded in popularity at the expense of TV viewing. At the end of 2015, ratings
company Nielsen, reported TV viewing fell by 8% from year earlier levels while online streaming-to-TV surged by
more than 50% during the same period. Traditional TV content is now available on an ever-widening array of video
services such as Netflix, Hulu and YouTube. Once having established accounts with these channels, a user is able to
model to one in which they become internet and video service providers.
While going online doesn't mean free, since streaming service still costs money, the cost to the consumer often is
lower than monthly cable subscriptions and online streaming enables users to pay only for what they actually want. At
the time of this writing, Hulu runs $8 per month, Netflix is $9 per month and Amazon is $99 per year. The new HBO
Now costs $15 per month, and Sling TV — which has an assortment of "cable" channels, including AMC and ESPN —
starts at $20 per month. In addition, some shows are not part of unlimited streaming plans, requiring you to pay for
individual episodes or seasons.
Making money as a content distributor (e.g., cable companies) or as a content provider (e.g., TV networks) was
always a numbers game. The traditional cable business model has stood largely intact for more than 30 years. Cable
The now legendary 74 year old John Malone was a formative figure in the cable industry. His vision for the cable
industry when it was in its infancy was to create a subscription business generating predictable and growing revenue
stream by making every household in America a cable customer. The industry would have high barriers to entry because
of its huge capital requirements. While subject to regulation as a utility, the cable business could justify raising prices by
bundling services sold to its largely captive audience which in the early years had few alternatives to cable.
Malone realized his vision by taking control of Tele-Communications Inc. (TCI) in his early 30’s and through a
and broadband services. And their strategy for achieving this transformation is through acquisition.
While the cable industry has always been subject to a high degree of acquisition activity, it has historically been used
mostly as a mechanism for achieving and sustaining a high level of revenue and profit growth. More recently, cable
firms have been engaging in acquisitions as much for survival as growth. Acquisitions for the cable companies represent
a much more rapid way of obtaining increased geographic coverage, customer contracts, as well as network and content
bid. Charter’s aggressive tactics seem to reflect the instincts of cable mogul John Malone. He has substantial influence
16
on Charter’s strategy through Liberty Broadband Corporation’s (Liberty) substantial equity stake in Charter. Malone is
the controlling shareholder in Liberty.
When Comcast’s deal was thwarted by regulators, the highly leveraged Charter took a less aggressive approach
getting Mr. Malone more involved in the initial phases of the deal. He called TWC’s CEO Rob Marcus initially
indicating that Charter wanted a friendly deal. Charter deliberately avoided making what would be perceived by TWC
Including debt and equity, the transaction value (also called enterprise value) of TWC was $78.7 billion. The deal
enables Charter to quadruple its number of cable subscribers, with much of the increase coming in such key cities as
New York, Los Angeles, and Dallas. The combined businesses will have more than 24 million cable customers, second
only to Comcast’s 27 million. In addition, the combined firms will have greater leverage in negotiating contracts with
television networks wanting to distribute their content to the new firm’s cable customers. TWC shares rose 7.3% on the
deal's announcement date, or about one-half of the offer price premium. Charter’s shares gained 2.5%.
In the wake of the failure of market leader Comcast to get approval to acquire TWC, why did Charter believe it could
get approval? There is little market overlap between Time Warner, Charter and Bright House and the combined
In May 2016, Charter received regulatory approval to acquire Time Warner subject to certain conditions being
satisfied. These include requiring Charter to expand broadband service in areas that are currently underserved and to
provide affordable internet service to at least 525,000 low income households.
To be successful in the coming years, cable operators will need to lean heavily on their broadband businesses to
generate profit growth while limiting shrinkage in their TV business. That means investing in broadband infrastructure,
streaming video services and other technologies. Consequently, the demands on cash flow will accelerate.
The impact of the consolidation among cable providers on content providers is ominous. The Charter/TWC deal
shrinks the number of major internet and cable TV distributors in the US to just four: Comcast, Charter, Verizon and
themselves.
While content distributors may currently have the upper hand in their dealings with content providers, their
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on what basis they want to compete will help sustain their advantage over content suppliers. However, as technological
and regulatory change occurs, they must be willing to vary their business models to accommodate changes in their
external environment.
Discussion Questions:
1. Using the motives for mergers and acquisitions described in Chapter 1, which do you think apply to
Charter’s acquisition of Time Warner Cable? Discuss the logic underlying each motive you identify.
Be specific.
Answer: The motives for Charter’s takeover of Time Warner Cable included strategic realignment,
cost savings synergies, market power, and possibly hubris. As a relatively small cable provider,
Charter’s competitive position was weak relative to the industry leaders. External circumstances were
2. What are the key implicit assumptions underlying Charter’s bid t takeover Time Warner Cable? Do
you believe these assumptions were realistic? Why/why not.
Answer: Key assumptions include (implicit or otherwise) the following: that size matters, regulators
will approve the merger, the trend toward online video will continue, and the businesses can be
integrated with a minimum of disruption to all constituent groups, The notion that size matters in
improving a firm’s competitive position focuses on cost savings, potential cross selling opportunities
3. Speculate as to why Charter offered Time Warner Cable a choice of various combinations of stock
and cash? How might the combination of the offer price affect its attractiveness to TWC
shareholders? Be specific.
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4. Would you view Charter’s takeover of Time Warner Cable as a horizontal or vertical merger? Explain
your answer?
5. Charter’s share price rose by 2.5% while Time Warner’s share price jump by 7.3%, about one-half of
the offer price premium. Speculate as to why the stock prices of the two firms acted as they did
immediately following the announcement of an agreement between the two firms to merge.
6. What factors contributed to cable industry consolidation? Be specific. Explain how each factor you
identify impacted industry competitors.
PC Maker Lenovo Moves to Diversify Its Core Business
Key Points
• Firms unable to anticipate change often are forced to react to it and to make choices under great duress.
• A common reaction when a firm’s current product focus is in jeopardy is to diversify either into products or
services related to or entirely unrelated to their core skills.
• Either choice can be highly risky if the firm’s core skills are becoming obsolete or if the firm is unable to adapt
fast enough to the skills required in the new competitive environment.
With the global personal computer market in steady decline, the board and senior management of Lenovo Corporation,
the Chinese-based global leader in PC manufacturing, expressed increasing concern about the firm’s future viability.
The decline in PC demand was worsening with the global PC market falling by 10% in 2013 to 314.5 million units
sold according to technology consulting firm IDC. Lenovo was under pressure to implement the new strategy quickly.
In contrast, the $2.91 billion Motorola Mobility deal represented a potentially highly significant growth opportunity.
2011. Selling the unit reflected Google’s submission to mounting shareholder pressure to rid itself of the cash
hemorrhaging business that many believed provided an unnecessary management distraction from the firm’s core search
business.1 Lenovo is picking up more than 2000 patents, including those necessary to produce smartphones, in addition
to the phone handset manufacturing operation.
Lenovo is the third largest smartphone maker in the world behind Samsung and Apple. However, its sales are
future growth is likely to slow from its rapid pace of the past decade. Moreover, the US handset market is highly
concentrated with Samsung and Apple having a combined market share of 68% according to NPD Group, a market
research firm. The remainder of the handset market is divided among HTC, Motorola Mobility, and Blackberry.
Lenovo had expressed interest in acquiring Motorola in 2012 but was rebuffed by Google management. In November
2013, Google’s executive chairman, Eric Schmidt called Lenovo’s chief executive and asked if he was still interested in
a deal. Google was unwilling to sell Motorola to competitors like Microsoft or Samsung. Lenovo was viewed as the
ideal buyer for its smartphone business, since the world’s largest PC maker could become a big booster of Android,
Google’s mobile operating system. Lenovo began exclusively making Android phones in 2013. For Lenovo, the deal
Microsoft Acquires Nokia in the Ongoing Smartphone Wars
Case Study Objectives: To Illustrate
• Common motives for corporate restructuring
• Alternative forms of corporate restructuring strategies.
1 While Google paid $12.5 billion for Motorola and sold it for $2.91 billion, the loss is much less than it would appear.
Once the global leader in mobile phone handsets, Finnish based Nokia Inc. saw its fortunes dissipate as it failed to adapt
to a worldwide shift to smartphones. In the wake of intensified competition from its Asian rivals for lower end phones,
the firm’s market share fell to 14% at the end of 2013, from a peak of 40% in 2007. To conserve cash, the firm was
forced to suspend its dividend in 2013 for the first time in its 148-year history.
In Finland, where Nokia is viewed as a technology icon, this news was greeted with shock. At one time, the firm’s
to Google’s decision in 2008 to offer its Android operating system at no cost to handset makers.
As was Google with its Android smartphone operating system, Nokia was seeking to establish an industry standard
based on its Symbian software, using it as a platform for providing online services to smartphone users, such as music
and photo sharing. Nokia was attempting to position itself as the premier supplier of online services to the smartphone
market by dominating the market with handsets reliant on the Symbian operating system.
mirroring Google’s strategy in offering the software free to app developers and other handset manufacturers. However,
the Symbian operating system was inferior to both the Apple IOS and Google Android operating systems, putting Nokia
at a serious competitive disadvantage. Finally, the success of their strategy was heavily dependent on Nokia’s ability to
convince other handset makers (Nokia competitors) to adopt their software.
Increasingly viewed as pocket computers, smartphones outsold personal computers for the first time in the fourth
player in the intensely competitive smartphone market. Under the deal, Nokia adopted Windows Phone 7 (WP7) as its
principal smartphone operating system, replacing its own Symbian software. Nokia and Microsoft were betting that
wireless carriers such as Verizon, AT&T, and Vodafone would want an alternative system to iPhone and Android.
The partnership seemed to hold considerable promise. Nokia remained a powerhouse in feature phones and, if it could
successfully transition these devices to the WP7 operating system, it may be able to increase market penetration sharply.
WP7, at this time, has none of these problems. If customers become frustrated with Android, then WP7 could gain
significant share.
Nokia could have partnered with Google, as have many handset manufacturers. However, such a partnership made
