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was not exclusive, Microsoft would continue to have other hardware partners, and Nokia would continue to make some
Symbian powered devices, at least until a WP7-based smartphone had proven to be a commercial success. Microsoft
also agreed to invest about 1 billion dollars in Nokia over a period of years to defray development and marketing costs.
The alliance enabled Nokia to adopt new software (WP7) with an established community of developers but that has sold
relatively poorly since its introduction in late 2010. With the phase out of its Symbian operating system over a period of
guarantee success in the mobile phone market.
Despite having been an early entrant into the smartphone business, Microsoft had been unable to gain significant
market share. Over the years, Microsoft has struck deals with many of the world’s best known cellphone manufacturers,
including Motorola and HTC Corp. But these alliances were hampered by either execution problems or by an inability
of Microsoft to prevent handset makers from shifting to other technologies such as Google’s Android operating system.
early in the fall of that year.
To better implement the partnership, Nokia reorganized into two business units: Smart Devices and Mobile Phones.
The Smart Devices unit would focus on manufacturing the new Windows Phone 7 devices. The Smart Devices business
must compete in the smartphone market against the likes of those producing handsets powered by the Google operating
system, Blackberry, and Apple with only the Windows Phone 7 powered phone. The Mobile Phones operation would
with Nokia’s stock falling 11% on the announcement. Similarly, Microsoft’s shares fell by 1% as investors feared that
the firm had teamed with a weak player in the smartphone market and that the 2-year transition period before WP7-
based smartphones would be sold in volume would only allow Android-based smartphones and iPhones to get further
ahead.
Its potential notwithstanding, the partnership faced many challenges. Despite setting the industry standard for
WP7 system as an alternative to Android in its negotiations with Google threatening to shift resources to WP7.
Furthermore, Nokia is a European company and Europe is where it has greatest market share. However, Microsoft has
had a checkered past with EU antitrust authorities which sued the firm for alleged monopolies in its Windows and
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2012 undercutting Nokia plans to develop and market own tablet devices. Moreover, sharing of intellectual property
held by the two companies was not nearly as seamless as had been hoped at the inception of the partnership.
Development activities at the two firms overlapped as both Microsoft and Nokia were spending money on app
developers, music stores, and other content required for the ecosystem (i.e., products and content using a common
operating system). It soon became apparent that both partners would be better off operating as a single entity owned by
technology competitor. Most of Microsoft revenues and profits come from its Windows operating system, Office suite
of software, and the X-Box game console. It has so far failed to establish a profitable mobile device business. Its own
tablet, the Surface, has thus far had limited success since its launch in 2012. With the limited likelihood other vendors
would support its Windows 8 phone system, Microsoft believed it had little choice but to move beyond its software
roots increasingly into hardware.
portion of its foreign held cash to pay for the acquisition, enabling it to avoid a hefty tax burden if such funds were
repatriated to the United States. Microsoft undertook a similar strategy when it acquired Skype for $8.2 billion, the
largest acquisition in its history.
The acquisition firmly committed Microsoft to a vertical business strategy in which it would own both the hardware
and software products. The “Microsoft strategy” is patterned after the Apple model built around iPads, iPhones and the
phones accounted for only 3.7% of smartphone shipments in 2013. The Surface tablet, while showing some
improvement in sales in early 2014, still lagged far behind industry leader Apple. Nokia has fallen to second place in
terms of shipments of mobile phones behind Samsung and is not even in the top five makers of smartphones.
Furthermore, integrating with minimal disruption the two disparate Microsoft and Nokia corporate cultures is a daunting
task. The takeover of Nokia may prove to be just another battle in the ongoing global smartphone wars.
Discussion Questions
1. Using the motives for mergers and acquisitions described in Chapter 1, which do you think apply to Microsoft’s
acquisition of Nokia? Discuss the logic underlying each motive you identify. Be specific.
Answer: Microsoft has been struggling to strategically realign itself into a leading global mobile technology
competitor due to the market shift to smartphones and tablet computers to offset the substitution of these new
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2. Speculate as to why Microsoft and Nokia initially decided to form a partnership rather than have Microsoft simply
acquire Nokia? Why was the partnership unsuccessful?
Answer: A partnership may have been preferred for several reasons: it was less costly for Microsoft to finance
R&D at Nokia than to buy the entire firm, the challenges on integrating an operation the size of Nokia’s handset
business are daunting, and Nokia may not have wanted to sell its handset operations at that time.
3. Speculate as to why Microsoft used cash rather than some other form of payment to acquire Nokia?
4. The Nokia takeover is an example of vertical integration. How does vertical integration differ from horizontal
integration? How are the two businesses (software and hardware) the same and how are they different? What are
the potential advantages and disadvantages of this vertical integration for Microsoft? Be specific.
Answer: The takeover is an example of vertical or backward integration in which Microsoft’s Phone 8 operating
system software would be used to power Nokia’s handsets. Vertical integration refers to a firm either taking control
of its distribution operations (forward integration) or taking control of a former supplier (backward integration).
Horizontal takeovers occur between competitors and offer more opportunity for cost savings due to overlapping
functions than vertical integration.
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5. What are the critical assumptions that Microsoft is making in buying Nokia? Do you believe these assumptions are
realistic? Explain your answer.
The key assumption Microsoft is making is that the marketplace wants an alternative to Google’s Android and
Apple’s IOS operating systems. The marketplace consists of distributors, handset manufacturers, app developers,
Google Acquires Motorola Mobility in a Growth-Oriented as well as Defensive Move
Key Points
The acquisition of Motorola Mobility positions Google as a vertically integrated competitor in the fast-growing
wireless devices market.
The acquisition also reduces their exposure to intellectual property litigation.
______________________________________________________________________________
By most measures, Google’s financial performance has been breathtaking. The Silicon Valley–based firm’s revenue
in 2011 totaled $37.9 billion, up 29% from the prior year, reflecting the ongoing shift from offline to online advertising.
While the firm’s profit growth has slowed in recent years, the firm’s 26% net margin remains impressive. About 95% of
the firm’s 2011 revenue came from advertising sold through its websites and those of its members and partners.2 Google
is channeling more resources into “feeder technologies” to penetrate newer and faster-growing digital markets and to
2 Google views its members (customers) as the over 1 million businesses that post advertisements on its websites;
34% in 2011, while advertising revenue from its members contributed 27% of total and grew by 18%.
Google was under pressure from its handset partners, including HTC and Samsung, to protect them from patent
infringement suits based on their use of Google’s Android software.3 Microsoft has already persuaded HTC to pay a fee
for every Android phone manufactured, and it is seeking to extract similar royalties from Samsung. If this continues,
such payments could make creating new devices for Android prohibitively expensive for manufacturers, forcing them to
turn to alternative platforms like Windows Phone 7. With a limited patent portfolio, Google also was vulnerable to
lawsuits create entry barriers to potential competitors, as the threat of lawsuits may discourage new entrants. It now
pays competitors to sue routinely over alleged patent infringements.
Risks associated with the deal include the potential to drive Android partners such as Samsung and HTC to consider
using Microsoft’s smartphone operating system, with Google losing license fees currently paid to use the Android
operating system. The deal offers few cost savings opportunities due the lack of overlap between Google, an Internet
Samsung, HTC, Sony Ericsson, and LG are now both partners and competitors of Google. It is difficult for a firm
such as Google to both license its products (Android operating system software) and compete with those licensees by
selling Motorola handsets at the same time. Nokia has already aligned with Microsoft and abandoned its own mobile
operating system. Others may try to create their own operating systems rather than become dependent on Google.
Samsung released phones in 2011 that run on a system called Bada; HTC has a team of engineers dedicated to
customizing the version of Android that it uses on its phones, called HTC Sense.
Discussion Questions:
1. Many acquisitions are intended to create measureable synergy between the acquirer and target firms. In what
sense is Motorola Mobility’s role in this transaction unclear? Identify sources of synergy between Google and
Motorola Mobility. What factors are likely to make the realization of this synergy difficult? Be specific.
Answer: It is unclear at the outset if the primary motivation to acquire Motorola Mobility is its extensive patent
portfolio or to position Google as a phone maker and distributor of customized Android powered phones.
3 Apple, Microsoft, and Oracle accused Google or the companies that use its Android operating system in the handsets
26
headquartered in Chicago and Google in the Silicon Valley. The two companies are very different in terms of
what and how they serve their customers. Google makes internet services and software, thrives on high profit
margins and distributes it product using giant data centers. In contrast, Motorola makes hardware, has modest
2. Using the motives for mergers and acquisitions described in Chapter 1, which do you thing apply to Google’s
acquisition of Motorola Mobility? Be specific.
Answer: A number of motives may be applicable. Google’s assumption that they could operate a
manufacturing operation and that they could determine the value of the Motorola Mobility patent portfolio in a
3. Speculate as to why the share price of Motorola Mobility did not increase by the full extent of the premium and
why Google’s share price fell on the day of the announcement. Be specific.
4. Speculate as to why the shares of other handset manufacturers jumped on the announcement that Google was
buying Motorola Mobility. Be specific.
5. How might the growing tendency for technology companies to buy other firms’ patents affect innovation? Be
specific.
Answer: Money that is being spent to buy patents for technologies developed by other firms’ results in less
Lam Research Buys Novellus Systems to Consolidate Industry
______________________________________________________________________________________________
Key Points
Industry consolidation is a common response to sharply escalating costs, waning demand, and increasing demands
of new technologies.
Customer consolidation often drives consolidation among suppliers.
______________________________________________________________________________________________
To stay competitive, makers of equipment used to manufacture semiconductor chips were compelled to increase
R&D spending sharply. Chip manufacturers resisted paying higher prices for equipment because their customers, such
as PC and cellphone handset makers, were facing declining selling prices for their products. Chip equipment
manufacturers were unable to recover the higher R&D spending through increasing selling prices. The resulting erosion
in profitability due to increasing R&D spending was compounded by the onset of the 2008–2009 global recession.
Corporation (Lam) agreed to buy rival Novellus Systems Inc. (Novellus) for $3.3 billion. Lam anticipates annual cost
savings of $100 million by the end of 2013 due to the elimination of overlapping overhead.
Under the terms of the deal, Lam agreed to acquire Novellus in a share exchange in which Novellus shareholders
would receive 1.125 shares of Lam common stock for each Novellus share. The deal represented a 28% premium over
the closing price of Novellus’s shares on the day prior to the deal’s public announcement. At closing, Lam shareholders
announcement date.
Lam and Novellus produce equipment that works at different stages of the semiconductor-manufacturing process,
making their products complementary. After the merger, Lam’s product line would be considerably broader, covering
more of the semiconductor-manufacturing process. Semiconductor-chip manufacturers are inclined to buy equipment
from the same supplier due to the likelihood that the equipment will be compatible. Lam also is seeking access to
developing their technologies in combination to ensure they work together. Lam has greater penetration with Samsung
and Novellus with Intel.
Lam also stated on the transaction announcement date that a $1.6 billion share repurchase program would be
implemented within 12 months following closing. The buyback allows shareholders to sell some of their shares for cash
such that, following completion of the buyback, the deal could resemble a half-stock, half-cash deal, depending on how
firms’ combined cash balances and cash flow. Structuring the deal as an all-stock purchase at closing allows Novellus
shareholders to have a tax-free deal.4
Discussion Questions:
1. Why did Lam’s shares close down 4 percent on the news? Why did Novellus’ shares close up 28 percent?
Answer: The drop in Lam’s share price reflected current investor concern about potential EPS dilution. The
2. Speculate why Lam used stock rather than some other form of payment?
3. Describe how market pressures on semiconductor manufacturers’ impact chip equipment manufacturers and
how this merger will help Lam and Novellus better serve their customers in the future.
4. How do the high fixed costs in the highly cyclical chip equipment manufacturing industry encourage
consolidation?
5. Is this deal a merger or a consolidation from a legal standpoint?
6. Is this deal a horizontal or vertical transaction? What is the significance of this distinction?
Answer: The two firms are not direct competitors since they supply equipment that is used in different phases
of the semiconductor chip production process. However, it could still be classified as a horizontal merger since
4 When target firm shareholders receive primarily acquirer company stock in exchange for their stock, the transaction is
tax free to the target firm’s shareholders. That is, they do not have to pay tax on any gain until they decide to sell their
29
7. What are the motives for the deal? Discuss the logic underlying each motive you identify.
Answer: a. Economies of scope.
8. How are Lam and Novellus similar and how are they different? In what way will their similarities and
differences help or hurt the long-term success of the merger?
Answer: The primary differences are that Lam and Novellus produce chip manufacturing equipment in
different but adjacent phases of the semiconductor chip manufacturing process, and they have significantly
9. Speculate as to why Lam announced a $1.6 billion share repurchase program at the same time it announced the
deal.
10. Do you believe this deal would help or hurt competition among semiconductor chip equipment manufacturers?
V.F. Corp Buys Timberland
__________________________________________________________________________________________
Key Points
Acquisitions often are used to change a firm’s product focus rapidly.
Acquisitions of direct competitors often represent significant revenue growth and cost-saving opportunities.
The timely realization of synergies is critical to recovering purchase price premiums.
Widely recognized in the United States and Europe as a maker of rugged outdoor apparel, Timberland (TBL) had
stumbled in recent years. Its failure to turn around its money-losing Yellow Boot brand, the limited success of its
advertising campaign to encourage consumers to think of Timberland apparel as a year-round brand, and overly
ambitious expansion plans in China caused earnings to deteriorate. Despite annual revenues growing to more than $1.6
billion in fiscal year 2011, the firm was losing market share to such competitors as the Gap and Sears Holdings.
30
Timberland’s share price declined as investor confidence in management waned when the firm failed to meet its
quarterly earnings forecasts. Timberland was ripe for takeover.
With annual revenue of $7.7 billion, apparel maker V.F. Corporation (VFC), owner of such well-known brands
as The North Face, Wrangler, and Lee, was always on the prowl for firms that fit its business strategy. VFC has grown
With its focus on outdoor apparel, Timberland became a highly attractive target, especially as its share price
declined. VFC pounced on the opportunity to add the highly recognizable Timberland trademark to its product portfolio.
On June 13, 2011, VFC announced that it had reached an agreement to pay TBL shareholders $43 per share in an all-
accelerate the growth in TBL product sales by expanding their availability through its own e-commerce site and through
its international operations. Likewise, VFC expected to achieve substantially larger discounts on raw material purchases
than TBL because of its larger bulk purchases and to reduce overhead expenses by eliminating redundant positions.
Xerox Buys ACS to Satisfy Shifting Customer Requirements
In anticipation of a shift from hardware and software spending to technical services by their corporate customers, IBM
announced an aggressive move away from its traditional hardware business and into services in the mid-1990s. Having
sold its commodity personal computer business to Chinese manufacturer Lenovo in mid-2005, IBM became widely
recognized as a largely “hardware neutral” systems integration, technical services, and outsourcing company.
in 2008 for $13.9 billion. On September 21, 2009, Dell announced its intention to purchase another IT services
company, Perot Systems, for $3.9 billion. One week later, Xerox, traditionally an office equipment manufacturer
announced a cash and stock bid for Affiliated Computer Systems (ACS) totaling $6.4 billion.
Each firm was moving to position itself as a total solution provider for its customers, achieving differentiation from
its competitors by offering a broader range of both hardware and business services. While each firm focused on a
services.
With annual sales of about $6.5 billion, ACS handles paper-based tasks such as billing and claims processing for
governments and private companies. With about one-fourth of ACS’s revenue derived from the healthcare and
government sectors through long-term contracts, the acquisition gives Xerox a greater penetration into markets which
should benefit from the 2009 government stimulus spending and 2010 healthcare legislation. More than two-thirds of
ACS’s revenue comes from the operation of client back office operations such as accounting, human resources, claims
management, and other business management outsourcing services, with the rest coming from providing technology
10 percent on the news of the transaction. With about $1 billion in cash at closing in early 2010, Xerox needed to
borrow about $3 billion. Standard & Poor’s credit rating agency downgraded Xerox’s credit rating to triple-B-minus,
one notch above junk.
Integration is Xerox’s major challenge. The two firms’ revenue mixes are very different, as are their customer bases,
with government customers often requiring substantially greater effort to close sales than Xerox’s traditional
commercial customers. Xerox intends to operate ACS as a standalone business, which will postpone the integration of
gain access to current Xerox customers. Presumably, additional incentives are needed, such as some packaging of Xerox
hardware with ACS’s IT services. However, this may require significant price discounting at a time when printer and
copier profit margins already are under substantial pressure.
Customers are likely to continue, at least in the near term, to view Xerox, Dell, and HP more as product than service
companies. The sale of services will require significant spending to rebrand these companies so that they will be
Discussion Questions:
1. Discuss the advantages and disadvantages of Xerox’s intention to operate ACS as a standalone business.
As an investment banker supporting Xerox, would you have argued in support of integrating ACS
immediately, at a later date, or to keep the two businesses separate indefinitely? Explain your answer.
Answer: The decision to operate ACS as a standalone unit may have been required to gain ACS and board
management support. Furthermore, operating ACS as a separate entity helps to preserve the brand and
corporate culture of the firm as distinctly separate from customer perception of Xerox as a product
32
2. How are Xerox and ACS similar and how are they different? In what way will their similarities and
differences help or hurt the long-term success of the merger?
Answer: Xerox is a product company and ACS is a services firm. Product firms are more familiar with the
manufacturing, sale, and servicing of tangible products. The way in which products are sold and serviced
3. Based on your answers to questions 1 and 2, do you believe that investors reacted correctly or incorrectly
to the announcement of the transaction?
Dell Moves into Information Technology Services
Dell Computer’s growing dependence on the sale of personal computers and peripherals left it vulnerable to economic
downturns. Profits had dropped more than 22 percent since the start of the global recession in early 2008 as business
spending on information technology was cut sharply. Dell dropped from number 1 to number 3 in terms of market
share, as measured by personal computer unit sales, behind lower-cost rivals Hewlett-Packard and Acer. Major
competitors such as IBM and Hewlett-Packard were less vulnerable to economic downturns because they derived a
larger percentage of their sales from delivering services.
Historically, Dell has grown “organically” by reinvesting in its own operations and through partnerships targeting
specific products or market segments. However, in recent years, Dell attempted to “supercharge” its lagging growth
through targeted acquisitions of new technologies. Since 2007, Dell has made ten comparatively small acquisitions
information technology (IT) services, but an agreement could not be reached.
Dell’s global commercial customer base spans large corporations, government agencies, healthcare providers,
educational institutions, and small and medium firms. The firm’s current capabilities include expertise in infrastructure
consulting and software services, providing network-based services, and data storage hardware; nevertheless, it was still
largely a manufacturer of PCs and peripheral products. In contrast, Perot Systems offers applications development,
systems integration, and strategic consulting services through its operations in the United States and ten other countries.
Perot Systems in an all-cash offer for $30 a share in a deal valued at $3.9 billion. The tender offer (i.e., takeover bid) for
