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Question: When does a business put itself up for sale? Answer: When it is unable to adapt to changing competitive conditions. That
is exactly what the second largest US supermarket chain, Safeway, did in early 2014. Beset by slowing industry-wide sales and a
1% in 2014 according to IBISWorld Inc.
Safeway’s decision is the continuation of a longer term trend in the industry toward consolidation which has accelerated in
recent years. Kroger Co., the largest US supermarket chain, snapped up regional chain Harris Teeter in 2013. Also in 2013, an
investor group led by private equity partnership Cerberus Capital Management acquired from SuperValu the remaining
Albertsons’s stores it did not already own as well as Acme Markets, Jewel–Osco, Shaw’s and Star Markets brands. Most of
remaining options including more aggressively downsizing its operations, the firm’s board concluded that selling the firm to a
strategic buyer would make the most sense. The most attractive strategic buyer would be one with “deep pockets,” a willingness to
invest in the firm, and whose existing operations were sufficiently similar to offer the prospect of substantial synergies.
With this in mind, Safeway agreed to be acquired by Cerberus Capital Management in a deal valued at $9.4 billion, assuming
fully diluted shares outstanding of 235 million (i.e., common shares plus all securities that can be converted into common shares).
surfaced within the 21 day period to $250 million for bids submitted after that date.
Kroger expressed interest in buying Safeway early in 2014. However, the substantial increase in industry concentration
resulting from combining Kroger and Safeway made this option unlikely to be acceptable to the regulators. Furthermore, Kroger
was busy integrating its acquisition of the Harris Teeter supermarket chain. Without any serious alternative buyers, the transaction
closed in late 2014. Despite the combination of Albertsons and Safeway, Kroger will remain the industry leader with 2,640
president and CEO, becoming the President and CEO of the combined firms. The deal creates a network of 2,400 stores in 24
states and the District of Columbia employing more than 250,000 people. The combined firms also operate 27 distribution
facilities and 20 manufacturing plants. While the two chains have stores across the country, the deal creates a dominant West Coast
combination and significantly improves their East Coast coverage.
The motivation for the deal is to cut costs and to become more responsive to customer demands by refurbishing some stores and
Amazon.com. Both Safeway and Albertsons also agreed to selected store sales in regions where the deal would substantially
increase concentration. The regulators presumed that, by allowing consolidation in the supermarket industry, rivalry in the grocery
business will become even more intense further benefitting consumers.
HP Implements a Transformational Strategy, Again and Again
_______________________________________________________________________________________________________
Key Points
Failure to develop and implement a coherent business strategy often results in firms reacting to rather than anticipating changes in
the marketplace.
Firms reacting to changing events often adopt strategies that imitate their competitors.
Apotheker took over as CEO in November 2010, HP had lost 44% of its market value through August 2011. A transformational
announcement appeared to be in order.
HP, the world’s largest technology company by revenue, announced that, after an extensive review of its business portfolio, it
had reached an agreement to buy British software maker Autonomy for $11.7 billion. The firm also put a for-sale sign on its
personal computer business, with options ranging from divestiture to a spinoff to simply retaining the business. HP said the future
premium. With annual revenue of about $1 billion (only 1% of HP’s 2010 revenue), the purchase price represents a multiple of
more than 10 times Autonomy’s annual revenues. HP’s then-CEO, Leo Apotheker, indicated that the acquisition would help
change HP into a business software giant, along the lines of IBM or Oracle, shedding more of the company’s ties to lower-margin
consumer products. Autonomy, which makes software that searches and keeps track of corporate and government data, would
expedite this change. HP said that the acquisition of Autonomy will complement its existing enterprise offerings and give it
potential customers about the long-term outlook for the business, HP may have succeeded in scaring off potential customers.
With this announcement, HP once again appeared to be lagging well behind its major competitors in implementing a coherent
business strategy. It agreed to buy Compaq in 2001 in what turned out to be widely viewed as a failed performance. In contrast,
IBM transformed itself by selling its PC business to China’s Lenovo in late 2004 and establishing its dominance in the enterprise
IT business. HP appears to be trying to replicate IBM’s strategy.
outbid three other companies to acquire the firm for $1.2 billion, ultimately paying a 23% premium. However, sales of webOS
phones and the TouchPad have been disappointing, and the firm decided to discontinue making devices based on webOS, a
smartphone operating system it had acquired when it bought Palm in late 2010.
In contrast to the mixed results of the Compaq and Palm acquisitions, HP’s purchase of Electronic Data Systems (EDS) for
$13.9 billion in 2008 substantially boosted the firm’s software services business. IBM’s successful exit from the PC business early
in 2004 and its ability to derive the bulk of its revenue from the more lucrative services business has been widely acclaimed by
investors. Prospects seemed good for this HP acquisition. However, in an admission of the firm’s failure to realize EDS’s
Under pressure from investors to jettison its current CEO, HP announced on September 22, 2011, that former eBay CEO, Meg
Whitman, would replace Leo Apotheker as Chief Executive Officer. In yet another strategic flip-flop, HP announced on October
27, 2011, that it would retain the PC business. The firm’s internal analysis indicated that separating the PC business would have
cost $1.5 billion in one-time expenses and another $1 billion in increased expenses annually. Citing the deep integration of the PC
group in HP’s supply chain and procurement efforts, Whitman proclaimed the firm to be stronger with the PC business.9
In mid-December 2011, HP announced that it would also reverse its earlier decision to discontinue supporting webOS and
stated that it would make webOS available for free under an open–source license for anyone to use. The firm will continue to make
enhancements to the webOS system and to build devices dependent on it. By moving to an open–source environment, HP hopes
brand.
Discussion Questions
1. Discuss the advantages and disadvantages of fully integrating business units within a parent firm? Be specific.
Answer: Increasing integration among businesses makes significant cost savings and productivity improvements possible.
For example, operating units can share overhead departments such as customer support, IT, distribution, and purchasing.
Moreover, parts and components may become interchangeable reducing design and purchase costs. To the extent parts are
2. Discuss the impact of HP’s strategic reversals over the last decade on its various constituencies such as customers,
employees, stockholders, and suppliers. Be specific.
Answer: While it is important to recognize the need to change inappropriate strategies, the frequency with which HP
changed strategic direction had to negatively impact its major constituencies. Customers had to be confused as to which
3. Discuss the strategic advantages and disadvantages of diversified versus relatively focused firms? Be specific.
9 The one-time charges included establishing infrastructure such as new systems for IT, customer support, sales, and distribution
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4. To what do you attribute the inconsistent and incoherent strategic flip-flops at Hewlett-Packard during the last decade? Be
specific.
Answer: It is unclear whether the inability to implement and sustain a coherent strategy at HP was due to the poor quality
Years in the Making: Kinder Morgan Opportunistically Buys El Paso Corp. for $20.7 Billion
______________________________________________________________________________________________________
Key Points
Companies often hold informal merger talks for protracted periods until conditions emerge that are satisfactory to both parties.
Capital requirements and regulatory hurdles often make buying another firm more attractive than attempting to build the other
firm’s capabilities independently.
______________________________________________________________________________________________________
Using a combination of advanced horizontal drilling techniques and hydraulic fracturing, or “fracking” (i.e., shooting water and
chemicals deep underground to blast open gas-bearing rocks), U.S. natural gas production has surged in recent years. As a result,
proven gas reserves have soared such that the Federal Energy Information Administration estimates that the overall supplies of
natural gas would last more than 100 years at current consumption rates. But surging supplies have pushed natural gas prices to $4
per million BTUs down from a peak of $13 in July 2008. Despite the depressed prices, energy companies around the globe have
shipping much of their new oil production by train to west coast refineries, and excess gas is being burned off. In the meantime,
new oil and gas fields are being developed in Ohio, Kansas, Oklahoma, Texas, and Colorado. According to the Interstate Natural
Gas Association of America Foundation, a trade group, pipeline companies are expected to have to build 36,000 miles of large–
diameter, high-pressure natural gas pipelines by 2035 to meet market demands, at a cost of $178 billion.
Responding to these developments, on October 17, 2011, Kinder Morgan (Kinder) agreed to buy the El Paso Corporation (El
Paso) for $21.1 billion in cash and stock. Including the assumption of debt owed by El Paso and an affiliated business, El Paso
Pipeline Partners, the takeover is valued at about $38 billion. This represents the largest energy deal since Exxon Mobil bought
the west coast. To attempt to replicate the El Paso pipeline network would have been time consuming, required large amounts of
capital, and faced huge regulatory hurdles.
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Kinder will own or operate about 67,000 miles of the more than 500,000 miles of oil and gas pipelines stretching across the
United States.10 Kinder’s pipelines in the Rocky Mountains, the Midwest, and Texas will be woven together with El Paso’s
25% to $24.81. For each share of El Paso, Kinder paid $14.65 in cash, .4187 of a Kinder share, and .640 of a warrant entitling the
bearer to buy more Kinder shares at a predetermined price. The purchase price at closing valued the deal at $26.87 per El Paso
share and constituted a 47% premium to El Paso 20–day average price prior to the announcement. Kinder’s debt will increase to
$14.5 billion from $3.2 billion after the acquisition. To help pay for the deal, Kinder is seeking a buyer for El Paso’s exploration
business. The combined firms will be called Kinder Morgan. Richard D. Kinder, the founder of Kinder Morgan, will be the
chairman and CEO.
The proposed takeover was not approved by regulators until May 2, 2012, on the condition that Kinder Morgan agree to sell
three U.S. natural gas pipelines. The deal represents the culmination of years of discussion between Kinder Morgan and El Paso.
Kinder, which went private in 2006 in a transaction valued at $22 billion, reemerged in an IPO in February 2011, raising nearly
Discussion Questions
1. Who are Kinder Morgan’s customers and what are their needs?
2. What factors external to Kinder Morgan and El Paso seemed to drive the transaction? Be specific.
Answer: With shale oil and gas fields in Pennsylvania, North Dakota and Texas providing an increasing share of the
nation’s energy supplies, pipeline customers needed easier and more efficient access to these new energy supplies. The
3. What factors internal to Kinder Morgan and El Paso seemed to be driving the transaction? Be specific.
Answer: In view of the regulatory and licensing hurdles as well as the huge capital requirements, buying El Paso
4. How would the combined firms be able to better satisfy these needs than the competition?
5 Do you believe the transaction can be justified based on your understanding of the strengths and weaknesses of the two
firms and perceived opportunities and threats to the two firms in the marketplace? Be specific.
10 Parfomak, September 26, 2011.
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From a Social Media Darling
to an Afterthought—The Demise of Myspace
_____________________________________________________________________________________
Key Points
It is critical to understand a firm’s competitive edge and what it takes to sustain it.
Sustaining a competitive advantage in a fast-moving market requires ongoing investment and nimble and creative decision
making.
In the end, Myspace appears to have had neither.
______________________________________________________________________________
A pioneer in social networking, Myspace started in 2003 and reached its peak in popularity in December 2008. According to
ComScore, Myspace attracted 75.9 million monthly unique visitors in the United States that month. It was more than just a social
network; it was viewed by many as a portal where people discovered new friends and music and movies. Its annual revenue in
2009 was reportedly more than $470 million.
Myspace captured the imagination of media star, Rupert Murdoch, founder and CEO of media conglomerate News Corp. News
2011, Myspace was losing more than 1 million visitors monthly, with unique visitors in May 2011 about one–half of their previous
December 2008 peak. Advertising revenue swooned to $184 million in 2011, about 40% of its 2009 level.11
In the wake of Myspace’s deteriorating financial performance, News Corp initiated a search for a buyer in early 2011. The
initial asking price was $100 million. Despite a flurry of interest in social media businesses such as LinkedIn and Groupon, there
was little interest in buying Myspace. In an act of desperation, News Corp sold Myspace to Specific Media, an advertising firm,
for only $35 million in mid-2011 as the value of the MySpace brand plummeted.
What happened to cause Myspace to fall from grace so rapidly? A range of missteps befuddled Myspace, including a flawed
business strategy, mismanagement, and underinvestment. Myspace may also have been a victim of fast-moving technology, fickle
popular culture, and the hubris that comes with rapid early success. What appeared to be an unimaginative strategy and
underinvestment left the social media field wide open for new entrants, such as Facebook. Myspace may also have suffered from
outpaced Myspace in terms of monthly visitors. Myspace, like so many other Internet startups, had its “fifteen minutes of fame.”
Adobe’s Acquisition of Omniture: Field of Dreams Marketing?
On September 14, 2009, Adobe announced its acquisition of Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO
Shantanu Narayen announced that the firm was pushing into new business at a time when customers were scaling back on
11 Gillette, Bloomberg BusinessWeek, July 3, 2011, pp. 54–57.
purchases of the company’s design software. Omniture would give Adobe a steady source of revenue and may mean investors
would focus less on Adobe’s ability to migrate its customers to product upgrades such as Adobe Creative Suite.
Adobe’s business strategy is to develop a new line of software that was compatible with Microsoft applications. As the world’s
largest developer of design software, Adobe licenses such software as Flash, Acrobat, Photoshop, and Creative Suite to website
developers. Revenues grow as a result of increased market penetration and inducing current customers to upgrade to newer
Web analytic software allows its customers to measure the effectiveness of Adobe’s content creation software. Advertising
agencies and media companies use Omniture’s software to analyze how consumers use websites. It competes with Google and
other smaller participants. Omniture charges customers fees based on monthly website traffic, so sales are somewhat less sensitive
than Adobe’s. When the economy slows, Adobe has to rely on squeezing more revenue from existing customers. Omniture
benefits from the takeover by gaining access to Adobe customers in different geographic areas and more capital for future product
Investors seem to be questioning the price paid for Omniture, whether the acquisition would actually accelerate and sustain
revenue growth, the impact on the future cyclicality of the combined businesses, the ability to effectively integrate the two firms,
and the potential profitability of future revenue growth. Each of these factors is considered next.
Adobe paid 18 times projected 2010 earnings before interest, taxes, depreciation, and amortization, a proxy for operating cash
flow. Considering that other Web acquisitions were taking place at much lower multiples, investors reasoned that Adobe had little
able to deliver more value to its customers. Adobe plans to merge its programs that create content for websites with Omniture’s
technology. For designers, developers, and online marketers, Adobe believes that integrated development software will streamline
the creation and delivery of relevant content and applications.
The size of the market for such software is difficult to gauge. Not all of Adobe’s customers will require the additional
functionality that would be offered. Google Analytic Services, offered free of charge, has put significant pressure on Omniture’s
Integrating the Omniture measurement capabilities into Adobe software design products and cross-selling Omniture products
into the Adobe customer base require excellent coordination and cooperation between Adobe and Omniture managers and
employees. Achieving such cooperation often is a major undertaking, especially when the Omniture shareholders, many of whom
were employees, were paid in cash. The use of Adobe stock would have given them additional impetus to achieve these synergies
in order to boost the value of their shares.
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Adobe is betting that the potential increase in revenues will grow profits of the combined firms despite Omniture’s lower
margins. Whether the acquisition will contribute to overall profit growth depends on which products contribute to future revenue
growth. The lower margins associated with Omniture’s products would slow overall profit growth if the future growth in revenue
came largely from Omniture’s Web analytic products.
Discussion Questions:
1. Who are Adobe’s and Omniture’s customers and what are their needs?
Answer: Adobe’s customers include anyone interested in developing Web content that is readable on PCs, Apple
2. What factors external to Adobe and Omniture seem to be driving the transaction? Be specific.
3. What factors internal to Adobe and Omniture seem to be driving the transaction? Be specific.
Adobe’s core skills were in the area of developing Web design software, licensing such software to customers and
4. How would the combined firms be able to better satisfy these needs than the competition?
Answer: By offering multiple products, Adobe might be able to provide better product compatibility than its competitors.
5. Do you believe the transaction can be justified based on your understanding of the strengths and weaknesses of the two
firms and perceived opportunities and threats to the two firms in the marketplace? Be specific.
Answer: No. The two firms had significantly different core skills. Adobe specialized in developing Web design software
sold under the conventional licensing model while Omniture developed optimization and measurement software
CenturyTel Buys Qwest Communications to Cut Costs and Buy Time
as the Landline Market Shrinks
Key Points:
• Market segmentation can be used to identify “underserved” segments which may sustain firms whose competitive
position in larger markets is weak.
• A firm’s competitive relative is best viewed in comparison to those firms competing in its served market rather than with
industry leading firms.
____________________________________________________________________________________________
In what could best be described as a defensive acquisition, CenturyTel, the fifth largest local phone company in the United States,
acquired Qwest Communications, the country’s third largest, in mid-2010 in a stock swap valued at $10.6 billion. While both firms
29
are dwarfed in size by AT&T and Verizon, these second-tier telecommunications firms will control a larger share of the shrinking
landline market.
In 2010, about one-fourth of U.S. homes used only cell phones, and cable behemoth Comcast, with 7.6 million residential and
business phone subscribers, ranked as the nation’s fourth largest landline provider. CenturyTel has no intention of moving into the
wireless and cable markets, which are maturing rapidly and are highly competitive.
While neither Qwest nor CenturyTel owns wireless networks and therefore cannot offset the decline in landline customers as
AT&T and Verizon are attempting to do, the combined firms are expected to thrive in rural areas where they have extensive
coverage. In such geographic areas, broadband cable Internet access and fiber-optics data transmission line coverage are is limited.
The lack of fast cable and fiber–optics transmission makes voice over Internet protocol (VOIP)—Internet phone service offered by
cable companies and independent firms such as Vonage—unavailable. Consequently, customers are forced to use landlines if they
want a home phone. Furthermore, customers in these areas must use landlines to gain access to the Internet through dial-up access
or through a digital subscriber line (DSL).
Discussion Questions
1. How would you describe CenturyTel’s business strategy? Be specific.
2. Describe the key factors both external and internal to the firm that you believe are driving this strategy.
3. Why might the acquisition of Qwest be described as defensive?
Oracle Continues Its Efforts to Consolidate the Software Industry
Oracle CEO Larry Ellison continued his effort to implement his software industry strategy when he announced the acquisition of
1990s as a leader in customer relationship management (CRM) software. CRM software helps firms track sales, customer service,
and marketing functions. Siebel’s dominance of this market has since eroded amidst complaints that the software was complicated
and expensive to install. Moreover, Siebel ignored customer requests to deliver the software via the Internet. Also, aggressive
rivals, like SAP and online upstart Salesforce.com have cut into Siebel’s business in recent years with simpler offerings. Siebel’s
annual revenue had plunged from about $2.1 billion in 2001 to $1.3 billion in 2004.
In the past, Mr. Ellison attempted to hasten Siebel’s demise, declaring in 2003 that Siebel would vanish and putting pressure on
the smaller company by revealing he had held takeover talks with the firm’s CEO, Thomas Siebel. Ellison’s public announcement
of these talks heightened the personal enmity between the two CEOs, making Siebel an unwilling seller.
Oracle’s intensifying focus on business applications software largely reflects the slowing growth of its database product line,
which accounts for more than three fourths of the company’s sales.
Siebel deal raised concerns about the computer giant’s partners falling under the control of a competitor. IBM and Oracle compete
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fiercely in the database software market. Siebel has worked closely with IBM, as did PeopleSoft and J.D. Edwards, which had
been purchased by PeopleSoft shortly before its acquisition by Oracle. Retek, another major partner of IBM, had also been recently
acquired by Oracle. IBM had declared its strategy to be a key partner to thousands of software vendors and that it would continue
to provide customers with IBM hardware, middleware, and other applications.
Discussion Questions:
1. How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some
combination of all three)? Explain your answer.
Answer: The business strategy can best be described as a cost leadership strategy focused on business application
software in which Oracle seeks to add the revenue from acquired companies without taking on much additional cost
and to achieve revenue growth for its existing product lines by cross-selling its current products to the customers of
2. What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry
consolidation? Be specific.
3. Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the development
of Oracle’s business strategy. Be specific.
Answer: From an external point of view, Oracle’s core product offering, database software, is maturing. Since the
product represents three-fourths of the firm’s revenue, it is unlikely to achieve rapid growth as long as it remains
4. In what way do you think the Oracle strategy was targeting key competitors? Be specific.
HP Redirects Its Mobile Device Business Strategy with the Acquisition of Palm
With global PC market growth slowing, Hewlett-Packard (HP), number one in PC sales worldwide, sought to redirect its business
strategy for mobile devices. Historically, the firm has relied on such partners as Microsoft to provide the operating systems for its
mobile phones and tablet computer products. However, the strategy seems to have contributed to the firm’s declining smartphone
sales by limiting its ability to differentiate its products and by delaying new mobile product introductions.
HP has been selling a smartphone version of its iPaq handheld device since 2007, although few consumers even knew HP made
such devices, since its products were aimed at business people. Sales of iPaq products fell to $172 million in 2009 from $531
million in 2007 and to less than $100 million (excluding sales of Palm products) in 2010.
With smartphone sales expected to exceed laptop sales in 2012, according to industry consultant IDC, HP felt compelled to
move aggressively into the market for handheld mobile devices. The major challenge facing HP is to overcome the substantial lead
that Apple, Google, and Research–In-Motion (RIM) have in the smartphone market.
To implement the new business strategy, HP acquired Palm in mid-2010 in a deal valued at $1.4 billion (including warrants and
“platform” to link the firm’s mobile devices and create a unique experience for the user of multiple HP mobile devices. The intent
is to create an environment where users can get a common look and feel and a common set of services irrespective of the handset
they choose.
HP also acquired 452 patents and another 406 applications on file. Palm offers one key potential competitive advantage in that
its operating system can run several tasks at once, just as a PC does; however, other smartphones are expected to have this
capability in the near future.
By buying Palm, HP signals a “go it alone” strategy in smartphones and tablet computers at the expense of Microsoft. HP is
Discussion Questions
1. To what extent could the acquisition of Palm by HP be viewed as a “make versus buy decision” by HP?
2. How would you characterize the HP strategy for mobility products (cost leadership, differentiation, focus, or a hybrid) and why?
BofA Acquires Countrywide Financial Corporation
On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its acquisition of mortgage lender Countrywide
Financial Corp (Countrywide) for $4 billion, a 70 percent discount from the firm’s book value at the end of 2007. Countrywide
originates, purchases, and securitizes residential and commercial loans; provides loan closing services, such as appraisals and flood
determinations; and performs other residential real estate–related services. This marked another major (but risky) acquisition by
The purchase of the troubled mortgage lender averted the threat of a collapse of a major financial institution because of the U.S.
2007–2008 subprime loan crisis. U.S. regulators were quick to approve the takeover because of the potentially negative
implications for U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the third quarter of 2007.
Countrywide’s exposure to the subprime loan market (i.e., residential loans made to borrowers with poor or nonexistent credit
histories) had driven its shares down by almost 80 percent from year-earlier levels. The bank was widely viewed as teetering on
32
The acquisition provided an opportunity to buy a market leader at a distressed price. The risks related to the amount of potential
loan losses, the length of the U.S. housing slump, and potential lingering liabilities associated with Countrywide’s questionable
business practices. The purchase made BofA the nation’s largest mortgage lender and servicer, consistent with the firm’s business
strategy, which is to help consumers meet all their financial needs. BofA has been one of the relatively few major banks to be
successful in increasing revenue and profit following acquisitions by “cross-selling” its products to the acquired bank’s customers.
Discussion Questions:
1. How did the acquisition of Countrywide fit BofA’s business strategy? Be specific. What were the key assumptions
implicit the BofA’s business strategy? How did the existence of BofA’s mission and business strategy help the firm
move quickly in acquiring Countrywide?
Answer: BofA mission is to become the nation’s largest consumer bank. Its strategy is to provide a full range of financial
services (e.g., credit/savings accounts, credit cards, home-equity loans, mortgages, etc.) to its customers. A mortgage
tends to be among the largest financial commitments most households will make. Once this relationship is established,
2. How would you classify the BofA business strategy (cost leadership, differentiation, focus or some combination)?
Explain your answer.
Answer: BofA followed a hybrid focus strategy (i.e., a combination of differentiation and focus). The bank endeavored to
3. Describe what the likely objectives of the BofA acquisition plan might have been. Be specific. What are the key
assumptions implicit in BofA’s acquisition plan? What are some of the key risks associated with integrating the
Countrywide? In addition to the purchase price, how would you determine BofA’s potential resource commitment in
making this acquisition?
Answer: The acquisition plan objectives could have been to secure access to Countrywide’s branch and ATM network
and brand name at a fraction of book value and to limit any further erosion in the value of its prior $2 billion investment
in Countrywide convertible preferred shares. The immediate need was to assess the likelihood of continuing loan losses
that Countrywide might incur, potential cost savings, as well as potential opportunities for selling current Countrywide
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4. What capabilities did the acquisition of FleetBoston Financial and MBNA provide BofA? How did the Countrywide
acquisition complement previous acquisitions?
Answer: The acquisition of FleetBoston Financial augmented the BofA’s infrastructure by providing an extensive branch
network and added customers and new accounts. The latter considerations offered the prospect of selling these new
5. What options to outright acquisition did BofA have? Why do you believe BofA chose to acquire Countrywide rather than
to pursue an alternative strategy?
Answer: With bankruptcy a real possibility, BofA could have simply waited until Countrywide sought protection of the
bankruptcy court and then sought to acquire the firm while in bankruptcy, with the acquisition conditioned on the Court’s
Nokia’s Gamble to Dominate the Smartphone Market Falters
The ultimate success or failure of any M&A transaction to satisfy expectations often is heavily dependent on the answer to a
simple question. Was the justification for buying the target firm based on a sound business strategy? No matter how bold,
innovative, or precedent-setting a bad strategy is, it is still a bad strategy.
In a bold move that is reminiscent of the rollout of Linux, Nokia, a Finnish phone handset manufacturer, announced in mid–
2008 that it had reached an agreement to acquire Symbian, its supplier of smartphone operating system software.12 Nokia also
announced its intention to give away Symbian’s software for free in response to Google’s decision in December 2008 to offer its
Android operating system at no cost to handset makers.
This switch from a model in which developers had to pay a license fee to create devices using the Symbian operating system
12 A smartphone is one device that can take care of all of the user’s handheld computing and communication needs in a single handheld device.
34
system. Nokia hopes to exploit economies of scale by spreading any fixed cost associated with online services over an expanding
customer base. Such fixed expenses could include a requirement by content service providers that Nokia pay a minimum level of
royalties in addition to royalties that vary with usage.
27 percent of the smartphone market, according to the NPD Group. Research-In-Motion (RIM), the maker of the Blackberry,
remained the U.S. market share leader in 2010 at 33 percent.
Dell Computer’s Drive to Eliminate the Middleman
Historically, personal computers were sold either through a direct sales force to businesses (e.g., IBM), through company-owned
stores (e.g., Gateway), or through independent retail outlets and distributors to both businesses and consumers (e.g., CompUSA).
distributors and selling directly to the end user. Dell Computer introduced a dramatically new business model for selling personal
computers directly to consumers. By starting with this model when the firm was formed, Dell did not have to worry about being in
direct competition with its distribution chain.
Dell has changed the basis of competition in the PC industry not only by shifting much of its direct order business to the
internet but also by introducing made–to-order personal computers. Businesses and consumers can specify online the features and
common industry standards like Intel chips and Microsoft operating systems. By its nature, the Dell model requires aggressive
expansion. As growth in the PC market slowed in the late 1990s, the personal computer became a commodity. Since computers
had become so powerful, there was little need for consumers to upgrade to more powerful machines. To offset growth in its
primary market, Dell undertook a furious strategy to extend the Dell brand name into related electronics markets. The firm started
to sell “low end” servers to companies, networking gear, PDAs, portable digital music players, an online music store, flat-panel
product innovator, Dell has succeeded in process innovation. The company has more than 550 business process patents, for
everything from a method of using wireless networks in factories to a configuration of manufacturing stations that is four times as
productive as a standard assembly line.
Dell’s expansion seems to be focused on its industry lead in process engineering and innovation resulting in super efficient
factories. The current strategy seems to be to move into commodity markets, with standardized technology that is widely
13 For more information, see www.guardian.co.uk/business/2010/feb/04/symbian-smartphone-software-open-source.
35
becoming more commodity-like but still require some R&D, Dell takes on partners. For example, in the printer market, Dell is
applying its brand name to Lexmark printers. In storage products, Dell has paired up with EMC Corp. to sell co-branded storage
machines. As these markets become more commodity-like, Dell will take over manufacturing of these products. This is what
happened at the end of 2003 when it took over production of low–end storage production from EMC. In doing so, Dell was able to
cut production costs by 25%.
The success of Michael Dell’s business model is evident. Its share of the global PC market in 2003 topped 16%; the company
accounts for more than one-third of the hand-held device market. At the end of 2003, Dell’s price–to earnings ratio exceeded IBM,
Microsoft, Wal-Mart, and General Electric. Dell has had some setbacks. In 2001, the firm scrapped a plan to enter the mobile–
phone market; in 2002 Dell wrote off its only major acquisition, a storage-technology company purchased in 1999 for $340
million. Dell also withdrew from the high-end storage business, because it decided its technology was not ready for the market.
Discussion Questions:
1. 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?
Answer: Dell’s primary customers are businesses and consumers. Current competitors include HP, Sony, Fujitsu, and
IBM. Potential competitors include retailers such as retailers such as Best Buy, CompUSA, and Walmart. Suppliers
include component suppliers, printer manufacturer Lexmark, plasma TV manufacturers, and EMC in high end storage
machines.
2. In your opinion, what market need(s) was Dell able to satisfy better than his competition?
3. How would you characterize Dell’s original business strategy (i.e., cost leadership, differentiation, niche, or some
combination? Give examples to illustrate your conclusions. How has Dell’s strategy evolved over time? Give examples
to illustrate your answer.
Answer: Dell’s original strategy was to focus on a hybrid strategy of differentiation and cost leadership. Dell originally
differentiated itself through online ordering and achieved cost leadership through minimizing working capital
4. How would you describe Dell’s current implementation strategy (i.e., solo venture, shared growth/shared control,
merger/acquisition, or some combination)? On what core competencies is Michael Dell relying to make this strategy
work?
Consolidation in the Global Pharmaceutical Industry:
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The Glaxo Wellcome and SmithKline Beecham Example
By the mid-1980s, demands from both business and government were forcing pharmaceutical companies to change the way they
did business. Increased government intervention, lower selling prices, increased competition from generic drugs, and growing
pressure for discounting from managed care organizations such as health maintenance and preferred provider organizations began
to squeeze drug company profit margins. The number of contact points between the sales force and the customer shrank
stricter formularies, allowing physicians virtually no leeway to prescribe unlisted drugs. The growing use of formularies resulted in
buyers needing fewer drugs and sharply reduced the need for similar drugs.
The industry’s first major wave of consolidations took place in the late 1980s, with such mergers as SmithKline and Beecham
and Bristol Myers and Squibb. This wave of consolidation was driven by increased scale and scope economies largely realized
through the combination of sales and marketing staffs. Horizontal consolidation represented a considerable value creation
investments. Because development costs are not significantly lower for generic drugs, it became increasingly difficult to generate
positive financial returns from marginal products. Duplicate overhead offered another opportunity for cost savings through
consolidation, because combining companies could eliminate redundant personnel in such support areas as quality assurance,
manufacturing management, information services, legal services, accounting, and human resources.
The second merger wave began in the late 1990s. The sheer magnitude and pace of activity is striking. Of the top-20 companies
called Glaxo SmithKline and had annual revenue of $25 billion and a market value of $184 billion. The combined companies also
would have a total R&D budget of $4 billion and a global sales force of 40,000. Total employees would number 105,000
worldwide. Although stressed as a merger of equals, Glaxo shareholders would own about 59% of the shares of the two
companies. The combined companies would have a market share of 7.5% of the global pharmaceutical market. The companies
projected annual pretax cost savings of about $1.76 billion after 3 years. The cost savings would come primarily from job cuts
among middle management and administration over the next 3 years
Discussion Questions:
1. What was driving change in the pharmaceutical industry in the late 1990s?
Profit margin pressures continued to mount on drug companies due to the proliferation of managed care, reductions in the
number of “me–too” drugs, and new medical breakthroughs in human genome research. The cost of supporting the drug
2. In your judgment, what are the likely strategic business plan objectives of the major pharmaceutical companies and why
are they important?
3. What are the alternatives to merger available to the major pharmaceutical companies? What are the advantages and
disadvantages of each alternative?
Drug companies could enter joint ventures or partnerships or make minority investments in research oriented
4. How would you classify the typical drug company’s strategy in the 1970s and 1980s: cost leadership, differentiation,
focus, or hybrid? Explain your answer. How have their strategies changed in recent years?
Historically, drug companies tended to pursue differentiation strategies that were heavily dependent on the ability of their
5. What do you think was the major motivating factor behind the Glaxo SmithKline merger and why was it so important?
The primary factor seems to be the desire to achieve sufficient scale to support the necessary R&D to commercialize new
Maturing Businesses Strive to “Remake” Themselves—
UPS, Boise Cascade, and Microsoft
UPS, Boise Cascade, and Microsoft are examples of firms that are seeking to redefine their business models due to a maturing of
their core businesses. With its U.S. delivery business maturing, UPS has been feverishly trying to transform itself into a logistics
expert. By the end of 2003, logistics services supplied to its customers accounted for $2.1 billion in revenue, about 6% of the
firm’s total sales. UPS is trying to leverage decades of experience managing its own global delivery network to manage its
customer’s distribution centers and warehouses. 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. Microsoft, after meteoric
growth in its share price throughout the 1980s and 1990s, experienced little appreciation during the six-year period ending in 2006,
despite a sizeable special dividend and periodic share buybacks during this period. Microsoft is seeking a vision of itself that
motivates employees and excites shareholders. Steve Ballmer, Microsoft’s CEO, sees innovation as the key. However, in spite of
spending more than $4 billion annually on research and development, Microsoft seems to be more a product follower than a leader.
Discussion Questions:
1. In your opinion, what are the primary challenges for each of these firms with respect to their employees, customers,
suppliers, and shareholders? Be specific.
2. Comment on the likely success of each of this intended transformation?
Answer: UPS could have the easiest time making the transformation since they already have the IT systems and customer
service orientation to provide logistical services that they provide for their own operations. OfficeMax will be challenged
38
Pepsi Buys Quaker Oats in a Highly Publicized Food Fight
On June 26, 2000, Phillip Morris, which owned Kraft Foods, announced its planned $15.9 billion purchase of Nabisco, ranked
seventh in the United States in terms of sales at that time. By combining Nabisco with its Kraft operations, ranked number one in
the United States, Phillip Morris created an industry behemoth. Not to be outdone, Unilever, the jointly owned British–Dutch
giant, which ranked fourth in sales, purchased Bestfoods in a $20.3 billion deal. Midsized companies such as Campbell’s could no
announced a reduction of 6000 in its worldwide workforce.
As one of the smaller firms in the industry, Quaker Oats faced a serious problem: it was too small to acquire other firms in the
industry. As a result, they were unable to realize the cost reductions through economies of scale in production and purchasing that
their competitors enjoyed. Moreover, they did not have the wherewithal to introduce rapidly new products and to compete for
supermarket shelf space. Consequently, their revenue and profit growth prospects appeared to be limited.
of consolidation.
After a review of its options, Quaker’s board decided that the sale of the company would be the best way to maximize
shareholder value. This alternative presented a serious challenge for management. Most of Quaker’s value was in its Gatorade
product line. It quickly found that most firms wanted to buy only this product line and leave the food and cereal businesses behind.
Quaker’s management reasoned that it would be in the best interests of its shareholders if it sold the total company rather than to
By November 21, 2000, Coca-Cola and PepsiCo were battling to acquire Quaker. Their interest stemmed from the slowing
sales of carbonated beverages. They could not help noticing the explosive growth in sports drinks. Not only would either benefit
from the addition of this rapidly growing product, but they also could prevent the other from improving its position in the sports
drink market. Both Coke and PepsiCo could boost Gatorade sales by putting the sports drink in vending machines across the
country and selling it through their worldwide distribution network.
was rising as the drama unfolded. In the days that followed, talks between Coke and Quaker broke off, with Coke’s board
unwilling to support a $15.75 billion offer price.
After failing to strike deals with the world’s two largest soft drink makers, Quaker turned to Danone, the manufacturer of Evian
water and Dannon yogurt. Much smaller than Coca-Cola or PepsiCo, Danone was hoping to hype growth in its healthy nutrition
and beverage business. Gatorade would complement Danone’s bottled–water brands. Moreover, Quaker’s cereals would fit into
approached Quaker’s management. Its second proposal was the same as its first. PepsiCo was now in a much stronger position this
39
time, especially because Quaker had run out of suitors. Under the terms of the agreement, Quaker Oats would be liable for a $420
million breakup fee if the deal was terminated, either because its shareholders didn’t approve the deal or the company entered into
a definitive merger agreement with an alternative bidder. Quaker also granted PepsiCo an option to purchase 19.9% of Quaker’s
stock, exercisable only if Quaker is sold to another bidder. Such a tactic sometimes is used in conjunction with a breakup fee to
discourage other suitors from making a bid for the target firm.
With the purchase of Quaker Oats, PepsiCo became the leader of the sports drink market by gaining the market’s dominant
share. With more than four–fifths of the market, PepsiCo dwarfs Coke’s 11% market penetration. This leadership position is
widely viewed as giving PepsiCo, whose share of the U.S. carbonated soft drink market is 31.4% as compared with Coke’s 44.1%,
a psychological boost in its quest to accumulate a portfolio of leading brands.
Discussion Questions:
1. What factors drove consolidation within the food manufacturing industry? Name other industries that are currently
undergoing consolidation?
Answer: The supermarket industry is a mature market subject to intense price competition. This has resulted in extensive
2. Why did food industry consolidation prompt Quaker to announce that it was for sale?
Answer: Quaker Oats was too small to afford to purchase larger competitors; as a result, it was unable to realize cost
3. Why do you think Quaker wanted to sell its consolidated operations rather than to divide the company into the food/cereal
and Gatorade businesses?
Answer: Since most of Quaker’s value was in the Gatorade business, management believed that it could command the
highest price by putting the entire company up for sale rather than splitting it up into independent operations.
4. Under what circumstances might the Quaker shareholder have benefited more if Quaker had sold itself in pieces (i.e.,
food/cereal and Gatorade) rather than in total?
Answer: It is unclear that Quaker would necessarily receive maximum value by selling the consolidated business and
letting the buyer determine what to do with the food manufacturing businesses. This strategy may have limited the
5. Do you think PepsiCo may have been willing to pay such a high price for Quaker for reasons other than economics? Do
you think these reasons make sense? Explain your answer.
Answer: PepsiCo is noted as a marketing machine. There may in fact be hubris attached to being recognized worldwide
as a market leader in the non-alcoholic beverage market. The firm is very conscious of the role of brand recognition in
40
eBay Struggles to Reinvigorate Growth
Founded in September 1995, eBay views itself as the world’s online market place for the sale of goods and services to a diverse
community of individuals and small businesses. Currently, eBay has sites in 24 different countries, and it offers a wide variety of
tools, features, and services enabling members to buy and sell on its sites. The firm’s primary business is Markeplaces consisting
of eBay, Shopping.com, and classified websites. In 2006, this business accounted for 90 percent of eBay’s sales and profits.
Historically, acquisitions made by eBay have always been related to e-commerce. For example, concern about slowing growth in
about 3 cents a minute, voicemail, and providing a traditional phone number for Skype accounts. Skype is facing new competition
from Google, Yahoo!, and many startups.
eBay expects Skype to facilitate trade on their sites by increasing the ability of buyers and sellers to negotiate. In addition to
paying eBay listing and completed-auction fees, sellers also could pay eBay a fee for getting an internet call, or lead, via Skype.
eBay will also use Skype to facilitate entering new markets, such as new cars, travel, real estate, and personal and business
services. Skype software gives eBay an advantage in China, Eastern Europe and Brazil, where online trust is not well-established
and where haggling may be more a part of the culture.
Discussion Questions:
1. Do you believe this acquisition if related or unrelated to eBay’s business? What are the implications of your answer..
Answer: While both businesses deal with software, Skype is more a pure software-based communications business,
largely unrelated to eBay’s core skills which are based in ecommerce and marketing and managing online auctions. As an
2. What are some of the key assumptions implicit in eBay’s decision to make this acquisition?
Answer: Key assumptions include that Skype can be integrated into eBay in a smooth and timely manner. The different