vision statement for a corporation.) If you were the CEO of Google, what might your vision for its future be? Explain
the rationale for your answer.
Answer: Firms defining their vision broadly often do so out of concern that opportunities will be missed if they define
their mission too narrowly. The first step in defining a firm’s mission is to determine what business you are in. If your
customer base is subject to wild largely unpredictable changes, you would plan differently if your customers were
stable or declining. If you are in a business where brand loyalty is important you may be able to take risks others
cannot. The outcome of this self-assessment process is the mission statement. It defines the current and future business.
That is, its ultimate purpose.
2. In the context of M&A, synergy represents the incremental cash flows generated by combining two businesses.
Identify the potential synergies you believe could be realized in Google’s acquisition of Nest that could be achieved by
leveraging other Google products and services. Be specific. Identify synergies Google is not likely to realize by
operating the firm as a wholly-owned largely autonomous subsidiary. Speculate as to why Google has chosen to
operate Nest in this manner.
Answer: Nest will provide Google access to lifestyle and in-home activities data. When combined with the range of
demographic (e.g., age, address, home ownership status, etc.) and psychographic (e.g., personal preferences such as the
purchase preferences, etc.) data, such information can create a more complete picture of what a consumer wants.
3. Describe Google’s investment strategy? What are the factors driving their investment strategy? How might
shareholders eventually react to this strategy? How might this investment strategy hurt the firm long-term?
Answer: Google is likely to experience exceptional double-digit growth in revenue for years to come driven by the
ongoing shift of brick and mortar retailing and advertising to the Internet. Such additional traffic on the Internet will
enable the firm to sell additional advertisement on its website and those of its partners. However, Google has taken on
many of the characteristics of a venture capital firm or private equity investor interested in investing in high potential
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hardware and software business.
4. Describe what you believe to be Google’s business strategy? Would you describe their strategy as cost leadership,
differentiation, focus or a hybrid strategy? Explain your answer. To what extent do you believe it is driven by changes
in the firm’s external environment? To what extent have factors internal to the firm driven Google’s business strategy?
Answer: Google’s business strategy seems implicitly to be taking actions necessary to drive more people to using the
Internet more frequently and in more diverse ways. The strategy seems to fall in the differentiation category as the
pervasiveness of the Google brand has made it a household name. Many Internet users associate the name with high
5. What are the potential threats to Google’s current vision and business strategy?
Answer: Privacy concerns could severely limit Google’s expansion strategy and its accumulation of personal and
Exxon Mobil’s (Exxon) Unrelenting Pursuit of Natural Gas
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Key Points
Believing the world will be dependent on carbon-based energy for many decades, Exxon continues to pursue aggressively
amassing new natural gas and oil reserves.
This strategy is consistent with its core energy extraction, refining, and distribution skills.
As the world’s largest energy company, Exxon must make big bets on new reserves of unconventional gas and oil to
increase future earnings.
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Exxon has always had a reputation for taking the long view. By necessity, energy companies cannot respond to short-term
gyrations in energy prices, given the long lead time required to discover and develop new energy sources. While energy
23
prices will continue to fluctuate, Exxon is betting that the world will remain dependent on oil and gas for decades to come
and that new technology will facilitate accessing so-called unconventional energy sources.
During the last several years, Exxon continued its headlong rush into accumulating shale gas and oil properties that
began in earnest in 2009 with the acquisition of natural gas exploration company XTO Energy. While natural gas prices
1980s, the firm seemed to have developed a phobia about acquisitions. Rather than make big acquisitions, Exxon started
buying back its stock, purchasing more than $16 billion worth between 1983 and 1990, and spending about $1 billion
annually on oil and gas properties and some small acquisitions.
Exxon Mobil Corporation stated publicly in its 2009 annual report that it was committed to being the world’s premier
petroleum and petrochemical company and that the firm’s primary focus in the coming decades would likely remain on its
often trapped above oil deposits. Energy companies now drill horizontal wells and fracture them with high–pressure water,
a practice known as “fracking.” That technique has enabled energy firms to release natural gas trapped in the vast shale oil
fields in the United States as well as to recover gas and oil from fields previously thought to have been depleted. The
natural gas and oil recovered in this manner are often referred to as “unconventional energy resources.”
In an effort to bolster its position in the development of unconventional natural gas and oil, Exxon announced on
Known as a wildcat or independent energy producer, the 23-year-old XTO competed aggressively with other
independent drillers in the natural gas business, which had boomed with the onset of horizontal drilling and well fracturing
to extract energy from older oil fields. However, independent energy producers like XTO typically lack the financial
resources required to unlock unconventional gas reserves, unlike the large multinational energy firms like Exxon. The
geographic overlap between the proven reserves of the two firms was significant, with both Exxon and XTO having a
to offer their shareholders significant future earnings growth. Given the long lead time required to add to proven reserves
and the huge capital requirements to do so, energy companies by necessity must have exceedingly long-term planning and
investment horizons. Acquiring XTO is a bet on the future of natural gas. Moreover, XTO has substantial technical
expertise in recovering unconventional natural gas resources, which complement Exxon’s global resource base, advanced
R&D, proven operational capabilities, global scale, and financial capacity.
6 Rex Tillerson, Exxonmobil CEO, 2009 Exxonmobil Annual Report.
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In the five-year period ending in 2010, the U.S. Energy Information Administration (EIA) estimates that the U.S. total
proven natural gas reserves increased by 40% to about 300 trillion cubic feet, or the equivalent of 50 billion barrels of oil.
Unconventional natural gas is projected by the EIA to meet most of the nation’s domestic natural gas demand by 2030,
representing a substantial change in the overall energy consumption pattern in the United States. At current consumption
differences due to Exxon Mobil’s and XTO’s dissimilar corporate cultures.
Discussion Questions and Answers:
1. What was the total purchase price or enterprise value of the transaction?
2. Why did Exxon Mobil’s shares decline and XTO Energy’s shares rise substantially immediately following the
announcement of the takeover?
Answer: Exxon Mobil’s share price dropped by about 4 percent on the announcement of the share for share
3. What do you think Exxon Mobil believes are its core skills? Based on your answer to this question, would
you characterize this transaction as a related or unrelated acquisition? Explain your answer.
Answer: Exxon Mobil clearly views itself as an oil and gas exploration, production, and distribution
4. Identify what you believe the key environmental trends that encouraged Exxon Mobil to acquire XTO Energy.
5. How would you describe Exxon Mobil’s long-term objectives, business strategy, and implementation
strategy? What alternative implementation strategies could Exxon have pursued? Why do you believe it chose
an acquisition strategy? What are the key risks involved in ExxonMobil’s takeover of XTO Energy?
Answer: Exxon Mobil’s long-term objective is to provide its shareholders with increasing earnings growth
and shareholder value appreciation. It is pursuing a focus strategy, which entails applying its traditional skills
in oil and gas extraction in reserve-rich geographic areas. It is implementing this strategy by acquiring a firm
7 When target firm shareholders receive primarily acquirer shares for their shares, the transaction is deemed to be tax
free, in that no taxes are due until the acquirer shares are sold (see Chapter 12).
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Microsoft Invests in Barnes & Noble’s Nook Technology
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Key Points
Firm size often dictates business strategy.
Diversifying away from a firm’s core skills often is fraught with risk.
Accumulated corporate cash balances often create potential agency problems.
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Microsoft, like Apple, has been in business for three decades. Unlike Apple, Microsoft has failed to achieve and sustain the
high growth in earnings and cash flow needed to grow its market value. For years, Microsoft has attempted to reduce its
dependence on revenue generated from its Windows operating system software and the Office Products software suite by
targeting high-growth segments in the information technology industry. Despite these efforts, the firm continues to generate
more than four-fifths of its annual revenue from these two product lines.
Skype, the Internet telephony firm, for $8.5 billion in the biggest acquisition in the firm’s history. Its contribution to
Microsoft’s revenue and profit growth is unclear at this time.
Despite a number of acquisitions during the last few years, Microsoft amassed a cash hoard of more than $60 billion by
the end of March 2012. The amount of cash creates considerable pressure from shareholders wanting the firm either to
return the cash to them through share buybacks and dividends or to reinvest in new high-growth opportunities. In recent
viewed as a growth area for e–books. Analysts valued the new B&N subsidiary at $1.7 billion, more than twice B&N’s
consolidated value at the close of business on May 1, 2012. After the announcement, B&N’s market value jumped to $1.25
billion.
As a result of the deal, the two firms will settle their patent infringement suits, and B&N will produce a Nook e–reading
application for the Windows 8 operating system, which will run on both traditional PCs and tablets. Microsoft, through its
and-mortar stores, of which the firm has 691 retail stores and 641 college bookstores.
In making the B&N investment, Microsoft is placing another bet on an industry in which it lags behind its competitors
and puts it in competition with Amazon.com Inc., Apple Inc., and Google Inc. The Nook currently runs on Google’s
Android software, as does Amazon’s Kindle Fire. The two firms will share revenue from sales of e-books. The partnership
also has the potential for Microsoft to manufacture e-readers and for future Nook devices to be powered by Microsoft
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(physical) book business has declined rapidly. With revenue and profits declining, B&N was looking for a strategic partner
to accelerate the growth of its e-book business globally. B&N had been accepting offers from a number of potential
90% market share of the e-book market, but this has eroded as new players, such as Apple, Google and now Microsoft,
have entered. According to market research firm IHS iSuppli, Apple had 62% of the tablet market in 2011, reflecting the
success of its iPad, with Amazon’s Kindle having a 6% share and B&N’s Nook a 5% share. Book publishers appear to have
been encouraged by Microsoft’s investment in B&N due to their growing concern that Amazon would dominate the e-book
market and the pricing of e-books if B&N were unable to become a viable competitor to Amazon.com.
Unlike rivals such as Apple, Microsoft has relied mainly on partners to create hardware that runs its software, with the
exception of the Xbox video game unit and the company’s ill-fated Zune media player. Microsoft is constrained by its
partnerships, in that if the firm begins to create its own hardware, then it puts itself into direct competition with partners
who make hardware such as tablet devices powered by Microsoft operating systems.
Discussion Questions:
1. Speculate as to why Microsoft seems to be having trouble diversifying its revenue stream away from Windows and
the Office Products suite?
Answer: Microsoft’s roots are as a software company. It has been wildly successful by selling many millions of
copies of its Windows operating system worldwide and subsequently selling end users of the operating system
software the firm’s Office Products suite. To ensure compatibility with the firm’s operating system, it is natural for
2. What are the key factors external and internal to Microsoft driving its investment in Barnes & Noble?
Answer: The good news for Microsoft is that its core products continue to generate a huge annuity-like cash flow
stream; the bad news is that the firm has yet to demonstrate an ability to reinvest successfully this cash flow in
related high growth market segments. The sheer size of the firm’s cash hoard creates pressures from shareholders
3. Speculate as to how analysts valued B&H’s e–book subsidiary at $1.7 billion. In what way might this number
understate the value of the subsidiary at the time the Microsoft investment was made?
Answer: Analysts valued the new B&H subsidiary housing its Nook e-reader and e-book titles at $1.7 billion by
4. In your opinion, what does Microsoft bring to this partnership? What does Barnes & Noble contribute? What are
likely to be the challenges to both parties in making this relationship successful?
27
Answer: Microsoft contributes both cash and name recognition and an operating system. While all are important,
the fact that a firm like Microsoft would invest in B&N legitimizes the firm’s Nook e-reader in the eyes of both
potential customers and investors. Concerns about B&N’s Nook being marginalized may at least temporarily have
Sony’s Strategic Missteps
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Key Points
Realizing a complex vision requires highly skilled and consistent execution.
A clear and concise business strategy is essential for setting investment priorities.
Corporate financial and human resources most often need to be concentrated in support of a relatively few key initiatives to
realize a firm’s vision.
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As the fifth-largest media conglomerate (measured by revenues), Sony Corporation (Sony) continues to struggle to get it
right. Its products and services range from music and movies to financial services, TVs, smartphones, and semiconductors.
The firm’s top-three profit contributors include its music, financial services, and movie operations; TV manufacturing has
been its greatest profits drag. As the third–largest global manufacturer of TVs, behind Korea’s Samsung and LG
Electronics, Sony has been unable to offset the slumping demand in the United States and Europe for Bravia TVs,
recording nine consecutive yearly losses.
Sony’s corporate vision is to provide consumers easy, ubiquitous access to an array of entertainment content. Sony
wants to provide both the content and the means to enable consumers to access the content. However, rather than a roadmap
outlining how the firm intends to achieve this vision, its business strategy lists four broad themes or areas in which it will
Columbia, and TriStar Pictures.
As with many companies, Sony’s vision seems to exceed its ability to execute. Derailed in recent years by an
appreciating yen, a lingering global economic slowdown, an earthquake that crippled its factories, and flooding in Thailand
that forced factory closings, Sony recorded its fifth consecutive annual loss for the fiscal year ending March 2012.
Cumulative five-year losses totaled more than $6 billion. In 2000, the firm was worth more than $100 billion; however, by
late 2012, it was valued at less than $18 billion. This compares to its major competitors, Apple and Samsung, which were
Research in Motion, Ericsson, and EMC Corp. to purchase patents owned by Nortel Networks Corp used in mobile phones
and tablet computers for $4.5 billion in cash. Sony, along with the Blackstone Group and others, also acquired EMI Music
Publishing from Citigroup for $2.2 billion. In addition, Sony bought out Ericsson’s 50% stake in their mobile phone
venture for $1.5 billion in order to integrate the smartphone business with its gaming and tablet offerings. Little progress
seems to have been made in shoring up its money–losing TV manufacturing business. The firm’s lack of focus or more
narrowly defined priorities may be at the center of the firm’s poor financial performance.
Oracle’s Efforts to Consolidate the Software Industry
Key Points:
• Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its
business strategy.
• A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing
business environment.
• Increasingly, the major software competitors seem to be pursuing very similar strategies.
• The long-term winner often is the firm most successfully executing its chosen strategy.
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Oracle ‘s completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat
more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of
proprietary database and middleware services (accounting for about three–fourths of the firm’s revenue), Oracle is now seen
as a leader in enterprise resource planning, customer relationship management, and supply chain management software
by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative
software market. Customers could choose the technology they preferred (i.e., “best of breed”) and assemble those products
in their own data centers networks to support growth in the number of users and the growing complexity of user
requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems)
became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and
getting the disparate software applications to work together. Although some buyers still prefer to purchase the “best of
breed” software, many are moving to purchase suites of applications that are compatible.
In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of
its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there,
Oracle proceeded to acquire 55 firms, with more than one–half focused on strengthening the firm’s software applications
potentially diluting existing shareholders.
In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply
chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring
other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning
unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead
overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing
approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for
inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially
the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied
Oracle’s acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated
to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to
which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring
new revenue streams. Ironically, in the short run, Oracle’s acquisition binge has resulted in increased complexity as each
new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply
be masking underlying problems brought about by this growing complexity.
Discussion Questions and Answers:
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
2. 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 historically represented three–fourths of the firm’s revenue, Oracle recognized that it was unlikely
3. In what way do you think the Oracle strategy was targeting key competitors? Be specific.
4. What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry
consolidation? Be specific.
Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction
Cingular outbid Vodafone to acquire AT&T Wireless, the nation’s third largest cellular telephone company, for $41 billion
in cash plus $6 billion in assumed debt in February 2004. This represented the largest all-cash transaction in history. The
combined companies, which surpass Verizon Wireless as the largest U.S. provider, have a network that covers the top 100
U.S. markets and span 49 of the 50 U.S. states. While Cingular’s management seemed elated with their victory, investors
soon began questioning the wisdom of the acquisition.
By entering the bidding at the last moment, Vodafone, an investor in Verizon Wireless, forced Cingular’s parents, SBC
Communications and BellSouth, to pay a 37 percent premium over their initial bid. By possibly paying too much, Cingular
put itself at a major disadvantage in the U.S. cellular phone market. The merger did not close until October 26, 2004, due to
With AT&T Wireless, Cingular would have a combined subscriber base of 46 million, as compared to Verizon
Wireless’s 37.5 million subscribers. Together, Cingular and Verizon control almost one half of the nation’s 170 million
wireless customers. The transaction gives SBC and BellSouth the opportunity to have a greater stake in the rapidly
expanding wireless industry. Cingular was assuming it would be able to achieve substantial operating synergies and a
reduction in capital outlays by melding AT&T Wireless’s network into its own. Cingular expected to trim combined capital
costs by $600 to $900 million in 2005 and $800 million to $1.2 billion annually thereafter. However, Cingular might feel
Discussion Questions:
1. What is the total purchase price of the merger?
2. What are some of the reasons Cingular used cash rather than stock or some combination to acquire AT&T
Wireless? Explain your answer.
31
3. How might the amount and composition of the purchase price affect Cingular’s, SBC’s, and BellSouth’s cost of
capital?
4. With substantially higher operating margins than Cingular, what strategies would you expect Verizon Wireless to
pursue? Explain your answer.
service.
Bank of America Acquires Merrill Lynch
Against the backdrop of the Lehman Brothers’ Chapter 11 bankruptcy filing, Bank of America (BofA) CEO Kenneth Lewis
announced on September 15, 2008, that the bank had reached agreement to acquire mega–retail broker and investment bank
Merrill Lynch. Hammered out in a few days, investors expressed concern that the BofA’s swift action on the all–stock $50
billion transaction would saddle the firm with billions of dollars in problem assets by pushing BofA’s share price down by
21 percent.
BofA saw the takeover of Merrill as an important step toward achieving its long-held vision of becoming the number 1
provider of financial services in its domestic market. The firm’s business strategy was to focus its efforts on the U.S. market
by expanding its product offering and geographic coverage. The firm implemented its business strategy by acquiring
selected financial services companies to fill gaps in its product offering and geographic coverage. The existence of a clear
offering.
The acquisition of Merrill makes BofA the country’s largest provider of wealth management services to go with its
current status as the nation’s largest branch banking network and the largest issuer of small business, home equity, credit
card, and residential mortgage loans. The deal creates the largest domestic retail brokerage and puts the bank among the top
five largest global investment banks. Merrill also owns 45 percent of the profitable asset manager BlackRock Inc., worth an
demise of Merrill Lynch. By the end of the first quarter of 2009, the U.S. government had injected $45 billion in loans and
capital into BofA in an effort to offset some of the asset write-offs associated with the acquisition. Later that year, Lewis
announced his retirement from the bank.
Mortgage loan losses and foreclosures continued to mount throughout 2010, with a disproportionately large amount of
such losses attributable to the acquisition of the Countrywide mortgage loan portfolio. While BofA’s vision and strategy
may still prove to be sound, the rushed execution of the Merrill acquisition, coupled with problems surfacing from other
acquisitions, could hobble the financial performance of BofA for years to come.
When Companies Overpay—Mattel Acquires The Learning Company
Mattel, Inc. is the world’s largest designer, manufacturer, and marketer of a broad variety of children’s products selling
directly to retailers and consumers. Most people recognize Mattel as the maker of the famous Barbie, the best-selling
fashion doll in the world, generating sales of $1.7 billion annually. The company also manufactures a variety of other well–
known toys and owns the primary toy license for the most popular kids’ educational program “Sesame Street.” In 1988,
Mattel revived its previous association with The Walt Disney Company and signed a multiyear deal with them for the
worldwide toy rights for all of Disney’s television and film properties
Business Plan
Mission Statement and Strategy
Mattel’s mission is to maintain its position in the toy market as the largest and most profitable family products
technical expertise and resources to penetrate the software market as quickly as the company desires. Consequently, Mattel
seeks to acquire a software business that will be able to manufacture and market children’s software that Mattel will
distribute through its existing channels and through its Website (Mattel.com).
Defining the Marketplace
The toy market is a major segment within the leisure time industry. Included in this segment are many diverse
retailers and e–commerce stores in 1999 included Toys “R” Us Inc., Wal-Mart Stores Inc., Kmart Corp., Target,
Consolidated Stores Corp., E-toys, ToyTime.com, Toysmart.com, and Toystore.com. The retailers are Mattel’s direct
customers; however, the ultimate buyers are the parents, grandparents, and children who purchase the toys from these
retailers.
Competitors. The two largest toy manufacturers are Mattel and Hasbro, which together account for almost one–half of
key customers such as Wal-Mart and Toys “R” Us. It would be costly for new entrants to replicate these relationships.
Moreover, brand recognition of such toys as Barbie, Nintendo, and Lego makes it difficult for new entrants to penetrate
certain product segments within the toy market. Proprietary knowledge and patent protection provide additional barriers to
entering these product lines. The large toymakers have licensing agreements that grant them the right to market toys based
on the products of the major entertainment companies.
East and Mexico to take advantage of low labor costs. Parts, such as software and microchips, often are outsourced to non–
Mattel manufacturing plants in other countries and then imported for the assembly of such products as Barbie within
Mattel-owned factories. Although outsourcing has resulted in labor cost savings, it also has resulted in inconsistent quality.
Opportunities and Threats
Opportunities