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9.3 Mergers and Acquisitions LO 9–5
POWERPOINT SLIDE 32
EXAMPLES
To offer not only communications but also TV services, AT&T acquired DirecTV for a deal valued at almost $50 billion.
This merger also strengthens AT&T’s bargaining power with media companies at a time when more and more content is
streamed online (we discussed the dynamics in the industry in ChapterCase 7 on Netflix). Shortly thereafter, DirecTV’s main
rival, Dish Network, announced that it would merge with T-Mobile, the third largest wireless service provider in the U.S.
after AT&T and Verizon.
NEWER FACULTY: In the mature phase of an industry life cycle competition is based more around cost leadership than
differentiation. In response to the increased importance of economies of scale, industry consolidation through mergers
increases in frequency. The U.S. passenger airline industry is one such example with mergers of United with Continental,
EXERCISE
9.3 Mergers and Acquisitions LO 9–6
POWERPOINT SLIDES 33–34
EXAMPLES
POWERPOINT SLIDE 33
Adidas acquired Reebok in 2006 to overcome competitive disadvantage by generating synergies and economies of scale so
the company can at least compete with Nike and other competitors.
NEWER FACULTY: Managers sometimes have their own agenda when using M&As for their own benefits in terms of pay,
power, and prestige and this is part of the “principal–agent problem.”
Shire Pharmaceutical is pursuing in 2015 both a horizontal integration with a major competitor, Baxalta for $30B, and
acquisition of a much smaller biotech firm, Dyax for $6.5B. Students might discuss how Shire’s motivations for the two
acquisitions differ (See Denise Roland and Rory Gallivan’s article, Shire to Acquire Dyaz for Up to $6.5 Billion” at The
Wall Street Journal, dated November 2, 2015.
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DISCUSSION TOPICS
POWERPOINT SLIDE 33
NEWER FACULTY: Horizontal integration has benefits to the firms involved. Consider the consolidation in the event
promotion business when Live Nation bought Ticketmaster in 2010. Ask students to list some specific advantages of the
acquisition for Live Nation. Ask them to identify any downsides in the merger. Focus them on the list in the chapter of the
benefits of horizontal integration strategy. Live Nation enjoyed the reduced competitive intensity, lowered their cost through
economies of scale, gained access to new markets and distribution channels, and increased differentiation with more brand
names. A potential downside of the merger might have been integration failure because combining two firms requires strong
leaders and cultural compatibility.
POWERPOINT SLIDE 34
EXPERIENCED FACULTY: What motivated the cross-border merger of two major advertising firms, Omnicom and Publicis?
This merger will certainly provide economies of scale and could potentially increase the firm’s negotiating power with its
customers and suppliers. However, will it give the combined firm the resources and capabilities that it needs to compete
effectively against the new disruptors in the advertising business, like Google and Facebook? Ask students to do an industry
analysis of the ad agency business and create a competency development wish list for a large traditional advertising agency.
What types of acquisition targets might accelerate the process of gaining those skills? (See “Advertising giants to merge”
7/29/13 The Wall Street Journal.)
POWERPOINT SLIDE 34
What is motivating the acquisition of EMC by Dell? It is not unusual for a firm that is having trouble competing effectively
to acquire another firm that is having similar difficulties. They see capturing additional economies of scale as their best hope
for gaining an edge over more nimble or innovative competitors (and they may not be seen as attractive partners to their
leading competitors). Ask students whether they think that this strategy is likely to be effective in the case of EMC and Dell.
Why or why not? This is also an opportunity to raise the issue of how much ground a firm can lose to competitors by
focusing for a long period on a complex post-merger integration process. This process can slow innovation and distract
management from operational excellence on existing business. How might Dell’s major rivals, HP and Lenovo benefit from
Dell’s distraction? (See “EMC takeover marks return of Michael Dell” D Clark, D Cimilluca, and R McMillan 10/13/15 The
Wall Street Journal.)
EXERCISES
POWERPOINT SLIDE 34
One industry currently going through a wave of consolidation of competitors is the commercial airline industry. Assume
Southwest Airlines has just changed CEOs. The new CEO vows to make Southwest the largest airline company in the United
States and plans to buy another airline to increase Southwest’s scale. Southwest reported cash reserves of $1.7B dollars at the
end of 2014, so it is in a healthy financial position for an acquisition. Consider overall size and existing complementary
airline routes as major factors in selecting an appropriate partner for Southwest. You can find route maps on the websites of
INTEGRATION
Drag-and-Drop: Horizontal Integration
This click-and-drag interactive covers the textbook example firms and four of the benefits of using horizontal integration,
including mergers and acquisitions. Then four related questions follow. Students need to be familiar with textbook
Section 9.3 before proceeding with this activity. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this exercise by having classroom discussions
about the benefits and drawbacks of some horizontal integration examples. Discussion question 1 in the end of chapter
material suggests a discussion on the Live Nation/Ticketmaster merger. Students often frequent concerts and they may
have some sharp opinions on this near monopoly in ticket purchasing systems.
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all major airlines, or go to a site such as Airline Route Maps to compare several airlines on one web page. You may also
want to refer back to Exhibit 3.5 for the strategic groups map of the U.S. airline industry. As a team, review this financial and
routing data and make a recommendation to the new leadership of Southwest for its best potential partner. Students will need
POWERPOINT SLIDE 34
Ask students to identify a recent horizontal integration that is important in your geographic area. For example, the merger of
United and Continental airlines is quite salient in Houston and Chicago. Then, ask them to step through the sources of value
and costs in Exhibit 9.5 to evaluate the probable effects of the merger. For this example, one could argue that competitive
9.3 Mergers and Acquisitions LO 9–7
POWERPOINT SLIDES 35–36
EXAMPLE
Monsanto made an acquisition offer to Syngenta in 2015, so that they could grow their pesticide business (“Buy” growth
strategy). Syngenta rejected that offer because they felt that they could grow their business more effectively organically
(“Build” growth strategy), although there may have been some executive hubris and a principal–agent problem involved.
Syngenta’s shareholders did not agree and the Syngenta CEO was fired. (See “Syngenta CEO Mike Mack to step down” J
Revill and J Bunge 10/21/15 The Wall Street Journal.) This example illustrates the dilemma facing the leaders of a target
firm in an acquisition offer. They need to be able to look at their internal growth prospects and ability to generate future
shareholder value through a realistic, risk-weighted lens (not the “check–mark” optimism reflected in many corporate
business projections) and compare it to the immediate value to their shareholders of a cash offer and the projected value of
the other firm’s stock in a stock offer. They also need to communicate enough with major shareholders to ensure that they
share a common view of growth prospects.
STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDES 66 AND 36
These videos show interviews with the decision makers for the Google/YouTube example in the text.
DISCUSSION TOPICS
The chapter distinguishes between “merging with competitors” (or horizontal integration) and the acquisitions of
smaller companies, often tech ventures. Do you expect there to be a difference in the failure rate? Why or why not?
Which concepts introduced in Chapter 6 (when discussing cost drivers) could help in lowering the failure rate of serial
acquisitions? Students will have different views on this, but ideally you should start the conversation by reaching an
agreement on what constitutes success or failure. If you measure success by shareholder value creation, then the size of the
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Strategy Highlight 9.2
POWERPOINT SLIDE 35: FOOD FIGHT: KRAFT’S HOSTILE TAKEOVER OF CADBURY
Cadbury has a strong position in emerging economies and Kraft needs access to these markets so it won’t lose the
competitive advantage. But the entry barrier seems very high for Kraft as it executes a hostile takeover of Cadbury.
Following the acquisition, Kraft kept its North American grocery business and spun off its international snack business,
including the Cadbury brand, into a separate firm, Mondelēz, in the hopes of accelerating growth and international expansion.
As of late 2013, Mondelēzes’ performance is somewhat below shareholder expectations.
EXERCISE
Ask students to research Hershey in China, reviewing Hershey’s recent candy product launches in China and compare them
to Mondelēz China’s new Oreo products and Cadbury products. National and international news outlets have carried stories
on the product launches. The Hershey China site does not have English text, but students may comment on the fact that most
of the people featured in the ads are Caucasian. The Mondelēz China website has English text, but if you have students who
can read Mandarin, they could be asked to make a presentation to the class comparing snack firm product development
strategies in China to those in the country of your university. Cadbury has much more expertise than both Hershey and Kraft
in international marketing. Can they see evidence of Mondelēz benefiting from this capability? You may want to refer back
to this discussion in Chapter 10 when you discuss localization. AACSB 2015 Standard 9 Managing in a global context
9.3 Mergers and Acquisitions LO 9–8
POWERPOINT SLIDES 37–38
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDE 65
Prof. Laurence Capron discusses evaluating M&As.
EXAMPLES
Why did activist shareholder, Nelson Peltz, think that PepsiCo should buy Mondelēz and then separate and spin off the
beverage business? Ask students to exercise their critical reasoning skills by making a list of what they would need to know
to determine whether this suggestion would create shareholder value. They should identify obvious issues such as the
profitability and profit growth rate of each industry and the relative competitive position of each firm. You should guide them
through the better-off test also. Would Mondelēz generate more value as part of FritoLay than separately? If so, why? What
are the sources of synergies? This could also be a jumping off point for a discussion of the challenges of integrating two
competitors after a merger. (See “Oreo, meet Dorito” 7/18/13 The Wall Street Journal.)
POWERPOINT SLIDE 38
An example of the “Winner’s Curse” is HP’s purchase of Autonomy for more than $10B. In this example, HP overpaid for
this acquisition to the delight of its competitors and then had to write-off more than $8B in book value associated with the
assets. (See “Inside H–P’s missed chance to avoid a disastrous deal” 1/22/13 The Wall Street Journal.) Oracle’s CEO claimed
that they thought Autonomy was overvalued at the $6B purchase price they were offered. (See “Ellison stirs the pot over H-P
deal” 9/30/11 The Wall Street Journal.) Ultimately, HP wrote off almost the entire cost of the acquisition. To what extent did
a principal–agent problem drive HP’s decision?
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DISCUSSION TOPICS
EXPERIENCED FACULTY: An important part of the dynamics inherent to a change of strategy (see Exhibit 8.13) for a large
firm is the fact that it can change the structure of the industry. The obvious changes that students will see quickly are reduced
rivalry and reduced buyer power. Consolidating two major firms also reduces supplier power. What they may not understand
is that anti-monopoly agencies, such as the FTC and the European Monopolies and Merger Commission, will often force
structural changes to protect consumers that create opportunities for rivals. Like in chess or war, successful merger strategy
involves envisioning the responses of rivals and governments in response to your actions. You need to determine which
assets you might be forced to give up or sell to rivals, how that will weaken you, and how it will strengthen one or more
END OF CHAPTER ETHICAL/SOCIAL ISSUES 1
POWERPOINT SLIDE 37
If mergers and acquisitions quite often end up providing a competitive disadvantage, why do so many of them take
place? Given the poor track record of such outings, is the continuing M&A activity a result of principal–agent
problems and managerial hubris? What can be done to overcome principal–agent problems? Are there other reasons
for poor performance?
EXERCISE
“Winners Curse at Gourmet Adventures” is an exercise that demonstrates the risks of overbidding for acquisitions. It can be
found on Russ Coff’s Carpenter Strategy Toolbox site.
Research Update
Bauer, F. and Matzler, K. (2013), Antecedents of M&A success: The role of strategic complementarity, cultural fit, and degree and
speed of integration.
Strat. Mgmt. J.,
doi: 10.1002/smj.2091
EXPERIENCED FACULTY: This research identifies three antecedents to M&A success, integrating multiple management
theories. Using strategic management theory, the authors find that strategic complementarity is positively related to M&A
success. Using organizational behavior theory, they find that degree of integration and cultural compatibility are
positively related to M&A success. Integrating the two schools of thought, they find that strategic complementarity is an
antecedent to both degree of integration and cultural compatibility.
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9.4 Implications for Strategists
POWERPOINT SLIDES 39–42
END OF CHAPTER ETHICAL/SOCIAL ISSUES 2
POWERPOINT SLIDE 41
Alliances and acquisitions can sometimes lead to less access or higher prices for consumers. Comcast bought NBC
Universal (from GE). When one content provider and the Internet access provider are the same, will this lead to some
content being favored over others on the Internet? For example, will Comcast want to send Universal movies (which it
owns) with faster download capabilities than it sends, say, a Harry Potter movie from Warner Brothers (which it
doesn’t own)? If you were a Comcast executive, would you want to favor the speed of your own content delivery
versus other content providers, including Netflix?
One can never rule out the possibility that a firm would act in its own best interest. Because business is business, being
profitable and maximizing shareholders’ value is usually their primary objective. In this case, with Comcast buying NBC
Universal, Comcast might not alter the download speed, but almost certainly Comcast will try to strongly market Universal
DISCUSSION TOPICS
POWERPOINT SLIDE 42
Alliances can be mixed blessings. They can provide a strong competitive advantage, but this may evolve into competitive
dependence and create the potential for hold-up. Two examples to illustrate this point are Google/Samsung and
Zynga/Facebook. For either of these examples, you could develop an exercise in decision making skills by asking the
students to develop two mutually exclusive strategies for either Samsung, Google, Facebook, or Zynga and then explain why
one is superior to the other using sound strategic logic grounded in analysis.
Samsung built very successful businesses in smartphones and tablets by taking advantage of the free Android operating
system. Now Google’s Android strategy has become highly dependent on Samsung, giving Samsung strong bargaining
Android devices. If they don’t get what they want, they could play Google off against Microsoft or they could backward
integrate by developing their own operating system. Another interesting direction for this discussion would be to focus on
Samsung’s concerns when Google purchased one of Samsung’s rivals in handset manufacture, Motorola. See “Samsung
sparks anxiety at Google” 2/26/13 The Wall Street Journal.
Zynga built its casual gaming business primarily through its strategic alliance with Facebook. Eventually it grew to a
substantial segment of Facebook’s revenue. Which firm gained more from that alliance can be the subject of a meaty debate,
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END OF CHAPTER DISCUSSION QUESTION 3
POWERPOINT SLIDE 42
Alliances are often used to pursue business-level goals, but they may be managed at the corporate level. Explain why
this portfolio approach to alliance management would make sense.
END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDE 58
The global public relations and communications firm Burson-Marsteller conducted its first study of how the Fortune Global
100 used social media in 2010. It found that 79 percent of the 100 largest companies used Twitter, Facebook, YouTube, or
corporate blogs to communicate corporate messages to customers and other stakeholders. Burson-Marsteller wanted to learn
how the largest global companies had changed their usage of social media after two years of experience and conducted The
Global Social Media Check-Up 2012. The 2012 study focused on the Fortune Global 100 companies’ social media activity
on Twitter, Facebook, YouTube, Google Plus, and Pinterest. The findings show that companies have gained experience and
adapted quickly. Twitter is the most popular platform, as tweets have exploded from 50 million tweets per day in 2010 to 340
million per day in 2012 (over 1 billion every three days). Because of this popularity, 82 percent of the companies have
Twitter accounts (up from 65 percent in 2010), and 79 percent are actively engaged in retweeting or @mentions. YouTube
has seen the most growth in company usage—79 percent of companies create original content to use on YouTube (up from
50 percent) and average 2 million viewers. Companies are also reacting faster to new social media platforms; Google Plus
was launched in November 2011, and 48 percent of the largest companies had accounts by March 2012. Another new
platform, Pinterest, is joined by invitation, and 48 percent of the Global 100 have accounts. The study found that companies
Do the firms seem to do a good job of managing their web identity? If you chose firms from the same industry, is it
evident how each firm’s web content relates to its competitive position?
What differences do you find among the three firms? For example, do some tailor their message for different
stakeholders? Are some firms more creative in generating YouTube content?
19
Strategy Term Project
Term Project Module 9
In this section, you will study your selected firm’s use of acquisitions and alliances to grow or change its business. AACSB
2015 Standard 9 Application of knowledge (able to translate knowledge of business and management into practice)
Use Exhibit 9.1 as a decision tree guide on your focal firm. Identify a strategic resource gap to study about the firm.
Use the related questions to guide your thinking on the appropriate corporate strategy (build, borrow, or buy) to
employ to close this gap and move the company forward.
Research what strategic alliances your firm has entered in the past three years. If there are several of these, choose the
three you identify as the most important for further analysis. Based on company press releases and business journal
reports for each alliance, what do you find to be the main reason the firm entered these alliances?
Do you think each of the three alliances achieves the original intent, and therefore is successful? Why or why not?
Does your firm have an identifiable alliance management organization? Can you find any evidence that this
organization improves the likelihood of success for these alliances? What responsibilities does this alliance
management organization have in your firm?
firm may help identify an alliance management organization.
Has your firm participated in any mergers or acquisitions in the past three years? What was the nature of these
actions? Did they result in a consolidation of competitors?
INTEGRATION
HP Running Case: Module 9
While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis
would be helpful to cover this portion of the term project.
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my
Strategy
POWERPOINT SLIDE 56
We ask students to complete the individual analysis before class and then work on the joint network in class. AACSB 2015
Standard 9 Reflective thinking (able to understand oneself in the context of society)
Create a list of up to 12 people at your university with whom you regularly communicate (in person, electronically, or
both). Draw your network (place names or initials next to each node), and connect every node where people you
communicate with also talk to one another (i.e., indicate friends of friends). Can you identify strong and weak ties in
your network?
What is the degree of closure in your network? The density of your network reflects the degree of closure. Network
density can be calculated in three simple steps. Step 1: Create a simple matrix in which you list the names of the
people in your network on both the horizontal and vertical axis. (This can be easily done in an Excel spreadsheet.)
Then put an X in each box, indicating who knows whom in your network. Each x corresponds to a social tie in your
network. Count the total number of Xs in your matrix. Let’s assume X = 8. Step 2: If your network contains 12 people
(including yourself), N = 12. The maximum network density is calculated by the following formula: [N x (N 2 1)] / 2. If
your network size is 12, then your maximum network density is [12 3 (12 2 1)] / 2 5 66.This is the maximum number of
ties in your network when everybody knows everybody. Step 3: To calculate your actual network density, divide X by
N: Network density = (X/N). In the example with 8 ties in a network of 12 people, the network density is 0.67. The
closer this number is to 1, the denser the network.
Network density is bound by 0 and 1. Is a network density that approaches 1 the most beneficial? Why or why not?
Think about weak ties, which can also be indirect connections.
The student should understand that the density closer to 1 indicates that he or she has more strong ties in their social networks.
Compare your network to that of your group members (two to four people in your class). Do you find any
commonalities in your networks? Who has the greatest social capital, and why? What can you do to “optimize” your
network structure?
Students will compare their density of networks, and the higher the density is, the more social capital one can enjoy because
social capital is derived from the connections within and between social networks. It is a function of whom one knows and
what advantages one can create through those connections. Ask students to identify who has the highest degree centrality in
the network—the number of direct ties a firm has in a network, out of the possible direct ties (in this case, n = 7); the more
direct ties, the more centrally located the firm is. A person with high network centrality not only is highly visible and
Now compare your actual career-related network using a site such as LinkedIn. Are any of your connections linked
together? With how many alumni from your university are you linked? These alumni can provide a source of “weak
ties” that may help you get a foot in the door at a potential new employer if you leverage them effectively.
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Ask students how they can maintain an appropriate network structure by having suitable numbers of strong ties and weak ties.
How can they be active in their social networks so they can create more social capital?
EXERCISE
Social Network Bingo can be a fun alternative to this analysis. It is described on Russ Coff’s Carpenter Strategy Toolbox site.