21
demand. This would enable the major TV networks to seek partners from firms such as Facebook or Apple when they
launch their own internet based video service. The cable companies turned online video and broad band suppliers must
Discussion Questions:
1. Using the motives for mergers and acquisitions described in Chapter 1, which do you think apply to
Charter’s acquisition of Time Warner Cable? Discuss the logic underlying each motive you identify.
Be specific.
Answer: The motives for Charter’s takeover of Time Warner Cable included strategic realignment,
cost savings synergies, market power, and possibly hubris. As a relatively small cable provider,
Charter’s competitive position was weak relative to the industry leaders. External circumstances were
forcing the firm to undergo a strategic realignment away from the traditional cable model to one
focused more on broadband services to cope with the consumer’s shift to online video content. The
2. What are the key implicit assumptions underlying Charter’s bid t takeover Time Warner Cable? Do
you believe these assumptions were realistic? Why/why not.
Answer: Key assumptions include (implicit or otherwise) the following: that size matters, regulators
will approve the merger, the trend toward online video will continue, and the businesses can be
integrated with a minimum of disruption to all constituent groups, The notion that size matters in
improving a firm’s competitive position focuses on cost savings, potential cross selling opportunities
(i.e., selling to each firm’s customers, and the ability to finance major investment undertakings. What
22
3. Speculate as to why Charter offered Time Warner Cable a choice of various combinations of stock
and cash? How might the combination of the offer price affect its attractiveness to TWC
shareholders? Be specific.
Answer: By offering stock, Charter was able to satisfy the potential demands of some TWC
shareholders who wanted stock in the new Charter in order to participate in any upside potential
4. Would you view Charter’s takeover of Time Warner Cable as a horizontal or vertical merger? Explain
your answer?
5. Charter’s share price rose by 2.5% while Time Warner’s share price jump by 7.3%, about one-half of
the offer price premium. Speculate as to why the stock prices of the two firms acted as they did
immediately following the announcement of an agreement between the two firms to merge.
6. What factors contributed to cable industry consolidation? Be specific. Explain how each factor you
identify impacted industry competitors.
Answer: Changing technology has enabled consumers to “cut the cord” with cable and move to the
PC Maker Lenovo Moves to Diversify Its Core Business
Key Points
• Firms unable to anticipate change often are forced to react to it and to make choices under great duress.
• A common reaction when a firm’s current product focus is in jeopardy is to diversify either into products or
services related to or entirely unrelated to their core skills.
• Either choice can be highly risky if the firm’s core skills are becoming obsolete or if the firm is unable to adapt
fast enough to the skills required in the new competitive environment.
With the global personal computer market in steady decline, the board and senior management of Lenovo Corporation,
the Chinese-based global leader in PC manufacturing, expressed increasing concern about the firm’s future viability.
23
In contrast, the $2.91 billion Motorola Mobility deal represented a potentially highly significant growth opportunity.
The purchase price consisted of $660 million in cash, $750 million in Lenovo shares, and a 3-year promissory note
valued at $1.5 billion. Motorola Mobility includes handset technology that Google had acquired for $12.5 billion in
2011. Selling the unit reflected Google’s submission to mounting shareholder pressure to rid itself of the cash
hemorrhaging business that many believed provided an unnecessary management distraction from the firm’s core search
business.5 Lenovo is picking up more than 2000 patents, including those necessary to produce smartphones, in addition
to the phone handset manufacturing operation.
Lenovo is the third largest smartphone maker in the world behind Samsung and Apple. However, its sales are
geographically concentrated, with 90% of its smartphones sold in China. The acquisition of Motorola gives the firm a
While the US market is large, it is also maturing. With 60% of American cellphone owners having smartphones,
future growth is likely to slow from its rapid pace of the past decade. Moreover, the US handset market is highly
concentrated with Samsung and Apple having a combined market share of 68% according to NPD Group, a market
research firm. The remainder of the handset market is divided among HTC, Motorola Mobility, and Blackberry.
Lenovo had expressed interest in acquiring Motorola in 2012 but was rebuffed by Google management. In November
2013, Google’s executive chairman, Eric Schmidt called Lenovo’s chief executive and asked if he was still interested in
The purchase of Motorola Mobility will give the firm a strong brand in the mobile market outside of China and
relationships with AT&T and Verizon. Along with Apple, Lenovo will be the only major technology firm with global
product lines in PCs, smartphones, and tablets giving Lenovo the opportunity to become a one-stop shop for firms to
buy all their devices from the same vendor. Eventually, the firm hopes to become a major player in the global
smartphone market.
While mobile phones use different kinds of chips than PCs and servers, many parts and much of the handset
assembly is done by the same companies. By increasing their volume of parts purchases, Lenovo may be able to
Microsoft Acquires Nokia in the Ongoing Smartphone Wars
24
Case Study Objectives: To Illustrate
• Common motives for corporate restructuring
• Alternative forms of corporate restructuring strategies.
Once the global leader in mobile phone handsets, Finnish based Nokia Inc. saw its fortunes dissipate as it failed to adapt
to a worldwide shift to smartphones. In the wake of intensified competition from its Asian rivals for lower end phones,
the firm’s market share fell to 14% at the end of 2013, from a peak of 40% in 2007. To conserve cash, the firm was
forced to suspend its dividend in 2013 for the first time in its 148-year history.
In Finland, where Nokia is viewed as a technology icon, this news was greeted with shock. At one time, the firm’s
market value was almost 5% of the country’s gross domestic product. The firm represented a major source of national
As was Google with its Android smartphone operating system, Nokia was seeking to establish an industry standard
based on its Symbian software, using it as a platform for providing online services to smartphone users, such as music
and photo sharing. Nokia was attempting to position itself as the premier supplier of online services to the smartphone
market by dominating the market with handsets reliant on the Symbian operating system.
Nokia also hoped to spread 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. Similarly, the development cost incurred by service providers can be defrayed
by selling into a growing customer base.
In many ways this strategy was doomed from the start. Nokia was pursuing essentially a “me–too” strategy by simply
mirroring Google’s strategy in offering the software free to app developers and other handset manufacturers. However,
On February 11, 2011, Nokia’s CEO Stephen Elop announced an alliance with Microsoft to establish a third major
player in the intensely competitive smartphone market. Under the deal, Nokia adopted Windows Phone 7 (WP7) as its
principal smartphone operating system, replacing its own Symbian software. Nokia and Microsoft were betting that
wireless carriers such as Verizon, AT&T, and Vodafone would want an alternative system to iPhone and Android.
The partnership seemed to hold considerable promise. Nokia remained a powerhouse in feature phones and, if it could
successfully transition these devices to the WP7 operating system, it may be able to increase market penetration sharply.
Android appeared vulnerable at the time due to a number of problems: platform fragmentation, inconsistent updates and
globe. The two firms also would jointly market their products and integrate their mobile application online stores such
that Microsoft’s Marketplace (applications and media store) would absorb Nokia’s current online applications and
content store (Ovi). Nokia phones would use Microsoft’s Bing search engine, Zune music store, Xbox live, gaming
center, and would work with Microsoft on future services to expand the capabilities of mobile devices. Since the deal
For Microsoft, the alliance gave it access to Nokia’s extensive intellectual property portfolio in the mobile market to
strengthen the WP7 system. For Microsoft, the deal also represented a major opportunity to boost lagging sales in the
mobile phone market. The alliance also gave Microsoft access the world’s largest phone maker and its huge brand
recognition. While Microsoft gained backing for its Windows phone operating system with the deal, this would not
guarantee success in the mobile phone market.
Despite having been an early entrant into the smartphone business, Microsoft had been unable to gain significant
market share. Over the years, Microsoft has struck deals with many of the world’s best known cellphone manufacturers,
including Motorola and HTC Corp. But these alliances were hampered by either execution problems or by an inability
of Microsoft to prevent handset makers from shifting to other technologies such as Google’s Android operating system.
For example, after failing to deliver mobile phone technology that would compete with Apple and Google’s innovative
Chinese phones.
Despite all the fanfare surrounding the formation of the partnership, investors expressed their disapproval of the deal
with Nokia’s stock falling 11% on the announcement. Similarly, Microsoft’s shares fell by 1% as investors feared that
the firm had teamed with a weak player in the smartphone market and that the 2-year transition period before WP7–
based smartphones would be sold in volume would only allow Android-based smartphones and iPhones to get further
ahead.
Its potential notwithstanding, the partnership faced many challenges. Despite setting the industry standard for
handsets, Nokia did not have a smartphone product comparable to Apple’s iPhone (introduced in 2007) and Google’s
Android system (first shipped in 2009). With Samsung, HTC, and LG having invested heavily in Android-powered
The partnership’s performance since its inception has been problematic. Its success was based on the premise it
could rapidly develop a compelling smartphone and tablet combination powered by first Windows Phone 7 and later the
26
Windows Phone 8 operating system that would be widely accepted in the marketplace and enable the sale of lucrative
Microsoft content.
Since 2011, Nokia has developed several Windows based phones which showed only tepid sales growth, despite
good reviews from industry pundits. Eventually, friction developed after Microsoft introduced its Surface tablets in late
2012 undercutting Nokia plans to develop and market own tablet devices. Moreover, sharing of intellectual property
The partnership with Microsoft failed to be the panacea the two firms expected. Symbian sales collapsed and Nokia
faced increased competition from Asian rivals at the lower end of the handset market. The firm was rapidly running out
of options.
At the same time, Microsoft was getting frustrated in its ability to transform the firm into a formidable mobile
technology competitor. Most of Microsoft revenues and profits come from its Windows operating system, Office suite
of software, and the X-Box game console. It has so far failed to establish a profitable mobile device business. Its own
tablet, the Surface, has thus far had limited success since its launch in 2012. With the limited likelihood other vendors
would support its Windows 8 phone system, Microsoft believed it had little choice but to move beyond its software
roots increasingly into hardware.
The acquisition firmly committed Microsoft to a vertical business strategy in which it would own both the hardware
and software products. The “Microsoft strategy” is patterned after the Apple model built around iPads, iPhones and the
firm’s App Store and Google’s model built on the Android operating system, Google Plus market place, and Nexus line
of tablets. The acquisition also had the added benefit of preventing a Microsoft competitor from acquiring Nokia.
After selling its phone business, Nokia is a shadow of its former self. Its remaining businesses include network
Discussion Questions
1. Using the motives for mergers and acquisitions described in Chapter 1, which do you think apply to Microsoft’s
acquisition of Nokia? Discuss the logic underlying each motive you identify. Be specific.
Answer: Microsoft has been struggling to strategically realign itself into a leading global mobile technology
competitor due to the market shift to smartphones and tablet computers to offset the substitution of these new
27
integrating into the handset business in an effort to integrate its Windows Phone 8 operating system with hardware
(handsets). It should be considered related diversification in that it represented the sale of existing products (i.e., a
Microsoft operating system powered handset) that it had been selling under the prior partnership with Nokia to its
current customers.
2. Speculate as to why Microsoft and Nokia initially decided to form a partnership rather than have Microsoft simply
acquire Nokia? Why was the partnership unsuccessful?
Answer: A partnership may have been preferred for several reasons: it was less costly for Microsoft to finance
R&D at Nokia than to buy the entire firm, the challenges on integrating an operation the size of Nokia’s handset
business are daunting, and Nokia may not have wanted to sell its handset operations at that time.
3. Speculate as to why Microsoft used cash rather than some other form of payment to acquire Nokia?
4. The Nokia takeover is an example of vertical integration. How does vertical integration differ from horizontal
integration? How are the two businesses (software and hardware) the same and how are they different? What are
the potential advantages and disadvantages of this vertical integration for Microsoft? Be specific.
Answer: The takeover is an example of vertical or backward integration in which Microsoft’s Phone 8 operating
system software would be used to power Nokia’s handsets. Vertical integration refers to a firm either taking control
of its distribution operations (forward integration) or taking control of a former supplier (backward integration).
Horizontal takeovers occur between competitors and offer more opportunity for cost savings due to overlapping
functions than vertical integration.
28
5. What are the critical assumptions that Microsoft is making in buying Nokia? Do you believe these assumptions are
realistic? Explain your answer.
The key assumption Microsoft is making is that the marketplace wants an alternative to Google’s Android and
Apple’s IOS operating systems. The marketplace consists of distributors, handset manufacturers, app developers,
and end users. Distributors such as Verizon, AT&T, and Vodafone can use the option of another operating system
to gain leverage in their negotiations with vendors. The same thing is true with handset manufacturers such as
Google Acquires Motorola Mobility in a Growth-Oriented as well as Defensive Move
Key Points
The acquisition of Motorola Mobility positions Google as a vertically integrated competitor in the fast-growing
wireless devices market.
The acquisition also reduces their exposure to intellectual property litigation.
______________________________________________________________________________
By most measures, Google’s financial performance has been breathtaking. The Silicon Valley–based firm’s revenue
in 2011 totaled $37.9 billion, up 29% from the prior year, reflecting the ongoing shift from offline to online advertising.
While the firm’s profit growth has slowed in recent years, the firm’s 26% net margin remains impressive. About 95% of
the firm’s 2011 revenue came from advertising sold through its websites and those of its members and partners.6 Google
is channeling more resources into “feeder technologies” to penetrate newer and faster-growing digital markets and to
increase the use of Google’s own and its members’ websites. These technologies include the Android operating system,
designed to power wireless devices, and the Chrome operating system, intended to attract Windows- and Mac-based
computer users.
6 Google views its members (customers) as the over 1 million businesses that post advertisements on its websites;
29
clout with wireless carriers, which control cellphone pricing and distribution. Revenue growth could come from license
fees paid on the Motorola patent portfolio and sales of its handsets and by increasing the use of its own websites and
those of its members to generate additional advertising revenue.
Google was under pressure from its handset partners, including HTC and Samsung, to protect them from patent
infringement suits based on their use of Google’s Android software.7 Microsoft has already persuaded HTC to pay a fee
for every Android phone manufactured, and it is seeking to extract similar royalties from Samsung. If this continues,
such payments could make creating new devices for Android prohibitively expensive for manufacturers, forcing them to
turn to alternative platforms like Windows Phone 7. With a limited patent portfolio, Google also was vulnerable to
lawsuits against its Android licenses.
Motorola Mobility’s shares soared by almost 57% on the day of the announcement. Led by Nokia, shares of other
phone makers also surged. In contrast, Google’s share price fell by 1.2%, despite an almost 2% rise in the S&P 500
stock index that same day.
Discussion Questions:
1. Many acquisitions are intended to create measureable synergy between the acquirer and target firms. In what
sense is Motorola Mobility’s role in this transaction unclear? Identify sources of synergy between Google and
Motorola Mobility. What factors are likely to make the realization of this synergy difficult? Be specific.
30
more clout with the telecommunications carriers such as AT&T and Verizon which currently control how
handsets are priced and distributed.
Factors that are likely to make it difficult to realize this synergy are that the two firms possess disparate
corporate cultures and are located in substantially different geographic locations. Motorola Mobility is
headquartered in Chicago and Google in the Silicon Valley. The two companies are very different in terms of
2. Using the motives for mergers and acquisitions described in Chapter 1, which do you thing apply to Google’s
acquisition of Motorola Mobility? Be specific.
Answer: A number of motives may be applicable. Google’s assumption that they could operate a
manufacturing operation and that they could determine the value of the Motorola Mobility patent portfolio in a
few weeks of due diligence may have in part reflected hubris. The acquisition also reflected related
3. Speculate as to why the share price of Motorola Mobility did not increase by the full extent of the premium and
why Google’s share price fell on the day of the announcement. Be specific.
4. Speculate as to why the shares of other handset manufacturers jumped on the announcement that Google was
buying Motorola Mobility. Be specific.
Answer: Shares of other handset makers rose amid speculation that they could be takeover targets. The rise in
5. How might the growing tendency for technology companies to buy other firms’ patents affect innovation? Be
specific.
Answer: Money that is being spent to buy patents for technologies developed by other firms’ results in less
31
Lam Research Buys Novellus Systems to Consolidate Industry
______________________________________________________________________________________________
Key Points
Industry consolidation is a common response to sharply escalating costs, waning demand, and increasing demands
of new technologies.
Customer consolidation often drives consolidation among suppliers.
______________________________________________________________________________________________
Highly complex electronic devices such as smartphones and digital cameras have become ubiquitous in our everyday
lives. These devices are powered by sets of instructions encoded on wafers of silicon called semiconductor chips
(semiconductors). Consumer and business demands for increasingly sophisticated functionality for smartphones and
cloud computing technologies require the ongoing improvement of both the speed and the capability of semiconductors.
This in turn places huge demands on the makers of equipment used in the chip-manufacturing process.
Under the terms of the deal, Lam agreed to acquire Novellus in a share exchange in which Novellus shareholders
would receive 1.125 shares of Lam common stock for each Novellus share. The deal represented a 28% premium over
the closing price of Novellus’s shares on the day prior to the deal’s public announcement. At closing, Lam shareholders
owned about 51% of the combined firms, with Novellus shareholders controlling the rest.
In comparison to earlier industry buyouts, the purchase seemed like a good deal for Lam’s shareholders. At 2.3 times
Novellus’s annual revenue, the purchase price was almost one-half the 4.5 multiple paid by industry leader Applied
Materials for Variant in May 2011. The purchase premium paid by Lam was one-half of that paid for comparable
transactions between 2006 and 2010. Yet Lam shares closed down 4%, and Novellus’ shares closed up 28% on the
announcement date.
32
Discussion Questions:
1. Why did Lam’s shares close down 4 percent on the news? Why did Novellus’ shares close up 28 percent?
Answer: The drop in Lam’s share price reflected current investor concern about potential EPS dilution. The
rise in Novellus’s share price by 28 percent reflected the response to the 28 percent purchase price premium
2. Speculate why Lam used stock rather than some other form of payment?
3. Describe how market pressures on semiconductor manufacturers’ impact chip equipment manufacturers and
how this merger will help Lam and Novellus better serve their customers in the future.
4. How do the high fixed costs in the highly cyclical chip equipment manufacturing industry encourage
consolidation?
5. Is this deal a merger or a consolidation from a legal standpoint?
6. Is this deal a horizontal or vertical transaction? What is the significance of this distinction?
Answer: The two firms are not direct competitors since they supply equipment that is used in different phases
of the semiconductor chip production process. However, it could still be classified as a horizontal merger since
33
7. What are the motives for the deal? Discuss the logic underlying each motive you identify.
Answer: a. Economies of scope.
8. How are Lam and Novellus similar and how are they different? In what way will their similarities and
differences help or hurt the long-term success of the merger?
Answer: The primary differences are that Lam and Novellus produce chip manufacturing equipment in
different but adjacent phases of the semiconductor chip manufacturing process, and they have significantly
9. Speculate as to why Lam announced a $1.6 billion share repurchase program at the same time it announced the
deal.
10. Do you believe this deal would help or hurt competition among semiconductor chip equipment manufacturers?
Answer: The combined companies would result in the fourth largest competitor in the industry. As such, it is
not likely to affect pricing adversely. The combination could affect competition favorably if the resulting cost
34
advertising campaign to encourage consumers to think of Timberland apparel as a year-round brand, and overly
ambitious expansion plans in China caused earnings to deteriorate. Despite annual revenues growing to more than $1.6
billion in fiscal year 2011, the firm was losing market share to such competitors as the Gap and Sears Holdings.
Timberland’s share price declined as investor confidence in management waned when the firm failed to meet its
quarterly earnings forecasts. Timberland was ripe for takeover.
Xerox Buys ACS to Satisfy Shifting Customer Requirements
In anticipation of a shift from hardware and software spending to technical services by their corporate customers, IBM
announced an aggressive move away from its traditional hardware business and into services in the mid-1990s. Having
sold its commodity personal computer business to Chinese manufacturer Lenovo in mid-2005, IBM became widely
recognized as a largely “hardware neutral” systems integration, technical services, and outsourcing company.
Because information technology (IT) services have tended to be less cyclical than hardware and software sales, the
move into services by IBM enabled the firm to tap a steady stream of revenue at a time when customers were keeping
computers and peripheral equipment longer to save money. The 2008–2009 recession exacerbated this trend as
corporations spent a smaller percentage of their IT budgets on hardware and software.