Chapter 4
4.1 How does planning facilitate the acquisition process?
Answer: Some individuals tend to shudder at the thought of following a structured process because of perceived
delays in responding to both anticipated and unanticipated opportunities. Anticipated opportunities are those
identified because of the business planning process. This process consists of understanding the firm’s external
4.2 What is the difference between a business plan and an acquisition plan?
Answer: The business plan articulates a mission or vision for the firm and a business strategy for realizing that
mission for all of the firm’s stakeholders. If it is determined following an analysis of available options that an
4.3 What are the advantages and disadvantages of using an acquisition to implement a business strategy as
compared to a joint venture?
Answer: Acquisitions offer the advantages of both speed and control; however, they may require significant
capital to acquire the target firm. If stock is used, there is some potential for earnings per share dilution. A joint
4.4 Why is it important to understand the assumptions underlying a business plan or an acquisition plan?
Answer: To assist in the selection of the appropriate option, it is crucial to clearly state explicit and implicit
4.5 Why is it important to get senior management heavily involved early in the acquisition process?
Answer: It is crucial to get senior management’s input early in the process to ensure that those involved in
4.6 In your judgment, which of the acquisition plan management preferences discussed in this chapter is the most important
and why?
Answer: While it is difficult to say that one preference is necessarily more important than another, the criteria that
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4.7 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. How would you describe the OfficeMax
mission and business strategy implicit in these actions.
Answer: This restructure represents a dramatic transformation of an old line paper company into a products and services
4.8 Dell Computer is one of the best known global technology companies. In your opinion, 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
Lenovo. 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.
4.9 .Discuss the types of analyses inside GE that may have preceded GE’s 2008 announcement that it would spin-off its
consumer and industrial business to its shareholders.
Answer: GE typically would have conducted a review of its business portfolio with the intent of determining the relative
4.10 Ashland Chemical, the largest U.S. chemical distributor, acquired chemical manufacturer, Hercules Inc., for $3.3 billion in
2008. This move followed Dow Chemical Company’s purchase of Rohm & Haas. The justification for both acquisitions was
to diversify earnings and offset higher oil costs. How will these combinations offset escalating oil costs?
Answer: By combining firms with overlapping operations, both fixed and variable expenses can be reduced. Fixed costs per
unit produced are reduced (i.e., economies of scale) by closing underutilized facilities and increasing average operating
Solutions to Chapter Case Study Questions
NEWMONT BECOME GLOBAL LEADER IN THE GOLD MINING INDUSTRY
Discussion Questions and Answers;
1. If you were managing the firm, how would you be guided by Newmont’s corporate vision, business strategy, and
implementation strategy?
Answer: The firm’s vision clearly states that the firm believes that it has a responsibility to all stakeholders. A guiding
principle would be that financial returns to shareholders should not come at the expense of actions that degrade the
2. What external and internal factors are driving the merger between Newmont and Goldcorp?
Answer: The industry is consolidating rapidly through M&As in an attempt to acquire new reserves and the scale necessary to
earn competitive financial returns. The accelerating pace of consolidation may have forced Newmont to act more quickly than
3. 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 combining Newmont and Goldcorp? Speculate as to what might be some
of the challenges limiting the timely realization of these synergies?
Answer: Cost savings could be realized by sharing best practices at the two firms and spreading overhead expense over a
larger revenue stream. The takeover also enabled Newmont to lower its operating risk by increasing its presence in Canada, a
4. Why did Newmont’s shares fall and Goldcorp’s rise immediately following the deal’s announcement? Speculate as to why
Goldcorp’s share price did not rise by the full amount of the premium.
Answer: It is normal for an acquirer’s share price to fall in share for share exchanges as the issuance of new acquirer shares
5. What alternative implementation strategies could Newmont have pursued? Speculate as to why they may have chosen to
acquire rather than an alternative implementation strategy? What are the key risks involved in the takeover of Goldcorp?
Examination Questions and Answers
True/False Questions: Answer True or False to the following questions
1. A planning-based acquisition process consists of both a business plan and acquisition plan, which drive all subsequent
phases of the acquisition process. True or False
2. A business plan articulates a mission or vision for the firm and a strategy for realizing that mission. True or False
3. Determining where a firm should compete starts with deciding who the firm’s current or potential customers are and what
are their needs. True or False
4. Market segmentation involves identifying customers with common characteristics and needs. True or False
5. An analysis of markets should involve current and potential customers, as well as current and potential competitors, but
it should exclude suppliers. True or False
6. A competitive self-assessment involves an analysis of the firm’s absolute strengths and weaknesses. True or False
7. A firm’s core competencies refer to those skills which are required to produce the firm’s primary products but
which have little or no application in producing related products. True or False
8. Core competencies should be defined as narrowly as possible. True or False
9. A corporate mission statement should be defined as broadly as possible since it seeks to describe the corporation’s reason
for being, and it should not exclude the firm from pursuing any significant opportunities. True or False
10. The market targeted by the firm should reflect the fit between the corporation‘s primary strengths and competencies and
its ability to satisfy customer needs better than the competition. True or False
11. Corporate objectives are defined as what is to be accomplished within a specific period. True or False
12. A firm should choose that strategy from among the range of reasonable alternatives that enables it to achieve its stated
objectives in an acceptable time period without regard for resource constraints. True or False
13. A price or cost leader in an industry is usually the firm with the largest market share. True or False
14. The experience curve is most important in analyzing industries with low fixed costs. True or False
15. A cost leadership strategy can be highly destructive to the firm with the largest market share if pursued concurrently by a
number of firms with very different market shares. True or False
16. A differentiation strategy is one in which customers believe that various competitors have significantly different cost
structures. True or False
17. A differentiation strategy is one in which a firm’s products are perceived by customers to be slightly different from other
firms’ products in the same industry. True or False
18. Firms adopting a focus strategy tend to concentrate their efforts by selling a few products to a single market and compete
primarily on price. True or False
19. Firms adopting a focus strategy compete primarily based on their superior understanding of how to satisfy their customers
needs better than the competition. True or False
20. Coca Cola is an example of a company that pursues both a differentiation and cost leadership strategy. True or False
21. The evolution of the growth of a product can be characterized in four stages: embryonic, growth, maturity, and decline.
This description is called a business attractiveness matrix. True or False
22. Strong sales growth and low entry barriers characterize the embryonic and growth stages of a product’s life cycle.
True or False
23. An acquisition plan defines the objectives to be achieved by acquiring another firm, management’s preferences as to how
the acquisition process should be managed, resources required, and the roles and responsibilities of those responsible for
implementing the plan. True or False
24. An acquisition plan is developed if management determines that an acquisition or merger is required to implement the
firm’s business strategy. True or False
25. Resource limitations in developing the acquisition plan include money, borrowing capacity, as well as management time
and skills. True or False
26. Operating risk addresses the ability of the buyer to manage the acquired company. True or False
27. An acquisition is one of many options available for implementing a firm’s business plan. True or False
28. Financial risk refers to the buyer’s willingness and ability to leverage a transaction as well as the willingness of
shareholders to accept near-term earnings per share dilution. True or False
29. Examples of management preferences used in an acquisition plan include their preference for an asset or stock purchase
or openness to partial rather than full ownership of the target firm. True or False
30. While management’s upfront involvement in the acquisition process is crucial, management should largely disengage
from the process until the transaction is completed. True or False
31. Market profiling entails collecting sufficient data to accurately assess and characterize a firm’s competitive environment
within its chosen markets. True or False
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32. Potential competitors include firms (both domestic and foreign) in the current market, those in related markets, current
customers, and current suppliers. True or False
33. The market or markets in which a firm chooses to compete should reflect the fit between the firm’s primary strengths and
its ability to satisfy customers needs better than the competition. True or False
34. A cost leadership strategy is most appropriate when pursued concurrently by a number of firms in the same industry with
approximately the same market share. True or False
35. The joint venture may represent an attractive alternative to a merger or acquisition. True or False
36. Stakeholders only include a firm’s shareholders. True or False
37. The implementation strategy refers to the way in which a firm chooses to implement its business strategy. True or False
38. A merger or acquisition is generally not considered an example of an implementation strategy. True or False
39. Contingency plans are actions that are taken as an alternative to the firm’s current business strategy. True or False
40. Good planning expedites sound decision making. True or False
41. Planning in advance of a merger or an acquisition necessarily slows down decision making. True or False
42. A collection of markets is said to comprise an industry. True or False
43. A corporate mission statement seeks to describe the corporation’s purpose for being and where the corporation hopes to
go. True or False
44. A diversification strategy involves a firm moving into only those businesses which are unrelated to the firm’s current core
business. True or False
45. Management can obtain insight into the firm’s probable future cash requirements and in turn its value by determining its
position in its industry’s product life cycle. True or False
46. Accounting considerations rarely affect the decision to buy another business rather than to build the business internally.
True or False
47. Overpayment risk involves the dilution of EPS or a reduction in its growth rate resulting from paying significantly more
than the economic value of the acquired firm. True or False
48. Acquisition plan objectives should be directly linked to key business plan objectives. True or False
49. The acquisition plan provides the detail needed to implement effectively the firm’s business strategy, True or False
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50. The acquisition plan establishes a schedule of milestones to keep the process on track and clearly defines the authority
and responsibilities of the individual charged with managing the acquisition process. True or False
Circle only one of the options.
1. All of the following represent commonly found components of a well-constructed business plan except for
a. Mission statement
b. Strategy
c. Acquisition plan
d. Objectives
e. Tactical or implementation plans
2. Which of the following represent key components of the acquisition process
a. Business plan
b. Integration plan
c. Search plan
d. Negotiation process
e. All of the above
3. Which of the following best defines market segmentation
a. The identification of customers with common characteristics and needs
b. The identification of customers with heterogeneous characteristics and needs
c. The grouping of customers with different characteristics
d. The process of reducing large markets into smaller markets without regard to customer characteristics
e. The process of identifying the various markets that comprise an industry without regard to customer
characteristics
4. Determining how to compete requires a firm’s management to consider which of the following factors?
a. Factors critical to successfully competing in its targeted markets
b. An external market analysis
c. An evaluation of what criteria customers use to make buying decisions
d. Availability of product substitutes
e. All of the above
5. Determining where a firm should compete requires management to consider which of the following factors?
a. Determining the firm’s current customers only
b. Determining the firm’s potential customers only
c. Determining the needs of current and potential customers, as well as suppliers
d. Determining the needs of potential suppliers only
e. A and D only
6. Market profiling requires an analysis of all of the following factors except for:
a. Customers
b. Suppliers
c. Core competencies
d. Current and potential competitors
e. Product or service substitutes
7. All of the following questions are relevant for conducting a self-assessment or internal analysis of the firm except for
a. What are the firm’s critical strengths and weaknesses as compared to the competition?
b. Can the firm’s critical strengths be easily duplicated and surpassed by the competition?
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c. Can the firm’s critical strengths be used to gain strategic advantage in the firm’s chosen market?
d. What are the least important factors customers consider in making purchasing decisions?
e. Can the firm’s key weaknesses be exploited by the competition?
8. Which of the following examples represents the best application of a firm’s primary core competence?
a. Honda Motors manufactures cars, motorcycles, lawnmowers, and snow blowers
b. IBM provides both software services and manufactures computer hardware
c. PepsiCo manufactures and distributes soft drinks and manages restaurant chains
d. Microsoft sells operating system software and access to the internet through its MSN subscription service
e. McDonalds sells hamburgers and pizza.
9. What is the core competence underlying Honda Corporation product offering?
a. Product distribution
b. Marketing
c. Internal combustion engine design
d. Exterior design
e. Organizational structure
10. In selecting an appropriate business strategy, all of the following are relevant questions except for
a. Does the firm have sufficient resources to implement the strategy?
b. Have all reasonable alternatives available for implementing the strategy been evaluated?
c. What are the key assumptions underlying the various strategic options under consideration?
d. What do the firm’s targeted customers primarily consider in making purchasing decisions?
e. Why might an acquisition be preferred to a joint venture in implementing the business strategy?
11. In a conducting a self-assessment, a firm should consider all of the following except for
a. The degree on government regulation in its targeted markets
b. The effectiveness of its R&D activities
c. Product quality
d. Responsiveness to changing customer needs
e. Brand name recognition
12. A good mission statement should be
a. Very broadly defined
b. Very narrowly defined
c. Reference the firm’s targeted markets, product or service offering, distribution channels and management’s core
operating beliefs
d. Describe only the purpose of the corporation
e. A and C only
13. All of the following represent generic business strategies except for
a. Cost leadership
b. Differentiation
c. Focus
d. Market segmentation
e. A and D
14. All of the following are true about experience curves except for
a. Applicable primarily to differentiation strategies
b. Applicable primarily to cost leadership strategies
c. Reflect declining average unit costs due to increasing accumulated production levels
d. Reflect both economies of scale and the introduction of more efficient production methods as output increases
e. Often found in commodity-type industries
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15. All of the following are true about product life cycles except for
a. Strong sales growth and low barriers to entry often characterize the early stages of a product’s introduction
b. New entrants have substantially poorer cost positions, as a result of their small market shares when compared to
earlier entrants.
c. Later phases are characterized by slower market growth rates
d. During the high growth phases, firms usually experience high positive operating cash flow
e. The introduction of product enhancements can extend a firm’s product life cycle
16. An acquisition plan entails all of the following except for
a. Identifies key management objectives for making an acquisition
b. Determines important resource constraints
c. Articulates management’s preferences for acquiring stock or assets or considering competitors as possible targets
d. Constitutes the firm’s business plan
e. Defines roles and responsibilities of those on the acquisition team
17. Which of the following are ways to implement a firm’s business strategy?
a. Merge or acquisition
b. Joint venture
c. Going it alone
d. Asset swap
e. All of the above
18. Which of the following are components of an acquisition plan?
a. Timetable
b. Resource/capability evaluation
c. Management preferences
d. Objectives
e. All of the above
19. Which of the following are components of a business strategy?
a. Mission/vision
b. Objectives
c. Internal analysis
d. External analysis
e. All of the above
20. Stakeholders include which of the following groups?
a. Shareholders
b. Customers
c. Lenders
d. Suppliers
e. All of the above
21. Which of the following are true of real options?
a. Real options give management the ability to delay the implementation of a strategy
b. Real options give management the ability to accelerate the implementation of a strategy
c. Real options give management the ability to abandon a strategy
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d. Real options represent the ability of management to change their strategy after the strategy has been
implemented.
e. All of the above
22. Which of the following are not components of the negotiation phase of the acquisition process?
a. Refining valuation
b. Identifying potential target firms
c. Conducting due diligence
d. Structuring the deal
e. Developing the financing plan
23. Which of the following phases of the acquisition process contains a “feedback” loop?
a. Negotiation phase
b. Search phase
c. Integration phase
d. Post-closing evaluation phase
e. Closing
24. Which of the following are common objectives of an external analysis?
a. Determining where to compete
b. Determining how to compete
c. Identifying core competencies
d. A & B only
e. A, B, & C
25. Examples of corporate level strategies include which of the following:
a. Growth
b. Diversification
c. Operational
d. Financial
e. All of the above
Case Study Short Essay Examination Questions
END OF CHAPTER CASE STUDY: PAYMENT PROCESSOR VANTIV GOES GLOBAL WITH WORLDPAY
TAKEOVER
Case Study Objectives: To illustrate how
• Changes in customer buying behavior can impact significantly an industry’s value chain
• The resulting disruption can force rapid consolidation among competitors
discussion of how this trend is sparking a consolidation not only among retailers but also among their suppliers. The focus in this
case study is on merchant acquirers. Figure 4.2 illustrates the value chain for credit and debit card processing industry.2
Key participants in this value chain include the cardholder, merchant, merchant acquirer (merchant bank),3 issuing bank
Credit/Debit Card Processing Industry Value Chain
For merchant acquirers revenue is driven by the volume of transactions processed and fees per transaction. The latter is a
percent of the sale amount (merchant discount rate) or a fixed fee per transaction. Due in part to the “Amazon effect” merchant
acquirers are under substantial pressure to combine to reduce costs in the wake of declining in-store transactions at traditional
retailers. The challenges facing merchant acquirers are compounded by rising competition from technology startups which squeeze
the fees merchants pay to merchant acquirers. The combination of downward pressure on fees and lethargic growth in the number
of in-store transactions has constrained revenue and profit improvement.
The Vantiv deal to acquire Worldpay is one of the most significant in the payment processing industry since the 2008 financial
crisis. Payment processing has become increasingly important for financial institutions as more people shop online and move
money using cellphones or other digital devices such as tablets. They need accurate systems to minimize fraud and networks
robust enough to handle the growing volume of online transactions. Vantiv became the largest merchant acquirer with 20% share
in the U.S. in 2016, knocking First Data from the top spot for the first time in 20 years, according to Nilson.
Totally focused in the U.S., four-fifths of Vantiv’s 2016 revenue of $1.9 billion came from merchant services. The remainder
was attributable to financial institution services. Merchant services consist of processing electronic payments at point-of-sale or
online, security and fraud services for small to mid-sized merchants and top tier regional and national retailers. Revenue per
transaction was $.074 for each of 21 billion transactions processed in 2016. Financial institution services consist of managing
Merchant Acquirer
Payment Network
Issuer Processor
Financial Institution
Merchant
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Worldpay is an international merchant acquirer, processing digital and in-store payments in 146 countries. By buying
Worldpay, Vantiv acquires a huge international footprint, especially in Europe. Worldpay will also help Vantiv out of the rut that
large U.S. retailers are in because of Amazon. Currently only 15% of Vantiv’s business is with online retailers, the rest is with
brick and mortar stores. In contrast, Worldpay has 34% of its revenue from online businesses.
Discussion Questions and Answers:
1. Who are Vantiv’s customers and what are their needs?
2. How would you describe Vantiv’s corporate vision, business strategy, and implementation strategy?
Answer: The firm’s vision is to become a world leading merchant acquirer. The intention is to achieve this vision by pursuing
3. What external and internal factors are driving the merger between Vantiv and Worldpay?
Answer: External factors included a shift in consumer behavior and the emergence of new technologies; internal factors
4. 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 combining Vantiv and Worldpay? Speculate as to what might be some of
the challenges limiting the timely realization of these synergies?
Answer: Cost savings could be realized by sharing best practices at the two firms and research and development costs.
Revenue could be increased by cross-selling each firm’s services to the other firm’s customers. Synergies are often much
5. How would the combined firms be able to better satisfy their customer needs than the competition?
6. Why did Vantiv shares fall and Worldpay’s rise immediately following the announcement? Speculate as to why Worldpay’s
share price did not rise by the full amount of the premium.
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Answer: It is normal for an acquirer’s share price to fall in share for share exchanges as the issuance of new acquirer shares
often is viewed as dilutive to current shareholders. In contrast, target share prices will rise close to the offer price as
7. What alternative implementation strategies could Vantiv have pursued? Speculate as to why they may have chosen to acquire
rather than an alternative implementation strategy? What are the key risks involved in the takeover of Worldpay?
Answer: Vantiv could have partnered with other merchant acquirers or reinvested cash flows to build merchant banking
operations in other countries. Partnering is fraught with control issues, often subject to slow decision making, and
HOME SHOPPING FEELS THE HEAT FROM AMAZON
KEY POINTS
• Senior managers often react to rather than anticipate emerging market trends.
• Being late, they are forced to imitate what market leaders have been doing, relying on better execution of their strategy to
remain competitive.
• In doing so, they often continue to struggle to achieve a sustainable competitive advantage.
___________________________________________________________________________
The concept of shopping from one’s own home has been around for years. Sears, Roebuck & Company started as a mail order
catalog company in 1888 allowing people to order items from catalogs using mail delivery, with the products often shipped
directly to the customer. In 1977, the Home Shopping Network (HSN) began airing television programming promoting products
that could be ordered via landline. The industry has evolved from home shopping channels to electronic retailing dominated by the
likes of Amazon.com. The three types of home shopping include mail or telephone ordering from catalogs; responding via
telephone to advertisements in print, TV and radio media; and online shopping.
Amazon’s increasing dominance of retailing has not only impacted brick and mortar stores but also television, radio and catalog
sales. In the wake of the explosion in e-commerce, most brick and mortar retailers have been left struggling with a growing
number of retailers from American Apparel to Radio Shack having filed for bankruptcy. Leaders in TV home shopping such as
HSN and QVC have been seen their sales decline in line with the growth of e-commerce, despite their efforts to shift more of their
business online. According to eMarketer, sales in the TV home shopping industry have fallen 2.9% in the U.S. and 2.3% globally
between 2011 and 2016. Amazon, which has been growing aggressively, dominates the online shopping space.
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International revenue accounts for about one-third of total annual revenue. The majority of QVC customers are women who on
average make 25 purchases a year.
Liberty Interactive, QVC’s parent, had been interested in buying HSN for years, but HSN’s shares sold at a premium making a
share exchange dilutive for Liberty Interactive. Declining sales and eroding profit margins pushed Liberty Interactive into
approaching HSN about combining their respective businesses. HSN seeing few alternatives proved receptive. In early July 2017,
Liberty Interactive announced that it had reached an agreement with HSN to merge in a deal that valued the firm at $2.1 billion.
Already a minority shareholder, Liberty Interactive is buying the 62% of HSN that it does not already own. Investors drove HSN
shares up by 26% just after the announcement, while Liberty Interactive shares dropped by more than one percent.
YAHOO’S FALL FROM GRACE
Case Study Objectives: To illustrate
• The tenuous nature of competitive advantage;
• The connection between ineffective governance and shareholder wealth destruction; and
• How investor impatience can limit management and board options.
________________________________________________________________________________________________________
Nowhere is the impact of creative destruction more apparent than on the internet. We can be sure that the growth of the internet
will continue to spawn new innovations challenging the survivability of current competitors. The process of “creative destruction”
in which current businesses give way to new businesses with new ways of doing things will continue to change the competitive
landscape for years to come. Moreover, the pace of creative destruction is accelerating due to the quickening pace of technological
change. The inescapable conclusion is that factors contributing to a firm’s competitive advantage today may be irrelevant
tomorrow causing firms once dominant in their chosen markets to fall by the wayside. This is the story of one such firm, Yahoo, a
former internet darling that failed to keep pace with the changing realities of the marketplace.
It is in the shadow of these three powerhouses that Yahoo has struggled to find its place on the internet. Largely locked out
of selling products and services on the internet because of its diminutive size, the firm derived the bulk of its revenue and profits
from advertising. But with online users flocking to Facebook, Google, and Amazon.com to satisfy their needs, Yahoo became less
attractive for advertisers.
After more than a decade of mismanagement, Yahoo announced that it had reached an agreement on July 25, 2016 to sell its
core internet operating assets to wireless telecom giant Verizon Inc. for $4.8 billion in cash.5 The remaining assets would include
investments in Chinese e-commerce firm Alibaba, Yahoo Japan, and a small patent portfolio. How did a firm that once dominated
internet search and served as an online gateway for millions fall from grace? A look into the past helps to answer this question.
When Yahoo went public in 1996 in an initial public offering, the internet in many ways was still in its infancy. Consumers
were quick to gravitate to Yahoo’s quirky brand and soon became reliant on the firm’s search capability to help them find
interesting and meaningful content. Yahoo also pioneered the “internet portal” concept offering consumers a single site to satisfy
the majority of their online needs. The firm was known for its fierce independence and for a culture that was slow to adapt to
technologies not invented by Yahoo. While still one of the most popular destinations on the internet, it was dwarfed by its major
competitors. The firm’s annual revenue declined from $7.3 billion in 2008 to about $4.3 billion in 2015. While the firm did
receive major cash infusions from the partial sale of its stake in Alibaba, the Chinese mega e-commerce business, its operating
profits have been sliding inexorably lower in recent years. Most of its market value was a result of its investment made years ago
in Alibaba.
Yahoo’s assets at the end of 2015 consisted of a series of investments in other companies and in wholly owned and operated
businesses. The firm’s most valuable investments included Alibaba and Yahoo Japan. At that time, the value of Yahoo’s stake in
Alibaba was $32.5 billion and its stake in Yahoo Japan was $8.6 billion. The company’s net cash — or cash minus debt — was
$4.2 billion. This sums to $45.3 billion and compares to the stock market’s then valuation of the firm of $32.5 billion. Investors’
lower valuation of the firm reflected a lack of confidence in the board’s ability to enhance the value of its operating units.
The firm’s websites were one of its greatest assets. Yahoo claimed on its website that every day 43 million people come to its
sites for the “best the web has to offer” and they on average return daily.6 The challenge has been to find a way to convert this
5 Closing the deal was hampered by the discovery in November 2016 of several hacks of more than one billion Yahoo email users‘
private accounts which had occurred in 2013 and 2014 and the potential reduction in the firm’s value resulting from these
incidents. Verizon argued the hacks resulted in a material loss of value and attempted to negotiate a lower purchase price. Yahoo
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the internet.
Perhaps the greatest factor limiting Yahoo’s turnaround in recent years has been a rapid succession of CEOs and muddled
governance. The firm’s governance issues ranged from the failure to provide consistent leadership at the top, board oversight, lack
of an enduring mission statement and successful business strategy, poor stewardship of the firm’s financial resources, and an
inability to align the firm’s culture with longer-term objectives. Since 2008, the firm changed CEOs five times and experienced an
unsolicited takeover attempt by Microsoft, a proxy contest, several public flare-ups with activist investors, as well as a loss of
board members and key management personnel.
The firm’s board and management had been unable to settle on a clearly defined and credible vision that could be effectively
communicated to consumers and businesses that describes where and how the firm chooses to compete. This has left consumers
and businesses confused about what Yahoo is and why they should be using it. Yahoo in its 2015vision statement viewed itself as
“a guide focused on informing, connecting, and entertaining our users. By creating highly personalized experiences for our users,
we (Yahoo) keep people connected to what matters most to them, across devices and around the world. In turn, we create value for
advertisers by connecting them with the audiences that build their businesses.”8 This statement on its face seems to lack the
specificity to provide clear direction for the firm and to forge a unified culture intent on achieving this undertaking. At its worst, it
seems to allow the firm broad sway in making acquisitions and corporate investments.
During the first two years as CEO, Ms. Mayer had been able to emerge largely unscathed despite these missteps because of
investors’ focus on the firm’s stake in Alibaba. In recent years, much of Mayer’s and the board’s time seems to have been taken up
in 2015 by what to do with the Alibaba investment. Throughout 2015, Yahoo’s board and management were under considerable
pressure to deliver value to shareholders and to do it soon. Or else face the prospect of a proxy fight for control of the board.
Private equity firm, Starboard Value, which has a track record of successfully forcing firms to change management, board
members, and strategies, had been most active in seeking a complete restructure of Yahoo. On November 19, 2015, Starboard
CEO Jeffrey Smith sent a letter to the board and management expressing its displeasure with Yahoo’s performance and that it had
17
strategy for the business could have been successful due to investor impatience. Investors wanted to either see improved operating
performance or to cash out. Activist investors moved aggressively to resolve the firm’s floundering performance. While some
progress had been made with mobile revenues increasing as a share of total revenue and increasing monthly visitors, the firm’s
competitive position relative to Google in search and Facebook in social media worsened. In the end, investors simply lost
confidence in the firm’s ability to compete in markets subject to rapid technological change, viewing the firm as irrelevant in
online advertising, search, social media and commerce.
Discussion Questions:
1. How would you describe the Yahoo corporate culture prior to Marissa Mayer becoming CEO? How might this have
slowed her ability to transform the company?
Answer: The Yahoo pre-Mayer culture was widely viewed as fiercely independent, stubborn, and more likely than not to
shun technologies not developed by Yahoo. This contributed to the slow pace with which it updated its search technology
compared to Google’s. For years, the firm seemed to lack direction, exhibited poor product management skills, and was
lacking in leadership reflected by the revolving door for CEOs. When the founders were fired, the firm lost its star
2. How did the culture change after Mayer’s appointment as CEO in 2012? Be specific.
Answer: The new culture had star power under the direction of Mayer, a former EVP at Google with a great track record
for project management. The culture went from a not invented here syndrome to outward looking with the firm
completing more than 40 acquisitions in less than 4 years. The culture changed in that Mayer was able to motivate
9 Various forms of split-offs represent possible strategies to exit its remaining investments to minimize potential tax liabilities.
With Softbank owning 43% of its shares, Yahoo Tokyo shares trade only on Japan exchanges and tend to be relatively illiquid and
unattractive for U.S. shareholders. To get as much cash as possible for its shareholders, Yahoo could execute a cash rich split-off
3. Do you believe the expectations for Mayer were excessive when she became CEO in 2012? What would you have done
differently if you were the CEO of Yahoo?
Answer: In fairness, it is unlikely that Mayer can turn around Yahoo given its yawning competitive gap with Google,
tarnished brand, lumbering bureaucracy, and stultified culture. She had performed admirably at Google and was known as
4. What corporate governance issues does Yahoo face? How do these issues impact Yahoo’s strategy?
Answer: Given the nearly 7 year decline in revenue and operating profit, Mayer and the Yahoo board were highly
vulnerable to a proxy fight for control of the board. This vulnerability reflected the widely held perception that the board
and the CEO engaged in lavish spending including spending out $1.1 billion on Tumblr, $17 million to stream one NFL
5. Discuss how Yahoo’s “legacy” investments in Alibaba and Yahoo Japan constrained its ability to revitalize its core
operating businesses. Be specific.
Answer: These investments contributed most (and sometimes all) of Yahoo’s shareholder value. Activist investors
clamored for the disposition of these investments to shareholders in order to unlock what was perceived by many
investors to be the firm’s primary source of value. Consequently, the firm’s board and senior management spent much of
6. Discuss how the Yahoo brand represented both an asset and a potential liability for the firm in implementing new
strategies. Be specific.
Answer: As one of the most widely recognizable brands on the internet, the Yahoo brand offered the potential to attract
users to new products and services cloaked in this brand. However, with the passage of time and the failure to create
TURMOIL AMONG MEDIA COMPANIES
KEY POINTS
• Industry leaders often have a unique vision of the future of their business and are highly adept at implementing their
business strategies
• Leadership positions can be sustained only if the leading firms continuously “reinvent” themselves to stay ahead of
____________________________________________________________________________________________________
Traditional companies are those that tend to conform to the conventional way of doing business. Nontraditional firms are those that
eschew conventional wisdom. What follows is a discussion of two different groups of firms in what could be loosely defined as the
“media” industry and how they react differently to a rapidly changing competitive landscape. Traditional media firms tend to view
the future through a rear view mirror feeling most comfortable with what they know. In contrast, nontraditional firms less
constrained by the past are more inclined to look far into the future to identify the “next big thing.”
Media companies are arguably those which disseminate proprietary and nonproprietary content through multiple distribution
channels generating revenue from subscriber fees and charging businesses to advertise to their subscriber/customer base.
Traditionally media firms have included cable TV, wireless carriers, newspapers, radio, and movie production companies, as well
as blogs and websites. Social networking company, Facebook, and online search behemoth, Google, position themselves as
partners to the traditional media firms giving them access to their huge global audiences.
Facebook and Google to capture an ever increasing share of global mobile advertising revenues.
Traditional media companies have been slow to respond to the ongoing shift of customers to accessing content by using a
variety of mobile devices. Telecom companies like Comcast, AT&T, and Verizon were primarily content distributors and not
content providers since they produced relatively little of their own content. The disastrous acquisition of Time Warner
Communications by AOL for $165 billion in 2000 in an attempt to marry content and distribution made telecom firms hesitant to
develop proprietary content. Their concern was that they would compete with their own content producing advertising customers.
Also, as was demonstrated with the AOL-Time Warner tie-up, corporate cultures between content providers and distributors can
be very different, potentially creating an integration nightmare.
Fearing that they are lagging the shift by consumers to mobile devices and that their core businesses are in peril, the large
media companies are resurrecting the strategy adopted by AOL in its ill-fated takeover of Time Warner. Comcast was among the
first to revive this strategy when it completed its takeover of NBCUniversal by buying the remaining 49% it did not already own
from General Electric in 2013. The total paid for all of NBCUniversal exceeded $30 billion. In 2015, wireless and cable TV giant
AT&T completed its acquisition of DirecTV for $48 billion and cable provider Charter Communications catapulted itself into the
second position in the mature cable industry by acquiring Time Warner Cable for an eye-popping $55 billion.11
What’s up? Facebook Buys Messaging Startup WhatsApp for $21.8 Billion
Case Study Objectives: To illustrate
• The role of factors external to a firm in developing the firm’s business strategy
• How maintaining competitive advantage is transient especially in businesses subject to rapid technological change
• How overvalued acquirer shares can contribute to overpaying for a target firm.
Talk about a takeover had been underway since early 2012 when Facebook founder and CEO Mark Zuckerberg contacted Jan
Koum cofounder and CEO of mobile messaging company WhatsApp about the possibility of a deal. Koum had long been cool to
the idea of selling his company because that smacked of his losing control of WhatsApp. The discussions continued throughout
that year and into 2013 on an informal basis. Eventually Zuckerberg was able to entice Koum to accept an offer that essentially
made WhatsApp’s 55 employees enormously wealthy seemingly without having to alter their business model in any way. While
the deal clearly transfers ownership to Facebook, it does not at least from the outside appear to cede control. Mark Zuckerberg
refers to the acquisition of WhatsApp as a partnership reinforcing the notion of Jan Koum’s continuing independence.
WhatsApp vision is to make messaging accessible to anyone regardless of what phone they own, where they live or how much
money they make. WhatsApp received $10 million in funding from Sequoia Capital in 2011 and, despite modest annual revenue of
about $20 million in 2013, it is profitable. Jan Koum, CEO and founder, who owns 45% of the startup, picked the name because it
sounded like “whats up.” Having grown up in the Ukraine when it was still part of the now defunct Soviet Union, Koum
remembers the country’s repressive secret police and has an understandable aversion to allowing users of his company’s service to
be tracked electronically.