There may be
gains to be had by combining different bundles of resources and
co-coordinating their activities.
Strategies should only be seriously considered if it looks like they
will deliver net gains, even after taking opportunity costs into account.
Mergers fall into
two categories
1) lead to sharing of resources and a fall in
cost
2) Increase in market power of the firm
Shifting the
demand curve(s) to the right and possibly reducing demand elasticity
Pitfalls
in judging success:
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Measurement difficulties |
Test
should be whether this combination added value compared to what would have
been the case it had not taken place Difficult
to measure benefits from combination if they do not fully emerge until some
years down the line. |
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Other
motives |
May
not be to increase profitability for example merger because they desire the status
and rewards larger firm, doubling turnover not profit or Management
acquired a supplier to prevent a rival cutting them off from essential
supplies, this may not directly increase profits but could instead reduce the
chances of a future reduction. |
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Wrong
criteria |
Even
if combination actually adds value it may be a failure according to some
criteria. Many joint ventures are
deemed to be failures because they do not fully achieve their stated
objective and allotted life span. It
may be that the gains to either or both partners are not fully reflected in
the performance of the joint venture.
Both my still be able to gain know-how to their advantage in other
activities. |
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Opportunity cost |
Make
limited judgment on whether or not added value. Allow for the opportunity cost of alternatives foregone. True cost and real failure rate of the
chosen options may be even higher than is observed or reported. |
Two important
messages from the empirical evidence on combination activities:
1) They frequently tend to disappoint in
terms of adding value, especially from the point of view of making an acquisition
and most especially from the point of view of joint venturing
2) The strategic motives and implications of
combination may be more complex than just short-term profit maximizing motive’s
and this may be reflected in the apparently poor performance of combinations
when they are judged in those terms.
The proper answer as to why a merger was chosen should
refer to the relative merits (costs and benefits) of this method compared to
its alternatives.
Need to compare possible methods of adding value.
Competitive advantage by reducing costs or increasing
market power.
A number of ways that gains can be achieved
characteristics are (adding value):
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1. Similar
outlets: eliminating duplication |
Eliminating the
duplication through combining i.e. sales forces |
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2. Similar
products: eliminate competition |
New combined
sales force, push up margins, less worry about price and other forms of
competition from a rival |
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3. Similar
activities: increasing sales |
New combination
does the same thing as before with potential of increasing their sales
productivity. Can result in no
resource savings or increased revenues |
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4. Similar
activities: improving capabilities |
One firm
superior selling capabilities , selling practise and training method compared
to rival combining catch up the practices, increased aggregate sale revenue
and/or reduced marketing cost per unit. |
Combining two sets of activities and resources
represented by two sets of sales forces could result in a number of potential
benefits in this once category of potential resource linkage. These include:
1)
elimination of duplicated activity
2)
increased control over buyers
3)
increased productivity and
4)
diffusion of superior or best practice capabilities throughout
the combination.
Gains may be in terms of
Increased
market power could be reflected in increased bargaining power with respect to buyers,
while market power effects from combining purchasing departments could be
reflected in increased bargaining strength with respect suppliers.
Most obvious way to
achieve gains through resource sharing or enhanced market power is through
merger of two firms, or acquisition of one firm by the other.
1. The whole value chain matters economies may be obtained through
combination depends very much on the case in hand. e.g. production or sales
force.
2. Alternative methods of combining
activities. Alternative is internal expansion, benefit
is increase scale of output, organic
growth may allow the firm to achieve the necessary size eventually without the
problems of integrating different systems that may be incompatible.
Where
the benefits reflect reduced duplication of activity, the firm may be able to
achieve the same ends by concentrating on competing against its rival and
encouraging or forcing its withdrawal from this market. In principal the intended outcomes of merger
and acquisition may also be achievable through internal growth or co-operative
arrangements.
1)
Why gains are often so poor – why do mergers and acquisitions
so often fail to realize the added value that had been promised from the
combination?
2)
Why does one party to the transaction (the shareholders of
acquiring firms) often seem to do badly compared their counterparts on the
other side of the transaction?
Frequent
disappointments in terms of added value.
Compatibility
problems
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Part of the
combination simply not suited to each other.
Skills not readily transferable. Different skill competences,
principal-agent problem 1) Limited
co-ordination of resources new firm could fail to achieve 2) Attempts to
co-ordinate and harmonize prove costly, skills and competences transferred
are not appropriate to the other parts of the firm |
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Optimistic bias |
Pitfalls
and problems that lie in wait on the way to extracting that value are often
less easy to identify in advance. |
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Strategy matching, interdependent strategies |
Rival’s
strategy is wise (add value) or foolish (does not add value) 1)
prevent foreclosure 2)
maintain competitive positioning potential
benefits not necessarily reflected in added value |
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Insulation from environment surprise |
Gains are in
terms of at least partially offsetting the adverse consequences of any
surprise threats. potential
benefits not necessarily reflected in added value |
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Agency problems, managerial motives for merger |
Principal
agent problem not necessarily act in the best interest of the
principals. Benefit management team
or chief executive empire-building objective. |
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The Prisoners’ Dilemma |
When it is
clear to both firm that they would be better off it they could agree not to
purse such strategies. Problem may not
trust each other |
Acquirers tends
to get a much worse deal than the acquired firm in takeovers for number reasons
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Grossman-Hart, dispersion of ownership |
Dispersed
ownership may actually increase the price to be paid for the acquisition and
result in a worse deal for the acquirer. Dispersion
of ownership of the firm amongst any number of shareholders create
difficulties for take-over bids. Each
may reason that anything any individual does will not affect the change of
the bid going through or failing.
Rather than sell out hang on and free ride on a full share. |
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Winner’s Curse |
‘winning’
firm when it discovers that it had an inflated estimate of the true worth of
its prize in the first place. Best
defence against winners curse is natural caution and risk aversion. |
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Excessive Self-Confidence (Hubris) |
Management
involved in take over become so caught up in the thrill of the chase and the
excitement of deal making that they allow their bids to become
unrealistically inflated. Lack of
balance judgment bid prices pursed up beyond regarded as reasonable. |
Merger or
acquisition may be chosen over internal growth for a variety of reasons as in
the following cases
Joint ventures
score even worse then merger and acquisition
Merger or
acquisition may be seen as a ‘quick fix’ to problems that internal growth may
find more difficulties in dealing with, at least within the time scale
envisaged by the management. Even if
the merger deliver immediate pay-offs this still leaves the issue whether such
a strategy is suited to deliver sustained competitive advantage over time.
Co-operative
activities:
Licensing
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is
effectively permission for another firm to indulge in an activity that would
otherwise be forbidden by law. It
usually involves the transfer of intellectual property rights in technology
for specified periods and territories, in the form of patents, designs,
trademarks. Etc |
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Franchising |
involves
the transfer of intellectual property from one party to another for specified
periods and territories, usually based
around the rights to use the franchisor’s name and trademarks, as in
the case of McDonalds and KFC. |
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Main
difference between a license and a franchise is that licenses usually
relate to part of a business (the technology for a specified product
or products) While franchising tends to involve the transfer of know how ranging over the entire business, for purchasing through production to presentation and selling. |
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Informal co-operation |
is
difficult to pin down and define in formal terms; it really depends on the
context in which it takes place. But
the logic of it is clear enough and can be summarizes as ‘you scratch my
back and I may scratch yours’ |
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Sub-contracting |
Involves
separating out part of a production process to be dealt with under contract
by a separate firm. They are
increasingly assuming more responsibility for R&D and design activities,
with the relation between buyer and supplier now frequently evolving into
long-term co-operation. |
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Alliances |
Involves
a formal or informal agreement to co-operate on a variety of matters. Alliances can have both resource-based and
transaction-cost logic Advantage
for a resource-based perspective is both sets of managerial teams can build
up familiarity and understanding in terms of how the other firm works. Transaction-cost
logic is that they should inhibit opportunism. It may be easier to have opportunistically for one-off acts of
co-operation where the partners do not have any other co-operative agreements
with each other. |
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Network participation |
Can
display some of the features and attractions of joining a club. Networks may exist where three or more
firms are directly or indirectly linked by a series of co-operative
agreements. It may be set up by
formal agreement, or it may simply evolve without any central set of
objectives, direction or planning.
The essential quality of a network is that there are access and
transaction cost benefits from joining, over and above the benefits which
one-on –one co-operative agreements or alliances can provide |
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Joint Venture |
is
a form of co-operative activities that has increased rapidly in numbers in
recent years. Definitions vary but generally tend to have these five
characteristics. 1)
two or more ‘parent firms agree to co-operate 2)
new entity ‘child’ is created for a specified task and
possibly duration 3)
child has its own decision-making capability 4)
child is co-owned by the parents 5)
There is provision for continuing parental supervision and
control over the venture |
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Joint
venture Considerations:
Contractual
issues
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contract
between the parties may absorb considerable amount of managerial and legal
resources, rights, responsibilities and obligation of the parties. Need to police and monitor performance of
the other |
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Complex hierarchy |
complex
hierarchical arrangement |
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Appropriability
problems |
intellectual
property leaking out, merger more able to keep important secrets and
techniques private. |
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1)
Why joint venture and not other forms of co-operation? |
Frequently
adopted in areas where there is still major uncertainty concerning market and
/or technical possibilities |
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2) Why join
venture not merger and acquisition? |
Can
be designed to cover only the selected range of the resources that are of relevance
to the venture opportunity, and these in turn may relate to only a small part
of the relevant partners activities. |
Two
basic ways that joint venture can perform:
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1) Selected pieces of value chain |
Example: joint venture in sales only rest of their
activities separate |
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2) Selected businesses of the firm |
Decision-making
facility to co-ordinate resource sharing over the relevant region of the firm,
again localizing most of the costs of co-ordination to that region of the
firm. |
Combings effort of two or more firms done
in two main ways
Combine into one separate entity
through merger or acquisition
Co-operative agreement such as joint
venture or alliance – limited to part of the firm
Main effect
Stimulating effect on the demand
side
And /or
Generate economies of scale or scope
on the supply side through sharing resources.
Considerable evidence to suggest that merger, acquisition
and joint venture frequently very disappointing in terms of their performance.