International Strategy and Organization

Internationalization through Mergers and Acquisitions

0447092 ALVES, João

0447093 BORREGO DO VALE, João

0447094 LAGINHA, Luís

0447095 NUNES, Bruno

Overview - 1

Alliances vs. AcquisitionsThe Value of M&A StrategiesPerformance Implications of M&AReasons for M&ASustained Competitive AdvantageImplications for Bidding Firm ManagersImplications for Target Firm Managers

Overview - 2

Decision of InternationalizationEntry ModesProblems in Entry ModesPerformance of M&AsSynergy Realization of M&AsCase Study: “Mannesmann and

Vodafone: The unfriendly takeover”

Alliances vs. Acquisitions

Alliances allow simultaneous and fast entering into multiple countries

Objective: achieve complementary capabilities or economies of scale

Do not have high risks of failure and high transaction costs

Alliances vs. Acquisitions

Acquisitions allow for a greater rationalization than alliances

In alliances all decisions must be made by consensus among the partner firms

Alliances are transient in nature and must remain reversible

Alliances vs. Acquisitions

Alliances are inherently less efficient than acquisitions

Future alliances might be formed as a first step toward a merger

Alliances make it possible to avoid the culture shock in the wake of an acquisition

The Value of M&A Strategies

The unrelated caseNPV(A+B) = NPV(A) + NPV(B)P = NPV(A+B) – NPV(A)Only generates normal economic profit

The related caseNPV(A+B) > NPV(A) + NPV(B)

M&A: The Related Case

FTC Categories Vertical Merger Horizontal Merger Product Extension Merger Market Extension Merger Conglomerate Merger

Lubatkin (1983): Technical economies Pecuniary economies Diversification economies

M&A: The Related Case

Jensen and Ruback (1983): To reduce production or distribution costs

1. Through economies of scale2. Through vertical integration3. Through the adoption of more efficient

production or organizational technology4. Through the increased utilization of the

bidder’s management team5. Through a reduction of agency costs by

bringing organization-specific assets under common ownership

M&A: The Related Case

Jensen and Ruback (1983) (cont.): Financial motivations

1. To gain access to underutilized tax shields

2. To avoid bankruptcy costs

3. To increase leverage opportunities

4. To gain other tax advantages To gain market power in product markets To eliminate inefficient target management

Performance Implications of M&A

The more strategically related bidding and target firms are, the more economic value M&A create

Economic value appropriated by the owners of the target firm

Why do managers of bidding firms continue to engage in M&A strategies?

Reasons for M&A

Ensuring survivalFree cash flowAgency problemsManagerial hubrisThe potential for above-normal profits

Sustained Competitive Advantage

To generate above-normal profitsValuable, rare, and private synergies

between bidding and target firmsValuable, rare, and costly-to-imitate

synergies between bidding and target firmsUnexpected valuable synergies between

bidding and target firms

Implications for Bidding Firm Managers

Search for valuable and rare synergiesKeep information away from other

biddersKeep information away from targetsAvoid winning bidding warsClose the deal quickly

Implications for Target Firm Managers

Seek information from biddersInvite other bidders to join the bidding

competitionDelay but do not stop the acquisition

Decision of Internationalization

Knowledge Clusters Interrelated groups of firmsTechnology leading firmsHighly skilled labor In urban areas or regions nearby

Incentives to not enter intoKnowledge SpilloversLocals may imitate know-how

Entry modes

3 Entry Type ModesGreenfield InvestmentJoint VentureAcquisition

Greenfield Investment (79%)Acquisition (15%)Joint Venture (6%)

Assets

AcquisitionProblem if acquired have a high ratio of

undesired resourcesAdvantage to ‘plug into’ a local firm

Greenfield InvestmentGradually develop its own network

Joint VenturesOnly have access to selected assets

Problems in Entry Modes

AssetsAbsorptive CapacitySocial Entry BarriersLocal Labor MarketInstitutions and Membership

Problem of Absorptive Capacity

Entry Mode Advantages Disadvantages

Greenfield Investment

Slow and expensive communication process

  May fail to build own code books

Joint Venture Access to local 'interpreter' Internal communication problems

  Risk of imitation by partner firm

Acquisition Acquisition of code books  

Long process of constructing code books ‘Interpreter’ for the firm Transfer knowledge from local do global Preferred should be Acquisition

Problem of Social Entry Barriers

Entry Mode Advantages Disadvantages

Greenfield Investment

Lower social entry barriers through signaling commitment

Slow and expensive trust-building process

  May remain an outsider

Joint Venture

Lowering social barriers through preserving local 'flavor'

 

Access to indirect networks through local partner firm

 

Acquisition

Acquisition of direct networks Hostile acquisitions may raise social entry barriers

Acquisition of indirect networks through employees' social

relations

Direct networks may dissolve after acquisitions

  Employees key to indirect networks may leave after acquisition

Local Labor Market

Entry Mode Advantages Disadvantages

Greenfield Investment

 Less insecure hiring process Slow hiring process

Joint Venture Access to partner firms' labor Scale problems

AcquisitionAcquisition of labor Knowledgeable employees may

leave after acquisition

Condemned by local firms – firms should avoid the raise social barriers

Personnel may want to quit after acquisition Joint Venture may be more costly than

acquisition

Institutions and Membership

Entry Mode Advantages Disadvantages

Greenfield Investment

  Slow and expensive process of becoming a member

Joint VentureAccess to membership through

local partner firmRisk of partner firm appropriating

benefits

AcquisitionAcquisition of membership through

employeesEmployees key to membership may

leave after acquisition

Specialized firms and educations and research institutions

Creation of shared codebooks Same problem as in the social entry barriers

Performance of M&As

Strategic ManagementEconomicsFinanceOrganizational ResearchHuman Resources Management

Synergy Realization of M&As

M&As success is calibrated by the degree of synergy realization

Combination potential

Organizational integration

Lack of employee resistance

Achieving Synergies through Combination Potential

“Economies of sameness” – similar operations “Economies of fitness” – different, but

complementary operations

Operational synergies Administration synergies Managerial synergies Financial synergies

Achieving Synergies through Organizational Integration

Degree of interaction (the greater it is, the greater the degree of synergy realization)

Coordinative effort to improve the quality of interaction (with special integrators, transition teams and preplanning

Little, or poorly executed, interaction and coordination are unlikely to produce substantial joint benefits

Employee resistance, undermining synergy realization

M&As affect career plans M&As create appearance of psychological

problems such as: “We versus they” antagonism Condescending attitudes Distrust, Tension and Hostility

Grave cultural problems

Occur more with similarities in operations than in differences

Other important factors of synergy realization

Management style similarity Attenuates employee resistance Cushions the degree of change and enhances cooperation

Cross-border Combination Impede the interaction and coordination because of country

differences Culture clashes promoting employee resistance May speed new markets access and promote globalization

synergies Relative Size

Insufficient managerial attention to smaller targets Positively associated Organizational integration

Case Study

Mannesmann and Vodafone – The Unfriendly Takeover

Vodafone – focus on providing mobile telephone services

Mannesmann – aimed to become the European leader in integrated telecommunications

Main objectives

Achieving a bigger scale that would stimulate cost reduction

Achieving technological leadershipAchieving a significant presence in

continental Europe

The takeover - 1

Vodafone’s expansion focused exclusively on mobile communications

Acquiring Mannesmann would give a quick access to the German telecommunication market and foster the fast growing strategy

The takeover - 2

Friendly start – Vodafone starts negotiating with Mannesmann

Defensive Tactics – Mannesmann acquisition of Orange

Vodafone’s response

The takeover - 3

The final bid53.7 Vodafone shares for each

Mannesmann share (266.40 € each; total of 120 billion €)

Synergy effects

Customer base from 28 million to 59 million

Enhancement of logistics, marketing strategy, brand awareness and technological capacity and capabilities

Product development, based on technological innovation became the watchword

Questions and Considerations

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