By:

Ashley Daniels
Kate Daisher
Tim Lothamer

Chapter 9
Corporate Strategy:
Mergers and Acquisitions, Strategic Alliances
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

9-2

Chapter Outline
9.1Mergers
Mergersand
andAcquisitions
Acquisitions
9.1

Merging with Competitors

Merging
with Competitors
Why Do Firms Make Acquisitions?
Why
Do Firms Make Acquisitions?
M&A and Competitive Advantage
M&A
and Competitive Advantage

9.2Strategic
StrategicAlliances
Alliances
9.2

Why Do Firms Enter Strategic Alliances?

Why
Do Firms Enter Strategic Alliances?
Governing Strategic Alliances
Governing
Strategic Alliances
Alliance Management Capability
Alliance
Management Capability

9.3Implications
Implicationsfor
forthe
theStrategist
Strategist
9.3

9-3

Should Companies Merge?

9-4

9.1 Mergers and Acquisitions

Merger: combining two companies usually similar in size
Friendly approach

Ex: Ernst & Young

financial audits, taxes, consulting and advisory services to companies.

1989

2013

9-5

9.1 Mergers and Acquisitions

1849 Harding & Pullein founded in England. Joined by Frederick Whinney
1894 Arthur Young starts his first firm, Stuart and Young, in Chicago. Harding & Pullein renamed Whinney,
Smith & Whinney.
1903 Alwin and Theodore Ernst form Ernst & Ernst in Cleveland, US.
1906 Arthur and brother Stanley form Arthur Young & Company in Chicago.
1924 Arthur Young allies with Broad Paterson & Co, England.
Ernst & Ernst allies with Whinney, Smith & Whinney.
1939 Clarkson allies with Woods Gordon & Co to expand into management consulting.
1944 Clarkson Gordon & Company allies with Arthur Young & Co.
1979 Ernst & Whinney forms and becomes the fourth largest accountancy firm in the world.
Arthur Youngs European offices join several large local European firms.
1989 Arthur Young combines with Ernst & Whinney to create Ernst & Young.
9-6

9.1 Mergers and Acquisitions

Acquisition: purchase or takeover of a company
Can be friendly
Ex: Disney buys Pixar in 2006
Purchased for $7.4 billion

Our partnership with Disney has probably been the most successful
partnership in Hollywood history, and its been the best thing that ever
happened for Pixar. We wouldnt be here today without it
-Steve Jobs

9-7

9.1 Mergers and Acquisitions

Hostile takeover
Ex: Vodafone buys Mannesmann in 2000
$180.95 billion merger
First time in Germany for a large merger
1 Mannesmann share = 59 Vodafone shares
Vodafone: 50.5% ownership
Rebranded soon after merger

9-8

Merging with Competitors

Horizontal integration: process of merging and acquiring
competitors
HP buys Compaq in 2002.
Pfizer buys Wyeth in 2009. * Fired more than 15,000 employees
Live Nation buys Ticketmaster in 2010.

Benefits:

Reduce competitive intensity

Lower costs
Increased differentiation
Access to new markets and distribution channels
9-9

Strategy Highlight 9.1

FoodFight:
Fight:Krafts
KraftsHostile
HostileTakeover
TakeoverofofCadbury
Cadbury
Food

Kraftacquired
acquiredCadbury
CadburyininUK.
UK.
Kraft

Hostile takeover, $20 billion deal

Hostile
takeover, $20 billion deal
Cadbury has strong position in emerging economies.
Cadbury has strong position in emerging economies.
Perfected distribution system in countries like India
Perfected distribution system in countries like India

2012Kraft
Kraftrestructured
restructuredtotoMondelez
Mondelez
2012
WithHersheys
Hersheysattention
attentionononChina
China(2013
(2013entry),
entry),Kraft
Kraft
With
hasananopportunity
opportunityfor
forgaining
gainingU.S.
U.S.market
marketshare.
share.
has
9-10

M&A and Competitive Advantage

Many M&As actually destroy shareholder value!
When there is value, it often goes to the acquiree.
Acquirers tend to pay a premium.
Vodaphone example
1 Mannesmann share = 59 Vodafone shares

Why still desire M&As?

Larger Company: Prestige, Power, and Pay
Overcome competitive disadvantage
(Nike vs. Adidas/Reebok)

Superior acquisition and integration capability

Cisco acquired more than 150 technology companies
9-11

9.2 Strategic Alliances

STRATEGICALLIANCE
ALLIANCE
STRATEGIC
voluntary arrangement between firms that involves the sharing of
AA
voluntary arrangement
between
firms that
theofsharing
of
knowledge,
resources, and
capabilities
withinvolves
the intent
developing
knowledge,
and
capabilities with the intent of developing
processes, resources,
products, or
services
processes, products, or services

STRATEGIC
CRITERIA
STRATEGIC CRITERIA

alliance qualifies as strategic only if it has the potential to affect a

AnAnalliance
qualifiesadvantage.
as strategic only if it has the potential to affect a
firms competitive
firms competitive advantage.

RATIONALVIEW
VIEWOF
OFCOMPETITIVE
COMPETITIVEADVANTAGE
ADVANTAGE
RATIONAL

Framework where critical resources and capabilities are embedded in

Framework
where critical
resources
and capabilities are embedded in
strategic alliances
that span
firm boundaries
strategic alliances that span firm boundaries

9-12

Why Do Firms Enter Strategic

Alliances?
Strengthen competitive position
Apple vs. Amazon

Enter new markets

Local partner for global growth
Microsoft partners with Yahoo on search

Hedge against uncertainty

Real options approach
Roche invests in Genentech 1990 & buys it in 2009

Access critical complementary assets

Pixar partners with Disney

Learn new capabilities

GM & Toyota (NUMMI) formed in 1984
Who won the learning race? Probably Toyota.
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Strategy Highlight 9.2

Strategic Alliances to Challenge Amazon
Strategic Alliances to Challenge Amazon

AmazonsKindle
Kindle
Amazons

Content providers do not want fixed price for e-books. ($9.99)

Content providers do not want fixed price for e-books. ($9.99)
Below cost is the same strategy Amazon started for printed books.
Below cost is the same strategy Amazon started for printed books.

ApplesiPad
iPad
Apples

Let publishers set the prices directly (Agency model)

Let publishers set the prices directly (Agency model)
Worked with publishers to increase bargaining power
Worked with publishers to increase bargaining power

ChallengeAmazons
Amazonsearly
earlylead
leadininthe
thedelivery
deliveryofofe-content
e-content
Challenge
Amazon share dropped from 90 to 60% in e-books.
Amazon share dropped from 90 to 60% in e-books.

2013 a afederal
federaljudge
judgeruled
ruledthat
thatApple
Applecolluded
colludedwith
with
2013
publisherstotodrive
driveupupprices
pricesofofe-books
e-books
publishers
9-14

Exhibit 9.2 Key Characteristics of

Different Alliance Types

9-15

NON-EQUITY ALLIANCES

Most common forms of alliance

Supply agreements
Distribution agreements
Licensing agreements

Vertical strategic alliances

Firms share explicit knowledge
Knowledge that can be codified
Patents
User manuals and fact sheets,
Scientific publications
9-16

EQUITY ALLIANCES

At least one partner takes partial ownership position

Stronger commitment toward the relationship

Allow the sharing of tacit knowledge

Tacit knowledge concerns the know-how

Partial ownership, thus equity alliances signal

stronger commitments
Moreover, equity alliances allow for the sharing of
tacit knowledge that can not be codified.
Toyota has an equity alliance with Tesla.
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JOINT VENTURES

Joint ventures (JVs) are the strong ties, trust, and

commitment that can result.
Created and owned by two or more companies
Hulu owned by NBC, ABC, and Fox

Long-term commitment
Exchange both tacit and explicit knowledge
Frequent interaction of personnel

Used to enter foreign markets

Least common of the 3 types of alliances
9-18

Alliance Management Capability

A firms ability to effectively manage three alliancerelated tasks concurrently
30 to 70% of all alliances yield disappointing results

1. Partner selection and alliance formation

2. Alliance design and governance
3. Post-formation alliance management

9-19

PARTNER SELECTION AND ALLIANCE FORMATION

The expected alliance benefits must exceed its costs.

One or more of the five alliance formation reasons
should be present:
1.
2.
3.
4.
5.

Strengthen competitive position

Enter new markets
Hedge against uncertainty
Access critical complementary resources
Learn new capabilities

. Partner compatibility and commitment are necessary

conditions for a successful alliance.
9-20

9.3 Implications for the Strategist

A strategist has three options to drive firm growth:
Organic growth through internal development
External growth through alliances
External growth through acquisition

The build-borrow-or-buy framework:

Aids strategists in deciding whether to pursue internal
development (build)
Enter a contract arrangement or strategic alliance (borrow)
Acquire new resources, capabilities, and competencies
(buy)
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Exhibit 9.5 How to Implement a

Corporate Strategy: The Build-Borrow-orBuy Framework

9-22

Build-Borrow-or-Buy Framework
How does the strategist know whether the firms resources are
relevant in addressing the new challenge or opportunity?
A firms internal resources are relevant if they are
Similar to those you need to develop
Superior to those of competitors in the targeted area

Are the targeted resources tradable?

Source the resource externally Franchise or license
How close do you need to be with your resource partner?
Equity Alliance or Joint Venture over an outright acquisition
Acquisitions = costly, complex and difficult to reverse

9-23

Cont.
Internal resources insufficient to build?
Resources cannot be borrowed through alliance?
Closeness to the resource partner needed?
Will an M & A be successful?

9-24

ChapterCase 9
Disney, Todd Anderson/AP Images

How Buzz Lightyear, Iron Man, and Darth Vader Joined

How Buzz Lightyear, Iron Man, and Darth Vader Joined
Mickeys Family
Mickeys Family

Disneyearns
earnsover
over$45
$45billion
billionininrevenues
revenuesmajor
major
Disney
purchases:
purchases:
2006 acquired Pixar for $7.4 billion
2006
acquired Pixar for $7.4 billion

After Eisner left Disney in the fall of 2005

After Eisner left Disney in the fall of 2005

2009 acquired Marvel Entertainment for $4 billion

2009
acquired Marvel Entertainment for $4 billion
2012 acquired Lucasfilm for over $4 billion
2012
acquired Lucasfilm for over $4 billion

Disneyuses
usesalliances
alliancesand
andacquisitions
acquisitionsfor
forcomplementary
complementary
Disney
assets.
assets.
Related-linked diversification (see Ch. 8)
Related-linked
diversification (see Ch. 8)

9-25

ChapterCase 9
Disney, Todd Anderson/AP Images

Consider
This
Consider This
CEO Bob Igers acquisition-led growth strategy
CEO
Bob Igers acquisition-led growth strategy
Disney has become increasingly diversified
Disney
has become increasingly diversified
Business revenue streams are more predictable.
Business
revenue streams are more predictable.
Box office, home entertainment, theme parks, cable TV,
Box
office, home entertainment, theme parks, cable TV,
toys, licensing, etc.
toys, licensing, etc.
Media industry is being disrupted:
Media
industry is being disrupted:
People spend less time watching movies in theaters.
People
spend less time watching movies in theaters.
More time-consuming content is available online.
More
time-consuming content is available online.

9-26

Resources
A Timeline of our history. (2016, April 14). Retrieved from http://www.ey.com/GL/en/About-us/Ourpeople-and-culture/Our-history/About-EY---Key-Facts-and-Figures---History---Timeline
Karnitschnig, M. (2009, Janary 26). Pfizer to pay $68 billion for Wyeth. Retrieved from
http://www.wsj.com/articles/SB123293456420414421
Nga, A. (2015, July 12) Why was Pixar acquired by Disney? Retrieved from
https://www.quora.com/Why-was-Pixar-acquired-by-Disney
Vodafone seals Mannesmann deal. (2016, April 14). Retrieved from
http://news.bbc.co.uk/2/hi/business/630293.stm

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