JWI 540 Strategy, 8/24/12, Week8 Summary
The merits and challenges of M&As and partnerships between firms are reviewed. Levers to tilt the odds toward success are identified.
I. Why M&A
************
M&A is the fastest, most powerful tool a company can use to change its competitive game.
Adds real fire power to growth arsenal
M&A gives twice the talent to pick from. Ideally M&A results in 1+1 = 3
Potential Benefits of Acquisitions:
Allows a firm to obtain in a single transaction,
- capabilities or resources that would take years to develop.
- Reduce costs through consolidation and eliminatiion of redundant positions and activities.
- Increase a firm's market share, competitive advantage from greater size
A partnership allows you to capitalize on another firm's resources.
An acquisition makes resources one's own.
II. Problems with M&A
*********************
Majority of M&As fail
Benefits of M&A are many times not realized
It feels like death to most people in the acquired organization, with lives turned upside down
III. How to avoid common traps in M&A and make a successful acquisition?
**************************************************************
1. Check if the same business result can be achieved at lower risk with a partnership or organic growth.
2. Does it make strategic sense and further the strategic objectives of the firm ?
Is this acquisition aimed at getting quick results that organic growth cannot match ?
Is this to Acquire a competitor?
Is this to move quickly into an area where you don't currently compete?
3. If acquisition is justified, are clear criteria for selection of target company set ?
4. Does the acquisition create value?
5. Before starting the acquisition process, stay aware of the common traps in M&A (Welch, 2005)
Sin#1 - Beware of merger of equals. Anticipate people dueling over who is really in charge. Identify roles and responsibilities ahead of the acquisiton.
Sin#2 - Cultural fit based on values of the two companies is as important as strategic fit that is based on products, technologies and numbers. Some cultures don't combine, they combust. Cross-cultural differences in a merger are usually not addressed until it is too late.
Sin#3 - Reverse hostage situation
Due to deep concessions given, the acquired firm is in charge in the end. Don't pay too much for something you don't own.
Sin#4 - Being afraid rather than going boldly
Complete the integration process within 90 days of closing (eg. Lou Gerstner at IBM managed transitions successfully by drawing attention to the firm-wide priorities of the 90-days). Do not let uncertainty morph into inertia or fear.
Sin#5 - Conqueror syndrome
Don't march into new territory and install your people everywhere.
For new and expanded firm to survive, it needs the best team - you may need to let go of some of your own.
Sin#6 - Paying too much
Beware of deal Heat that comes from overheated desire.
Don't get caught in the negotiation frenzy fanned by competitive bidders and investment bankers.
6. Before the Acquisition, consider the risks you are about to take (JWI 540, Week8, Lecture1)
(i) The people in the acquired firm could prove difficult to manage
(ii) The people in the acquired firm may be used to different objectives
To counter the risks and ensure a successful acquisition
(i) Manage actively
(ii) Have clear and shared goals with well-defined targets
(iii) Have clearly defined and quantified benefits supported by strong business rationale
(iv) Monitor progress - Explicit metrics and detailed reporting must be used to ensure targets are met, problems are resolved quickly and effectively.
(v) Create and encourage formal and informal connections between the two firms
Provide multiple channels of communication about both opportunities and problems.
Ensure clear accountability so there is never any doubt about who is in charge and where decisions will be made.
(vi) Place qualified managers chosen from both firms - It is vital to Select, prepare, support, reward qualified managers.
Wisdom to know what not to do - and not doing it - is among the most valuable contributions of a strategic manager (JWI 540, Week8, Lecture1)
(vii) Manage expectations across both firms and encourage a learning mindset
7. During the acquisition process, keep the following four key factors in mind.
Pace:
*******
Some acquisition situations will reward the swift; but in some cases, rushing with deal heat can hurt. Consider your Assumptions and frame of mind - You are probably thinking that the deal must get done and quickly. You may even be afraid that rivals may swoop in and snatch away your target. You have a bias for action and measure your effectiveness by how fast you can get the deal done. However, moving forward too rapidly can result in a due diligence process that fails to produce information that would be helpful in deciding whether to go forward with an acquisition. Focus instead on the spirit of discovery-driven strategy: how quickly can you discover whether there is any future in this deal ?
If there is value in the acquisition, move the process forward. But, as a merger may represent a strategic shift for the organization, think carefully about fundamental changes needed to realize the full strategic potential of the acquisition. Then rush to integrate the firms within 0 to 90 days of closing, to capture advantages, reduce uncertainty, fear, low morale and inertia in minds of people.
On the other hand, if the value of acquisition is inadequate, move on and explore other opportunities.
Power:
*********
Get with the top leaders of the firm you are acquiring and read the power bases in your respective firms. Senior leaders from both sides should consider and discuss how conflicts will be resolved, how decisions will be made and how ideas will be assessed. Simply assigning job titles and agreeing on formal job definitions is not enough. Look beyond the organizational charts - many decisions about resources and agendas do not fall into one person's job domain.
In every firm, informal power network influences key decisions. Create a power map of the new organization - to evaluate options, explore opportunities, and investigate financing.
Formally or informally, where will key strategic decisions be made ?
Who will make staffing and investment decisions post-merger ?
Who will control scarce resources and key assets?
Do not end up arguing endlessly about whose systems and culture to use.
Make the leadership call early on, clarify who is in charge, take the pain, get the transition over with fast, and don't worry about stepping over toes of people. Err on side of speed rather than being too sensitive about stepping on toes (Welch, podcast, JWI 540, Week8)
Information:
*************
To reduce anxiety, avoid miscommunication and increase trust in the firm, provide information to the employees of the firms, before, during and after the acquisition. Messages are often complicated; information cannot always be shared openly. Different audiences need to get different information at different times and in different formats.
Common errors in this area are: Sharing too much too soon or too little too late.
Define an information sharing process that works for the firm. Develop good measures and feedback around the information sharing to ensure same problems do not recur in future acquisitions.
People:
*********
People are stretched thin before, during, after an acquisition. Demands of integration come on top of regular work. New processes need to be learned and new tasks mastered. Most people are on edge emotionally, struggling to adapt to changes, worried about losing their jobs. This is why the following people management challenges need to be handled with care:
- match right people in right jobs in the new organization to build the skills needed to exploit the strategic advantage an acquisition creates.
- Prepare to face resistance from many people unhappy with the changes.
- Face the unpleasant task of deciding whom to let go and also deal with emotions of those who go and those who stay.
- Balance the needs of the top 20% versus the middle 70%
IV. Partnerships (Week8, Lectur1)
**************
Sometimes A firm can't meet its strategic goals on its own
Lacks resources - people, money, skills, physical or intangible assets, energy - necessary to carry out its strategy.
Options:
Develop internally
Partner with a firm for a short term
Buy the assets, hire the people or the entire firm you need
Between building or developing what you need internally and buying it elsewhere lies partnering with another business.
Benefits of Partnering
***********************
(a) Opportunity to learn fast and fail fast - walk away without trying to salvage a large investment.
(b) Enjoy a high potential upside for a relatively small investment while being protected from serious downside risk.
(c) Share different skill sets and financial risk
Beneficial in High-risk investments: share knowledge and financial exposure.
eg. Green energy industry has great deal of uncertainty around consumer preferences, dominant technologies, regulatory decisions, costs.
(d) Take small stakes in entrepreneurial firm in the form of Joint ventures or partnerships on selected projects.
eg. Rapidly changing high-tech sectors. Cisco & MSFT
Lower cost and higher flexibility than M&A
Different ways to partner
**************************
(i) Informal relationship: Preferred supplier network; agree to give purchasing preference to certain suppliers in exchange for better terms.
(ii) Formal relationship: Contractual agreement; Joint venture in which two firms share ownership of a project or enterprise.
(iii) Strategic Alliance: Formal agreement but not shared ownership.
(iiia) Highly integrated alliance: Functions almost like a formal relationship
Different functions inside both firms are involved from R&D, marketing, customer service, manufacturing, distribution eg. Apple & Nike with ipod sensors
(iiib) Focused alliance: involves a limited part of each partner's business such as manufacturing.
eg.IKEA had long standing mfg arrangements with some supplires, got favorable rates
(iiic) Experimental alliances: shorter duration, project-specific. Temporarily use a partner's distribution network to get customer reaction to
your product in a foreign market.
Risks of Partnering
********************
(i) Difficult to manage
***********************
Partners Not fully committed. Relationship can easily dissolve. Partner can suddenly pull out resulting in a rude suprise.
- Slow in decision making
- reluctant to commit resources
- unwilling to respond with sense or urgency when internal problems arise
(ii) Different objectives
**************************
Partners kid themselves into thinking they will be able to reach their goals
but end up working at cross-purposes
(iii) Betrayal
***************
Malicious partner
Secretly allocates costs from other parts of its business to a Joint Venture, cheating the partner.
Loss of proprietary data, processes, product designs - clear guidelines and safeguards not in place.
Hollow out one partner - cheating partner grabs substantial knowlede, people, resources.
Mole - partner's real intent is to weaken the other firm.
Victim firm does not realize what is happening until it is deeply committed to the partnership and the damage is done.
(iv) Intangible and unquantifiable metrics for success
********************************************************
(v) Constantly Nitpicking a Strong contract
********************************************
Insisting on following the letter of the contract
(vi) Too formal or Too informal relationships
*********************************************
Too informal: No relationships at all
Too formal: Rigidly defined with specified points of communication
To ensure a successful partnership
*********************************
(i) Manage actively
********************
Increase managerial attention more than in-house action items as they focus on risky new activities
(ii) Have clear and shared goals with well-defined targets
***********************************************************
(iii) Have clearly defined and quantified benefits supported by strong business rationale
******************************************************************************************
eg. tangible increase in sales
Intangible benefits could result in less disciplined partnerships
eg. hoping both partners will learn about new markets
need to specify what they hope to learn over a certain time period, how knowledge will be measured, how it will be used.
(iv) Have a strongly worded contract - but never use it to nitpick
*************************************
Mistrust and failure can result from nitpick
Very existence of a contract can lead to success
(v) Monitor progress
********************
Vitally important to good alliances and partnerships.
Do not delegate duties to partner firm and hope for the best.
Explicit metrics and detailed reporting must be used to ensure targets are met, problems are resolved quickly and effectively.
(vi) Create formal and informal connections between partner firms
*****************************************************************
Provide multiple channels of communication about both opportunities and problems.
Encourage informal contact between people from two firms.
Ensure clear accountability so there is never any doubt about who is in charge and where decisions will be made.
(vii) Place qualified management on both sides
**********************************************
Vital to Select, prepare, support, reward qualified managers.
Partnerships complicated by Geos, culture eg. US-China joint venture
No single manager can master all necessary skills without support from home team
(viii) Manage expectations
***************************
Learning mindset - manage expectations about how much can be accomplished
Removes stigma of failure when partnership or alliance dissolves.
Ending or restructuring an alliance is a powerful indicator of success.
Companies may now know enough to pursue similar opportunities on their own or acquire resources they need on a temporary basis.
Wisdom to know what not to do - and not doing it - is among the most valuable contributions of a strategic manager
****************************************************************************
V. Have Exit Strategy clear
***********************
Under what conditions would you walk away from an M&A or Partnership negotiation ?
Think about Risk/Reward and BATNA.
Dr DP
The merits and challenges of M&As and partnerships between firms are reviewed. Levers to tilt the odds toward success are identified.
I. Why M&A
************
M&A is the fastest, most powerful tool a company can use to change its competitive game.
Adds real fire power to growth arsenal
M&A gives twice the talent to pick from. Ideally M&A results in 1+1 = 3
Potential Benefits of Acquisitions:
Allows a firm to obtain in a single transaction,
- capabilities or resources that would take years to develop.
- Reduce costs through consolidation and eliminatiion of redundant positions and activities.
- Increase a firm's market share, competitive advantage from greater size
A partnership allows you to capitalize on another firm's resources.
An acquisition makes resources one's own.
II. Problems with M&A
*********************
Majority of M&As fail
Benefits of M&A are many times not realized
It feels like death to most people in the acquired organization, with lives turned upside down
III. How to avoid common traps in M&A and make a successful acquisition?
**************************************************************
1. Check if the same business result can be achieved at lower risk with a partnership or organic growth.
2. Does it make strategic sense and further the strategic objectives of the firm ?
Is this acquisition aimed at getting quick results that organic growth cannot match ?
Is this to Acquire a competitor?
Is this to move quickly into an area where you don't currently compete?
3. If acquisition is justified, are clear criteria for selection of target company set ?
4. Does the acquisition create value?
5. Before starting the acquisition process, stay aware of the common traps in M&A (Welch, 2005)
Sin#1 - Beware of merger of equals. Anticipate people dueling over who is really in charge. Identify roles and responsibilities ahead of the acquisiton.
Sin#2 - Cultural fit based on values of the two companies is as important as strategic fit that is based on products, technologies and numbers. Some cultures don't combine, they combust. Cross-cultural differences in a merger are usually not addressed until it is too late.
Sin#3 - Reverse hostage situation
Due to deep concessions given, the acquired firm is in charge in the end. Don't pay too much for something you don't own.
Sin#4 - Being afraid rather than going boldly
Complete the integration process within 90 days of closing (eg. Lou Gerstner at IBM managed transitions successfully by drawing attention to the firm-wide priorities of the 90-days). Do not let uncertainty morph into inertia or fear.
Sin#5 - Conqueror syndrome
Don't march into new territory and install your people everywhere.
For new and expanded firm to survive, it needs the best team - you may need to let go of some of your own.
Sin#6 - Paying too much
Beware of deal Heat that comes from overheated desire.
Don't get caught in the negotiation frenzy fanned by competitive bidders and investment bankers.
6. Before the Acquisition, consider the risks you are about to take (JWI 540, Week8, Lecture1)
(i) The people in the acquired firm could prove difficult to manage
(ii) The people in the acquired firm may be used to different objectives
To counter the risks and ensure a successful acquisition
(i) Manage actively
(ii) Have clear and shared goals with well-defined targets
(iii) Have clearly defined and quantified benefits supported by strong business rationale
(iv) Monitor progress - Explicit metrics and detailed reporting must be used to ensure targets are met, problems are resolved quickly and effectively.
(v) Create and encourage formal and informal connections between the two firms
Provide multiple channels of communication about both opportunities and problems.
Ensure clear accountability so there is never any doubt about who is in charge and where decisions will be made.
(vi) Place qualified managers chosen from both firms - It is vital to Select, prepare, support, reward qualified managers.
Wisdom to know what not to do - and not doing it - is among the most valuable contributions of a strategic manager (JWI 540, Week8, Lecture1)
(vii) Manage expectations across both firms and encourage a learning mindset
7. During the acquisition process, keep the following four key factors in mind.
Pace:
*******
Some acquisition situations will reward the swift; but in some cases, rushing with deal heat can hurt. Consider your Assumptions and frame of mind - You are probably thinking that the deal must get done and quickly. You may even be afraid that rivals may swoop in and snatch away your target. You have a bias for action and measure your effectiveness by how fast you can get the deal done. However, moving forward too rapidly can result in a due diligence process that fails to produce information that would be helpful in deciding whether to go forward with an acquisition. Focus instead on the spirit of discovery-driven strategy: how quickly can you discover whether there is any future in this deal ?
If there is value in the acquisition, move the process forward. But, as a merger may represent a strategic shift for the organization, think carefully about fundamental changes needed to realize the full strategic potential of the acquisition. Then rush to integrate the firms within 0 to 90 days of closing, to capture advantages, reduce uncertainty, fear, low morale and inertia in minds of people.
On the other hand, if the value of acquisition is inadequate, move on and explore other opportunities.
Power:
*********
Get with the top leaders of the firm you are acquiring and read the power bases in your respective firms. Senior leaders from both sides should consider and discuss how conflicts will be resolved, how decisions will be made and how ideas will be assessed. Simply assigning job titles and agreeing on formal job definitions is not enough. Look beyond the organizational charts - many decisions about resources and agendas do not fall into one person's job domain.
In every firm, informal power network influences key decisions. Create a power map of the new organization - to evaluate options, explore opportunities, and investigate financing.
Formally or informally, where will key strategic decisions be made ?
Who will make staffing and investment decisions post-merger ?
Who will control scarce resources and key assets?
Do not end up arguing endlessly about whose systems and culture to use.
Make the leadership call early on, clarify who is in charge, take the pain, get the transition over with fast, and don't worry about stepping over toes of people. Err on side of speed rather than being too sensitive about stepping on toes (Welch, podcast, JWI 540, Week8)
Information:
*************
To reduce anxiety, avoid miscommunication and increase trust in the firm, provide information to the employees of the firms, before, during and after the acquisition. Messages are often complicated; information cannot always be shared openly. Different audiences need to get different information at different times and in different formats.
Common errors in this area are: Sharing too much too soon or too little too late.
Define an information sharing process that works for the firm. Develop good measures and feedback around the information sharing to ensure same problems do not recur in future acquisitions.
People:
*********
People are stretched thin before, during, after an acquisition. Demands of integration come on top of regular work. New processes need to be learned and new tasks mastered. Most people are on edge emotionally, struggling to adapt to changes, worried about losing their jobs. This is why the following people management challenges need to be handled with care:
- match right people in right jobs in the new organization to build the skills needed to exploit the strategic advantage an acquisition creates.
- Prepare to face resistance from many people unhappy with the changes.
- Face the unpleasant task of deciding whom to let go and also deal with emotions of those who go and those who stay.
- Balance the needs of the top 20% versus the middle 70%
IV. Partnerships (Week8, Lectur1)
**************
Sometimes A firm can't meet its strategic goals on its own
Lacks resources - people, money, skills, physical or intangible assets, energy - necessary to carry out its strategy.
Options:
Develop internally
Partner with a firm for a short term
Buy the assets, hire the people or the entire firm you need
Between building or developing what you need internally and buying it elsewhere lies partnering with another business.
Benefits of Partnering
***********************
(a) Opportunity to learn fast and fail fast - walk away without trying to salvage a large investment.
(b) Enjoy a high potential upside for a relatively small investment while being protected from serious downside risk.
(c) Share different skill sets and financial risk
Beneficial in High-risk investments: share knowledge and financial exposure.
eg. Green energy industry has great deal of uncertainty around consumer preferences, dominant technologies, regulatory decisions, costs.
(d) Take small stakes in entrepreneurial firm in the form of Joint ventures or partnerships on selected projects.
eg. Rapidly changing high-tech sectors. Cisco & MSFT
Lower cost and higher flexibility than M&A
Different ways to partner
**************************
(i) Informal relationship: Preferred supplier network; agree to give purchasing preference to certain suppliers in exchange for better terms.
(ii) Formal relationship: Contractual agreement; Joint venture in which two firms share ownership of a project or enterprise.
(iii) Strategic Alliance: Formal agreement but not shared ownership.
(iiia) Highly integrated alliance: Functions almost like a formal relationship
Different functions inside both firms are involved from R&D, marketing, customer service, manufacturing, distribution eg. Apple & Nike with ipod sensors
(iiib) Focused alliance: involves a limited part of each partner's business such as manufacturing.
eg.IKEA had long standing mfg arrangements with some supplires, got favorable rates
(iiic) Experimental alliances: shorter duration, project-specific. Temporarily use a partner's distribution network to get customer reaction to
your product in a foreign market.
Risks of Partnering
********************
(i) Difficult to manage
***********************
Partners Not fully committed. Relationship can easily dissolve. Partner can suddenly pull out resulting in a rude suprise.
- Slow in decision making
- reluctant to commit resources
- unwilling to respond with sense or urgency when internal problems arise
(ii) Different objectives
**************************
Partners kid themselves into thinking they will be able to reach their goals
but end up working at cross-purposes
(iii) Betrayal
***************
Malicious partner
Secretly allocates costs from other parts of its business to a Joint Venture, cheating the partner.
Loss of proprietary data, processes, product designs - clear guidelines and safeguards not in place.
Hollow out one partner - cheating partner grabs substantial knowlede, people, resources.
Mole - partner's real intent is to weaken the other firm.
Victim firm does not realize what is happening until it is deeply committed to the partnership and the damage is done.
(iv) Intangible and unquantifiable metrics for success
********************************************************
(v) Constantly Nitpicking a Strong contract
********************************************
Insisting on following the letter of the contract
(vi) Too formal or Too informal relationships
*********************************************
Too informal: No relationships at all
Too formal: Rigidly defined with specified points of communication
To ensure a successful partnership
*********************************
(i) Manage actively
********************
Increase managerial attention more than in-house action items as they focus on risky new activities
(ii) Have clear and shared goals with well-defined targets
***********************************************************
(iii) Have clearly defined and quantified benefits supported by strong business rationale
******************************************************************************************
eg. tangible increase in sales
Intangible benefits could result in less disciplined partnerships
eg. hoping both partners will learn about new markets
need to specify what they hope to learn over a certain time period, how knowledge will be measured, how it will be used.
(iv) Have a strongly worded contract - but never use it to nitpick
*************************************
Mistrust and failure can result from nitpick
Very existence of a contract can lead to success
(v) Monitor progress
********************
Vitally important to good alliances and partnerships.
Do not delegate duties to partner firm and hope for the best.
Explicit metrics and detailed reporting must be used to ensure targets are met, problems are resolved quickly and effectively.
(vi) Create formal and informal connections between partner firms
*****************************************************************
Provide multiple channels of communication about both opportunities and problems.
Encourage informal contact between people from two firms.
Ensure clear accountability so there is never any doubt about who is in charge and where decisions will be made.
(vii) Place qualified management on both sides
**********************************************
Vital to Select, prepare, support, reward qualified managers.
Partnerships complicated by Geos, culture eg. US-China joint venture
No single manager can master all necessary skills without support from home team
(viii) Manage expectations
***************************
Learning mindset - manage expectations about how much can be accomplished
Removes stigma of failure when partnership or alliance dissolves.
Ending or restructuring an alliance is a powerful indicator of success.
Companies may now know enough to pursue similar opportunities on their own or acquire resources they need on a temporary basis.
Wisdom to know what not to do - and not doing it - is among the most valuable contributions of a strategic manager
****************************************************************************
V. Have Exit Strategy clear
***********************
Under what conditions would you walk away from an M&A or Partnership negotiation ?
Think about Risk/Reward and BATNA.
Dr DP
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