A marriage made in heaven

Firms have a choice when it comes to growth. The IB syllabus requires consideration of both internal/organic and external growth, and within external growth students need to evaluate joint ventures, strategic alliances, mergers and takeovers as a means of achieving a firm’s growth objectives.

In 2011, PwC the global professional services consultancy put the total value of merger and acquisition deals at $149 billion, up by a third from 2010, with the average deal coming it at $105 million, up from $70 million the previous year. These values came close to the levels seen in 2007, before the global economic slowdown. However, it is predicted that global mergers and acquisitions activity will fall back in the first half of 2012, bringing an end to the recovery that the deal market has enjoyed since the financial crisis.

Certainly, external growth offers the opportunity for firms to grow overnight and to move into markets where they have no existing presence. However, the success of commercial partnerships is mixed and in some cases has led to huge losses for the businesses involved. For example, in 2001 the merger of AOL-Time Warner was seen as a marriage made in heaven, allowing the integrated business to deliver all manner of entertainment to global markets using the internet. It was then, and still remains, the largest merger in American business history. However, the expected synergies between AOL and Time Warner  never materialised and two years later, the company announced a staggering $99 billion loss, which at the time was the largest loss ever reported by a company. In 2003, AOL was dropped from the name of the business and a full demerger took place in 2009. Jeff Bewkes, the chairman and chief executive of Time Warner, has accepted that Time Warner’s merger with AOL was “the biggest mistake in corporate history”.

There are many motives for mergers and acquisitions (M&A), but despite the goal of performance improvement, results from mergers and acquisitions are often disappointing. An excellent slide show of some of the biggest US failed mergers over two decades, with links to detailed summaries of the reasons, was published in Businessweek in April 2009.

A recent report of inorganic growth, summarised by Strategy+Business, shows that deals based on what companies do well (core competencies) are likely to lead to improved performance. The report examines the factors that distinguish companies with a track record of M&A success compared to those where the process is disappointing. In summary, the following factors are likely to underpin successful mergers and acquisitions:

1. Capability access deals. The goal here is to acquire skills and knowledge that the acquiring company lacks.

Example: Walt Disney’s acquisition of Pixar in 2006, provided animation capabilities and added new films it could market to its established audience.

2. Product and category adjacency deals. Here the acquiring company buys another business with a product, service, or brand related to, but not identical to its existing business categories.

Example: Procter & Gamble’s purchase of Gillette in 2005

3. Geographic adjacency deals. The idea is to expand the business into a new location, rather than a new sector or category.

Example:  South African Breweries’ purchases of Miller (U.S.) in 2002 and Bavaria Brewery (Colombia) in 2005.

4. Consolidation deals. These deals take advantage of synergies and economies of scale, usually between two companies with similar businesses.

Example: The Delta–Northwest merger in 2008.

5. Diversification deals. These deals allows companies to enter a new or unrelated sector, with the aim of insulating results against fluctuations in the business cycle.

Example: Philip Morris: Diversification Away from the Core Business

Anticipating that the cigarette industry would decline in the future, Philip Morris decided to diversify its product offerings and looked for acquisitions of unrelated products to decrease dependence on the future of tobacco. In 1970 it acquired Millers’ Brewing for $ 227 million. Miller was the eighth largest U.S. brewer with a 4.4% market share. Philip Morris increased Miller production, introduced new lines of products (Miller Malt Liquor, Milwaukee Ale, Miller Ale), acquired Meister Brau in 1972, and in 1975 introduced Miller Lite. By 1972, under Philip Morris Miller grew to the 3rd largest brewer, behind Schlitz; in 1980, Miller overtook Schlitz to become the second largest brewer. Today Philip Morris Companies is a holding company with a diversified product offering: Miller Brewing, General Foods (acquired, 1985), Kraft, Oscar Meyer (acquired, 1981), and Philip Morris. In 1989, tobacco products accounted for 40% of sales, food products accounted for 51%, and beer accounted for 8%.

Source: Management Guru

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IB-style questions

1. Distinguish between a ‘merger’ and a ‘takeover’.

2. Explain the concept of synergies following an M&A.

3. Applying Ansoff’s matrix, classify the growth strategies identifed in the Strategy+Business report, and provide an example of each.

4. Select one of the M&A examples and evaluate extrenal growth as a method of business expansion.

 

Class Assignment

Students investigate one of the M&A deals in this post and produce a report evaluating the success or failure. To achieve this they:

  • Analyse the reasons for the M&A and prepare a a PEST analysis. What synergies were expected?
  • Investigate more widely the political and economic factors affecting the merged firm
  • Examine the effect of the M&A on market share, sales revenues, costs and profits

 

Sources:

NYTimes Aol-Time Warner Delta-North West Disney-Pixar

Strategy+Business.com

Knowledge@Wharton

Bloomberg BusinessWeek

Business week SAB-Miller

2 Comments
  • Jane EAGERS
    March 17, 2012

    Thanks Paul,

    I’ve sent this as link to one of my yr 12’s who’s looking at mergers for his extended essay……better than communication!!!

    • Paul Clark
      March 18, 2012

      Thanks Jane – glad it was helpful. See you soon I hope.
      Paul

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