mergers & acquisitions lec 1 27th jan

8/14/2019 Mergers & Acquisitions Lec 1 27th Jan

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Mergers & Acquisitions


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THE CHANGE FORCES

The increased pace of M&A activity in

recent years has reflected powerfulchange forces in the world economy.

Ten change forces are identified


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Ten change forces are identified:

The forms, sources, and intensity of

competition have expanded.

New industries have emerged.

While regulations have increased in

some areas, deregulation has takenplace in other industries.


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Ten change forces are identified:

Favorable economic and financial

environments have persisted from 1982

to 1990 and from 1992 to mid-2000.

Within a general environment of strong

economic growth, problems have

developed in individual economies and

industries.


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Overriding all are technological changes,

which include personal computers,

computer services, software, servers, and

the many advances in information

systems, including the Internet.

Improvements in communication and

transportation have created a globaleconomy. Nations have adoptedinternational agreements such as theGeneral Agreement on Tariffs and Trade(GATT) that have resulted in freer trade.


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Operating Efficiency

The next set of factors relates to efficiency

of operations. Economies of scale spread

the large fixed cost of investing in

machinery or computer systems over a

larger number of units.


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Economies of Scope

Economies of scope refer to cost reductions from

operations in related activities.

In the information industry, these wouldrepresent economies of activities in personal

computer (PC) hardware, PC software, server

hardware, server software, the Internet, and

other related activities.


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Combining Complementary

Activities

Another efficiency gain is achieved by

combining complementary activities, for

example, combining a company strong in

research with one strong in marketing.

Mergers to catch up technologically are

illustrated by the series of acquisitions by

AT&T.


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Restructuring Organization

Another major force stimulating M&A and

restructuring activities comprises changes in

industry organization.

An example is the shift in the computer industry

from vertically integrated firms to a horizontal

chain of independent activities.

Dell Computers, for example, has been very successful concentratingon PC sales with only limited activities in the many other segments ofthe value chain of the information industry.


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The economic and financial environments

have also been favorable for deal making.

Strong economic growth, rising stock

prices, and relatively low interest rates

have favored internal growth as well as a

range of M&A activities.


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Individual entrepreneurship has

responded to opportunities and, in turn,

created further dynamism in industrial

activities.

Examples are Bill Gates at Microsoft, AndrewGrove at Intel, Jack Welch at General Electric,

John Chambers at Cisco Systems, and BernieEbbers at MCI WorldCom, among the many.


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CONSEQUENCES OF THE CHANGEFORCES


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MERGER MOVEMENTS


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MERGER MOVEMENTS

The foregoing describes M&A activities beginning in1993,the fifth major merger movementthe era of strategicmegamergers.

This M&A activity exists worldwide, not just in the U.S.

economy. The forces in Europe have been similar to thefactors in the earlier merger movements in the United

States. The four previous merger movements in theUnited States can be briefly summarized:


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First Merger Movement1893 to 1904

The merger movement at the turn of the century was associated

with the completion of the transcontinental railroad system.

It created the first common market. Europe is experiencing

similar forces from its effort at integration.

In relation to the gross domestic product (GDP), this merger

movement in the United States has thus far been of greater

magnitude than any others, so the merger forces in Europe

are very strong. In the United States, major horizontal mergerstook place in steel, oil, telephone, and the basic manufacturing

industries at the time.


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Second Merger Movement1920s

This period was characterized by an

increase in vertical mergers.. Vertical

mergers enabled manufacturers to

control distribution channels more

effectively.

These were associated with the development of the radio, which made

national advertising possible, and the automobile, which permitted more

effective geographic sales and distribution organizations.


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Third Merger Movement1960s

The conglomerate mergers of the 1960srepresented in part an adjustment to the

slowdown in defense expenditures. In every

sample of conglomerates, at least one-halfof the companies were aerospace or natural

resourcedepleting companies (oil,forest).

Also at this time, industries like the food industries, hoping to avoid

their growth being tied down to population growth, diversified.

Much of the diversification at this time was ill advised as companies

moved away from their core competencies.

Also influencing this was the idea that a good manager, with the new

planning literature, could manage anything.


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Fourth Merger Movement1980s

Financial innovations, junk bonds, made all firmsvulnerable to a takeover bid.

Any company that was not performing up to itspotential could be taken over. Chemical Bank andDisney were both almost taken over.

So the availability of high-risk financing stronglypropelled the 1980s and there was somedismantling of the diversification of the 1960s.


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Each of the merger movements in the United States was

driven by a different set of economic and development forces.

But these movements did not occur randomly. A distinct group

of change factors propelled each movement. In the fifth mergermovement described above, more than 50 percent of the M&A

activity in a given year has been accounted for by five or six

industries. However, the identity of the industries has varied at

different time periods.


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The industry characteristics related to

strong M&A pressures can be summarized

as follows:


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1. Telecommunications. Technological

change and deregulation in the United

States and abroad (particularly Europe)

have stimulated efforts to develop a global

presence.


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1. Telecommunications. Technological

change and deregulation in the United

States and abroad (particularly Europe)

have stimulated efforts to develop a global

presence.


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2. Media (movies, records, magazines,

newpapers). Technological changes have

impacted the relationship between the

content and delivery segments.

There is potential overlap in the content of different media outlets. It is anattractive and glamorous industry (attracted Japanese investorsbeginning in late 1980s).


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3. Financial (investment banks, commercial

banks, insurance companies).

Globalization of industries and firms

requires financial services firms to go

global to serve their clients.


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5.Autos, oil and gas, industrial machinery.

All face unique difficulties that give

advantages to size, stimulating M&As to

achieve critical mass. Autos face globalexcess capacity. Oil faces the uncertainty

of price and supply instability due to

actions of the OPEC cartel.


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7. Food, retailing. It is hampered by slow

growth. Food consumption will only grow

at the rate of population growth.

Expanding internationally offersopportunities to grow in new markets.


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8. Natural resources, timber. Both face

exhausting sources of supply. Problems

exist in matching raw material supplies

with manufacturing capacity.


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mergers & acquisitions lec 1 27th jan

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