Based on eight years of research at 20 companies involved in 30 mergers or acquisitions in the United States, Europe and Asia, this book argues that too much attention is paid to takeover strategies and not enough to developing resources after they have been acquired. This book aims to redress this balance by devoting as much space to the issues that arise after an acquisition or takeover as to the measures needed to pull off the initial business coup.
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Philippe Haspeslagh is Associate Professor of Business Policy at INSEAD in Fontainebleau, France, and Director of its Strategic Issues in Mergers and Acquisitions Executive Program. David Jemison is Associate Professor of Management and Joseph Paschal Dreibelbis Faculty Fellow at the University of Texas at Austin. This book is based on the authors' research on acquisitions in ten countries as well as their experience as educators and advisors in the area of acquisition management and corporate development in international firms.Excerpt. © Reprinted by permission. All rights reserved.:
Mastering the Acquisition Process
The Key to Value Creation
Acquisitions have a unique potential to transform firms and to contribute to corporate renewal. They can help a firm renew its market positions at a speed not achievable through internal development. They can provide an ability to gain all the benefits from combining assets and sharing capabilities in a way not obtainable through partnerships. More profoundly, however, acquisitions can bring into a company capabilities the organization finds hard to develop, or they can provide the opportunity to leverage existing capabilities into much more significant positions.
The aim of this book is to help unshackle the potential of mergers and acquisitions by providing a perspective that differs from the prevailing financial, or even strategic, views. Our primary message is that key differences between acquisition success and failure lie in understanding and better managing the processes by which acquisition decisions are made and by which they are integrated.
Our arguments are directed to managers, executives, and directors of firms whose acquisitions are driven by strategic, not simply financial, motives for corporate renewal. They also address the interests of scholars concerned with how strategic factors, organizational factors, and performance interact in acquisitions.
In the past, acquisitions tended to come in distinct waves, but in the eighties acquisitions became an increasingly broad-based phenomenon as firms renewed their competitive positions, as industry after industry went through its own wave of restructuring, and as acquisition activity spread across the globe. Although it is too early to tell to whether the current level of acquisitive activity will continue or is just another wave, its composition is more varied and its nature more international than those of earlier waves.
In the United States, acquisition transactions in excess of $35 million increased from $186.4 billion in 1985 to $234.1 billion in 1989. Of these totals, acquisitions by European firms accounted for $28.8 billion, or 12.3 percent, compared with $4.5 billion in 1985, a figure that represented 2.4 percent then. Recently Japanese finns have begun to make acquisitions in the United States, moving from $126.5 million in 1985 to $7 billion in 1989, which is still only 3 percent of all acquisition transactions. Notwithstanding the publicity received by hostile takeovers during the period, the number of hostile bids in the United States was relatively small. During the period 1985-1989 there were only 114 such hostile takeover contests with a purchase price of more than $50 million. Of these, only thirty-eight were ultimately acquired.
In Europe, acquisition activity has not traditionally been as intense as it has been in the United States. Only Great Britain has an American-style market for corporate control. Yet with $87.1 billion of recorded acquisitions in 1989, European acquisition activity had increased eight-fold since 1985, a figure that might be underestimated, given the less complete reporting of transactions involving privately held firms. In terms of value, cross-border acquisitions had risen from 13 percent in 1985 to 36 percent in 1989, as the move to an integrated Europe gathered steam toward a unified market in 1992. Strong regional differences persisted, born out of different traditions and regulatory contexts.
In the meantime, Japan, which historically had known acquisitions mainly as an orderly rescue for troubled firms, was warming up to acquisitive development. The number of acquisitions involving Japanese companies increased from 289 in 1985 to 660 in 1989. Of this 1989 total, only fifteen were acquisitions by foreign companies in Japan.
In sum, going into the nineties, the acquisition phenomenon appeared increasingly broad based, fragmented, and global. Yet the issue of making acquisitions work has been relatively ignored by the academic literature, as well as by the media coverage of large takeovers. Ironically, while the public's attention has been turned to raiders, hostile takeovers, and financial acquisitions, the great preponderance of acquisitions in the United States and the United Kingdom, and almost all the activity in Continental Europe and Japan, has been strategic, generally amicable, and among firms and management groups who have neither sought nor encouraged publicity. Public attention is focused on the wrong issues for understandable reasons. After all, hostile takeovers by rapacious acquirers make far more interesting stories than friendly divisional acquisitions that contribute to the patient renewal of a firm's capabilities and competitive position.
THE DEBATE ABOUT ACQUISITIONS
Acquisitions have engendered an important debate among managers, public policy makers, and academics about their effects on, and importance to, economic welfare. Most of the academic research on acquisitions focuses on the financial impact of acquisition transactions, logical prescriptions for screening acquisition candidates, or the effect of acquisitions on the people or communities involved. While these issues are clearly complex, there is common agreement that from the perspective of the acquiring company, many acquisitions fail to accomplish their purpose. But the factors associated with these disappointing acquisition experiences are not addressed. We suggest that a focus on the pre-acquisition decision making and the post-acquisition integration processes will lead to new insights into how acquisitions can be used more effectively for strategic renewal.
PROBLEMS IN ACQUISITION DECISION MAKING
The problems frequently presented by pre-acquisition decision making are not self-evident. Whatever the pressures for time and secrecy that surround acquisition decisions, companies and managers do not make such decisions lightly, and they expend substantial resources to make the best decision possible. Yet they readily acknowledge frustrations with the process, as illustrated by this manager, whose acquisition we studied:
The speed with which things took place was mind-boggling. If we had done that sort of quickie analysis for a capital expenditure decision, the board's audit committee would have been down around our ears in a minute.
Chief financial officer of an acquiring firm
In an environment often characterized by real or perceived pressures for speed and secrecy, many managers and specialists engage not only in a process of analysis and evaluation, but also in a process of internal selling and negotiation, the outcome of which is not only an agreement to bid a certain price, but also a much more complex view of how the acquisition will be justified. As our research has revealed, despite all formal analysis and due process, the quality of that justification is often wanting, as acknowledged by another manager we interviewed:
A big justification for the merger was to cross-sell to each other's customers. But we made money in such different ways [fee for service versus interest income] that...nobody spoke the same language. Ultimately, we discovered that the fundamental characteristics of our customer bases were quite different and there wasn't nearly as much overlap as we had originally thought or hoped for.
Senior executive of an acquiring bank
THE PROBLEMS OF INTEGRATION
Decision-making problems are only a part of the story. Even if an acquisition opportunity is sound, the expected synergies have to be realized during the integration phase. Here, too, the contrast in experiences is stark. Consider the following comments from firms that were less experienced in acquisitions:
The chairman and president brought the top 10 people from both finns together and told us that we had a lot of potential if we could merge product lines and use each other's systems. They then told us that although there would be some start-up costs, they were confident that synergies would more than outweigh these and that we shouldn't have a performance dip. After they left the room, the two sides sat stating at each other, wondering why we were there and how we were going to make it work.
Executive from an acquired financial services firm
We were cast adrift...there was no support for us within the parent firm and nobody understood what we were. This was OK until the managers sent by the parent arrived with no instructions about what to do except make money.
Manager in a finance company acquired by a bank
The lack of direction that comes through in these remarks contrasts sharply with the sense of purpose that stands out in comments by experienced acquirers:
We knew from day one that they had to retain their entrepreneurial, market-oriented culture and be run at arm's length. Yet at the same time, we had to find ways to get the synergy.
Manager in ICI after the Beatrice Chemicals acquisition
When we make an acquisition, we adopt a centralized approach from the outset. We have a definite plan worked out when we go in, and there is virtually no need for extended discussions.
Manager in Electrolux after acquiring Zanussi
A lot of the success [with the integration] stemmed from the [negotiation of a] policy statement. The statement itself went into the drawer and never came out again. Its importance was that through protracted negotiations over every clause, each side came to understand the primary concerns of the other, and most importantly that trust and commitment was built up.
Managing Director, British Petroleum's Nutrition business
Why do some companies seem to handle acquisition decisions well when others do not? Why are some able to provide direction to integration efforts where others fail? In this book we describe the process by which value is created by firms, explore the ways in which acquisitions can contribute to value creation, and then address solutions to problems that management teams encounter when they use acquisitions as part of their overall corporate renewal strategies. Understanding this process of value creation, however, will require a shift in conception of the firm from a focus on immediate financial outcomes or current product-market positions to the capabilities that underlie these positions or financial results in the long term.
KEY CHALLENGES IN MANAGING ACQUISITIONS
Our research has identified four common challenges in managing acquisitions:
* Ensuring that acquisitions support the firm's overall corporate renewal strategy.
* Developing a pre-acquisition decision-making process that will allow consideration of the "fight" acquisitions and that will develop for any particular acquisition a meaningful justification, given limited information and the need for speed and secrecy.
* Managing the post-acquisition integration process to create the value hoped for when the acquisition was conceived.
* Fostering both acquisition-specific and broader organizational learning from the exposure to the acquisition
The variety and range of issues involved in strategic acquisitions are quite broad, as illustrated by the following example.
Strategic Acquisitions: The Case of BASF
For senior managers in BASF, one of Germany's diversified chemical giants, the spring of 1985 was a fascinating time. The Vorstand, as the management committee of German companies is called, was considering three different acquisition opportunities in the United States. The combined value of these acquisitions was $1.3 billion, which would significantly shift the geographic and business portfolio of the group.
One involved a bid for Inmont, the U.S. paint manufacturer. The acquisition would bring capabilities to project BASF's Paints division into one of the top three positions in the automotive paints sector, which was becoming increasingly concentrated and global (PPG and Du Pont were the other leading companies). At the same time, however, Inmont's printing ink businesses would present a considerable organizational challenge in an area where BASF was present but had had, until now, limited ambitions. The auction of Inmont involved many of BASF's traditional competitors, including ICI and Akzo.
Akzo, considered one of the most eager candidate buyers for Inmont, was at the same time the prospective seller in a second acquisition decision BASF was facing: the purchase of American Enka's fiber business. The logic here was quite straightforward: Enka's Fibres business strengthened BASF's vertically integrated position in the U.S.-fibers market and provided captive use for the company's American caprolactam facilities.
The third acquisition, a bid for Celanese Corporation's advanced composites businesses, was quite different. Whereas current applications of advanced composites were mainly in aerospace and military and civilian aviation, future applications foreseen for this industry were vast. These composites would provide high-performance substitutes for higher-volume automotive components and other applications. Despite its early position, Celanese had decided it could not wait for the payoffs from its investment to come. BASF, like other bidders, had to decide whether it was willing to pay a big premium for the opportunity to make the future investments required to develop the capabilities it would need to remain a key player in this emerging industry.
These three acquisitions illustrate the interwoven nature of strategic acquisition and divestiture activity among firms, not only in the chemical industry, but in a vast array of fields ranging from power equipment to consumer goods to financial services to publishing to transportation. Above all, they illustrate how the over-publicized deal-making aspect is only the tip of the iceberg in terms of the challenges faced by managers who make strategic acquisitions.
Challenge #1: Consistency with Strategy
Acquisitions are strategic decisions that can both reinforce and change a firm's direction. But ensuring that acquisition decisions are consistent with strategy is difficult, no matter how clear top management is about its current strategy or how disciplined a strategic planning process a company has. Individual acquisition opportunities call a firm's strategy into question almost as often as they fit with it. When should acquisition opportunities that fall outside the scope of the strategy be discarded, and when should they be embraced as a new potential thrust for the firm? Each of the three BASF acquisitions is an example of this ambiguous relationship between acquisitions and strategy:
* The Enka acquisition was fairly straightforward as a logical way of implementing the company's well-defined strategy of building a strong vertically integrated position in the United States.
* The Inmont acquisition opportunity, on the other hand, did not fit with the recently approved strategy for the Paints Division. The company had already tried to penetrate the U.S. automotive paints market on a much smaller scale through Glasurit America Inc. But in absence of a realistic chance to acquire significant market share, since then the division manager had received approval for a more modest European strategy. Now, with Inmont as a possibility, the board encouraged him not only to analyze Inmont, but also redefine a new divisional strategy including a much higher use of the group's cash flow.
* The Celanese acquisition, on the other hand, was in an area where the group did not yet have significant resources, apart
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