Diversification Using Mergers and Acquisitions

 

Diversification Using Mergers and Acquisitions

 

Companies often implement corporate-level acquisition strategies to achieve product diversification that can build core competencies.  In fact, acquisition strategy is the most common means of implementing diversification.  For each strategy discussed in the book, including diversification and merger and acquisition strategies, the company creates value only when its resources, capabilities, and core competencies are used productively.

 

Companies from different industries decide to use an acquisition strategy for several reasons; however, acquisition strategies are not without problems.  When acquisitions contribute to poor performance, a company may deem it necessary to restructure its operations.

 

Driven by M&A

 

Imagine Maruti Suzuki merging with Ford India.  Or Daewoo Motors and Fiat India becoming a part of General Motors India.  Or Hindustan Motors merging with Mercedes Benz India.

Sounds farfetched?  Not really.  In the race to expand their product portfolio for global market dominance, auto companies have gone into a deal frenzy.

Ending their 2-year search for partners, global auto giants DaimlerChrysler and Mitsubishi Motors recently tied the knot, whereby the debt-heavy Japanese company gets $2.04 billion from the German giant for a 34 percent stake.

 

the new alliances
Who…	…bought what…	…from whom…	… how much
General Motors	20% of Fiat	Agnelli Family	$2.40 bn
Daimler-Chrysler	34% of Mitsubishi Motor	Mitsubishi Motors	$2.04 bn
Volkswagen	34% of Scania	A Holding Investor	$1.60 bn
Ford Motor Co.	Land Rover	BMW	$2.90 bn

 

Just weeks before that, General Motors had bought the promoter Agnelli family's stake in Fiat, the Italian auto major.  Not to be left out, Ford Motor Company acquired the British sports utility vehicle brand, Land Rover, from BMW for $2.9 billion. The American No.2 in the automobile sector already owns stakes in other Asian car manufacturers such as Mazda, Suzuki, and Nissan.  All this, even as the ailing Daewoo Motors is scouting for a buyer, and Honda strikes a deal with General Motors to supply engines.

The rationale behind the alliances?  To make inroads into the growing Asian markets.  The Americans and Europeans cannot do that effectively today because they do not make the kind of small cars that consumers in Asia prefer.  Acquiring, or tying up with the popular Asian brands, will give them marketshare, without adding to the industry capacity.

 

A majority of deals fail to thrive due to post-deal issues, as organizations are unable to harness their synergies.  A Harvard study indicates that in 59 percent of the deals, market adjusted return of the company went down. First India witnessed acquisitions in the consumer and industrial products sector.  Last year, telecom and ICE were predominant sectors.  Oil and gas will probably be the upcoming sector for acquisitions in the coming year.  Private equity is still not very mature in India - a departure from the global trend.

 

A number of acquisitions took place during boom time. Given current market conditions, many organizations that relied on their soaring stock prices for doing big deals are facing tough circumstances.  Only those deals that have a strong potential to shorten time-to-market and increase market-share will survive.

 

In 1999 alone, $3.4 trillion was spent worldwide on mergers and acquisitions, up from $2.5 trillion in 1998 and $464 billion in 1990.  In the United States in 1999, $1.75 trillion in deals were announced, compared to $1.6 trillion in 1998 and $195 billion in 1990.

 

While it seems logical to expect that shareholders of acquiring companies should have received strong positive returns from these mergers, this did not appear to be the case.  In fact, research indicates the opposite: shareholders of acquired companies enjoyed significant positive returns while, on average, shareholders of acquiring companies received a zero return. And, some of this acquisition activity (and over-diversification by some companies) resulted in negative returns and a trend toward restructuring in many companies.

 

Remember, restructuring involves companies acquiring and divesting businesses (in many instances, businesses acquired in previous years) or assets to strategically refocus their operations--by becoming less diversified--and to develop effective core competencies.

 

FIGURE 5.6 Acquisition Strategies: Reasons and Problems