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ESSAY QUESTION MODULE 2

1. Present 7/10 common questions about M & A?


• Why do companies merge or acquire other companies?
Companies merge with other companies or acquire other companies
in order to improve their own competitive advantage. A company may have
reached a level of development where it needs new qualities that it is either
unable or unwilling to develop internally. The company may choose to
merge with or acquire another company in order to obtain certain skills.
Companies also merge or acquire on a nonstrategic basis.
Acquisitions in particular are often carried out on a speculative basis where
a company is purchased with the specific objective of selling it off later at a
higher price.
• How does a company choose between a merger and an acquisition?
Mergers and acquisitions both involve the combination of existing
companies into a new larger whole.
In the case of a merger, both organisations negotiate around the
terms and conditions of the merger and seek shareholder support.
In an acquisition one company buys another company. In some cases
there may be no negotiation or prior approval.
In most cases of a merger of equals both companies must be
prepared to make significant organisational changes and variations in
working practices. If a company is not prepared to do this, a simple
acquisition might be a more favourable option.
• What is strategic focus?
Strategic focus is concerned with how a company focuses on its core
strategy. As companies develop they establish a number of core
areas around which everything else evolves. These are the key
competencies that are central to the achievement of strategic
objectives and are defined by some form of strategic planning.
• What is strategic drift?
Strategic drift is the tendency for companies to drift off the course
set to achieve their strategic objectives. If the current and desired
positions are known, it is generally possible to plot a course between
these two positions along which the company must progress. In
practice, the company might drift away from this course for one or
more different reasons. There may be largescale impacts on the
organisation from external events. Alternatively there may be
insufficient control over the application of the organisation’s
resources.
• How do mergers differ from strategic alliances?
Mergers involve the combination of two companies into one new
company. In some cases the former companies can exist in a more or less
selfcontained state within the merger, but they are still a part of the new
company.
In a strategic alliance, two companies work together as partners. A
strategic alliance gives the two companies the opportunity to ‘check each
other out’ and ascertain whether or not a full merger would serve the
interests of both parties.
• Are mergers and acquisitions always between related companies?
A significant proportion of mergers and acquisitions are between
similar or apparently related companies. There is some evidence to suggest
that it is considerably less risky and the likelihood of success is far greater
where merging or acquiring companies ‘stick to familiar ground’. An
example of a related merger is the merger of two oil producers, leading to
the creation of a production giant.
Another significant proportion of mergers is taken up by basically
dissimilar companies that combine to make use of their indirectly related
resources. An example of this is the merger of a retail organisation with an
Internet service provider.
The final scenario is unrelated diversification, where companies
acquire other companies in unrelated sectors or industries. The unrelated
diversification approach was intended both to spread risk across a range of
ventures and to allow dynamic balancing between sectors of the economy
that were expanding against those that were contracting.
• Why do so many mergers appear to go wrong?
Mergers and acquisitions appear to go wrong because they are not
accurately assessed initially, the timescale of evaluation is too short, and
above all because the underlying rationale is degraded during
implementation, frequently as a result of cultural integration issues.

2. What are the differences between business strategy and corporate strategy.
Present 6 primary headings of resource-base view and 2 primary headings
of risk –based view in strategic alliances?
• Business strategy is concerned with how a company should compete
in each of its selected business areas,
• Corporate strategy is concerned with business diversification and
primarily with the selection of businesses in which the company
should be active.
• The Resource-Based View
 Finance. The financial heading relates primarily to the
availability of capital.
 Technology. This heading refers to the technology inherent in
the operational processes. A typical subset is research and
development and the innovation and development of new
products. It also includes any patents or trade marks that
might apply to the use of specific processes.
 People. The people heading includes the competency profile
of the employees. It also includes control over the use of this
competency profile, such as restrictions imposed by
intellectual property rights.
 Production. This heading includes production equipment,
supplies, access to raw materials, production and product
secrets and innovations.
 Management. This heading includes the management
competency of the organisation. Typical specific examples
include knowledge of the market (local knowledge) and
experience of the product.
 Brand. The larger partners are likely to have a unique brand
image. A particularly powerful brand image can be central to
the success of the alliance.
• The Risk-Based View
Partner risk relates to the risk of there being problems in the degree
of cooperation that develops among the various members of the
strategic alliance. In order to succeed, the alliance has to contain a
level of mutual trust and cooperation, especially where high-risk
items such as secret technology or high levels of finance are
involved.
Outcome risk relates to the likelihood of a given strategic objective
or set of objectives not being achieved, or, if they are achieved, that
the outcome will turn out to be less than or different from
expectations.
3. What is strategic fit, give some example of this?
Strategic mergers and acquisitions should generate a new
organisation with a good strategic fit. One of the most important
aspects of strategic fit is that the merger should allow the two
companies involved to use their respective strengths and overcome
their weaknesses. Strategic fit is based on the concept of synergy.
Examples:
Production and technology. A manufacturing company that
acquires one of its own suppliers is an obvious example of a good
technological strategic fit.
An example is that of an entertainment company merging
with an Internet company. The entertainment company may be able
to make use of the Internet company’s technology to market, sell and
distribute its products.
Culture. The issue of cultural fit is often underaddressed.
People tend to become established in their ways of doing
things, and it can be very difficult to make major modifications in
this respect. In considering strategic fit it is very important to
consider the compatibility of the two cultures and to assess the
extent to which they can be integrated.
One obvious example is the acquisition by a highly formal,
functionaly structured organisation of one with an informal project-
based research and development structure.
Customers. Two companies may have similar customer bases,
and by merging they may be able to exploit these bases more
effectively. Two airline companies could merge and as a result
deliver more flights where the joint customer base is expanding.
Support. It is generally possible to improve the efficiency of
support functions by merging, simply as a result of the economies of
scale generated.
Brand. A company brand can sometimes be improved by a
merger or acquisition. A large, lowbrand image organisation could
achieve an excellent strategic fit by acquiring a smaller, highbrand
image target.
Resources. In some cases the resources owned by a potential
target might be seen as an opportunity to achieve a good strategic fit.
A speculative finance or development company might show an
interest in a smaller company that, for example, owns attractive
areas of land in highvalue or potentially highvalue areas.

4. Advantages and disadvantages of unrelated diversification?


Advantages
• Market risk can be diversified across a range of sectors or industries.
• The company technically has a greater range of investment options.
• Capital investment can be balanced across a range of different
options.
• ‘Footholds’ can be created in potential growth industries or sectors.
• Revenue can be protected to some extent by the use of diversified
sources.
• Synergies can sometimes be generated by developing different
interests concurrently.
• Value can be added where diversified targets are well-chosen.
Disadvantages
• Manage and control all aspects of the conglomerate;
• Accurately detect and correct problems in one or more remote
sections of the conglomerate;
• Track each individual operation and detect problems quickly;
• Design and maintain a reliable enterprise wide risk management
system;
• Acquire and retain sufficient top level management staff;
• Align individual company and conglomerate strategic plans;
• Identify and exploit potential enterprise wide synergies;
• Evaluate the relative performance of the diversified sections;
• Be able to manage a serious problem is a remote section relating to
sector-specific issues.
5. Present reasons why turnaround might be preferable to divesture?
Longterm strategy. In some cases acquired companies may be seen as
vital to the longterm success of the company. This strategy might accept
that shortterm losses are inevitable if longterm profitability is to be
achieved. Such a situation could occur where an established company
acquires a specialist research and development (R&D) company.
Restoration of subsidiary profitability. The next option is to bring the
subsidiary back to profitability. In most cases this applies where continued
longterm subsidisation is not acceptable, and the problematic subsidiary
is set a target of returning to profitability. There is usually a time limit
within which the turnaround has to take place. If the subsidiary fails to
turn around, divestiture may become necessary. In some cases companies
may combine turnaround strategies with riskspreading strategies such as
unrelated diversification.
Portfolio balance. Another option is to develop a balanced portfolio where
variations in productivity balance each other out. This approach is widely
used in conglomerates whose strategy has been based on unrelated
diversification. Short- to medium-term fluctuations in one sector or industry
can be balanced by counter fluctuations in other sectors or industries.
Portfolio restructuring. Companies sometimes retain lossmaking
subsidiaries because they are regarded as being essential to the longterm
achievement of strategic objectives as discussed above, or because they are
active in sectors or industries that are strategically attractive or which
provide excellent potential for future growth.
This restructuring could include the divestiture of some companies and the
acquisition of others. Such restructuring often becomes necessary where:
– the core business encounter problems;
– the longterm future prospects of the portfolio become doubtful;
– a fortuitous business opportunity arises, and profitable companies have
to be divested to finance the exploitation of this opportunity;
– the company adopts a new strategy;
– new technology or practices emerge that render the existing portfolio
obsolete;
– large sections of the existing portfolio (both core and noncore) encounter
problems.
6. There is probably no single set of variables and characteristics that define
the ideal merger but perhaps, there may be a set characteristics that define
the potential for a very good merger. Please indicate Six primary
characteristics that should be present in order to provide the greatest
likelihood of a successful outcome of a ideal strategic merger
These characteristics are listed below.
• The target should be investigated in great detail and with great care
before the acquirer makes a commitment to acquire.
• The core business activities of the target should be compatible with,
and ideally complement, the core business activities of the acquirer.
• The acquisition should be friendly as opposed to hostile. Ideally the
acquisition should be welcomed by the target.
• The acquisition should not involve a largescale increase in debt for
the acquirer.
• Both the acquirer and the target should be accustomed to change and
should have reliable change management systems in place.
• Ideally both the target and the acquirer should have a commitment to
research, development and constant innovation.

7. Present Porter’s primary and secondary activities in value chain


Porter’s primary activities are as listed below.
• Inbound logistics. This activity involves the supplier relationship
management together with all of the activities necessary to receive,
process, store and distribute the primary production inputs.
• Operations. This activity embraces the activities that are used in
converting inputs (raw materials) to outputs (finished products). For
a manufacturing company, operations includes all aspects of the
manufacturing process itself.
• Outbound logistics. This includes all of the activities required to
gather, store and distribute the outputs. In the case of a
manufacturing company it includes the collection of products from
the production lines, temporary storage and subsequent distribution
and delivery of the finished products to the customer.
• Marketing and sales. This activity includes all the activities
necessary to advertise and promote the outputs, persuading
customers to buy the outputs and assisting in purchasing.
• Service. This includes all the activities necessary in order to ensure
that outputs are installed and operated effectively by the customer
base. In some cases this may include aftersales replacement or repair
of products under warranty. Service includes many aspects of the
customer relationship management process.
Porter’s secondary activities are as listed below.
• Procurement. This involves the acquisition of the inputs for the
production process. It includes supplier selection, supply price
negotiation, contract formulation and ordering.
• Human resource management. This element includes all the
activities involved in supplying adequate human resources including
interviewing, hiring, training, personal development and reward.
• Technological development. This activity includes the management
and development of the technological processes that are central to
the production process, and product/services, and research and
development. It includes IT and technological research and
development.
• Infrastructure. The infrastructure provides the background structure
holding the organisation together. It includes authority and
communication linkages, together with the usual support
departments including finance, accounting, customer interface and
quality control.

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