Internal development
When a firm invests in its own structure.
- Increases its size: new facilities, new staff, new machinery…
- Investment in new production factors that improve output capacity.
Internal development/growth= organic or natural growth:
- Deploys core competences
- Focuses them on expansion of current business or in the implementation of other new ones.
External development
When one firm purchases/invests in/associates with/controls other firms or the assets of those firms that are already in operation.
- Increases firms size by adding into its net worth the output capacity from the firm/assets integrated.
- Like internal, external can also mean expanding the current business or entering new one.
External development means: mergers, acquisitions or strategic alliances.
Reasons for external development:
- Economic performance
- Market power
- Other factors
Economic performance
- Reduction in operating costs (economies of scale, scope, synergies)
- Reduction in transaction costs
- Obtaining resources and capabilities (learning)
- Placement of surplus funds
- Replacement of management team (M&A)
- Fiscal incentives (M&A)
- Market power
- Gateway to an industry or country: overcoming entry barrier into industry/country
- Reduction in an industry’s level of competition (because when firms merge, this means an increase in the market power of the resulting firm) or influence/control on future development of industry
- Exploiting the advantages of vertical integration (this happens when mergers are vertical) means economic performance and market positioning.
- Suitable size for competing in a global market: to become a top-tier international competitor
- Other factors
- Managers own objectives (empire building=accomplish their utility function: remuneration, power, lower risk, social recognition, and not the objective of creating value for shareholders) (M&A)
- Industry mood: trends or fashion
- Combining the advantages of flexibility and specialization (alliances)
- Reducing the risk and uncertainty of investments (alliances)
M&A reasons:
- Replacement of the management team
- Right to tax breaks
Alliance reasons:
- Firms resort to cooperation as an alternative to an M&A
- Keeping management teams separate
- This leads to reduction in risks and uncertainty associated with major investments
External development processes are explains through number of these factors, not just one.
Advantages of external development:
- Faster than internal
- Facilitates processes of unrelated diversification in internationalization
- Leads to better choice for the right moment in which to enter an industry or a country
- Easier to enter mature industries.
Drawbacks for M&A only include:
- Do not always lead to the best decisions in the management of the growth process
- They require a process of information gathering and negotiating from target firm: not always easy
- Costly cause of duplicate assets, need to restructure… (except on certain occasions: poor management, economic/financial problems, etc…)
- Problems arise from: integration of the operational, organizational, cultural systems of the merging firms.
- Constraints by authorities: to preserve free market competition.
TYPES OF EXTERNAL DEVELOPMENT
- Merger=integration of 2 or more firms whereby at least 1 of the original ones disappears
- Acquisition=operation in which shares are traded between 2 firms, with each one keeping their own legal personality
- Cooperation or strategic alliances=relation between firms through specific legal arrangements/explicit or tacit agreements, and each firm keeps legal and operational independence.
All types of relationship between firms can be:
- Horizontal= when firms compete with each other and belong to the same industry
- Vertical= when firms are at different stages of cycle of exploitation of a product
- Complementary= when firms have no vertical relationship nor have they got direct competitors.
PURE MERGERS
when 2 or more firms, generally of similar size, agree to join forces, and incorporate all their resources (assets, property, rights, liabilities). The original firms disappear to be replaced by a new one
A et B -> C
MERGER BY TAKEOVER/ACQUISITION
1 firm disappears, equity is transferred to the other company. The B firm is wound up.
A et B -> A’
MERGER WITH A PARTIAL ASSETS TRANSFER
same as takeover/acquisition, but only part of 1 firms assets are transferred. And this firm is NOT wound up.
Aa et B -> C
Aa et B -> B
ACQUISITIONS :Can give rise to different degrees of control according to the amount of shareholder capital in acquired:
- Absolute
- Majority
- Minority
And depends on the way shares are distributed:
- Many shares amongst few individuals
- Not many for a large number of individuals
2 ways of buying a company:
- Leveraged Buyout LBO= means financing part of a firm’s sales price through borrowing. When the purchasing party is the target firm’s management team à Management Buyout MBO.
- A public takeover bid= when a firm makes an offer to buy all or part of the shareholder capital.
Firm deconcentration
= absence of growth (instead: splitting the firm’s net worth into several legally independent ones) +reduction in size (except if new firms incorporated continue to be part of the business group
- break up/split
- spin-off
Break-up/split=
when firm A gives all net worth to several new or pre-existing firms B and C, and then winds up.
- Pure demerger= when different parts of the net worth allocated to new companies
- Demerger/takeover= when recipient companies already exist
- Most complex case of demerger and merger= when net worth of demerged firm and pre-existing firm are combined to make a new firm
A -> B and C
Spin-off/demerger=
when part of net worth (a) of an existing company A is broken down to form legally independent firm.
Break-ups and spin-offs arise:
- To reorganise legal structure of firm.
- To restructure strategy through operations involving sale, harvest, winding-up of business.
- When divesting part of firm’s operations in response to authorities’ decisions.
Aa -> A et a
MANAGING MERGERS AND ACQUISITIONS
A. Choosing the target firm:
- Information gathering: identifying characteristics of the targeted firm
- Price setting
- Financing method
B. Organisational and cultural integration:
- Organisational design: job descriptions, chain of command, units, size of units, etc.
- Administrative processes: standardisation of processes, communication systems, performance
monitoring, etc.
- HR policy
- Organisational culture: values, beliefs, behaviour, rituals, etc.
C. Operations integration:
- Restructuring the resulting firm: synergies, staff, integration of systems, assets doubles? Etc.
- Compatibility of processes
D. Anti-trust laws:
- Spanish legislation
- European legislation
Strategic alliance/cooperation between firms=
agreement between 2 or more separate firms that by joining or
sharing their resources and/or capabilities, although not merging, introduce a certain degree of interrelation with a view to reinforcing their CAs. (FERNANDEZ SANCHEZ)
GARCIA CANAL summarises with these 6 points:
No dominance of one firm over the other
- Coordination of future actions
- Loss of organizational independence
- Blurring of the organisations boundaries
- Interdependence
- Achieving a goal.
Objective: greater balance between performance and flexibility, because management teams are kept separate
Pitfalls:
Undermining of a firm’s competitive positioning
- No delegation of power
- Loss of independence
- Costs in time and money
- Greater organisational complexity
- May be diverging interests
- Lack of trust and commitmen
