Category Archives: M&A

Turning Around Chrysler … Again

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This clip is an interview to Sergio Marchionne, CEO of FIAT and Chrysler, from “60 minutes.” Marchionne explains the process of transforming the struggling company into a profitable contender in the world market. This helps to introduce topics such as merger integration, alliances, strategy implementation, and turnaround strategy. There has been some buzz about Chrysler having an IPO. This adds an important stakeholder component since the main barrier to the IPO is disagreement on the purchase price for shares owned by the autoworker healthcare trust (42% of outstanding shares).

Contributed by Elisa Operti

Aventures Gastronomiques: Recursed

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You may recall the Gourmet Adventures exercise on the winners’ curse in M&A. This is a nice exercise to emphasize the risk of overbidding in M&A. Elisa Operti has taken this a step further. She writes: “I love using the Gourmet Adventures exercise in my Corporate Strategy course. I have been teaching in France and Italy in recent years. Thus, I developed a European version of the game (see the Aventures Gastronomiques Instruction sheet). I use a jar with 1€ coins, 10cents coins and 5cents and updated all the references (diameter, labels, etc…). I’ve labeled the restaurant chains after the French hero celebrated on each type of Euro coin. As a final suggestion, I found that, in this context, the game works perfectly with small groups (3-4 students).” The only thing I might add to this is that you may want to use coins from different countries to capture how country risk may increase the risk of the winners’ curse (e.g., it introduces more error/uncertainty into the valuations). Often students have been introduced to the concept of the winners curse. The point here is to emphasize that the strategic aspects of M&A (country risk, diversified targets, synergies, etc.) increase the risk by injecting uncertainty into valuations.

Contributed by Elisa Operti

Boycotting HBR? Some Alternatives…

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You may have followed the debate about HBR’s policy prohibiting professors from linking suggested HBR readings to their own library’s paid subscriptions (see Joshua Gans’ blog posts on this and his Financial Times article on HBR and their journal list). I have increasingly used McKinsey Quarterly which makes their articles available for free (you need to register but that’s free). Here are some HBR alternatives that seem to work well (often by authors you know well):

Strategy process & org change

Internal Analysis and Competitive Advantage

Continue reading →

Flush with Cash…

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A recent Wall Street Journal article points to a resurgence of toilet manufacturing in the U.S. but it is mostly under foreign ownership (like the Japanese company, Toto). Mary Tripsas has a nice HBS case on Toto’s attempts at entering the U.S. market and the WSJ article seems a nice conclusion to the story. A broader question one might ask is why product innovation has not penetrated the U.S, market in this industry. In Japan, top end toilets are highly differentiated and even link to electronic devices like Android smartphones. As such, this might spur discussion of when innovations are likely to take hold as well as questions about entry into new markets. Nevertheless, this video reminds us that there may still be a need for low tech solutions in this market…

Contributed by Russ Coff

Samsung owns the Android ecosystem?

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Google may have its back against the wall and needs the new Moto X phone to be a big success. They are planning to invest $500M just in marketing the new phone (more than Apple or Samsung). This may be motivated by the fact that Samsung is capturing up to 95% of the profits from the Android ecosystem since it owns the “last mile” where consumers lay down cash for devices. Samsung has recently invested further in their Tizen mobile operating system to keep their options open and solidify their bargaining power against Google (a nice 5 forces example of tapered integration). Google’s battle to remain relevant in the Android ecosystem is a nice update to the mini case posted earlier here on Google’s $12.5B acquisition of Motorola Mobility. Also, based on this review, it appears that they may have created some of the vertical integration value. Here is a demo video for the Moto X.

Contributed by Russ Coff

Chinese Dilemma: 170 Auto Makers

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Rose Yu of the WSJ has a nice recent article on the fragmented nature of the Chinese auto market and how this is leading to over capacity in the industry.electriccarconcept[1] Mark Lehrer identifies some nice classroom uses for this article in the WSJ WeeklyReview service. Here is what he suggests:

  • SUMMARY: The US auto industry has long had three big domestic car makers. China has more than 170. Optimistic Chinese auto executives send shudders through the rest of the global auto sector. Industry watchers worry that the world’s No. 1 auto market could soon be awash in overcapacity. That would rev up competition in China and pressure companies here to export more of their cars.
  • CLASSROOM APPLICATION: As a case in industry analysis, excess capacity seems to be an endemic feature of the car industry (related article). As a study in foresight, the question for class discussion is, first, how to deal with the problem in the US, and second, how to brace for the problem furling over from China in a few years.

QUESTIONS: Continue reading →

M&A: Resistance is Futile

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The Star Trek reference to the Borg may be lost on most of today’s students. However, their method of absorbing all life forms with which they come in contact is similar to how some firms integrate targets. I recently taught the GSK/Sirtris case in which there is a debate on how much to integrate a target that has a culture of innovation. Ultimately, Sirtris was fully integrated and the original research capabilities were lost. The final decision to shutter Sirtris came just as one of the original co-founders published promising new findings.

Contributed by Russ Coff

Groupon Follies: Get a Brazilian…

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This Groupon Superbowl commercial is quite funny (even if it is in bad taste). However, the company has struggled and one year after its IPO the price was 81% below the initial price. A recent spike when a hedge fund took a toehold position only underscores the company’s troubles as investors hope for better management. Before the IPO, Groupon turned down a $6B offer from Google — something that Google should appreciate since the company is worth less than half that amount a year after the IPO. One reason for the bearish response is that the entry barriers are fairly low and the competition is significant (e.g., Living Social and even a new eBay venture along these lines). Why was this so hot anyway?

Contributed by Russ Coff

Merging Cultures: BaFa BaFa

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Cultural differences can undermine M&A, alliances, or entry into foreign markets. As such, it may be important to show students how difficult it is to comprehend and coordinate with a different culture. The BaFa BaFa exercise accomplishes this beautifully. This exercise was originally developed for the U.S. Navy to train personnel on how to interact when being exposed to new cultures (see the extended history in this Simulation & Gaming article). The web site describes it as useful in diversity training. That’s true but it is also useful for strategy courses where cultural differences are relevant. The exercise requires about 2 – 3 hours to run so it is more useful for evening or executive courses where you have larger blocks of time. Here is an overview of how the exercise unfolds:

  • Separate the class into two groups that will be trained in the two cultures (you will need two classrooms and assistance in bringing both cultures up to speed).  Continue reading →

Winner’s curse at Gourmet Adventures

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Often in M&A, there is a concern that the buyer has overbid – especially when there is competition for the target and the risk of winner’s curse is heightened. In essence, if firms bid based on their “unbiased estimates” of the target’s value, the bids may be normally distributed around the true value and the winner is especially likely to have overbid (cursed). The task then, is to shade one’s bid to avoid overbidding. A standard exercise to demonstrate this phenomenon is to have the students bid on a jar of coins (which I describe as a restaurant chain). This is of special interest in a strategy course since the risk of being cursed is driven by the variance around the valuation (not the mean). Variance, it turns out, is driven by aspects of the target that are hard to value. These include strategic resources, human capital, complementarities, cross business synergies (e.g., layers of coins to reflect different target business units), or any other source of uncertainty. As such, even if the winner’s curse is covered in another course, these elements will be specific to a strategy course. Here are materials needed to run the exercise:

  • Instruction sheet describing the bidding/valuation task (and to submit bids)
  • Spreadsheet to record the results and show a simple estimation method
  • PowerPoint slides to lead discussion
  • 500ml jar with quarters, pennies, and nickels (as shown)

If you teach an online course, there is also a nice online simulation of this at GameTheory.net.

Contributed by Russ Coff

Seagram’s Acquisition of Universal

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The short film Trey Parker and Matt Stone made for Universal Studio’s takeover of Seagrams (wine coolers). Has many guest appearances, like Demi Moore, Sylvester Stallone, and Stephen Spielberg. This is a hard to find video – even Trey says he doesn’t have it! Watch the rest of it on Part II.

Contributed by Andrew Inkpen

Case Libraries

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2e1e41_ff04ac9674ba4be1848f097fee5bd061Here are some popular case repositories:

The CEO who wouldn’t leave

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I found that a recent article in BusinessWeek can be used as an interesting reading to explore power & politics in the context of M&A. The article describes how William Johnson was designated as CEO of Duke Energy after its acquisition of Progress Energy and how he was fired after only two hours. The original M&A agreement included a condition that stated that the CEO of the target (Progress Energy) would be named CEO of the merged company. However, he was fired two hours after the designation and the CEO of the acquirer (Duke Energy) was named CEO of the merged company. I think this article could motivate to further study this acquisition. It seems to be a novel illustration of a hostile acquisition.

 

Contributed by Francisco Morales

A Fly in the Ointment

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A recent blog post, along with a related New York Times article, outlines a dramatic increase in the price of generic ointments. Several factors might account for high prices including:

  • High barriers to entry as regulations require firms to prove that ointments are absorbed in the skin as well as branded products.
  • Oligopoly conditions supported by the barriers since there are only three players in the market (and they are differentiated since they produce different generics).
  • Willingness to pay since doctors and patients are not generally price sensitive when it comes to prescriptions. Continue reading →

Google’s $12.5B Acquisition of Motorola

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Google’s recent $12.5B acquisition of Motorola mobility is a great “ripped from the headlines” case. Here are a series of news articles that one can distribute (not all are really needed). In order to assess Google’s prospects for creating value, one must evaluate the following key sources of uncertainty:

  • Intellectual property as a resource. Will the patents help Google beat Apple in court (or reach a favorable settlement)? The litigation is a critical part of Apple’s global strategy to limit the threat that Android poses to the iPhone.
  • Vertical integration. Apple has created a great product that works very well. Part of the reason may be that the operating system and hardware are better integrated. Can Google produce a better product that commands a higher willingness to pay?
  • Alliance partners. Will Google lose partners who are now direct rivals (to Windows or new operating systems)? Continue reading →

Auction of Fire Net: Strategic Factor Markets

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This depicts an auction of a fire net as people contemplate jumping out of a burning building. Useful to talk about strategic factor market theory — especially if you have a dark sense of humor.

Contributed by Russ Coff

Delta Dental – A funny take on diversification

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Here are 3 classic Delta Dental commercials that illustrate inefficient diversification (in a funny way)!

See the other two if you click here: Continue reading →

Short Compilation of Experiential Exercises

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Click here to download this collection of exercises. This was assembled as part of an AoM session by Russ Coff and Don Hatfield

Contributed by Russ Coff

Acquire Box Game

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“Acquire is a box game that is easy to learn and can be played in about an hour by four players.  I bought a dozen games and break the class up into teams and link the game to cases on rivalry, competition, and acquisitions.  It does a great job of putting students in the position to see how serendipity and strategy interact, and how your wins are a function of others’ actions, intentions and hubris.  The first site below actually has a couple of free and simple DOS versions of the game that students can use for practice and familiarization.” Click Here to Access

Contributed by Mason CarpenterMason Carpenter

 

Quarter-length and Semester-length Simulations

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Attention simulation users: It would be great to have a separate page for each simulation below. If you have used it and can summarize strengths, limitations, and some tips for implementing, please submit a full entry on the simulation.

Click the links below to access quarter and semester length simulations

Contributed by Mason CarpenterMason Carpenter