Summary of all lecture slides and all required literature. Articles partly incorporated into a relevant document within the slides or separately after the lecture.
Summary of all lecture slides and all required literature. Articles partially incorporated at relevant section within slides or sep...
Mergers and Acquisitions (M&A): Transactions in which companies buy, sell or combine with
other companies. They involve a range of activities, including due diligence, valuation,
negotiation, and integration, and are used for a variety of strategic and financial objectives.
Why is M&A interesting?
- Big impact on the global economy, power dynamics between buyers and suppliers,
industry boundaries, and individual actors.
- Frequently happen for dramatic or questionable reasons & frequently fail
- Frequently create „winners and losers“ on different sides.
- They are risky and complex and their outcomes are difficult to anticipate.
What is corporate strategy?
Corporate Strategy: What businesses should we be in? (for multi-business organizations)
- Concerned with configuration (scope & scale) and growth of the corporate portfolio.
- Goal: Corporate advantage
NOT business/ competitive strategy: How do we compete and succeed?
- Concerned with competitiveness of each individual business line
- Goal: Competitive advantage
Single vs. Multi business
- Multi-business firms encompass different goals, strategies and types of competitions.
- A business = choices about what / for whom / and how to sell something.
o If we change one of these components, we are in a new business segment.
- NOT an industry. Industries = Cross price elasticity of demand!
- Different industry implies a different business, but a different business does not yet
imply a different industry.
Competitive vs. Corporate Advantage
- Corporate Advantage is not only about outcompeting in one or every
individual segment, but it is about the whole portfolio
- Who are we competing with?
o Everyone able to assemble a similar portfolio of businesses
o Financial investor could compile the same portfolio but
without the administrative overhead costs
corporate management must create benefits from
collaboration that exceeds the administrative costs
What is corporate advantage?
- Investors can jointly own businesses, managers can jointly
operate them (even when they are not jointly owned)
- Corporate advantage: comparison between what is and what
could have been. Ability of a firm to add value to its underlying businesses.
- Benchmark needed: comparison with the performance of similar businesses that are
run as stand-alone operations (break-up value of a firm)
,Who ‘makes’ corporate strategy?
The corporate headquarter (1/2)
- Differ in size: 10 to 10.000 people (avg. 4.3 individuals for every 1000 employees)
- Most firms: corporate strategy departments or corporate development teams (3-300)
o Manage the strategy process, corporate capital allocation, corporate-wide
strategic initiatives and ”develop” the portfolio though transactions
- Other firms: strategy meetings (divisional management discusses strategic issues)
The corporate strategy department (2/2)
The corporate strategy department is more important, larger and more active if:
- There is more synergy potential in the corporate portfolio:
o Firm has a higher level of vertical integration or related diversification
- There is more external change that may require to reevaluate the optimal
configuration of the corporate portfolio:
o Persistent supply or demand fluctuations
o Persistent technological, regulatory or social change
o Increased financial market scrutiny
- There is more internal change that may require to reevaluate the optimal
configuration of the corporate portfolio
o Changing corporate decision-makers (owners, executives, or supervisory
board members), with different visions or priorities
o High innovation rate: fast development of new products & market
opportunities
Value creation and destruction through corporate headquarters
How can good Corporate Strategy Create Value?
- Good corporate portfolio composition (corporate scope), increase weight on high
performing businesses
- Support synergy creation among different businesses
- Goal: Diversification Premium (corporate portfolio value > sum of its parts)
o Significant percentage of diversified firms outperform focused firms
How can poor Corporate Strategy Destroy Value?
- Overhead costs!
- Lack of alignment or short term focus
- Disruption, contamination, poor advice, lack of resource provision to business units
- Avoid: Diversification Discount (corporate portfolio value < sum of its parts)
Corporate scope: Vertical integration
Benefits of Vertical Integration: Risks of Vertical Integration:
- Lowering costs - Increasing costs
- Improve quality - Reducing quality
- Facilitate scheduling and planning - Reducing flexibility
- Facilitate investments in - Increasing the potential for legal
specialized assets repercussion
- Securing critical supplies and
distribution channels
, Corporate scope: Horizontal diversification
Potential Benefits of Related Diversification: Synergy Potential & Strategic Flexibility
Potential Costs to (Unrelated) Diversification: Coordination Costs & Influence Costs
Frequently Cited Research Findings:
- Inverted U-shape Relationship between degree of
diversification and firm performance (not always)
o In emerging markets, unrelated diversification helps
overcome inefficient capital markets and
institutional voids
o Some mature market players are highly successful
conglomerates (e.g. GE)
- The sources of value creation in unrelated diversification may not always be obvious!
Corporate strategy and Parenting theory (article)
- Justifying the parent: corporate parent in multibusiness companies must
demonstrate tangible benefits for the businesses in its portfolio to justify its costs
- Parenting advantage: Corporate parent must add more value than other rival
parents, otherwise all stakeholders better off with different parent. Guiding objective
for corporate strategy, underscores competitive edge effective parenting can provide
- Value destruction: Corporate hierarchies tend to destroy value (overhead, ill-judged
influence from senior managers, biased information filtering) disciplined decision-
making by parents, open communication and cost-effective assessments needed
- Lateral synergies: author challenges the traditional belief in the necessity of a
common parent for creating synergies between businesses. Suggests that many
synergies can be achieved independently by businesses and questions the
overemphasis on central intervention for creating value.
- Value creation: only occurs under three conditions
o Parent sees opportunity for business improvement & for helping parent role
o Parent has the required skills and resources to fulfill required role
o Parent understands the business and has discipline to avoid value destruction
concentration on key areas of opportunity to develop distinctive skills and avoid
dissipating energies on low-value activities.
- Corporate centers and management processes: ‘best practice’ approach to the
composition of parent inappropriate. Personal skills and cultural fit value.
Designing corporate centers, functions, and processes important to achieve specific
best practices tailored to the organization's needs.
- Diversity: avoid excessive diversity; focus on building portfolios around businesses
with similarities in parenting needs and opportunities. Align businesses within the
portfolio to optimize value creation and strategic coherence.
- Stretch and fit: balance between stretch for new opportunities and fit with existing
skills in corporate strategies. Embrace challenges while being realistic about the
organization's capabilities avoid overoptimism and failure in strategic initiatives.
- Business unit definition and corporate structure: define business units & corporate
structure in alignment with organization's value-creating objectives. Strategic fit!
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