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!
, Articles matter only in
connection to lecture
content (no nasty
questions about details
Corporate strategy (article) from the articles)
Central choices for multi-business firms:
- Where to compete (choice of businesses), what to own (choice of firm boundaries),
and how to organize (choice of structures, processes and incentives)
- Tests for these choices in context of horizontal diversification or vertical integration
o Better-off test: corporate advantage, does the firm's corporate ownership
structure add value and create synergies that benefit the overall organization
beyond what individual businesses could achieve on their own ?
o Ownership test: portfolio management, resource allocation, and the
alignment of businesses, should the entity own this firm?
o Organizational test: effectiveness of the corporate center in providing
support, coordination, and resources to the various business units.
Alignment: How a multi-business firm adds value to its portfolio impacts its ownership
(private or public, short or long term) & organization (centralized or decentralized). Example:
- Disney: value in shared key resources (characters) corporate center brand control
and coordination (cross-selling and marketing)
- PE firm: value in governance and monitoring, virtually no integration across portfolio
there is no single ‘right choice’ of corporate strategy. All three tests together important.
Heterogeneity and corporate level trade-offs: successful firms can compete within the same
industry while employing different sets of choices (i.e. closely related activity and resource
sharing in one firm vs. unrelated diversification in another)
Sustainability: ability to sustain value differs for conglomerate models versus related
diversification strategies. Factors that can undermine the sustainability of corporate
advantage stem from competition, internal organizational factors, and ownership structures.
Common reasons why corporate strategies fail
- Misplaced motives: firms often diversify to escape a declining core business, seek
growth in more attractive sectors, diversify risk, or smooth earnings streams.
However, diversification without addressing core issues does not solve underlying
problems, and firms may lack the capabilities to succeed in new areas
- Zero-sum arguments: expanding into adjacent businesses or parts of the value chain
with the aim to reduce costs may benefit one party but come at the expense of
another, leading to a zero-sum transfer of value
- Flawed synergy logic: challenges in realizing or identifying synergies in M&A
o Revenue synergies can be harder to quantify or achieve in practice
o Justifying scope expansions based on shared intangible core competencies
can be problematic, as firms may overestimate their competencies or fail to
identify distinctive capabilities
- Incorrect unit of analysis: focusing on the wrong level of the organization or failing to
align strategic decisions with overall corporate objectives misaligned strategies,
inefficient resource allocation, and missed opportunities for creating value
- ‘Best practice’ approach to corporate strategy: biases firms toward adopting
standardized practices or imitating successful strategies without considering their
unique context or competitive position.
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