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Mergers, Acquisitions And Corporate Restructuring

Prasad G. Godbole

Copyright 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Prasad G. Godbole. All rights reserved.

Chapter 3
Mergers and Acquisitions as a Growth Strategy

Copyright 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Prasad G. Godbole. All rights reserved.

CHAPTER 3

Why do companies resort to M & A?

M & A is a powerful strategy of instantaneous quantum growth.

CHAPTER 3

Classes of Growth Opportunities and M & A


Market Penetration Market Development Product Development Backward Integration Forward Integration Horizontal Integration Concentric Diversification

1. Intensive Growth

2. Integrative Growth

Horizontal Diversification Conglomerate Diversification

3. Diversification Growth

CHAPTER 3

Growth Strategy Model


Ansoffs Product Market Matrix
Ansoffs Product Market Matrix
Present products Present markets New markets Market penetration Market development New products Product development Diversification

CHAPTER 3

Classes of Growth Opportunities and M & A


I. Intensive Growth
(a) Market penetration

It involves a company seeking increased sales for its present products in the present markets through more aggressive marketing efforts. It involves activities like expanding the dealer and retailer network, getting bigger and prime shelf space from the retailers, launching attractive dealer and consumer incentive/gift schemes, launching heavy advertisement campaigns, etc. The ones who are market leaders already also need to maintain their position and if possible expand the degree of market penetration so as to enhance their leadership stature. It is achieved in an organic manner. Example: Marketing war between Pepsi and Coke or between Hindustan Unilever Limited (HUL) and Procter & Gamble (P&G)

CHAPTER 3

Classes of Growth Opportunities and M & A


(b) Market development

It consists of a company seeking increased sales by taking its existing products into new markets. When a regional company launches its products in another region or a company which was hitherto operating in a domestic market starts exporting its products, it is said to be following a market development strategy. It can be either organic or inorganic. Example: China Inc

CHAPTER 3

Classes of Growth Opportunities and M & A


(c) Product development
It consists of a company seeking increased sales by developing improved products for its present markets. Sometimes, companies phase out the older products in this process, whereas, at times the older products continue along with the newer ones, both catering to different sub segments of a market segment. Example: Nokia launches a new model of mobile phone every six months. Thus, Nokia creates a huge replacement demand by luring consumers with better features and conveniences of the latest models.

CHAPTER 3

Classes of Growth Opportunities and M & A


II.

Integrative Growth
(a) Backward integration
It consists of a company seeking ownership or increased control of its supply system. It could be organic or inorganic. Example: Reliance Industries Limited is the most impressive example of backward integration. Starting with Vimal range of fabrics, RIL went backward into manufacture of polyester fiber and yarn, followed by intermediate chemicals, polymers, refinery and finally oil exploration. With this, RIL has become a fully integrated company across the entire value chain.

CHAPTER 3

Classes of Growth Opportunities and M & A


(b) Forward integration

It consists of a company seeking ownership or increased control of its distribution system. It could be organic or inorganic. Example: A refinery getting into petrol pumps (like RIL) or a film production house getting into distribution and subsequently, into running of cinema halls.

CHAPTER 3

Classes of Growth Opportunities and M & A


(c) Horizontal integration
It consists of a company seeking ownership or increased control of its competitor (s). This means acquisition. It, by its definition itself, is an inorganic growth strategy. Example: Tata Steel acquiring Corus, Mittal Steel acquiring Arcelor and Jet Airways acquiring Sahara Airlines

CHAPTER 3

Classes of Growth Opportunities and M & A


IMPORTANT

Concept of integration whether backward, forward or horizontal does not mean that there has to be a merger of the target company ( acquired company) with the acquirer company. It is sufficient that the acquirer acquires control over the target company such as in case of Grasim- UltraTech.

CHAPTER 3

Classes of Growth Opportunities and M & A


III. Diversification Growth
(a) Concentric diversification
It consists of a company seeking to add new products that have technological or marketing synergies with the existing products. These products would normally appeal to new classes of customers. Example- if a cosmetics company that has hitherto been manufacturing and marketing only womens cosmetics launches the mens range, it would be an example of concentric diversification.

CHAPTER 3

Classes of Growth Opportunities and M & A


(b) Horizontal Diversification
It consists of a company seeking to add new products that could appeal to its present customers though, technically unrelated to its present product line. Example- The cosmetic company that has been manufacturing and marketing womens cosmetics, if this company enters womens garments business, it would be a case of horizontal diversification.

Versace gown

Versace perfume for women

CHAPTER 3

Classes of Growth Opportunities and M & A


(c) Conglomerate Diversification
It consists of a company seeking to add new products for new classes of customers, with no relationship to the companys current technology, products or markets. Example- ITC Limited is a classic case of conglomerate diversification. ITC is into many unrelated businesses, from cigarettes to hotels and paper and paperboards to biscuits and atta (flour).

CHAPTER 3

Other Growth Strategy Models


The BCG matrix
Relative market share position
Industry sale growth rate (percentage)
High +20% High 1.0 Medium 0.5 Low 0.0

Quadrant II Stars
Medium 0%

Quadrant I Question marks

Quadrant III
Low-20%

Quadrant IV

Cash cows

Dogs

CHAPTER 3

(a) The BCG matrix


STARS
Businesses that presently belong to high growth industries and enjoy high relative market share.

Strategies best suited:


Concentric diversification

Forward, backward and horizontal integration

Market penetration, product development and market development

CHAPTER 3

The BCG Matrix


CASH COWS
Businesses that enjoy high relative market share but are in low growth industries. Such businesses normally generate cash in excess of their needs.

Strategies best suited:

Product development

Concentric diversification

CHAPTER 3

The BCG Matrix


QUESTION MARKS
Are those businesses that have low relative market share in rapidly growing industries .

Strategies best suited:

Decide

between

To turn them into STARS

To Sell them

CHAPTER 3

The BCG Matrix


DOGS
Businesses that have a low relative market share in low or no growth industries. These are a drag on the firms profitability.

Strategies best suited:

Generally: Divestiture or Liquidation

Sometimes: Downsizing, cost reduction and reengineering

CHAPTER 3

Other Growth Strategy Models


The Grand Strategy matrix

While the BCG matrix was specifically developed to strategize portfolio rebalancing in case of multiple businesses firms, the grand strategy matrix can be used for single business firms or for different businesses or divisions of a multiple business firm.

CHAPTER 3

The Grand Strategy Matrix


Rapid market growth
Quadrant II Market penetration Quadrant I Market penetration Market development Product development Backward integration Forward integration

Market development
Product development Horizontal Integration Divestiture

Weak competitive position

Liquidation

Horizontal integration
Concentric diversification

Quadrant III Downsizing Cost reduction Reengineering Divestiture Liquidation

Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures

Strong competitive position

Slow market growth

CHAPTER 3

Other Growth Strategy Approach


Industry/ Product Life Cycle

Industry/Product Life Cycle

CHAPTER 3

Industry/ Product Life Cycle

This approach states that every industry and product passes through four stages during its life cycle, viz, introduction, growth, maturity and decline. It must be understood that in case of multi-product industries, a single products life cycle would not represent the life cycle of the industry as a whole.

In case of single product industries, the industry life cycle would be same as that of the product.

CHAPTER 3

Product Life Cycle


(a) Introduction stage:
A new product would normally emerge either to satisfy an existing demand hitherto being satisfied by another product or cater to an altogether new need.
Example- Sabir Bhatia launched Hotmail, Google launched a search engine

CHAPTER 3

Product Life Cycle

(b) Growth stage: This is a period of substantial sales and profit generation. While the existing players expand their capacity, many new players get attracted by lure of high growth in sales and profits.

CHAPTER 3

Product Life Cycle


(c) Maturity Stage: It is divided into two sub stages

CHAPTER 3

Product Life Cycle


(d) Decline stage:
In this stage, the sale of the product actually starts declining. This primarily happens due to the emergence of substitute products which satisfy the needs of the consumers in a more effective and economical manner.

CHAPTER 3

Industry Life Cycle


The concept of industry life cycle is an attempt to extend the concept of product life cycle at the level of industry as a whole. In case of single product companies such as cement, steel, paper, crude oil, the product life cycle would represent the industry life cycle. In case of multiple product companies such as pharmaceuticals, software, consumer durables, automobiles, the concept of industry life cycle becomes hazy.

CHAPTER 3

Lacunae in Product Life Cycle concept

It ignores the impact of the structural macroeconomic changes on resurgence of demand.


The concept also ignores the impact of economic cycles on demand, e.g. impact of recession. The concept of decline assumes the emergence of a substitute product that will replace the existing product. This is not true in most of the cases, e.g. malls have not been able to replace the retail grocery shops.

CHAPTER 3

Product Life Cycle and Strategies


(a) Introduction stage:

Launch of a new product or service would naturally require a firm to follow market penetration and market development, it will require a firm to invest a significant amount of resources. If the product has been launched by an established resourcerich firm, it would be able to take the product to the growth stage relatively easily and without falling prey to acquisition by other firms. If the product has been launched by a new firm promoted by first generation entrepreneurs, then such a firm often has no choice but to sell out to another large firm. Horizontal integration via mergers could be a good strategy for a bunch of new firms.

CHAPTER 3

Product Life Cycle and Strategies


(b) Growth stage:

The phenomenon of large resource-rich firms gobbling up stand alone start-ups is more pronounced in the growth stage because of larger investment. For example, Sabir Bhatia selling Hotmail to Microsoft for US$ 400 million. Bazee.com being sold to e-bay and Daksh e-Services merging with IBM.

CHAPTER 3

Product Life Cycle and Strategies


(c) Maturity stage:

Dominant Firms Firms that are not dominant

Horizontal integration Horizontal integration through the acquisition of a large but unprofitable firm Concentric diversification Downsizing, cost reduction and reengineering

Arcelor by Mittal Steel

Corus by Tata Steel


Tata Motors launched Sumo

Cash rich firms


Firms that are neither dominant nor cash rich

CHAPTER 3

Product Life Cycle and Strategies


(d) Decline stage:

For cash-rich firms in decline stage, one could prescribe conglomerate diversification through acquisition of firms in growth industries, followed by phasing out of declining business either through divestiture or liquidation.

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