Methods of Development: Mergers and Acquisitions, Ceu San Pablo University

Methods of Development

Internal Versus External Development

WHAT ARE THE METHODS or WAYS TO ACHIEVE THE OBJECTIVES OF THE STRATEGIES?

INTERNAL DEVELOPMENT

Growth through investments in its own structure by increasing its size, through the construction of new facilities, hiring personnel (investment in new factors).

The company deploys its core competencies which can be directed towards:

Expansion of current businesses

Introduction into new businesses

EXTERNAL DEVELOPMENT

Growth resulting from the acquisition, participation, association, or control of other already operating companies, or their assets.

The company achieves greater size by incorporating into its assets the productive capacity of another company or integrated assets.

Expansion of current businesses

Introduction into new businesses

ACHIEVE ANY OF THE DEVELOPMENT DIRECTIONSExternal Development Methods

INTERNAL DEVELOPMENT

MERGERS

Integration of two or more companies, with at least one of the original companies ceasing to exist

EXTERNAL DEVELOPMENT

ACQUISITIONS

Operation of buying and selling share packages between two companies. The legal personality is preserved

TYPES depending on the method /procedure

COOPERATION / ALLIANCES

Links and relationships are established between companies through legal formulas or explicit agreements. Legal and operational independence is maintainedReasons for Mergers and Acquisitions

Reasons for Economic Efficiency

REASONS FOR ECONOMIC EFFICIENCY

1. Reduction of operating costs: Lowering operational expenses.
2. Replacement of the integrated company's management team: Improving management by changing the leadership of the acquired company.
3. Allocation of surplus funds: Using excess money productively.
4. Obtaining tax incentives: For example, Company A decides to acquire a smaller company, Company B. Company B has accumulated tax losses from previous years. By acquiring Company B, Company A can use these tax losses to offset its own profits, thereby reducing its overall tax burden.

Strategic Reasons for Mergers and Acquisitions

STRATEGIC REASONS

1. Acquiring new resources and capabilities: Gaining technologies, knowledge, or skills that the company did not previously possess.
2. Entering a new industry or country: Using the merger or acquisition to enter new markets.
3. Reducing the level of competition in the industry or influencing its future evolution: Decreasing competition or shaping the market's development.
4. Gaining advantages of vertical integration: Controlling more stages of the production or distribution process.
5. Achieving the size to compete in a global market: Increasing the company's size to be more competitive on a global scale.

Other Factors in Mergers and Acquisitions

OTHER FACTORS

1. Meeting the personal goals of the executives: Achieving the personal or professional objectives of the company's executives.
2. Responding to prevailing trends or industry fads: Following the predominant trends in their sector.Advantages and Drawbacks of External Development

Advantages of External Development

ADVANTAGES

• Speed in growth
• Reduction of growth risk in unrelated diversification or internationalization processes
• Better selection of the right time to enter an industry or country
• Greater ease of introduction into mature industries

Drawbacks of External Development

DRAWBACKS

• Does not allow optimization of decisions in the management of the growth process
• Requires a process of obtaining information and negotiating with the target company
• Usually more costly, with exceptions
• Problems arising from the integration of productive, organizational, and cultural systems
• Limitations by public administration to preserve free competitionDevelopment Methods and Risks

Development Methods and Associated Risks

Financial Risk

Market Risk

Cultural Risk

Internal Development

High

High

Low

Mergers/Acquisitions

High

Low

High

Alliances

Medium

Low

Medium

• Financial risk: related to the possibility that the company does not achieve adequate profitability and loses the investment.
• Market risk: possibility of not being able to enter a specific market or not achieving success.
• Cultural risk: possibility of failure due to lack of organizational fit.

Types of Mergers and Acquisitions

Types of Mergers (I): Pure Merger

Pure Merger

• Two or more companies of equivalent size agree to merge, creating a new company to which they contribute all their resources: assets (goods and rights) + debts.
• The original companies (A + B) dissolve and give rise to a new company (C).

Source: Bueno (1996)

A

C

B

Example of Pure Merger: Dow Chemical and DuPont

1. Original Companies:

• Dow Chemical (A): Primarily engaged in the production of chemicals, plastics, and agrochemicals. Operated in several countries, including the United States, Canada, Germany, and Brazil.
• DuPont (B): Its core business included chemicals, advanced materials, biotechnology, and agricultural products. Operated in countries such as the United States, China, India, and Japan.

1. Merger Agreement: both companies agreed to merge on equal terms in December 2015.
2. Creation of New Company: a new company called DowDuPont (C) was created, officially starting operations on August 31, 2017.
3. Dissolution of Original Companies: Dow Chemical and DuPont dissolved and ceased to exist as independent entities
4. New Entity:

1. Core Business of DowDuPont: The new entity focused on three main areas: Agriculture, Materials Science, and Specialty Products.
2. Countries of Operation: DowDuPont operated globally, with significant presence in the United States, Canada, Germany, China, India, and Brazil.
3. Date of Operation: DowDuPont began operations on August 31, 2017.

This merger allowed DowDuPont to combine the strengths and resources of both companies to be more competitive in the global market.Types of Mergers (II)

Types of Mergers (II): Merger by Takeover

Merger by Takeover

• One of the involved companies (absorbed) disappears, integrating its assets into the absorbing company.
• The absorbing company (A) continues to exist, accumulating the assets of the absorbed company (B).

Source: Bueno (1996)

A

A'

B

Example of Merger by Takeover: Disney and 21st Century Fox

1. Original Companies:

• The Walt Disney Company (A): Primarily engaged in the production of movies, TV shows, theme parks, and entertainment products. Operated in several countries, including the United States, Canada, Japan, and France.
• 21st Century Fox (B): Its core business included the production and distribution of movies and TV shows, as well as the operation of TV channels and cable networks. Operated in countries such as the United States, United Kingdom, India, and Australia.

1. Merger Agreement: in December 2017, Disney agreed to acquire the assets of 21st Century Fox for approximately $71.3 billion.
2. Creation of New Company: no new company was created; instead, Disney absorbed the assets of 21st Century Fox.
3. Dissolution of the Absorbed Company: 21st Century Fox was dissolved and ceased to exist as an independent entity on March 20, 2019.
4. New Entity:

1. Core Business of Disney: After the merger, Disney continued to focus on the production of movies, TV shows, theme parks, and entertainment products, now with the additional assets of 21st Century Fox.
2. Countries of Operation: Disney operates globally, with significant presence in the United States, Canada, Japan, France, United Kingdom, India, and Australia.

This merger allowed Disney to expand its content catalog and strengthen its position in the global entertainment market.Types of Mergers (III)

Types of Mergers (III): Partial Assets Transfer (I)

Merger with Partial Assets Transfer (I)

• One company (A) contributes only part of its assets (a) along with the other company it merges with (B):

A new company (C) is created in the merger agreement.

• The company contributing the assets (A) does not dissolve.

Source: Bueno (1996)

A

a

C

B

Example of Merger with Partial Assets Transfer (I) : Pfizer, Upjohn (Pfizer Division) and Mylan

1. Original Companies:

• Pfizer (A): Primarily engaged in the research, development, and commercialization of pharmaceutical products. Operated in several countries, including the United States, the United Kingdom, and Japan.
• Upjohn (a): A division of Pfizer focused on established brand-name and generic medicines.
• Mylan (B): A global pharmaceutical company specializing in generic and specialty pharmaceuticals. Operated in countries such as the United States, the United Kingdom, India, and Germany.

1. Merger Agreement: in July 2019, Pfizer agreed to merge its Upjohn division with Mylan to create a new company.
2. Creation of New Company: a new company called Viatris (C) was created, officially starting operations on November 16,2020.
3. Dissolution : Upjohn Division (a) and Mylan (B) were dissolved and ceased to exist on November 16, 2020.
4. New Entity:

1. Core Business of Viatris: The new entity focused on the production and commercialization of established brand-name and generic medicines.
2. Countries of Operation: Viatris operates globally, with significant presence in the United States, the United Kingdom, Japan, India, and Germany.
3. Continuity of Pfizer: Pfizer continued to exist as an independent entity, focusing on its core business of research, development, and commercialization of innovative pharmaceutical products.

This merger allowed Pfizer to optimize its product portfolio and Viatris to combine the resources and expertise of Upjohn and Mylan to be more competitive in the global market for established brand-name and generic medicines.Types of Mergers (III)

Types of Mergers (III): Partial Assets Transfer (II)

Merger with Partial Assets Transfer (I

• One company (A) contributes only part of its assets (a) along with the other company it merges with (B):

v It is incorporated into one of the existing companies, increasing its size (B').

• The company contributing the assets (A) does not dissolve.

Source: Bueno (1996)

A

a

B'

B

Example of Merger with Partial Assets Transfer (II): IBM and Lenovo

1. Original Companies:

• IBM (A): Primarily engaged in the manufacturing of hardware and software, as well as providing technology and consulting services. Operated in several countries, including the United States, Canada, Germany, and Japan.
• Lenovo (B): Its core business included the manufacturing of personal computers and electronic devices. Operated in countries such as China, the United States, and Brazil.

1. Merger Agreement: in December 2004, IBM agreed to sell its Personal Computer Division (a) to Lenovo for approximately $1.75 billion.
2. Creation of New Company: no new company was created; instead, IBM's Personal Computer Division (a) was integrated into Lenovo (B), increasing its size and capabilities in the personal computer market.
3. Dissolution : IBM's Personal Computer Division was dissolved and ceased to exist in April 2005.
4. New Entity:

• Core Business of Lenovo (B'): After the merger, Lenovo continued to focus on the manufacturing of personal computers and electronic devices, now with the additional assets of IBM's personal computer division.
• Countries of Operation: Lenovo operates globally, with significant presence in China, the United States, Brazil, Germany, and Japan.
• Continuity of IBM: IBM continued to exist as an independent entity, focusing on its core business of manufacturing hardware and software, as well as providing technology and consulting services.

This merger allowed Lenovo to expand its presence in the personal computer market and strengthen its position in the global technology market.