Mergers Acquisitions And Other Restructuring Activities 7th Edition By Donald DePamphilis – Test Bank
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Sample
Questions
Chapter 4
Planning: Developing Business and
Acquisition Plans—Phases 1 & 2 of the Acquisition Process
Examination Questions and Answer
True/False Questions: Answer True or False to the following
questions
1. A
planning-based acquisition process consists of both a business plan and
acquisition plan, which drive all subsequent phases of the acquisition process.
True or False
Answer: True
2. A
business plan articulates a mission or vision for the firm and a strategy for
realizing that mission. True or False
Answer: True
3. Determining
where a firm should compete starts with deciding who the firm’s current or
potential customers are and what are their needs. True or False
Answer: True
4. Market
segmentation involves identifying customers with common characteristics and
needs. True or False
Answer: True
5. An
analysis of markets should involve current and potential customers, as well as
current and potential competitors, but
it should exclude suppliers. True or False
Answer: False
6. A
competitive self-assessment involves an analysis of the firm’s absolute
strengths and weaknesses. True or False
Answer: False
7. A
firm’s core competencies refer to those skills which are required to produce
the firm’s primary products but
which have little or no application in producing related
products. True or False
Answer: False
8. Core competencies
should be defined as narrowly as possible. True or False
Answer: False
9. A
corporate mission statement should be defined as broadly as possible since it
seeks to describe the corporation’s reason for being, and it should not exclude
the firm from pursuing any significant opportunities. True or False
Answer: False
10. The
market targeted by the firm should reflect the fit between the corporation‘s
primary strengths and competencies and its ability to satisfy customer needs
better than the competition. True or False
Answer: True
11. Corporate
objectives are defined as what is to be accomplished within a specific period.
True or False
Answer: True
12. A
firm should choose that strategy from among the range of reasonable
alternatives that enables it to achieve its stated objectives in an acceptable
time period without regard for resource constraints. True or False
Answer: False
13. A
price or cost leader in an industry is usually the firm with the largest market
share. True or False
Answer: True
14. The
experience curve is most important in analyzing industries with low fixed
costs. True or False
Answer: False
15. A
cost leadership strategy can be highly destructive to the firm with the largest
market share if pursued concurrently by a number of firms with very different
market shares. True or False
Answer: False
16. A
differentiation strategy is one in which customers believe that various
competitors have significantly different cost structures. True or False
Answer: False
17. A differentiation
strategy is one in which a firm’s products are perceived by customers to be
slightly different from other firms’ products in the same industry. True or
False
Answer: True
18. Firms
adopting a focus strategy tend to concentrate their efforts by selling a few
products to a single market and compete primarily on price. True or False
Answer: False
19. Firms
adopting a focus strategy compete primarily based on their superior
understanding of how to satisfy their customers needs better than the competition.
True or False
Answer: True
20. Coca
Cola is an example of a company that pursues both a differentiation and cost
leadership strategy. True or False
Answer: False
21. The
evolution of the growth of a product can be characterized in four stages: embryonic,
growth, maturity, and decline. This description is called a business
attractiveness matrix. True or False
Answer: False
22. Strong
sales growth and low entry barriers characterize the embryonic and growth
stages of a product’s life cycle.
True or False
Answer: True
23. An
acquisition plan defines the objectives to be achieved by acquiring another
firm, management’s preferences as to how the acquisition process should be
managed, resources required, and the roles and responsibilities of those
responsible for implementing the plan. True or False
Answer: True
24. An
acquisition plan is developed if management determines that an acquisition or
merger is required to implement the firm’s business strategy. True or False
Answer: True
25. Resource
limitations in developing the acquisition plan include money, borrowing
capacity, as well as management time and skills. True or False
Answer: True
26. Operating
risk addresses the ability of the buyer to manage the acquired company. True or
False
Answer: True
27. An
acquisition is one of many options available for implementing a firm’s business
plan. True or False
Answer: True
28. Financial
risk refers to the buyer’s willingness and ability to leverage a transaction as
well as the willingness of shareholders to accept near-term earnings per share
dilution. True or False
Answer: True
29. Examples
of management preferences used in an acquisition plan include their preference
for an asset or stock purchase or openness to partial rather than full
ownership of the target firm. True or False
Answer: True
30. While
management’s upfront involvement in the acquisition process is crucial,
management should largely disengage from the process until the transaction is
completed. True or False
Answer: False
31. Market
profiling entails collecting sufficient data to accurately assess and
characterize a firm’s competitive environment within its chosen markets. True
or False
Answer: True
32. Potential
competitors include firms (both domestic and foreign) in the current market,
those in related markets, current customers, and current suppliers. True or
False
Answer: True
33. The
market or markets in which a firm chooses to compete should reflect the fit
between the firm’s primary strengths and its ability to satisfy customers needs
better than the competition. True or False
Answer: True
34. A
cost leadership strategy is most appropriate when pursued concurrently by a
number of firms in the same industry with approximately the same market share.
True or False
Answer: False
35. The
joint venture may represent an attractive alternative to a merger or
acquisition. True or False
Answer: True
36. Stakeholders
only include a firm’s shareholders. True or False
Answer: False
37. The
implementation strategy refers to the way in which a firm chooses to implement
its business strategy. True or False
Answer: True
38. A
merger or acquisition is generally not considered an example of an
implementation strategy. True or False
Answer: False
39. Contingency
plans are actions that are taken as an alternative to the firm’s current
business strategy. True or False
Answer: True
40. Good
planning expedites sound decision making. True or False
Answer: True
41. Planning
in advance of a merger or an acquisition necessarily slows down decision
making. True or False
Answer: False
42. A
collection of markets is said to comprise an industry. True or False
Answer: True
43. A
corporate mission statement seeks to describe the corporation’s purpose for
being and where the corporation hopes to go. True or False
Answer: True
44. A
diversification strategy involves a firm moving into only those businesses
which are unrelated to the firm’s current core business. True or False
Answer: False
45. Management
can obtain insight into the firm’s probable future cash requirements and in
turn its value by determining its position in its industry’s product life
cycle. True or False
Answer: True
46. Accounting
considerations rarely affect the decision to buy another business rather than
to build the business internally. True or False
Answer: False
47. Overpayment
risk involves the dilution of EPS or a reduction in its growth rate resulting
from paying significantly more than the economic value of the acquired firm.
True or False
Answer: True
48. Acquisition
plan objectives should be directly linked to key business plan objectives. True
or False
Answer: True
49. The
acquisition plan provides the detail needed to implement effectively the firm’s
business strategy, True or False
Answer: True
50. The
acquisition plan establishes a schedule of milestones to keep the process on
track and clearly defines the authority and responsibilities of the individual
charged with managing the acquisition process. True or False
Answer: True
Circle only one of the options.
1. All
of the following represent commonly found components of a well-constructed
business plan except for
2. Mission
statement
3. Strategy
4. Acquisition
plan
5. Objectives
6. Tactical
or implementation plans
Answer: C
2. Which
of the following represent key components of the acquisition process
3. Business
plan
4. Integration
plan
5. Search
plan
6. Negotiation
process
7. All
of the above
Answer: E
3. Which
of the following best defines market segmentation
4. The
identification of customers with common characteristics and needs
5. The
identification of customers with heterogeneous characteristics and needs
6. The
grouping of customers with different characteristics
7. The
process of reducing large markets into smaller markets without regard to
customer characteristics
8. The
process of identifying the various markets that comprise an industry without
regard to customer characteristics
Answer: A
4. Determining
how to compete requires a firm’s management to consider which of the following
factors?
5. Factors
critical to successfully competing in its targeted markets
6. An
external market analysis
7. An
evaluation of what criteria customers use to make buying decisions
8. Availability
of product substitutes
9. All
of the above
Answer: E
5. Determining
where a firm should compete requires management to consider which of the following
factors?
6. Determining
the firm’s current customers only
7. Determining
the firm’s potential customers only
8. Determining
the needs of current and potential customers, as well as suppliers
9. Determining
the needs of potential suppliers only
10. A and
D only
Answer: C
6. Market
profiling requires an analysis of all of the following factors except for:
7. Customers
8. Suppliers
9. Core
competencies
10. Current
and potential competitors
11. Product
or service substitutes
Answer: C
7. All
of the following questions are relevant for conducting a self-assessment or
internal analysis of the firm except for
8. What
are the firm’s critical strengths and weaknesses as compared to the
competition?
9. Can
the firm’s critical strengths be easily duplicated and surpassed by the
competition?
10. Can
the firm’s critical strengths be used to gain strategic advantage in the firm’s
chosen market?
11. What
are the least important factors customers consider in making purchasing
decisions?
12. Can
the firm’s key weaknesses be exploited by the competition?
Answer: D
8. Which
of the following examples represents the best application of a firm’s primary
core competence?
9. Honda
Motors manufactures cars, motorcycles, lawnmowers, and snow blowers
10. IBM
provides both software services and manufactures computer hardware
11. PepsiCo
manufactures and distributes soft drinks and manages restaurant chains
12. Microsoft
sells operating system software and access to the internet through its MSN
subscription service
13. McDonalds
sells hamburgers and pizza.
Answer: A
9. What
is the core competence underlying Honda Corporation product offering?
10. Product
distribution
11. Marketing
12. Internal
combustion engine design
13. Exterior
design
14. Organizational
structure
Answer: C
10. In
selecting an appropriate business strategy, all of the following are relevant
questions except for
11. Does
the firm have sufficient resources to implement the strategy?
12. Have
all reasonable alternatives available for implementing the strategy been
evaluated?
13. What
are the key assumptions underlying the various strategic options under consideration?
14. What
do the firm’s targeted customers primarily consider in making purchasing
decisions?
15. Why
might an acquisition be preferred to a joint venture in implementing the
business strategy?
Answer: E
11. In a
conducting a self-assessment, a firm should consider all of the following
except for
12. The
degree on government regulation in its targeted markets
13. The
effectiveness of its R&D activities
14. Product
quality
15. Responsiveness
to changing customer needs
16. Brand
name recognition
Answer: A
12. A
good mission statement should be
13. Very
broadly defined
14. Very
narrowly defined
15. Reference
the firm’s targeted markets, product or service offering, distribution channels
and management’s core operating beliefs
16. Describe
only the purpose of the corporation
17. A and
C only
Answer: C
13. All
of the following represent generic business strategies except for
14. Cost
leadership
15. Differentiation
16. Focus
17. Market
segmentation
18. A and
D
Answer: D
14. All
of the following are true about experience curves except for
15. Applicable
primarily to differentiation strategies
16. Applicable
primarily to cost leadership strategies
17. Reflect
declining average unit costs due to increasing accumulated production levels
18. Reflect
both economies of scale and the introduction of more efficient production
methods as output increases
19. Often
found in commodity-type industries
Answer: A
15. All
of the following are true about product life cycles except for
16. Strong
sales growth and low barriers to entry often characterize the early stages of a
product’s introduction
17. New
entrants have substantially poorer cost positions, as a result of their small
market shares when compared to earlier entrants.
18. Later
phases are characterized by slower market growth rates
19. During
the high growth phases, firms usually experience high positive operating cash
flow
20. The
introduction of product enhancements can extend a firm’s product life cycle
Answer: D
16. An
acquisition plan entails all of the following except for
17. Identifies
key management objectives for making an acquisition
18. Determines
important resource constraints
19. Articulates
management’s preferences for acquiring stock or assets or considering
competitors as possible targets
20. Constitutes
the firm’s business plan
21. Defines
roles and responsibilities of those on the acquisition team
Answer: D
17. Which
of the following are ways to implement a firm’s business strategy?
1. Merge
or acquisition
2. Joint
venture
3. Going
it alone
4. Asset
swap
5. All
of the above
Answer: E
18. Which
of the following are components of an acquisition plan?
1. Timetable
2. Resource/capability
evaluation
3. Management
preferences
4. Objectives
5. All
of the above
Answer: E
19. Which
of the following are components of a business strategy?
1. Mission/vision
2. Objectives
3. Internal
analysis
4. External
analysis
5. All
of the above
Answer: E
20. Stakeholders
include which of the following groups?
1. Shareholders
2. Customers
3. Lenders
4. Suppliers
5. All
of the above
Answer: E
21. Which
of the following are true of real options?
1. Real
options give management the ability to delay the implementation of a strategy
2. Real
options give management the ability to accelerate the implementation of a
strategy
3. Real
options give management the ability to abandon a strategy
4. Real
options represent the ability of management to change their strategy after the
strategy has been
implemented.
1. All
of the above
Answer: E
22. Which
of the following are not components of the negotiation phase of the acquisition
process?
1. Refining
valuation
2. Identifying
potential target firms
3. Conducting
due diligence
4. Structuring
the deal
5. Developing
the financing plan
Answer: B
23. Which
of the following phases of the acquisition process contains a “feedback” loop?
1. Negotiation
phase
2. Search
phase
3. Integration
phase
4. Post-closing
evaluation phase
5. Closing
Answer: A
24. Which
of the following are common objectives of an external analysis?
1. Determining
where to compete
2. Determining
how to compete
3. Identifying
core competencies
4. A
& B only
5. A, B,
& C
Answer: D
25. Examples
of corporate level strategies include which of the following:
1. Growth
2. Diversification
3. Operational
4. Financial
5. All
of the above
Answer: E
Case Study Short Essay Examination Questions
Adobe’s Acquisition of Omniture: Field of Dreams Marketing?
On September 14, 2009, Adobe announced its acquisition of
Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO Shantanu
Narayen announced that the firm was pushing into new business at a time when
customers were scaling back on purchases of the company’s design software. Omniture
would give Adobe a steady source of revenue and may mean investors would focus
less on Adobe’s ability to migrate its customers to product upgrades such as
Adobe Creative Suite.
Adobe’s business strategy is to develop a new line of software
that was compatible with Microsoft applications. As the world’s largest
developer of design software, Adobe licenses such software as Flash, Acrobat,
Photoshop, and Creative Suite to website developers. Revenues grow as a result
of increased market penetration and inducing current customers to upgrade to
newer versions of the design software.
In recent years, a business model has emerged in which customers
can “rent” software applications for a specific time period by directly
accessing the vendors’ servers online or downloading the software to the
customer’s site. Moreover, software users have shown a tendency to buy from
vendors with multiple product offerings to achieve better product
compatibility.
Omniture makes software designed to track the performance of
websites and online advertising campaigns. Specifically, its Web analytic
software allows its customers to measure the effectiveness of Adobe’s content
creation software. Advertising agencies and media companies use Omniture’s
software to analyze how consumers use websites. It competes with Google and
other smaller participants. Omniture charges customers fees based on monthly
website traffic, so sales are somewhat less sensitive than Adobe’s. When the
economy slows, Adobe has to rely on squeezing more revenue from existing
customers. Omniture benefits from the takeover by gaining access to Adobe
customers in different geographic areas and more capital for future product
development. With annual revenues of more than $3 billion, Adobe is almost ten
times the size of Omniture.
Immediately following the announcement, Adobe’s stock fell 5.6
percent to $33.62, after having gained about 67 percent since the beginning of
2009. In contrast, Omniture shares jumped 25 percent to $21.63, slightly above
the offer price of $21.50 per share. While Omniture’s share price move
reflected the significant premium of the offer price over the firm’s
preannouncement share price, the extent to which investors punished Adobe
reflected widespread unease with the transaction.
Investors seem to be questioning the price paid for Omniture,
whether the acquisition would actually accelerate and sustain revenue growth,
the impact on the future cyclicality of the combined businesses, the ability to
effectively integrate the two firms, and the potential profitability of future
revenue growth. Each of these factors is considered next.
Adobe paid 18 times projected 2010 earnings before interest,
taxes, depreciation, and amortization, a proxy for operating cash flow.
Considering that other Web acquisitions were taking place at much lower
multiples, investors reasoned that Adobe had little margin for error. If all
went according to plan, the firm would earn an appropriate return on its
investment. However, the likelihood of any plan being executed flawlessly is
problematic.
Adobe anticipates that the acquisition will expand its
addressable market and growth potential. Adobe anticipates significant
cross-selling opportunities in which Omniture products can be sold to Adobe
customers. With its much larger customer base, this could represent a
substantial new outlet for Omniture products. The presumption is that by
combining the two firms, Adobe will be able to deliver more value to its
customers. Adobe plans to merge its programs that create content for websites
with Omniture’s technology. For designers, developers, and online marketers,
Adobe believes that integrated development software will streamline the
creation and delivery of relevant content and applications.
The size of the market for such software is difficult to gauge.
Not all of Adobe’s customers will require the additional functionality that
would be offered. Google Analytic Services, offered free of charge, has put
significant pressure on Omniture’s earnings. However, firms with large
advertising budgets are less likely to rely on the viability of free analytic
services.
Adobe also is attempting to diversify into less cyclical
businesses. However, both Adobe and Omniture are impacted by fluctuations in
the volume of retail spending. Less retail spending implies fewer new websites
and upgrades to existing websites, which directly impacts Adobe’s design
software business, and less advertising and retail activity on electronic
commerce sites negatively impacts Omniture’s revenues. Omniture receives fees
based on the volume of activity on a customer’s site.
Integrating the Omniture measurement capabilities into Adobe
software design products and cross-selling Omniture products into the Adobe
customer base require excellent coordination and cooperation between Adobe and
Omniture managers and employees. Achieving such cooperation often is a major
undertaking, especially when the Omniture shareholders, many of whom were
employees, were paid in cash. The use of Adobe stock would have given them
additional impetus to achieve these synergies in order to boost the value of
their shares.
Achieving cooperation may be slowed by the lack of
organizational integration of Omniture into Adobe. Omniture will become a new
business unit within Adobe, with Omniture’s CEO, Josh James, joining Adobe as a
senior vice president of the new business unit. He will report to Narayen. This
arrangement may have been made to preserve Omniture’s corporate culture.
Adobe is betting that the potential increase in revenues will
grow profits of the combined firms despite Omniture’s lower margins. Whether
the acquisition will contribute to overall profit growth depends on which
products contribute to future revenue growth. The lower margins associated with
Omniture’s products would slow overall profit growth if the future growth in
revenue came largely from Omniture’s Web analytic products.
Discussion Questions:
1. Who
are Adobe’s and Omniture’s customers and what are their needs?
Answer: Adobe’s customers include anyone interested in
developing Web content that is readable on PCs, Apple computers, and other
computer platforms as well as website designers. There needs would include ease
of use, flexibility, and cost.
Omniture’s customers include online advertisers and retailers
engaging in electronic commerce. There needs would include cost and accuracy of
software intended to determine how effective advertisements are and how site
users utilize the website content.
2. What
factors external to Adobe and Omniture seem to be driving the transaction? Be
specific.
Answer: Such factors include the emergence online renting of
software and a desire by larger customers to license different software from
the same vendor in an effort to achieve better compatibility. Omniture’s sales
were under pressure from Google Analytics’ free software.
3. What
factors internal to Adobe and Omniture seem to be driving the transaction? Be
specific.
Adobe’s core skills were in the area of developing Web design
software, licensing such software to customers and moving customers to upgrade
to new versions of the software in order to grow revenue. Omniture’s skills lay
in developing Web site optimization and measurement software and applying a
subscription based model in which customers pay based on the volume of site users.
4. How
would the combined firms be able to better satisfy these needs than the
competition?
Answer: By offering multiple products, Adobe might be able
to provide better product compatibility than its competitors. Customers have in
the past been willing to buy design products as needed and measurement products
as needed. Historically, Adobe and Omniture seem to serve largely separate
customer groups. Also, it is unclear why the combined firm’s would be able to
outsell such competitors as the much better capitalized Google offering free
Web analytical software. and smaller firms that might be able to undercut them
on price.
5. Do
you believe the transaction can be justified based on your understanding of the
strengths and weaknesses of the two firms and perceived opportunities and
threats to the two firms in the marketplace? Be specific.
Answer: No. The two firms had significantly different core
skills. Adobe specialized in developing Web design software sold under the
conventional licensing model while Omniture developed optimization and
measurement software distributed under a subscription model. It is unclear if
sufficient technology transfer can take place between the two firms to enable
to integration of their software, especially in view of the way Omniture would
be included in Adobe and the use of cash rather than stock to acquire Omniture.
While the trend toward renting software and having larger enterprises buy
different software packages from a single vendor is real, it is highly
uncertain that Adobe will be able to charge a high enough price for its
integrated product offering or to cross-sell Omniture products into its current
customer group in order to earn a competitive rate of return on its $1.8
billion investment .
CenturyTel Buys Qwest Communications to Cut Costs and Buy Time
as the Landline Market Shrinks
Key Points:
·
Market segmentation can be used to identify “underserved”
segments which may sustain firms whose competitive position in larger markets
is weak.
·
A firm’s competitive relative is best viewed in comparison to
those firms competing in its served market rather than with industry leading
firms.
____________________________________________________________________________________________
In what could best be described as a defensive acquisition,
CenturyTel, the fifth largest local phone company in the United States,
acquired Qwest Communications, the country’s third largest, in mid-2010 in a
stock swap valued at $10.6 billion. While both firms are dwarfed in size by
AT&T and Verizon, these second-tier telecommunications firms will control a
larger share of the shrinking landline market.
The combined firms will have about 17 million phone lines
serving customers in 37 states. This compares to AT&T and Verizon with
about 46 and 32 million landline customers, respectively. The deal would enable
the firms to reduce expenses in the wake of the annual 10 percent decline in
landline usage as people switch from landlines to wireless and cable
connections. Expected annual cost savings total $575 million; additional
revenue could come from upgrading Qwest’s landlines to handle DSL Internet.
In 2010, about one-fourth of U.S. homes used only cell phones,
and cable behemoth Comcast, with 7.6 million residential and business phone
subscribers, ranked as the nation’s fourth largest landline provider.
CenturyTel has no intention of moving into the wireless and cable markets,
which are maturing rapidly and are highly competitive.
While neither Qwest nor CenturyTel owns wireless networks and
therefore cannot offset the decline in landline customers as AT&T and
Verizon are attempting to do, the combined firms are expected to thrive in
rural areas where they have extensive coverage. In such geographic areas,
broadband cable Internet access and fiber-optics data transmission line
coverage are is limited. The lack of fast cable and fiber-optics transmission
makes voice over Internet protocol (VOIP)—Internet phone service offered by
cable companies and independent firms such as Vonage—unavailable. Consequently,
customers are forced to use landlines if they want a home phone. Furthermore,
customers in these areas must use landlines to gain access to the Internet
through dial-up access or through a digital subscriber line (DSL).
Discussion Questions
1. How
would you describe CenturyTel’s business strategy? Be specific.
2. 2.
Describe the key factors both external and internal to the firm that you
believe are driving this strategy.
3. Why
might the acquisition of Qwest be described as defensive?
Oracle Continues Its Efforts to Consolidate the Software
Industry
Oracle CEO Larry Ellison continued his effort to implement his
software industry strategy when he announced the acquisition of Siebel Systems
Inc. for $5.85 billion in stock and cash on September 13, 2005. The global
software industry includes hundreds of firms. During the first nine months of
2005, Oracle had closed seven acquisitions, including its recently completed
$10.6 billion hostile takeover of PeopleSoft. In each case, Oracle realized substantial
cost savings by terminating duplicate employees and related overhead expenses.
The Siebel acquisition accelerates the drive by Oracle to overtake SAP as the
world’s largest maker of business applications software, which automates a wide
range of administrative tasks. The consolidation strategy seeks to add the
existing business of a competitor, while broadening the customer base for
Oracle’s existing product offering.
Siebel, founded by Ellison’s one-time protégé turned bitter
rival, Tom Siebel, gained prominence in Silicon Valley in the late 1990s as a
leader in customer relationship management (CRM) software. CRM software helps
firms track sales, customer service, and marketing functions. Siebel’s
dominance of this market has since eroded amidst complaints that the software
was complicated and expensive to install. Moreover, Siebel ignored customer
requests to deliver the software via the Internet. Also, aggressive rivals,
like SAP and online upstart Salesforce.com have cut into Siebel’s business in
recent years with simpler offerings. Siebel’s annual revenue had plunged from
about $2.1 billion in 2001 to $1.3 billion in 2004.
In the past, Mr. Ellison attempted to hasten Siebel’s demise,
declaring in 2003 that Siebel would vanish and putting pressure on the smaller
company by revealing he had held takeover talks with the firm’s CEO, Thomas
Siebel. Ellison’s public announcement of these talks heightened the personal
enmity between the two CEOs, making Siebel an unwilling seller.
Oracle’s intensifying focus on business applications software
largely reflects the slowing growth of its database product line, which
accounts for more than three fourths of the company’s sales.
Siebel’s technology and deep customer relationships give Oracle
a competitive software bundle that includes a database, middleware (i.e.,
software that helps a variety of applications work together as if they were a
single system), and high-quality customer relationship management software. The
acquisition also deprives Oracle competitors, such as IBM, of customers for
their services business.
Customers, who once bought the so-called best-of-breed products,
now seek a single supplier to provide programs that work well together. Oracle
pledged to deliver an integrated suite of applications by 2007. What brought
Oracle and Siebel together in the past was a shift in market dynamics. The
customer and the partner community is communicating quite clearly that they are
looking for an integrated set of products.
Germany’s SAP, Oracle’s major competitor in the business
applications software market, played down the impact of the merger, saying they
had no reason to react and described any deals SAP is likely to make as
“targeted, fill-in acquisitions.” For IBM, the Siebel deal raised concerns
about the computer giant’s partners falling under the control of a competitor.
IBM and Oracle compete fiercely in the database software market. Siebel has
worked closely with IBM, as did PeopleSoft and J.D. Edwards, which had been
purchased by PeopleSoft shortly before its acquisition by Oracle. Retek,
another major partner of IBM, had also been recently acquired by Oracle. IBM
had declared its strategy to be a key partner to thousands of software vendors
and that it would continue to provide customers with IBM hardware, middleware,
and other applications.
Discussion Questions:
1. How
would you characterize the Oracle business strategy (i.e., cost leadership,
differentiation, niche, or some combination of all three)? Explain your answer.
Answer: The business strategy can best be described as a cost
leadership strategy focused on business application software in which Oracle
seeks to add the revenue from acquired companies without taking on much
additional cost and to achieve revenue growth for its existing product lines by
cross-selling its current products to the customers of the newly acquired
businesses. This requires that the existing Oracle infrastructure to
support the sales, marketing, and customer service functions formerly supported
by the acquired firm’s infrastructure. Moreover, The Oracle strategy is
characterized by substantial economies of scale to the extent that it can
achieve better utilization of its operations and economies of scope to the
extent it can have existing departments support additional product lines or
customer groups. Substantial cost savings are achieved by terminating
redundant employees and by spreading fixed costs over a larger revenue
stream. The strategy could also be viewed as a niche strategy to the
extent it is focused on increasing the firm’s share of the business application
software market by targeting customers seeking vendors capable of supplying a
range of business software that works well together. The strategy also
has elements of a differentiation strategy in that Oracle is attempting to
distinguish itself from single product vendors by developing the capability to
provide integrated business software applications.
2. What
other benefits for Oracle, and for the remaining competitors such as SAP, do
you see from further industry consolidation? Be specific.
Answer: Industry consolidation could provide Oracle and
the remaining competitors with additional pricing power by narrowing the range
of choices available to customers.
3. Conduct
an external and internal analysis of Oracle. Briefly describe those factors
that influenced the development of Oracle’s business strategy. Be specific.
Answer: From an external point of view, Oracle’s core product
offering, database software, is maturing. Since the product represents
three-fourths of the firm’s revenue, it is unlikely to achieve rapid growth as
long as it remains focused on this market segment. Moreover, customers have
made it clear that they are looking for vendors capable of providing a full
range of integrated software products. From an internal point of view,
Oracle’s core competency is in developing and marketing database software,
essentially a niche product. Moreover, their database systems are based
on proprietary software that does not easily integrate into a customer’s
existing software infrastructure. These external and internal
considerations necessitated a change in business strategy to broaden both the
firm’s product offering and skill set to support such an offering.
4. In
what way do you think the Oracle strategy was targeting key competitors? Be
specific.
Answer: The strategy targets competitors by eliminating
partners with whom competitors had worked to augment their product offering to
customers.
HP Redirects Its Mobile Device Business Strategy with the
Acquisition of Palm
With global PC market growth slowing, Hewlett-Packard (HP),
number one in PC sales worldwide, sought to redirect its business strategy for
mobile devices. Historically, the firm has relied on such partners as Microsoft
to provide the operating systems for its mobile phones and tablet computer
products. However, the strategy seems to have contributed to the firm’s
declining smartphone sales by limiting its ability to differentiate its
products and by delaying new mobile product introductions.
HP has been selling a smartphone version of its iPaq handheld
device since 2007, although few consumers even knew HP made such devices, since
its products were aimed at business people. Sales of iPaq products fell to $172
million in 2009 from $531 million in 2007 and to less than $100 million
(excluding sales of Palm products) in 2010.
With smartphone sales expected to exceed laptop sales in 2012,
according to industry consultant IDC, HP felt compelled to move aggressively
into the market for handheld mobile devices. The major challenge facing HP is
to overcome the substantial lead that Apple, Google, and Research-In-Motion
(RIM) have in the smartphone market.
To implement the new business strategy, HP acquired Palm in
mid-2010 in a deal valued at $1.4 billion (including warrants and convertible
preferred stock). HP acquired Palm at a time when its smartphone sales were
sliding, with Palm’s share of the U.S. market dropping below 5 percent in 2010.
Palm was slow to recognize the importance of applications (apps) designed
specifically for smartphones in driving sales. Palm has several hundred apps,
while the number for Apple’s iPhone and Google’s Android are in the tens of
thousands.
HP is hoping to leverage Palm’s smartphone operating system
(webOS) to become a leading competitor in the rapidly growing smartphone
market, a market that had been largely pioneered by Palm. HP hopes that webOS
will provides an ideal common “platform” to link the firm’s mobile devices and
create a unique experience for the user of multiple HP mobile devices. The
intent is to create an environment where users can get a common look and feel
and a common set of services irrespective of the handset they choose.
HP also acquired 452 patents and another 406 applications on
file. Palm offers one key potential competitive advantage in that its operating
system can run several tasks at once, just as a PC does; however, other
smartphones are expected to have this capability in the near future.
By buying Palm, HP signals a “go it alone” strategy in
smartphones and tablet computers at the expense of Microsoft. HP is also hoping
that by having a proprietary system, they will be able to differentiate their
mobile products in a way that Apple and Google have in introducing their
proprietary operating systems and distinguishing “look and feel.”
Through its sales of computer servers, software, and storage
systems, HP has significant connections with telecommunications carriers like
Verizon that could help promote devices based on Palm’s technology. Also,
because of its broad offering of PCs, printers, and other consumer electronics
products, HP has leverage over electronics retailers for shelf space.
Discussion Questions
1. To
what extent could the acquisition of Palm by HP be viewed as a “make versus buy
decision” by HP?
2. How
would you characterize the HP strategy for mobility products (cost leadership,
differentiation, focus, or a hybrid) and why?
BofA Acquires Countrywide Financial Corporation
On July 1, 2008, Bank of America Corp (BofA) announced that it
had completed its acquisition of mortgage lender Countrywide Financial Corp
(Countrywide) for $4 billion, a 70 percent discount from the firm’s book value
at the end of 2007. Countrywide originates, purchases, and securitizes
residential and commercial loans; provides loan closing services, such as
appraisals and flood determinations; and performs other residential real
estate–related services. This marked another major (but risky) acquisition by
Bank of America’s chief executive Kenneth Lewis in recent years. BofA’s
long-term intent has been to become the nation’s largest consumer bank, while
achieving double-digit earnings growth. The acquisition would help the firm
realize that vision and create the second largest U.S. bank. In 2003, BofA paid
$48 billion for FleetBoston Financial, which gave it the most branches,
customers, and checking deposits of any U.S. bank. In 2005, BofA became the
largest credit card issuer when it bought MBNA for $35 billion.
The purchase of the troubled mortgage lender averted the threat
of a collapse of a major financial institution because of the U.S. 2007–2008
subprime loan crisis. U.S. regulators were quick to approve the takeover
because of the potentially negative implications for U.S. capital markets of a
major bank failure. Countrywide had lost $1.2 billion in the third quarter of
2007. Countrywide’s exposure to the subprime loan market (i.e., residential
loans made to borrowers with poor or nonexistent credit histories) had driven
its shares down by almost 80 percent from year-earlier levels. The bank was
widely viewed as teetering on the brink of bankruptcy as it lost access to the
short-term debt markets, its traditional source of borrowing.
Bank of America deployed 60 analysts to Countrywide’s
headquarters in Calabasas, California. After four weeks of analyzing
Countrywide’s legal and financial challenges and modeling how its loan
portfolio was likely to perform, BofA offered an all-stock deal valued at $4
billion. The deal valued Countrywide at $7.16 per share, a 7.6 discount to its
closing price the day before the announcement. BofA issued 0.18 shares of its
stock for each Countrywide share. The deal could have been renegotiated if
Countrywide experienced a material change that adversely affected the business
between the signing of the agreement of purchase and sale and the closing of
the deal. BofA made its initial investment of $2 billion in Countrywide in
August 2007, purchasing preferred shares convertible to a 16 percent stake in
the company. By the time of the announced acquisition in early January 2008,
Countrywide had a $1.3 billon paper loss on the investment.
The acquisition provided an opportunity to buy a market leader
at a distressed price. The risks related to the amount of potential loan
losses, the length of the U.S. housing slump, and potential lingering
liabilities associated with Countrywide’s questionable business practices. The
purchase made BofA the nation’s largest mortgage lender and servicer,
consistent with the firm’s business strategy, which is to help consumers meet
all their financial needs. BofA has been one of the relatively few major banks
to be successful in increasing revenue and profit following acquisitions by “cross-selling”
its products to the acquired bank’s customers. Countrywide’s extensive retail
distribution network enhances BofA’s network of more than 6,100 banking centers
throughout the United States. BofA had anticipated almost $700 million in
after-tax cost savings in combining the two firms. Almost two-thirds of these
savings had been realized by the end of 2010. In mid-2010, BofA agreed to pay
$108 million to settle federal charges that Countrywide had incorrectly
collected fees from 200,000 borrowers who had been facing foreclosure.
Discussion Questions:
1. How
did the acquisition of Countrywide fit BofA’s business strategy? Be specific.
What were the key assumptions implicit the BofA’s business strategy? How
did the existence of BofA’s mission and business strategy help the firm move
quickly in acquiring Countrywide?
Answer: BofA mission is to become the nation’s largest consumer
bank. Its strategy is to provide a full range of financial services (e.g.,
credit/savings accounts, credit cards, home-equity loans, mortgages, etc.) to
its customers. A mortgage tends to be among the largest financial commitments
most households will make. Once this relationship is established, BofA hopes to
sell the household additional financial services. The acquisition of
Countrywide would enable BofA to realize its mission and strategy by adding
thousands of new customers.
BofA is implicitly assuming that the Countrywide customer base
will not erode during the integration of the two firms and those customers that
remain will be receptive to buying BofA products and services. The attrition
rate of the customer base is likely to be substantial as BofA will have to
renegotiate loan terms with some Countrywide customers while forcing others
into foreclosure. The resulting public relations nightmare may well tarnish
BofA’s reputation for some time to come. Future loan losses and customer
attrition could imperil BofA’s future revenue and earnings growth rates.
BofA had an established mission and business strategy, which
enabled them to determine immediately that Countrywide would fit their
long-term intentions. The takeover also represented an opportunity to pick up
market share by acquiring a major competitor at a time when the regulatory
authorities would be more willing to approve such a combination. Under more
normal circumstances, the regulators would have disallowed the takeover because
of the potential accumulation of market power in a single lender in the U.S.
residential mortgage market.
1. How
would you classify the BofA business strategy (cost leadership,
differentiation, focus or some combination)? Explain your answer.
Answer: BofA followed a hybrid focus strategy (i.e., a
combination of differentiation and focus). The bank endeavored to target a very
large and growing U.S. market for consumer loans and related services. By
catering to consumers, the bank hoped to develop substantial expertise in
anticipating and satisfying consumer needs better than its competitors. In
doing so, it hoped to differentiate itself from its competitors by being known
as the premier provider of financial services to the consumer market.
1. Describe
what the likely objectives of the BofA acquisition plan might have been. Be
specific. What are the key assumptions implicit in BofA’s acquisition
plan? What are some of the key risks associated with integrating the
Countrywide? In addition to the purchase price, how would you determine
BofA’s potential resource commitment in making this acquisition?
Answer: The acquisition plan objectives could have been to
secure access to Countrywide’s branch and ATM network and brand name at a
fraction of book value and to limit any further erosion in the value of its
prior $2 billion investment in Countrywide convertible preferred shares.
The immediate need was to assess the likelihood of continuing loan losses that
Countrywide might incur, potential cost savings, as well as potential
opportunities for selling current Countrywide customers additional financial
products and services. Senior management showed a preference for stock as
a form of payment. BofA chose to use stock rather than cash as a form of
payment because the issuance of new shares would result in little dilution of
BofA’s earnings per share. Because of Countrywide’s depressed share price, BofA
was able to issue relatively few new shares.
BofA is assuming that it can manage probable future loan losses
and customer attrition without seriously impairing the firm’s equity capital
base. Banks are required by regulators to maintain a certain ratio of equity to
loans outstanding. Any erosion in the bank’s capital could restrict future loan
growth, earnings, and share price appreciation. BofA is also assuming that it
can integrate Countrywide seamlessly (while continuing to absorb earlier
acquisitions) without disrupting the firm’s ongoing operations. A key risk is
that it will alienate not only Countrywide’s current customers but also its own
customers as service disruptions occur. Other risks include the potential
for the housing downturn to continue longer than expected.
While BofA was paying $4 billion for Countrywide, its actual
resource commitment could be much larger. The resource commitment includes the
cash infusion necessary to restore the combined firms’ capital to levels
required by industry regulators. Capital could be seriously eroded by future
loan losses. In addition, in view of the depth of Countrywide’s problems,
BofA’s management will have to commit a substantial amount of their time to
monitoring the integration of the two firms.
1. What
capabilities did the acquisition of FleetBoston Financial and MBNA provide
BofA? How did the Countrywide acquisition complement previous acquisitions?
Answer: The acquisition of FleetBoston Financial augmented
the BofA’s infrastructure by providing an extensive branch network and added
customers and new accounts. The latter considerations offered the prospect of
selling these new customers more services. MBNA broadened BofA’s product
offering by adding many new credit card customers. Such customers would also
represent opportunities to sell additional services. The addition of
Countrywide was a natural extension of BofA’s strategy of providing a full
array of s services to consumers. The addition of all three banks added to BofA’s
size and increased the opportunity to realize cost savings related to economies
of scale and scope.
1. What
options to outright acquisition did BofA have? Why do you believe BofA chose to
acquire Countrywide rather than to pursue an alternative strategy?
Answer: With bankruptcy a real possibility, BofA could have
simply waited until Countrywide sought protection of the bankruptcy court and
then sought to acquire the firm while in bankruptcy, with the acquisition
conditioned on the Court’s and other creditors’ willingness to forgive much of
the firm’s debt. The main advantage would have been that BofA might have been
able to avoid many of Countrywide’s obligations. The disadvantages of this
approach included that other bidders might have emerged boosting the eventual
purchase price. Alternatively, the firm could have been liquidated rather
than reorganized, potentially resulting in a loss of potential synergies as the
firm’s infrastructure, ATM and branch networks were sold in pieces.
Finally, customer attrition could have accelerated during bankruptcy
proceedings reducing the value of the acquisition.
Nokia’s Gamble to Dominate the Smartphone Market Falters
The ultimate success or failure of any M&A transaction to
satisfy expectations often is heavily dependent on the answer to a simple
question. Was the justification for buying the target firm based on a sound
business strategy? No matter how bold, innovative, or precedent-setting a bad
strategy is, it is still a bad strategy.
In a bold move that is reminiscent of the rollout of Linux,
Nokia, a Finnish phone handset manufacturer, announced in mid-2008 that it had
reached an agreement to acquire Symbian, its supplier of smartphone operating
system software.[1] Nokia
also announced its intention to give away Symbian’s software for free in
response to Google’s decision in December 2008 to offer its Android operating
system at no cost to handset makers.
This switch from a model in which developers had to pay a
license fee to create devices using the Symbian operating system software to a
free (open source) model was designed to supercharge the introduction of
innovative handheld products that relied on Symbian software. Any individual or
firm can use and modify the Symbian code for any purpose for free. In doing so,
Nokia is hoping that a wave of new products using Symbian software would blunt
the growth of Apple’s proprietary system and Google’s open source Android
system.
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