motivations of takeover.docx

motivations of takeover.docx

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motivationsoftakeover

Whydoweneedacquisitions?

YIZEWU

SouthwestUniversityofFinanceandEconomics

1.Introduction

Duringthemid-1980s,theU.S.economyexperiencedthehighestlevelofcorporatetakeoveractivitysincethelatel960s.Thencomesthewaveofacquisitions.IthasalwaysbeennotedthatVodafoneboughtMannesmannfor$183billionorAmericanOnlinetookcontrolofTimeWarnerfor$181billion,thosestrikinghugecases.Itseemsthattakeoverhasbeenanewtrendinthemodernmarket.Sincethat,weneedtoprobeintotheintentionsbehindM&Aanddistinguishbetweenthefriendlyorhostilemotivesinordertoimprovethewaysweconductandsuperviseit.

2.Abstract

Inthisessay,Iwillroughlytalkaboutthevariousmotivationsfrommicroandmacrotwodifferentangles.

Inthemicropartwhichisthemajorpart,Iwillfocusonthediscussionaboutwhatincentivesencouragethemanagerstohuntforanothercompanyandhowthismoveinreturnwillbenefitthem.Intheotherpart,oureyeswillbethrustintofurtherandbroaderspace.Increasinglypopularacquisitionsmusthavesomethingtodowiththewholedevelopmentofthemarket.Thepotentialutilitiesbehindthemergersandacquisitionscanbealsoconsideredasthemotivationsofthisbusinessdecisions.

3.Contents:

Bidsaresometimessurprisestotargetfirmshareholders.Manypreviousstudieshavefoundalargepriceincreaseinthefewdayssurroundingtheoriginalbidannouncementandthisannouncementeffectismuchlargerperunitoftimethanobservedpricemovementsbefore.Whytheshareholderscangetmuchhigherpremiums,thereareafewreasonsforthat.

First,andalsothemajorone,isthattakingoverwillincreaseacompany‘smarketpowerfromacorporatecombination,whichcanbeshownvividlyintheLenovo&IBMcase.A$1.75billiondealwhichcombinesthetwotycoonsinthecomputer-manufacturingworldcreatesamuchstrongerplayerintheglobalindustry.

WiththeM&AwithIBMPC-department,LenovohasresetitsstrategicfocusonitsPCproductionandmadegooduseoftheinternationalbrands,ThinkPadforfiveyears.ItisestimatedthatcouldenableLenovotoreachmorenewcustomersabroadandbolstergrowththroughinternationalexpansion.Atthetimeofthenegotiatingconference,Lenovo’sshareofworldPCmarketwasonly2.2%andthecompanyrankednumbernine,behindDell,HP,IBM,Fujitsu/Siemens,Acer,Toshiba,NECandApple.ByacquiringIBM’sPCdivision,theChinesecompanywouldbecomethethirdlargestPCmakerintheworldovernight.Itbecamethefastest-growingcomputermakersinthirdconsecutivequarterandevengrewfasterthantheoverallmarketinthefiveconsecutivequarters.

Withencroachingbiggerandbiggerworldmarket,Lenovoisnowtheworld'sfourthlargestPCmakerandpostedthefastestgrowthamongthetopfiveglobalPCcompaniesforthefirstquarterof2010,accordingtoHowieLau,Lenovo'sAseanvicepresidentandgeneralmanager.

Aftertheacquisition

Rateofriseintotalsales

Marketshares

Netprofit

Profitpershare

Firstseason

48.1%

10.2%

$5.5mn

0.57

Secondseason

41%

10.4%

$5.93mn

0.54868

Thirdseason

45.7%

10.5%

$6.02mn

0.537

（sourcesfromthehttp:

//en.wikipedia.org/wiki/Lenovo）

NotonlyLenovo,butalsoothertakeovercases.Figuretells,beforemergersandacquisitions,mosttargetcompany'searningspershare,returnonnetassetsandthemainindustryprofitmarginshavedecreasedsignificantly,fromthreeyearsbeforethemergerandreorganizationtomergersandacquisitionsbefore1year,earningspershareaveragefellfrom0.2038to0.1098,thetwoduringtheyearreducedby36.11%;whiletheaveragenetreturnonequity（ROE）decreasedfrom2.65%to-12.23%;mainbusinessprofitmargindecreasedfrom23.19%to18.23%.Mergerandreorganizationoftheyearandthesecondyearhasimproved,theaverageearningspershareroseby29.96%and29.99%;rateofreturnonnetassetsincreasedby106.86percentand752.46percent;Mainbusinessprofitmarginincreasedby29.38%and5.69%.Dataabovecaninsomedegreedemonstratemypreviousconclusion.

Second,itincreasestheproductivityandreducetheproductioncostsbyintegratingdifferentstrengthsofdifferentfirms.Inthiscase,IBM’spcdivisionembraceskeytechnologypropertyrights,R&Dcapabilities,globalsaleschannelsandmatureoperationteamswhileChinahasoft-notedlargemarket,manufacturingbase,engineeringtalentandgovernmentencouragement.ThatwasconsideredtobeoneofthelargestbenefitsLenovocouldgainthroughintegratingwithIBMandwouldenableLenovotoachieveapotentialcompetitiveadvantagethroughreducedcostsofproduction.

Wecanproveitwithabsolutelytruth.Itisincreasinglydifficulttocutproductioncostsnowadays,giventhatmanycomputermakershavealreadymovedtheirPCproductiontolowcostcountriessuchasChina.Asanillustration,thelaborcostsforLenovowerearock-bottom$3perdesktopPC,whichisamongthelowestanywhere.Suchlowcosthelpeddriveitsoperatingexpensestolessthan9%ofrevenues,whichwashalftheaverageforothersimilar-leveledcomputerhardwaremakers.

Thereisalsoanimportanteconomicaltheorybehindthephenomenonwhichiscalledeconomiesofscale.Thatmeanslong-runaveragetotalcostdeclinesasoutputincreases.Thecombinationofdifferentstrengthsraisestheproductionlevelsoastoallowspecializationamongworkers.

Exceptforthedirectimprovementsintheproductionprocess,theycanalsobenefitduetothemoreefficientmanagementsystemandthemixedeasternandwesternculture.LenovolearnedalotofexperiencefromthemucholderIBMintheintegrationofdifferentcorporateculture,consideringtheprevioussuccessfulM&AbetweenIBMandLotus.LenovotookaCircuitoustacticswhichmeansnotplanningtointegratethemanagementsystemofIBMPCdepartmentinthefirstphaseafterM&A.Instead,Lenovodecidetomanagetwoteamsseparatelyatthefirststageinordertopreventmuchconflictfromarisinginthefirstphase.

Therefore,aseparatemanagementmodewasencouragedbyLenovotoallowIBMPC-Dtomaintainitsownmanagementsystemandprocedures.Fromthecorporatecultureperspective,Lenovobelievethatwiththeadvantagetothesimilaritybetweentwocompanies,itshouldnotbetoodifficulttointegratetwocorporatecultures.Evenat,thepre-planningstage,theorganizationhasdesignedarangeofstrategysuchascocktailparty,acultureintegrationdiscussionboard.Inaddition,acultureintegrationcommitteewasvoluntarilysetupbyemployeesfromvariousdepartmentstodesigninitiativestoencouragecommunicationbetweentwoteams.AndtheincreasingpressuretocommunicatewithcolleaguesfromotherregionsforcedmanystaffsintheChinaregiontotaketrainingcoursestoimprovetheirEnglishability.Mostagreedthatthemarriagewasamotivationfortheemployeesinthelocalbranchtoupgradeself-ability.Andthemixedlogicofdifferentcorporateculturebroughtalotofsurprises.DuetothedifferenceinnationalculturehasaffectedthejobtasksofsomepositionswithinthenewcompanyThiscanbenotedfromaninterestingexampleprovidedbytheparticipant:

“Traditionally,theChinese’sperceptiononthejobdescriptionsofasecretaryisthatthesecretaryisexpectedtoprovideservicestohermanagersinallmannerswhichcansupportandhelptosmoothitsmanager’sjobthatwillgetmoreefficient.Ontheotherhand,asecretaryinWesterncountrieswouldbefocusedonthejobtaskswithintheorganizationratherthanonthemanager.Therefore,theemployeesintheChinaregionworkingwithotherinternationalcolleaguesaftertheacquisitionhavemadesomeminorchangesintheirexpectationofasecretary.Frommypointofview,Ibelievedthatnow,thesecretaryismoreprofessionalthanbeforeinthatsheisfocusingmoreontheday-to-dayoperatingtaskswithintheorganizationthanthejobofapersonalassistanttohermanager.”

Overall,themildstrategythatLenovohasadoptedtomanagetwoteamsseemstohaveworkedwellandthecultureintegrationcommitteeappearstohaveservedwellinencouragingthecommunicationbetweentwoteams.（referencesfrom“AchievingSuccessfulCross-CulturalandManagementIntegration:

TheExperienceofLenovoandIBM”BySharonaPeng）

Third,Increasetheunderestimatedlistedfirms’valuethroughenlargingbrandportfolio.

AsignificantmotiveforLenovobehindtheM&AwastheagreementwithIBMtobeabletousetheinternationalbrand,theThinkPad,forfiveyears.Chinesebusinesseskeentosellintheinternationalmarketrecognizethedauntingchallengethatfaceinbuildinginternationalbrands（HirtandOrr,2006）.Chineseheritagebrandsarelargelyregardedasprovidersofbasicvalueorunknownnamesonabox.Acquiringawellknowninternationalcompanywould,allowLenovotousethebrandoftheacquiredcompanyinthefirststageofintroducingtheproducttotheinternationalmarketandmightincreasethewillingnessofcustomerstotrytheproduct.SomeparticipantshaveindicatedthatChina’sproducthasalwaysbeenmarketedaslowqualityandlessexpensiveproducts.Usingawell-knownbrandsuchasIBMcouldincreasetheimpressionofcustomertowardstheproduct,thusenablingLenovotomarketitsproductatthehigherendofthemarket.Therefore,acquiringthePCdepartmentfromIBMenabledthecompanytomoveforwardandtointernationalizeintotheglobalmarket.Acquiringbrandwasconsideredtobethemostimportantmotive.AsChineseproducthasalwaysbeenmarketedatthelowerendoftheproductlinewithlowcostsandpoorquality,acquiringIBM’sbrandwouldenableL