EF4312 Mergers and Acquisitions Chapter 5 Sources and Limits of Value Creation in Horizontal Mergers

1
EF4312 Mergers and Acquisitions Chapter 5
Sources and Limits of Value Creation in
Horizontal Mergers
2
Learning Objectives

• At the end of this chapter, you should be able to
  understand
• The nature of horizontal or horizontally related
  mergers
• The rationale for such mergers
• How value may be created from such mergers
• The limits on value creation and
• The empirical evidence for the success of
  horizontal mergers.

3
Introduction

• Merger of firms selling the same product or
  service is a pure horizontal merger
• Merger of firms selling products that share some
  commonalties like technology, marketing channels
  though not the end-use is a related merger.
• Horizontal mergers often happen in industries and
  markets with products in the mature or decline
  stages of the product life cycle.

4
Sources of Value in Horizontal Mergers
5
Motivations

• Motivations for horizontal mergers arise from
• Low overall growth for industry products
• Excess capacity
• Tough competition, price pressure and pressure to
  cut costs
• Excess capacity due to several factors
• Sources of value creation in horizontal mergers
• Revenue enhancement
• Cost reduction
• Generating new resources and capabilities and
  thereby revenue growth or cost saving

6
Motivations

• Revenue enhancement in mergers may come from
• Increased market power
• Network externality or positive feedback from
  installed customer base
• Leveraging marketing resources and capabilities
• Cost savings in mergers may come from
• Reducing excess capacity
• Scale economies by spreading costs over an
  increased output of the same product
• Scope economies by spreading costs over an
  increased range of related products

7
The Value Net
8
Motivations

• Learning economies by reducing costs through
  efficiencies learnt through increasing the output
  of the same product over time
• These economies are maximised at the minimum
  efficient scale
• Diseconomies set in thereafter and organisational
  control problems prevent further efficiencies
• New growth opportunities also a source of value
  and come from creation of new technologies,
  products and markets

9
Plant-based Minimum Efficient Scale (MES) of
Production
10
Motivations

• They represent break-through and discontinuous
  changes in merging firms opportunities
• Acquisition often an exploratory investment in
  search of these unknown growth opportunities e.g.
  biotechnology
• Value creation in horizontal mergers based on
  redeployment of resources and capabilities
  between merging firms
• New growth opportunities depend on path-breaking
  changes through such redeployment

11
Resource redeployment

• Nature of resource redeployment and
  organisational capacity to accommodate it limit
  value created
• Not all resource transfers create unique and
  sustainable competitive advantage for merging
  firms
• Empirical evidence highlights difficulty of value
  creation through horizontal merger