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International Mergers & Acquisitions, Cooperations and Networks in the e-Business Industry

Focused on Google, Yahoo, MSN, YouTube, MySpace, Facebook, Studivz and others

Diploma Thesis 2007 160 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1. Introduction
1.1. Focus of the Book
1.2. Structure of the Book

2. International Mergers & Acquisitions, Cooperations and Networks in Business Administration Theory
2.1. Mergers & Acquisitions
2.1.1. Definitions, Characteristics, and the Concept of M&A
2.1.2. Concept of Synergy as a Main Motive for M&A—Other Motives
2.1.3. Structure of an M&A Process
2.1.4. Legal Framework—Regulatory Considerations
2.1.5. Financial Valuation in M&A
2.1.6. Key Success Factors in M&A
2.2. Cooperations
2.2.1. Definitions and Forms of Cooperative Arrangements
2.2.2. Theoretical Foundations for the Formation of Cooperations
2.2.3. Goals, Motives—Chances and Risks
2.2.4. Role of the Factors Power, Trust and Mistrust
2.2.5. Prerequisites for the Formation of a Cooperation
2.3. Strategic Alliances
2.3.1. Definitions, Characteristics, and Types of Strategic Alliances
2.3.2. Competitive Advantage and Value Creation in an Alliance
2.4. Joint Ventures
2.5. Networks
2.5.1. Definitions, Characteristics, and Types of Networks
2.5.2. Virtual Network
2.6. e-Business
2.6.1. Definitions—Market and Transaction Categories in e-Business
2.6.2. Components of an e-Business Model and e-Business Model Evaluation
2.6.3. Value Shop and the three Generic Strategies in e-Business
2.6.4. e-Business and the Creative Destruction Theory

3. Mergers & Acquisitions, Strategic Alliances, Joint Ventures and Networks in the International e-Business Industry
3.1. Merger & Acquisition Activities
3.1.1. e-Business M&A Activities in the United States
3.1.2. e-Business M&A Activities in Europe
3.1.3. e-Business M&A Activities in China
3.2. Strategic Alliance Activities
3.2.1. Strategic Alliance Activities in the United States
3.2.2. Cross-Border Strategic Alliance Activities
3.3. Joint Venture Activities
3.4. Network Activities

4. Strategic Analysis of the Mergers & Acquisitions, Strategic Alliances, Joint Ventures and Networks
4.1. Function of M&A in the e-Business Industry
4.2. Growth and Structure of the Online Advertising Market in U.S., Europe and China
4.3. Future Trends in the e-Business Industry
4.4. Google’s Winning Strategy over Yahoo and MSN
4.5. Strategic Value of YouTube for Google
4.6. Benefits of MySpace and Photobucket for News Corporation
4.7. Strategic Value of Skype for eBay
4.8. Right Media and Flickr Synergies for Yahoo
4.9. Strategic Value of Studiverzeichnis for Holtzbrinck, Germany
4.10. Strategy Recommendation for Microsoft’s Top Management

5. Summary and Conclusion

Appendix

References

List of Figures

Figure I: Types of Concentration

Figure II: Structure of an M&A Process

Figure III: Formula for NPV

Figure IV: The Forms of Cooperation

Figure V: The Forms of Coordination

Figure VI: Structure-Conduct-Performance Theory

Figure VII: Types of Networks

Figure VIII: Example of a Network—Supply Chain Network

Figure IX: Applications in e-Business

Figure X: Market and Transaction Categories in e-Business

Figure XI: The Value Shop

Figure XII: Total U.S. Advertising Market of $285 Billion in

($ Billion)

Figure XIII: Breakdown of the U.S. Online Advertising Market of $16.9 Billion in 2006

Figure XIV: Forecast of the U.S. Online Advertising Market by Format ($ Billion)

Figure XV: U.S. Internet Ad Spending by Major Industry Category

Figure XVI: Morgan Stanley—U.S. Online Advertising Spending per User

Figure XVII: EU-5 Online Advertising Spending per User

Figure XVIII: UK Breakdown of all Ad Spending in 2006

Figure XIX: UK Digital Media Mix in 2006

Figure XX: German Media Mix in 2006

List of Tables

Table I: Mergers & Acquisitions

Table II: Cooperations

Table III: e-Business

Table IV: Google’s e-Business M&A Activities

Table V: eBay’s e-Business M&A Activities

Table VI: Yahoo’s e-Business M&A Activities

Table VII: News Corporation’s e-Business M&A Activities

Table VIII: MSN’s e-Business M&A Activities

Table IX: Other U.S. e-Business M&A Activities

Table X: European Cross-Border e-Business M&A Activities

Table XI: European e-Business M&A Activities

Table XII: Chinese e-Business M&A Activities

Table XIII: U.S. Strategic Alliance Activities

Table XIV: Cross-Border Strategic Alliance Activities

Table XV: e-Business Joint Venture Activities

Table XVI: Examples of Networks in e-Business

Table XVII: Nielsen-Netratings—U.S. Search Share Ranking—May 2007

Table XVIII: U.S. Online Advertising Market 1997-2006

Table XIX: Morgan Stanley—U.S. Internet Advertising Forecast

Table XX: eMarketer Forecast of UK Online Ad Spending 2007-2011

Table XXI: Revenues from Google and Yahoo 2003-2006 ($ Million)

List of Abbreviations

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1. Introduction

1.1. Focus of the Book

The e-Business industry is a young industry that emerged in the 1990s in Silicon Valley, California. Sometimes the term e-Commerce is used as a synonym for e-Business. During the speculative dot-com bubble in 2000, stock markets in Western nations plunged dramatically and many e-Business companies went bankrupt and suddenly disappeared from the market.1 Between the aforementioned year and today, the e-Business industry has enormously experienced diverse changes albeit established itself as an innovative and profitable industry.

After the dot-com bubble many e-Business companies had three strategic options to survive in the changed market situation: stay independent, acquire other companies or enter into cooperative arrangements with others.

Since the year 2003, there has been a strong surge in the e-Business industry with many successful startups been formed in North America, Europe, China and India. At the same time, a stronger consolidation trend in the e-Business industry is observable in all regions. The number of merger and acquisition deals in the international e-Business industry has increased sharply since 2005 by 15%.2 Many big e-Business companies like eBay, Yahoo, Google and AOL have been very active in the e-Business merger and acquisition market, acquiring young innovative e-Business startups to augment their competitive advantage and resuscitate their market growth. At the same time, many e-Business companies engage in cooperative arrangements like strategic alliances, joint ventures and networks to profit from synergies between them and to invest in new technologies together, thereby building a collaborative competitive advantage against other competitors in the market.

This book presents and analyzes the significant mergers, acquisitions, and cooperations that were consummated in the e-Business industry between the year 2005 and the first quarter of 2007. It looks at the impact of mergers, acquisitions, and cooperations on the e-Business industry, and assesses the deals in the stated time period by analyzing the relationship between mergers, acquisitions, cooperations, market share, and competitive advantage to ascertain the strategic value that companies attain from such activities.

1.2. Structure of the Book

The following book is organized in five chapters. Chapter 2 explains business administration theories behind the key elements in the topic: Mergers & Acquisitions (M&A), cooperations, networks, and e-Business. It starts with basic definitions, characteristics, and the concept of M&A, concept of synergy as a main motive for M&A, and illustrates the structure of an M&A process. Furthermore, it examines cooperations and the different types of cooperative arrangements such as strategic alliances, joint ventures, and networks. This section focuses on the goals, motives, and prerequisites for the formation of cooperations, value creation, and competitive advantage in an alliance. It offers guidelines in establishing a successful and profitable cooperation. The last part of chapter 2 discusses what e-Business is, reviews e-Business applications, and the different transaction categories in e-Business. It concludes with linkages between e-Business and the creative destruction theory from Joseph Alois Schumpeter.

Chapter 3 presents M&A, strategic alliances, joint ventures and networks that were formed in the international e-Business industry between the year 2005 and the first quarter of 2007. It covers all the significant e-Business M&A, strategic alliance, joint venture and network agreements that were signed in the United States, Europe and China. Each deal is presented with a description of the companies involved, motives for closing the deal, and the synergy expectations of top management at the time of signing the deal.

Chapter 4 presents a strategic analysis of selected mergers and acquisitions, strategic alliances, joint ventures and networks in the e-Business industry described in chapter 3. It compares the M&A strategy of Yahoo, Google and Microsoft and makes an assessment of which one has proved successful to date, and has the best future prospects. It examines the strategic value of the acquisition of YouTube for Google, MySpace and Photobucket for News Corporation, Skype for eBay, Studiverzeichnis for Holtzbrinck, and Flickr for Yahoo. Finally, the summary and conclusion of the book follow in chapter 5.

2. International Mergers & Acquisitions, Cooperations and Networks in Business Administration Theory

2.1. Mergers & Acquisitions

2.1.1. Definitions, Characteristics, and the Concept of M&A

Merger and acquisition activities are nowadays a common phenomenon in many industries. Numerous M&A deals in diverse industries are reported in press releases every week. M&A activities change market structures, market share, and the depth of competition in a market. The amount of money at risk, the volume of the deals that are closed, and the prevalence of M&A across all industries in almost all regions in the world, gives M&A its eminent role in business administration theory.

In general, the quest for growth in a company can be realized with either one of the two growth strategies, namely organic or inorganic growth strategy. Organic growth strategy, also called “internal growth strategy”, refers to the growth of revenue, market share, and the size of a company independently without acquiring or cooperating with another company.3 Inorganic growth strategy, sometimes called “external growth strategy”, is the growth of a company through cooperation or concentration or both.4 In recent years the management of many companies turns to external instead of internal growth strategies to demonstrate growth due to time and resource disadvantages over competitors and ostensible synergies they see between other companies and their own.5 External growth strategy can be subdivided into cooperation and concentration based on the binding intensity between the companies involved. Binding intensity measures the level at which the resources, actions, and autonomy of decision of a company are restricted, due to a contractual arrangement with another company.6 As shown in Fig. I, there are two types of concentration—mergers and acquisitions. Although the terms “mergers” and “acquisitions” (M&A) technically have different meanings, they are most often confused or used as synonyms. “A merger is a combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm.”7 According to Gaughan, a merger is a combination of two companies in which only one company survives and the merged company ceases to exist, whereby the acquiring company assumes the assets and liabilities of the merged company.8 An acquisition, also known as “takeover”, is the buying of a company the “target” by another or the purchase of an asset such as a plant or a division of a company.9 The premise to M&A is that it is the panacea to fast growth in a market. It is much easier for companies to generate revenue growth by simply adding the annual revenues of acquisition targets to theirs than improving the profitability of an overall enterprise.10

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Figure I: Types of Concentration11

Mergers can be classified according to the stage in the value generation chain into horizontal, vertical or lateral mergers.12 A horizontal merger is a merger between two competitors in the same industry. It increases the market power of the new company significantly. A vertical merger is a merger between firms in different stages across the value generation chain, i.e. a firm merging with a supplier or a distributor. A lateral merger occurs when two merging firms do business in completely different industries.

A statutory merger is a merger in which the acquiring company assumes the assets and liabilities of the merged company.13 In a subsidiary merger, the target becomes part of a subsidiary of the acquirer. A unique way of taking a subsidiary of a company public without the expense, regulations, and time required for an IPO (Initial Public Offering) is a reverse subsidiary merger. In a reverse subsidiary merger, a subsidiary of the acquirer is merged into the target which is already listed on a stock exchange, thereby boosting the stock price.

Acquisitions can also be subdivided into horizontal, vertical or lateral acquisition based on the stage in the value generation chain. The M&A advisory industry has grown so pervasive that it has spawned its own lingo with terms such as bolt-on, roll-up, and carve-out.14 A bolt-on is a horizontal acquisition: a roll-up can be any of the three and is intended to increase the size of a firm.15

An acquisition can also be structured as an asset deal or stock deal, also known as “share deal”. An asset deal or “carve-out acquisition”, is a deal in which the acquirer purchases a plant, division or subsidiary of an existing company.16 In contrast to an asset deal, the acquirer purchases the whole company in a share deal. Acquisitions can also be classified as hostile or friendly depending on whether there is a consensus between the management of the target and acquirer. If the management of the target resists the acquisition offer, then it is called a hostile acquisition: if it is embraced, the acquisition is considered friendly.

2.1.2. Concept of Synergy as a Main Motive for M&A—Other Motives

The main motive behind each and every M&A deal that is consummated is based on the concept of synergy. Synergy, therefore can be seen as the lynchpin of every M&A deal. Synergy can be defined as the combination of two elements, A and B, to produce a greater result or where the sum of the results of the single elements A and B is far smaller than that of the whole A + B together—the well-known 2+2 = 5 effect.17 It infers that M&A generates greater value for shareholders by capitalizing on foreseeable synergetic benefits between two companies. In general, there are two main forms of synergy: operating and financial synergy.18 Operating synergy can furthermore be divided into revenue-enhancing and cost-reducing synergies. Revenue-enhancing synergies refer to the opportunity to increase total sales significantly by cross-selling of products, and having access to an already installed customer base along with restricted distribution channels. Cost-reducing synergies stem from economies of scale and scope effects that the organization then has.19 The economies of scale effect describes the decrease in cost per unit due to a significant increase in total output. For example, underutilized production plants can be used at full capacity and the fixed cost per unit will drop because the total fix cost will now be spread over many units. In contrast, economies of scope is the ability of a firm to utilize one set of resources to deliver a broader range of products and services.20 Examples are the elimination of unnecessary duplicative job positions, departments, production plants, etc. Financial synergy describes the possibility of a reduction in the weighted cost of capital of an acquiring firm if the cash flow streams of two companies are negatively correlated because of the low risk of insolvency that results as outcome of the merger.21

The problem associated with synergy as a non plus ultra argument for a merger is the quantification of its value in monetary terms, e.g. dollars or euro. The models that are used to calculate the value of synergies, such as net present value, are often subject to a wide array of bias. First, management often underestimates the time it will take to capture the synergies between two companies.22 Due to underestimation of the time periods, the net present values of synergies are substantially overestimated. Second, the acquirer’s lack of critical information about the target and failure to conduct a bottom-up synergy analysis normally leads to synergy estimations that are far from reality. The management of many companies fails to understand that the mere existence of synergies between two companies and the ability to derive financial gains from them by making use of the existing synergies are two different things. Because of the problems associated with the quantification and objectivity of synergies, vague and meaningless organizational terms are used in merger proposals to highlight the benefits of a merger decision to shareholders.23

Although synergy is stated first and foremost as the main reason for an M&A deal, there are many other motives. According to Napier, the motives to instigate a merger can be grouped in two classes: value-maximizing and non-value maximizing motives.24 An M&A deal is valuemaximizing when the main motive is to create value for shareholders for example through cost reduction, gaining foothold in new geographic markets or the efficient use of underutilized resources. Non-value maximizing motives describe deals that are primarily driven by other reasons, such as the zeal to maintain a market position, increase market share, management prestige or empire building goals.

Non-value maximizing deals reduce the shareholder value in a company and are not economically sound although they are overtly presented by management to shareholders as a sound economic decision.25 According to Levinson, managers engage in acquisitions out of the mere fear of obsolescence.26 In public view, managers who acquire other companies are perceived as successful, decisive, challenging, and very vibrant, so those who do not engage in acquisitions feel the pressure to emulate those who do. Other managers envision M&A as the best way to publicly exercise their power and social status by engaging in the amusing empire building game. They carry out subsequent deals to fit the “big boys” simile.27

2.1.3. Structure of an M&A Process

The structure of an M&A can be viewed as a three-step process as illustrated in Fig. II: premerger phase, merger phase and post-merger phase. Although the M&A process sounds very simple, it is fraught with many intricacies and complexities that have to be well addressed in each phase to avoid later surprises. Consequently, it is highly recommended that a company form an M&A team of experienced professionals and managers from different departments of the company that will work together to plan, coordinate, execute, and control the whole process.28

The pre-merger phase entails the written formulation of a strategic acquisition goal, definition of a search profile, pre-screening, and the first assessment of the potential candidates. The strategic acquisition goal expresses in pungent and measurable terms management’s objective with the planned M&A deal, e.g. increase net profit over 10% in four years, double sales in two years or move into new emerging geographic markets. A clear and concise definition of the strategic acquisition goal is vital because the goal strongly influences all subsequent decisions in the M&A process.29 A top-down approach is used to create the search profile, which contains the criteria used for screening the targets by deriving the selection criteria from the established acquisition goal. The possible selection criteria that can be considered in narrowing down the huge number of targets to a short list of two or three crown jewels can be product portfolio, strength of R&D, market share, range of revenue, geographic location, distribution channels, available technology or corporate culture.30 The salient point that emerges from the top-down approach is that it consistently aligns both the search profile and short list of candidates to the acquisition goal. Finding the best suitable M&A target is time-consuming and akin to searching for the needle in a haystack. Thus, setting an acquisition goal and employing a top-down approach aids the acquirer to easily recognize those candidates with the best strategic and resource fit.

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Figure II: Structure of an M&A Process31

The next phase in an M&A deal flow—the merger phase, incorporates six steps: meetings with management of the selected target, issuance of a letter of intent (LOI), conducting a due diligence, thorough financial valuation of the target, merger negotiations, and signing of the M&A agreement.32 The acquirer approaches and reveals his basic intentions and plans to the management of the target. Initial meetings are held at the top management level between the two parties to discuss and determine the propensity of shareholders and management to sell the company.33 These meetings provide a platform for both companies to get to know each other better, disclose their full intentions, concerns, potential discords, and specific crucial matters. The minutes of these meetings are held in a document called letter of intent, which also states the agreement of both companies to carry on with the proceedings. According to Ed Paulson, a letter of intent can be effectively used as a communication tool, which ensures that both parties are working in the same direction and with the same overall intention.34 A letter of intent saves money, time, mitigates the complexity of an M&A process and forestalls an unnecessary, expensive and tedious due diligence in the early stage of an M&A process.

Crilly refers to due diligence as “a process whereby an individual or an organization seeks sufficient information about a business entity to reach an informed judgment as to its value for a specific purpose.”35 Different types of due diligence are conducted in an M&A process, namely financial, legal, tax, operational, cultural, information technology, and human resource due diligence. Normally, the target requires the acquirer to sign a legal document called a Non-Disclosure-Agreement (NDA) prior to the due diligence that makes it illegal for the acquirer to make any use of the confidential information to which he would be exposed.36

In a typical due diligence, a seller gives the acquirer’s M&A team access to its annual financial reports, accounting records, customer records, legal records, shareholder data, sales, marketing, human resource, and non-balance sheet asset data in a room called “data room”. In the data room, the acquirer carefully scrutinizes all the data leaving no stones unturned and asks questions about crucial subjects and records that need further clarification or indicate red flags. Key findings and especially “deal killers and stoppers” should be summarized in an executive review for top management.37 These help management to build arguments for the merger negotiation, discover accounting irregularities, correctly adjust the price offer, and identify potential future problems. Due diligence is indeed a fact-finding process, which illuminates and explores every facet of a target company, and offers the objective answer if there is really a strategic and operational fit between two organizations. Subsequently, it can be seen as a strategic tool that reduces merger risks by increasing the quality and quantity of information about a target, thereby facilitating the decision whether to move on with a merger intention or terminate the whole process immediately.38 After the due diligence, the lawyers of both parties negotiate the legal, structural, and financial aspects of the deal, such as purchasing price, legal form of the merged companies, and contingencies. When it comes to price bargaining, the acquirer must find a good balance between pursuing his own egoistic interest while ensuring that the target company does not feel short-changed. After the two sides have agreed upon the final price and all other aspects of the deal, the merger agreement, which represents the legal framework of the merger is signed and the M&A deal is herewith closed.

The closing of an M&A deal marks the beginning of the post-merger integration process (PMI)—era of the real hard work. The whole pre-merger and merger phase were merely the prelude of the main part of an M&A process—the integration of both companies. Utilizing crucial information and insights gained about the target in the due diligence and based on the initial specific acquisition goal, management determines the optimal level of integration that will provide the best environment to fully capture the existing synergies. There are three possible integration levels from which a company can choose: full, moderate or minimal integration.39 Full integration means all departments and processes companywide are supposed to be merged and consolidated. Moderate integration requires the integration of certain key functions and processes, whereas minimal integration centralizes only certain corporate functions: there is no general rule that can be used to choose a certain integration level for a deal—the suitable level of integration is peculiar to the pertinent situation.40 After deliberating and agreeing on the integration level, a well-taught implementation plan must be designed, executed, and reviewed continuously to ensure the integration is proceeding properly to fully exploit and capitalize on projected synergies that both companies incarnate. Integration is the most difficult but decisive part of an M&A that determines if a deal performs up to some or all of its expectations, and ultimately fails or succeeds.

2.1.4. Legal Framework—Regulatory Considerations

In the United States, both big and small M&A deals can be subject to an antitrust confirmation by the regulatory bodies U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). Antitrust confirmation is the process of submitting a proposed M&A deal to an assigned antitrust body for clearance and approval or challenge.41 “The thrust of antitrust economies is to promote fair competition in the belief that this will promote economic efficiency and gains in consumer welfare.”42 Antitrust policies are implemented to hinder an M&A deal which creates a firm with high concentration because concentration enhances market power, and market power rigorously lessens competition and efficiency in the relevant market. The lack of a binding legal definition of the terms “concentration” and “relevant market” makes antitrust confirmation a contentious process. In microeconomic theory, market concentration is a function of the number of firms and their respective share of total market production.43 A relevant market is defined and delineated by a group of products and a geographic market. Product market perspective—a relevant market comprises of all those products and services which are regarded as interchangeable or substitutable by the consumer by reason of the characteristics, price or intended use: Geographic market perspective—a relevant market comprises the area in which the firms concerned are involved in the supply of products or services, and in which the conditions of competition are sufficiently homogeneous.44

Antitrust confirmation procedures create uncertainty for two firms engaged in merger talks. The antitrust statutes that regulate M&A deals in the U.S. are the Sherman Act of 1890, the Clayton Act of 1914, and the Hart-Scott-Rodino Antitrust Improvements Act of 1978. The Sherman Act, the cornerstone of all U.S. antitrust laws, outlaws all contracts, combinations, and conspiracies in restraint of trade or any attempt to monopolize an industry.45 The Clayton Act corroborated the Sherman Act and led to the creation of the FTC with the responsibility to oversee the anti-competitive business practices of firms. The Hart-Scott-Rodino Act is a legal preemptive tool which vests the DOJ and FTC the right to halt or discourage an M&A deal in an early stage by issuing an injunction that demands an advance approval of the deal prior to consummation.46 There are different merger guidelines that govern horizontal and nonhorizontal mergers. Companies are obliged by U.S. Federal Securities Laws to disclose merger negotiations because of their particular implications for shareholders.47

In the European Union, the European Commission (EC) has the authority to review deals based on two Directives—Art. 81 and Art. 82 of the European Community Treaty.48 Art. 81, prohibits cartels and collusions that distort competition and Art. 82, proscribes the willful acquisition or maintenance of monopoly power in an industry. In contrast to U.S. antitrust regulation, all mergers in the EU require a pre-merger notification to the EC.

2.1.5. Financial Valuation in M&A

The financial valuation of a target actually happens during the due diligence. The determination of the value of a target is a contentious issue in a sense that the end result depends heavily on assumptions. In the field of corporate finance, there are different valuation methods that can be applied to calculate the value of a firm. The valuation methods that have become commonplace in practice are comparable companies method, comparable transactions and discounted cash flow method (DCF). A peer group is group of companies that look alike.49

The comparable company and comparable transaction method belong to the peer group approach. The basic idea underlying the peer group approach is that similar companies should sell for similar prices.50 The peer group approach is based on the concept of financial multiple analysis, where a financial ratio of the peer group of the target is compared to that of the target. In the comparable companies method, the trading multiples of the peer group of the target, such as price-sales ratio, price-book ratio, and price-earnings ratio are calculated and multiplied with the respective reference value of the target. The three outcomes are then averaged to get the market value of equity for the target company. In contrast, the comparable transactions method derives the valuation multiples from merger transactions consummated by members of the target’s peer group. Although the peer group approach is very simple, it can culminate to totally wrong valuations figures if the peer group is not consistent.

The DCF method is more fundamental and comprehensive than the peer group approach and employs the analytical technique of net present value (NPV). The NPV of a target is the present value of all future free cash flows discounted at a specified interest rate minus the acquisition price Io.51 As in Fig. III, three factors affect the NPV: the expected future free cash flow (FCF), the discount rate (K), and the number of periods (t).

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Figure III: Formula for NPV

The NPV concept contends that the bigger the NPV the better and the general rule is that the acquisition of a target is profitable if the NPV is bigger than zero. Free cash flow stream projections require the M&A team to have a good understanding of the business economies and financial characteristics of the target’s industry.52 They become more precise as the acquirer utilizes the specific information provided by the target in the due diligence. Albeit projections are subject to human error and can be inadvertently misleading. A unique characteristic of the NPV is that the result is heavily dependent on the discount rate K. A small change in the discount rate generates a totally different NPV. The discount rate can be the cost of equity or the weighted average cost of capital.53

2.1.6. Key Success Factors in M&A

Managerial hubris, which is pride of the management of a firm, can preclude a rigorous systematic analysis of potential synergies between two companies: the chief executives of many companies are excessively over-confident in their own synergy judgment, refusing to seek the opinions of middle management and experts on the range and value of potential synergies.54 Executives should refrain from this behavior during initial M&A deliberations and instead establish an open dialogue where department managers can contribute without any fear of career retribution.

Companies should avoid orchestrating M&A deals with haste. Most of the time many potential acquirers vie for the same target at the same time, which compels the interested contestants to make a fast offer without first completing a thorough pre-merger analysis. Realistic time tables should be set up that give management ample time to review all the important aspects of a deal.55 An ill-structured pre-merger phase can severely impede the merger and postmerger phases and render the whole acquisition unprofitable.

Honest, direct, and seamless communication with all the stakeholders, e.g. employees, shareholders, customers, banks, and government institutions before, during, and after an M&A deal is one of the keys to M&A success. Executives should not gloss about the consequences of a deal for employees but “tell everything like it is”. Most of the time, employees of many companies first hear about the M&A plans of the management through informal sources, such as office rumors or press and are shocked, disappointed, powerless and feel short-changed by the management they trusted.56 Key employees desert and leave the company, and those who remain are frustrated and anxious. This has disastrous implications for the whole M&A deal since a merger process is people related. Even the best-laid strategies under this circumstance are likely bound to failure.

An appropriate and extensive cultural due diligence should be performed to forestall the creation of a merger that results in a “clash of corporate cultures”. An example of a clash of cultures that unwittingly diminished shareholder value was the 1994 acquisition of Snapple Beverages by Quaker Oats for $1.7 billion.57 In general, management assigns little or no attention to the question of cultural compatibility when it comes to an M&A deal. “Cultural due diligence will rarely be a critical factor in whether to do the deal or not, but rather a significant factor in making the deal work.”58 That said, prior to a merger, managers should understand and assess differences and similarities in core values, attitudes, remuneration, leadership, decision, and evaluation styles. Zimmer proposes the cultural due diligence be carried out in the pre-merger and not later in the merger phase.59

The selection of the optimal speed of integration is a critical success factor in M&A. As Homburg and Brucerius conclude in their study, there is no simple answer to the question of whether or not integration should be expedited.60 Relatedness describes how similar two companies are.61 The answer lies in a contingency approach and depends on the external and internal relatedness between two companies. External relatedness measures the similarities regarding competition strategy, target markets, and customers. The latter refers to similarities in terms of internal resources and elements of the corporate cultures, such as core value, management style, etc.

Although there can be synergies between two companies, it does not mean that they will automatically materialize if both companies merge. Top executives should not see the closing of a deal as the end of an M&A process. Rather, they should take a proactive role and not just delegate integration responsibility to middle management.62 A dedicated and capable core integration team must be created in which areas of responsibility and integration goals are defined for each team member.63 Furthermore, an integration success measurement metric should be periodically used to review the progress of the integration.

As befits any business transaction, M&A deals are exposed to transaction risks but they can be significantly reduced through intelligent deal design of the merger agreement.64 The form of payment, for example can be structured as fixed and contingent based on future developments.

2.2. Cooperations

2.2.1. Definitions and Forms of Cooperative Arrangements

Cooperation is an external growth strategy that can be an integral part of the overall competitive strategy of a company. There is no general definition of the term “cooperation” in business administration theory. Sydow defines cooperation as an interfirm collaborative use of business resources with the goal of improving the overall business performance for both parties.65 Gerth however, describes cooperation as a voluntary collaborative use of business resources between two companies which are legally independent based on a contractual or a tacit agreement.66 Cooperations can generally be classified into horizontal, vertical or lateral cooperations. A horizontal cooperation is a cooperation between competitors in a market. It conjoins specific functional resources of two companies, which are on the same level in the value generation chain to produce economies of scale and scope effects. A vertical cooperation is a cooperation between two companies across the value chain. A vertical cooperation with a distributor is called a forward-leaning vertical cooperation and with a supplier a backward-leaning vertical cooperation. Lateral cooperation is a cooperation between two companies whose value chains have nothing in common. Cooperations as shown in Fig. IV can be systematically divided into strategic and tactical alliances. There are three types of strategic alliances: joint ventures, leasing and consulting contracts. The formation of a cooperation can be viewed as a six-step process: appointing the planning and negotiating team, achieving internal consensus, strategic fit assessment, resource fit assessment, selecting the right partner, and negotiating an agreement.67 The planning and negotiating team is an interdisciplinary team that is entrusted with strategic and operational responsibility for the cooperation. Team members must therefore be well experienced, dedicated, and willing to fully serve the purpose of the cooperation.

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Figure IV: The Forms of Cooperation68

The team should incorporate representatives from all departments in the company that will be affected by the cooperation. The second step, achievement of internal consensus is an iterative review and revision process and therefore time-consuming but very important. Several internal meetings are held to deliberate on strategic, operational and legal aspects of the cooperation. The aspects involve what the company wants to reach with the cooperation, the scope of cooperation, resources needed, time frame, potential problems, and implications for the concerned departments. It serves as an internal platform for all parties to voice their opinions, concerns and also for disagreement resolution. In the third and fourth step, a strategic and resource fit assessment is done for the two potential partners. A strategic fit assessment checks how the strategies of both companies match, whereas a resource fit assessment analyzes how the tangible and intangible resources and technologies of the prospective partners complement each other.69 In this stage, a detailed SWOT-Analysis is completed to determine the strengths and weaknesses within the company as well as opportunities and threats in the environment because the weaknesses in the company and the threats in the environment serve as a starting point for the selection of a suitable partner in step five.70 In step five, the company selects and approaches the best-suited partner based on the analysis in step four and the goal of the cooperation that was set in step two. Finally, the two partners work out the legal terms of the cooperation agreement, which contains the financial pie-split terms, working process, rights, obligations, responsibilities, and voting power of each partner.71

2.2.2. Theoretical Foundations for the Formation of Cooperations

In business administration theory, there are three main theories that explain the formation of cooperations: Transaction Cost theory (TCT), Resource-Based-View theory (RBV), and Structure-Conduct-Performance theory (SCP).

In general, there are three main ways through which a company can coordinate its activities: through the market, hierarchy or cooperation. The market represents buy, which is the purchase of a product or service from a third party whereas the price serves as the principal coordinating mechanism. The hierarchy relates to make, which is the coordination of activities or production within the organizational structure of a firm. Cooperation on the other hand, can be envisaged as a hybrid form between market and hierarchy.72 The Transaction Cost theory from Coase postulates that for each given transaction, an economic subject would choose the coordination type within the continuum market and hierarchy that espouses the lowest transaction cost.73 At the core of the TCT is the notion that the lower the transaction costs the better. It envisions transaction cost as a cost incurred in making an economic exchange. The determinants of transaction costs are according to Williamson, frequency, specificity, uncertainty, limited rationality, and opportunistic behavior.74 The three forms of transaction costs that accumulate in a transaction are search and information costs, bargaining costs, contract policing and enforcement costs. Cooperation emerges at a point between two partners if they anticipate transaction cost savings from this coordination form. Cooperation gives companies a third leeway to tilt away from the make or buy coordination constraint. It transcends the market and hierarchy in efficiency if the activities are highly specific and mutable.

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Figure V: The Forms of Coordination75

The Resource-Based-View theory from Popper suggests that the efficiency and uniqueness of the core strategic resources of a firm induce its competitive advantage, thus the firm performance in a market.76 A firm’s resources include all assets, capabilities, organizational processes, firm attributes, information, and knowledge.77 The strategic resource profile of a firm encompasses the core competencies and products, routines, and capabilities. They are valuable, scarce, not perfectly mobile and substitutable, and serve as the sources of competitive advantage and sustainable firm performance. Firms own a heterogeneous factor endowment due to the imperfections in factor markets.78 Capabilities describe the codified, i.e. written or visualized and non-codified knowledge in a firm that the employees have.79 Routines are organizationally embedded capabilities. Core competencies are not tradable because there are no or only imperfect external markets. Material and strategic resources are different in a sense that the former depletes when utilized but the later are further upgraded. RBV argues that firms have an incentive to enter into cooperations to emulate and steadily internalize the best practices, core competencies, routines, and capabilities of the other partner.80

The Structure-Conduct-Performance approach from Bain and Mason contradicts the conclusion of the RBV theory. It states that the market structure of an industry determines or strongly influences crucial aspects of a firm’s market conduct and thus indirectly determines certain strategic dimensions of its performance.81 Porter adopted the classical Structure- Conduct-Performance theory from Bain and Mason and augmented it as portrayed in Fig. VI. The behavior of a firm in a market constitutes its competitive strategy, also called market conduct. Porter posits that the market structure and market conduct of a firm determines the firm’s performance and the market conduct and performance iteratively affect the market structure.83 The structure of a market can be described with the Five-Forces model from Porter. The five forces in an industry are the bargaining power of suppliers, bargaining power of customers, threat from potential newcomers, threat from substitute products, and the current prevailing rivalry in the market.84 These five forces interact with each other to determine the structure of a market. The generic competitive strategies from which a firm can choose are broad cost leadership, differentiation or concentration in a niche market.85 The function of the competitive strategy is to shield the firm from the negative effects of the five forces. Thus, firms form cooperations to strengthen their competitive advantage and to mitigate that of other rivals.

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Figure VI: Structure-Conduct-Performance Theory82

2.2.3. Goals, Motives—Chances and Risks

Firms pursue myriad goals simultaneously with the formation of cooperations. The motives for cooperations can be categorized into endogenous and exogenous motives.86

The endogenous motives refer to the “Inside-Out-View” of the firm, that is to say the RBV theory underpins the endogenous motives. Firms enter into cooperations to combine their complementary and non-complementary resources. It gives them the opportunity to achieve results they could never achieve independently.87 Cooperations generate economies of scale and scope effects for both companies, which lead to cost advantages.88 Each partner gets access to core competencies, core products, capabilities, and routines of the other partner, which are not acquirable in the factor market. A partner can easily augment his product and process know-how by learning from the other partner. Through cooperation in research both firms can reduce the normally bulk R&D cost and the time-to-market of new product and process innovations. Cooperation can also emanate from the fierce competition in a market. It then becomes a strategic necessity for the survival of a firm in an industry and no longer a choice. “An unprecedented number of strategic alliances between firms are been formed each year. These are not limited to a few industries but occur broadly in transportation, manufacturing, telecommunication, electronics, pharmaceuticals, finance, and even professional services. They bridge national borders and continents.”89

Exogenous motives of cooperation relate to the “Outside-In-View” of the firm, which means the SCP theory underlines the exogenous motives. Firms cooperate to jointly build market entry barriers for potential new entrants in the market. The joint effort corroborates the implications of the barriers for newcomers. They appall potential newcomers and deter them from entering the market. As a result, cooperation reduces the threat from potential newcomers in the Five-Forces model. Cooperation can also be viewed as a potential market entry strategy into new sectors or geographical markets.90 It serves as a way to circumvent direct investment limitations in foreign countries and reduces the business risks involved in the entry into new geographical markets. Firms cooperate with foreign partners to learn more about the structure of the foreign market before they make a direct investment. Furthermore, firms sometimes envision cooperation as a suitable vehicle to offer turnkey solutions to customers by complementing their products with that of partners.91 It offers them the easiest and quickest way to offer turnkey solutions.

Like in any collaboration, cooperations are also fraught with business risks. Cooperations can restrain a firm’s freedom of decision and prolong decision routes. A severe potential danger that looms in cooperations is systematic theft of the specific know-how of a firm, which can lead to a loss of core competencies.

2.2.4. Role of the Factors Power, Trust and Mistrust

Power must be fairly shared in a cooperative relationship to prevent the weaker partner from gaining the impression that he is solely being used as a means to an end. Fair does not call for an equal but a befitting power sharing based on the relative resources and contributions the partner invests.92 The financial pie-split that a partner extracts from the cooperation should not be lower than his relative investment in the cooperation.93 For each partner to further participate in the cooperation, the net present value of the expected future gains must be bigger than that of the exit option. An inept power and profit sharing reduces the commitment, trust, and interest of the disadvantaged partner in the cooperation, which entices the partner to take revenge via free-rider behavior. Transient opportunistic behavior is the least likely thing that fosters a cooperation because it creates adversity instead of collaboration. Cooperations place both firms in position of mutual dependency, which originates from the concerted effort. Each partner must thus learn to delicately balance his self-enlightened interests and that of the other partner.

Trust and commitment builds the basis of each and every cooperation from which the partners take the security necessary for the cooperation to thrive and prosper. Trust is defined in social science as the expectation that an individual or group will fulfill an obligation, behave in an agreed manner with integrity, negotiate, and act fairly even when a window of opportunism is present.94 Interorganizational trust represents trust between two firms. Commitment to a relationship refers to the enduring desire of a partner to maintain a valued relationship.95 Trust is an important factor that influences the development, stability and the future prospects of a cooperation. Although trust is not a sufficient condition for a cooperation’s success, it is necessary because it lessens the number of uncertainties and creates a secured environment for both parties. Intensive and personal communication between employees and management of the cooperating firms can effectively increase the trust between two organizations. The duration of a cooperative arrangement affects the propensity to exhibit opportunistic behavior. The longer the duration of a cooperative contract, the less the likelihood that a partner would show deviating behavior due to fear of sanctions from the other side in later periods. The duration of a contract can strengthen the trust between two firms.

In general, as Perlitz, Becker, and Schulze explain in their article “Impact of Culture on Trust in International Cooperations”, the development of trust between two companies is not culture-free but truly culture-bound.96 Cultural factors affect the way trust evolves in every stage of the cooperation formation process. Lahno portends that certain cultural and institutional conditions enhance the trust building process between two firms.97 Firms should consider how best the culture of their potential partner fits theirs before making a choice because certain cultures boost the trust building process while others slow it down.

2.2.5. Prerequisites for the Formation of a Cooperation

For a cooperation to really advance an organization’s long-term strategic plans, there are certain prerequisites that when fulfilled create a more favorable environment. The selection of a partner precedes the consummation of a cooperation. This selection should not be made by sheer happenstance but by clearly defining the areas of cooperation and ascertaining the requirement profile of the partner. In the requirement profile, the company prepares a detailed list of the competitive advantage, core competencies, routines, capabilities, technologies, distribution channels, and the market position the potential partner should have. A company should look out for a partner with complementary skills because cooperative arrangements flourish best when both partners have different core competencies, routines and capabilities that supplement each other.98 “Alliances between competitors with similar core businesses, markets, and skills tend to fail.”99 An overlap of the same resources does not benefit any of the partnering companies but rather creates commotion. The commotion results from the fact that the cooperation further intensifies the competition between the two partnering companies because they have the same target market and customers in focus. Prior to the signing of the final cooperation agreement, it is recommended to do test projects with the potential partner together. Test projects offer the best chance to get an authentic and extensive view of the skills, routines, and core competencies of the potential partner.

Cooperations are predicated on contracts. A crisp and clear clarification of the rights, obligations, and governance structure is indispensable since it delineates decision-taking processes, responsibilities, and competencies of each partner. It defines assignments and the range of decisions where a partner has veto rights and thereby hinders possible future conflicts upfront. Comprehensive conflict resolution schemes should be incorporated in the contract that lay out how conflicts should be settled. Such a contract creates the adequate environment needed to sustain a positive and productive cooperation.100 Conversely, a cooperation that is built on a weak contractual foundation is arguably prone to failure.

Cooperations are not antitrust free but are strictly governed by antitrust regulations because they can indirectly reduce market competition. The partners should possess a good understanding of the legal regulatory framework and consult with their corporate attorneys before signing the final agreement. Failure to comply with antitrust laws can lead to heavy fines, imposition of warranties, and an eventual prohibition of the whole cooperation.101

2.3. Strategic Alliances

2.3.1. Definitions, Characteristics, and Types of Strategic Alliances

Strategic alliance offers an alternative way to M&A and is the most common form of cooperative arrangement between organizations.102 “A strategic alliance is a cooperative arrangement between two or more organizations designed to achieve a shared strategic goal.”103 The term “strategic” means it has a profound impact on the overall business strategy and success of the incorporated organizations. It is long-term oriented and covers certain defined areas where two partners intend to build an alliance competence. In a strategic alliance the two cooperating organizations are legally independent although economically interdependent. Strategic alliances have many transaction cost advantages compared to the market and hierarchy. Compared to the market, strategic alliances have transaction cost advantages due to lower search and information cost for distributors and suppliers, seamless information flow between the partners, and short innovation time cycles. Conversely, compared to hierarchy, they are inherent with a lower risk of opportunistic behavior. At the outset of a strategic alliance, the intents of both organizations must be clearly established and communicated to each other for both parties to devise the appropriate alliance strategy and choose the suitable type of strategic alliance.104 This step helps each partner to verify how the proposed alliance adds to his current organization’s strategy.

As depicted in Fig. IV, there are three main types of strategic alliances—licensing contracts, consulting contracts, and joint ventures. A licensing contract is an agreement in which the licensor grants the licensee permission to use an intellectual property that he owns against the payment of royalties, e.g. the licensor may grant the licensee the permission to distribute products under his trademark. In a consulting contract, one partner provides professional advice in a particular area of expertise to the other partner, such as technology, innovation or product marketing.

In reference to the RBV theory, alliances can be divided into X and Y alliances based on the resource profile of each partner. An alliance is termed X-Alliance if the daily activities are divided in such a way that each partner specializes in what he does best.105 Thus, X alliances require both partners to have complementary strengths and weaknesses. The function of an X- Alliance is to balance out the competency deficits of each partner, so X-Alliances are closinggap alliances that cannot be formed between two partners with the same weaknesses. On the other hand, in Y-Alliances all activities are done collectively: Y-Alliances are critical-mass alliances that intend to bundle similar resources to generate cumulative economics of scale effects.106

Sometimes alliances are classified as exploration or exploitation alliance based on the intent of the alliance.107 Exploration alliances are innovation-driven and are formed to discover new opportunities, e.g. to discover a new technology. Exploitation alliances are leverageand synergy-driven, i.e. they are formed to transfer a set of competencies to a new business area.

2.3.2. Competitive Advantage and Value Creation in an Alliance

Competitive advantage is the ability of an organization to constantly overpower and outpace the Five Forces in Porter’s model and deliver relative superior return on investment over a long period.108 Through alliances firms amass interorganizational competitive advantage. Interorganizational competitive advantage is a competitive advantage that spans the boundaries of two firms.

Strategic alliances transform business rivalry to an entirely new shape of competition called “co-opetition”. Co-opetition stems from the combination of the words competition and cooperation.109 In a strategic alliance, a firm is stuck in a double windmill since it must cooperate with partners in an alliance to co-create value and at the same time compete with them in the market. The interplay between the partners in the market then becomes an intriguing subject of analysis. Furthermore, because of the proliferation of strategic alliances in one industry after the other, many organizations are members in at least one alliance.110 The unique value co-created by one alliance then fiercely competes with the one co-created by the other alliance. In such a constellation, the relative competitiveness of the value created by an alliance group impacts the performance of the individual partners heavily. Competition is therefore shifted to a higher hierarchical level of rival strategic alliances endeavoring to generate the highest value. Gomes-Casseres refers to the business rivalry that today takes place between sets of allied firms, rather than between single firms as “collective competition”.111 In this new environment, strategic alliances create the maximum value for a firm if the alliance strategy is integrated into the corporate strategy.

Alliance measurement metrics should be used to measure the value of partnering in an alliance. It helps an organization to efficiently manage its alliance as the saying goes, “if you don’t measure it, you can’t manage it”. The metrics used in alliance metrics management are sub-divided into alliance development metrics and alliance implementation metrics.112 Alliance development metrics are metrics that cover the areas of conceptualization, strategy alignment, strategic and resource fit, partner selection, structuring, team selection, and negotiation. Alliance implementation metrics are metrics focused on the operationalization and implementation of an alliance.

2.4. Joint Ventures

A joint venture is a strategic alliance in which the partners share the responsibility, control, and financial risk for a business venture which is legally independent from the parent firms.113 It can be classified into equity and contractual joint venture. In an equity joint venture, each partner contributes equity to form a new entity.114 The equity share of each partner can be equally or disproportionately distributed. The binding intensity between the partners is very strong because of the respective equity contributions. The new entity has its own hierarchical structure and corporate name. The formation of equity joint ventures involve considerable coordination costs, and time to negotiate and organize the joint venture agreement. Due to the fact that equity joint ventures are independent, the entity is very flexible and engages in explorative ventures that are more risky than the parent firms would undertake themselves. Therefore, equity joint venture is a suitable vehicle for risk diversification in organizations. In contrast, contractual joint ventures do not involve the creation of a new entity and are established on a collaborative contract. The level of commitment of the partners in a contractual joint venture is much lower because they do not make any significant investment in the seminal stage. Contractual joint ventures are much easier to form, control, coordinate and later dissolve. Equity joint ventures are a more desirable form of cooperative arrangement when forming exploration alliances and contractual joint ventures when forming exploitation alliances.115

International joint venture is a possible mode of market entry into new foreign markets. Joint ventures can be used to reduce the business risks associated with international business operations. The firm lacking knowledge about foreign markets can gradually learn more about it and build its own network before establishing a fully owned subsidiary. Above all, it takes longer for a newly established business to be viable. Building a new sales organization from scratch in a foreign country with quite a different culture than the home country can be a daunting task. The activities assigned to a joint venture are influenced by the capabilities of the foreign country and of both partners.116 The choice of market entry of a firm via joint venture is influenced by the size of the local firm relative to that of the foreign firm, the characteristics of the industry, and the cultural characteristics of the foreign and home countries.117 Cultural distance is an index that measures how far apart two national cultures are.118 It is cited by Evans as the most eminent factor in explaining foreign market entry mode, market attractiveness, degree of adaptation of marketing, distribution, product strategies, and the whole organizational performance.119

Joint ventures offer the right environment to learn, understand, and become more acquainted with the business customs and usances of a target country. American and European companies therefore normally choose to form joint ventures in the course of their international expansion when entering markets in Asian countries like Japan and China.120 Firms have realized that joint ventures with local partners facilitate market penetration much quicker. It gives organizations the biggest exposure to supply chain and distribution networks, and more importantly, ties to government agencies. Especially in China, it is almost impossible for a foreign company to establish a viable business without ties to local officials.

A joint venture agreement serves as a guideline and a legal anchor of every joint venture. The construction of the joint venture agreement is normally carried out by corporate attorneys of the parent firms. “It is absolutely essential that alliance partners take the proper time and care to construct the alliance agreement in the right manner.”121 The basic sections, provisions, and items outlined in a joint venture agreement are the introduction of the partners, intent of the alliance, definitions, authorization of the venture, responsibilities of the partners, representations, warranties, disclaimers, recourse limitations, termination, code of conduct, intellectual property right, and the confidentiality of proprietary information.122 Although a joint venture agreement is a legal document, it should not be left alone to the cooperate attorneys, rather the management of the parent firms must be actively involved to ensure that it also solutiondriven.

2.5. Networks

2.5.1. Definitions, Characteristics, and Types of Networks

Networks are tactical alliances. Tactical alliances are different from strategic alliances in that they are more “loosed” and not organized by the top management of an organization but by middle management. Tactical alliances can be formal or informal, last very short or over a long period of time.123

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Figure VII: Types of Networks124

The knots in Fig. VII represent the actors, which can be individuals, groups, firms, organizations or nations and the curbs relate to the indirect and direct relationships between the actors.

Depending on the number of firms, it can be differentiated between bilateral, trilateral and multilateral networks. Based on the number of curbs between the actors and the intensity of contacts, networks can be grouped into simple and complex networks. Furthermore, networks can be functionally classified into supply chain networks, distribution networks, sales networks, etc. A simple network evolves when one central actor develops similar relationships with many organizations. Apart from the central actor, the members of the network do not communicate with each other. Complex networks are strong networks in which the curbs are intertwined between all the actors, i.e. all the actors know each other and stand in constant communication.125

Networks are the opposite of a vertically fully integrated firm and are therefore highly flexible.126 In a network, the management of a firm does not end within its boundaries, but straddles far beyond it to cover all the relationships with network members, i.e. the extension of the vantage point over the whole value chain. As shown in the example in Fig. VIII, the management of a supply chain network includes all aspects of the supply chain.

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Figure VIII: Example of a Network—Supply Chain Network127

In a supply chain network, the suppliers in the upstream network, the firm and the distributors in the downstream network work hand in hand to deliver solutions to customers.128 The suppliers and distributors are highly integrated into the value creation chain. An organization can have more than one network for the same activities, which compete against each other to create the best value. There are three types of network competitions: innovation competition, time-based competition, and quality competition.129 Having more than one network drives a continual improvement process in every network since each network then wants to be number one.

2.5.2. Virtual Network

Virtual network is a new type of network that emerged through the advances in information and communication technology (ICT). Virtual networks are networks that are organized over the intranet, internet or extranet.130 They are sometimes referred to as E-Collaborations. An example of a virtual network is the global procurement platform from Audi, BMW and VW. Virtual networks are the most trivial form of cooperation in the e-Business industry because they are very easy to form and dissolve. There is a high response speed and increased interac-

tion between the partners in a virtual network. Network capability relates to the capability of a firm to flexibly adapt to continually changing market conditions by quickly integrating itself in new networks and exiting unprofitable ones. The competitiveness of virtual networks stems from reduced transaction costs and increased global outreach. “The ability of companies to form global networks on the internet will transform the way we do business in the future.”131 Virtual networks enable international organizations to build global networks with remote members even on other continents. Such a global network facilitates the international expansion strategy of an organization. For example, a firm in Düsseldorf, Germany, can network with counterparts in Bangalore, India, Guangzhou, China or San Francisco, USA, to share information and resources. Virtual networks can help companies find and develop new business opportunities in foreign countries, and can actually be employed in all industries, not only the e-Business industry. They can be employed in the energy, chemical, pharmaceutical, automobile or airline industry. Virtual networks can even be used as an adequate tool by an outsourcer to manage the business relationship with an outsourcee in an outsourcing contract. The whole coordination of the outsourced activities is then carried out over an online portal.

A special type of network in the e-Business industry is “affiliate network or affiliate program”. An affiliate program is a network that is focused on the exchange or provision of online advertising space against the payment of a fee, e.g. banners or buttons.132 More information and examples on affiliate networks will be provided in chapter 3.

2.6. e-Business

2.6.1. Definitions—Market and Transaction Categories in e-Business

There is no common definition of the term e-Business. The term e-Business was coined by former IBM CEO Lou Gerstner in 1990. IBM itself defines e-Business as an organization that connects its critical business systems directly to its customers, employees, partners, and suppliers via internet, intranet or the extranet.133 Zwanziger and Herden define e-Business as the integrated transformation and execution of the business processes of a firm with the help of information and communication technology over a network, such as internet, intranet or extranet to deliver value to customers.134 e-Business is often confused with e-Commerce, although e-Commerce is just one of the many applications in e-Business as shown in Fig. IX.135

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Figure IX: Applications in e-Business136

e-Commerce is an e-Business application that primarily consist of distributing, buying, selling, marketing, and servicing of products or services via internet, intranet or extranet.137 e- Commerce can be translated with e-retailing. The best example for e-Commerce is an online shopping portal like shopping.com, where consumers can buy everything from clothing, shoes, computers, electronics, toys, games, home and garden furnishings, sport apparel, etc.138 But as shown in the diagram above, there are much more e-Business applications that consumers use everyday than only e-Commerce, such as e-mail, e-banking, e-working, epublishing, e-calling, e-legal services, e-auctions, e-accounting, e-health care, e-conferencing, e-trading, e-ticketing, e-reservation, e-learning, e-gambling, e-support, e-consulting, e-social networking, etc.

e-Business transactions can be categorized as in Fig. X in nine sections based on the type of transaction partners between whom the transaction takes place.139 The transaction partner in e- Business can be a consumer (C), business (B) or a government (G). Each of these transaction partners can function at one time as a value generator at another as a value receiver. A value generator is a supplier of a product or a service and value receiver, the consumer. Given the three transaction partners nine electronic business constellations are feasible: Business-to- Business (B2B), Business-to-Consumer (B2C), Business-to-Government (B2G), Consumerto-Consumer (C2C), Consumer-to-Business (C2B), Consumer-to-Government (C2G), Government-to-Consumer (G2C), Government-to-Business (G2B), and Government-to- Government (G2G).

In the 3×3 matrix in Fig. X, the value generators are represented in the vertical and value receivers in the horizontal axis. The denotation of each e-Business transaction begins with the value generator followed by the receiver, e.g. if a consumer delivers a service to a consumer, the transaction is called Consumer-to-Consumer (C2C). Typical C2C e-Business examples are the online platforms eBay, Craigslist and all the existing social networking sites. eBay is an online auction platform where especially consumers buy or sell goods through auction. Consumers trade over one million different items on eBay everyday ranging from collectibles, books, appliances, electronics, jewelry, computers, software, furniture, vehicles, etc. Craigslist is the popular centralized network of online urban communities, featuring free classified advertisements. The portal was created in 1995 by Craig Newmark in San Francisco. On Craigslist, consumers publish classified ads for new and second-hand goods that they want to sell. Interested consumers then contact the vendors by e-mail or telephone. Social networking sites such as MySpace, Friendster, LinkedIn, Bebo, Facebook, and Studiverzeichnis are all examples of C2C e-Business.

[...]


1 Cp. Nethistory (2007), online.

2 Cp. Techweb (2007), online.

3 Cp. Bain & Company (2007a), online.

4 Cp. Bain & Company (2007b), online.

5 Cp. Developers.Net (2007), online.

6 Cp. Buchner, W. (2003), p. 52 et seq (Translated from German into English).

7 Scott, D. L. (2003), p. 7.

8 Cp. Gaughan, P. A. (2002), p. 7.

9 Cp. Scott, D. L. (2003), p. 7.

10 Cp. Gaughan, P. A. (2002), p. 112.

11 Cp. Own illustration of the types of concentration.

12 Cp. Investopedia (2007), online.

13 Cp. Investorwords (2007), online.

14 Cp. Galpin, T. J./Herndon, M. (1999), p. 1 et seq.

15 Cp. Netlingo (2007), online.

16 Cp. Deloitte (2007), online.

17 Cp. Bruner, F. R. (2004), p. 325.

18 Cp. Damodaran, A. (2007a), online.

19 Cp. More on economies of scale and economies of scope can be read in Damodaran, A. (2007b), online.

20 Cp. Gaughan, P. A. (2002), p. 116.

21 Cp. More on financial synergy can be found in Damodaran, A. (2007a), online.

22 Cp. The Mckinsey Quarterly (2007), online.

23 Cp. Galpin, T. J./Herndon, M. (1999), pp. 2 - 5.

24 Cp. Napier, N. K. (1989), pp. 271 - 289.

25 Cp. Cartwright, S./Cooper, C. L. (1996), p. 21.

26 Cp. Levinson, H. (1970), pp. 84 - 95.

27 Cp. Cartwright, S./Cooper, C. L. (1996), pp. 24 - 27.

28 Cp. Picot, G. (2002), pp. 15 - 20.

29 Cp. Weston, J. F./Mitchell, M. L./Mulherin, H. J. (2004), pp. 102 - 105.

30 Cp. Paulson, E./Court, H. (2001), p. 6.

31 Cp. Own illustration of the structure of an M&A process.

32 Cp. Paulson, E./Court, H. (2001), pp. 3 - 15.

33 Cp. Binder, P. M. (2006), pp. 71 - 72.

34 Cp. Paulson, E./Court, H. (2001), p. 8.

35 Crilly, W. M. (1998), p. 25.

36 Cp. Paulson, E./Court, H. (2001), p. 10.

37 Cp. Galpin, T. J./Herndon, M. (1999), p. 13.

38 Cp. Wisskirchen, C. (2006), p. 361.

39 Cp. Galpin, T. J./Herndon, M. (1999), p. 11 et seqq.

40 Cp. Galpin, T. J./Herndon, M. (1999), p. 14.

41 Cp. Weston, J. F. /Mitchell, M. L./Mulherin, H. J. (2004), pp. 24 - 45.

42 Bruner, R. F. (2004), p. 760.

43 Cp. Bain, J. (1956), p. 37.

44 Cp. European commission / U.S. Department of Justice (2007a), online.

45 Cp. Gaughan, P. A. (2002), p. 87.

46 Cp. Federal Trade Commission (2007), online.

47 Cp. Weston, J. F./Mitchell, M. L./Mulherin, H. J. (2004), p. 36.

48 Cp. European Commission (2007b), online.

49 Cp. MSN Encarta (2007), online.

50 Cp. Weston, J. F./Mitchell, M. L./Mulherin, H. J. (2004), p. 232.

51 Cp. Gaughan, P. A. (2002), p. 512.

52 Cp. Weston, J. F./Mitchell, M. L./Mulherin, H. J. (2004), p. 251.

53 Due to the size of the book, the specific details of the valuation methods can not be elaborated. But more information on valuation can be found in the book from Weston, Mitchell and Mulherin.

54 Cp. Roll, R. (1989), pp. 197 - 216 / Hitt, M. A./Harrison, J. S./Ireland, R. D. (2001), p. 7.

55 Cp. Sherman, A. J./Milledge, A. H. (2006), p. 15.

56 Cp. Galpin, T. J./Herndon, M. (1999), pp. 93 - 94.

57 Cp. Cartwright, S./Cooper, C. L. (1996), pp. 57 - 82.

58 Vector Group (2007), online.

59 Cp. Zimmer, A. (2001), p. 8.

60 Cp. Homburg, C./Brucerius, M. (2006), pp. 23 - 25.

61 Cp. Capron, L./Hulland, J. (1999), pp. 41 - 54.

62 Cp. Beamish, P. W./Boeh, K. K. (2007), pp. 1 - 5.

63 Cp. Galpin, T. J./Herndon, M. (1999), pp. 55 - 85.

64 Cp. More information on deal design can be read in Bruner, F. R. (2004), pp. 533 - 535.

65 Cp. Sydow, J. (1993), p. 93 (Translated from German into English).

66 Cp. Gerth, E. (1971), p. 11 (Translated from German into English).

67 Cp. Slowinski, G./Sagal, M. W. (2002), pp. 21 - 72.

68 Cp. Bullinger, H.-J./Ohlhausen, P./Warschat, J. (1997), pp. 24 - 48.

69 Cp. Doz, Y. L./Hamel, G. (1998), pp. 93 - 113.

70 Cp. More on SWOT-Analysis can be read in Williamson, D. et al. (2003).

71 Cp. Slowinski, G./Sagal, M. W. (2002), p. 26.

72 Cp. Friese, M. (1998), p. 66.

73 Cp. Coase, R. (1937), pp. 386 - 405.

74 Cp. Williamson, O. E. (1985), pp. 43 - 68.

75 Cp. Zentes, J./Swoboda, B./Morschett, D. (2005), p. 386. / Sydow, J. (2006), p. 9.

76 Cp. Popper, K. R. (1934), pp. 10 - 50.

77 Cp. Daft, R./Lengl, R. (1986), pp. 554 - 571.

78 Cp. Wernerfelt, B. (1984), pp. 170 - 180 / Wernerfelt, B. (1995), pp. 171 - 174.

79 Cp. Barney, J. B. (1991), pp. 99 - 120.

80 Cp. Hamel, G. (1991), pp. 235 - 236 / Prahalad, C. K./Hamel, G. (1990), pp. 79 - 91.

81 Cp. Bain, J. S. (1968), p. 430.

82 Cp. Porter, M. E. (1979), pp. 214 - 227.

83 Cp. Porter, M. E. (1980), pp. 10 et seqq.

84 Cp. Porter, M. E. (1985), p. 5.

85 Cp. More information on generic competitive strategies can be found in Porter, M. E (1985).

86 Cp. Zentes, J./Swoboda, B./Morschett, D. (2005), pp. 281 - 285.

87 Cp. Schmoll, G. A. (2001), p. 26.

88 Cp. Gerybadze, A. (1995), pp. 34 - 35.

89 Doz, Y. L./Hamel, G. (1998), p. xiii.

90 Cp. Perlitz, M. (2004), pp. 628 - 629.

91 Cp. Homburg, C./Krohmer, H. (2006), pp. 530 - 532.

92 Cp. Spekman, R. E./Isabella, L. A. (2000), pp. 255 - 259.

93 Cp. Doz, Y. L./Hamel, G. (1998), p. 195.

94 Cp. Bromiley, P./Cummings, L. L. (1995), pp. 20 - 21.

95 Cp. Moorman, C./Zaltman, G./Deshpande, R. (1992), pp. 314 - 329.

96 Cp. Perlitz, M./Becker, A./Schulze, L. (2006), pp. 480 - 490 (Title of the article is translated from German into English).

97 Cp. Lahno, B. (2002), p. 280.

98 Cp. Spekman, R. E./Isabella, L. A. (2000), p. 151.

99 Bleeke, J./Ernst, D. (1995), pp. 97 - 105.

100 Cp. Schmoll, G. A. (2001), pp. 100 - 113.

101 Cp. Gaughan, P. A. (2002), pp. 83 - 100.

102 Cp. Booz Allen Hamilton (2007), online.

103 Singh, H./Dyer, H. J. (1998), pp. 660 - 679.

104 Cp. Segil, L. (1996), p. 17.

105 Cp. Zentes, J./Swoboda, B./Morschett, D. (2005), p. 383.

106 Cp. Lubritz, S. (1998), p. 40 et seq.

107 Cp. Koza, M. P./Lewin, A. Y. (2000), pp. 146 - 151.

108 Cp. Porter, M. E. (1985), pp. 5 - 20.

109 Cp. Brandenburger, A. M./Nalebuff, B. J. (1997), pp. 1 - 30.

110 Cp. Gomes-Casseres, B. (1996), p. 1.

111 Cp. Gomes-Casseres, B. (1996), p. 2.

112 Cp. More on alliance measurement metrics can be found in Segil, L. (2004).

113 Cp. Kogut, B. (2004), p. 49.

114 Cp. Kogut, B. (2004), pp. 55 - 63.

115 Cp. Gulati, R./Singh, H. (1998), pp. 781 - 814.

116 Cp. Stopford, J./Wells, L. (1972), pp. 1 - 15 / Hladik, K. J. (1985), pp. 1 - 10.

117 Cp. Caves, E./Mehra, K. (1986), pp. 449 - 481.

118 Cp. Kogut, B./Singh, H. (1988), pp. 411 - 432.

119 Cp. Evans, J. /Mavondo, F. (2007), online.

120 Cp. Abegglen, J. C./Stalk, G. (1985), p. 2 et seqq.

121 Klugin, F. A./Hook, J. (2001), p. 27.

122 Cp. Klugin, F. A./Hook, J. (2001), pp. 35 - 47.

123 Cp. Schäfer, I. S. (2003), p. 29.

124 Cp. Zentes, J./Swoboda, B./Morschett, D. (2005), p. 390.

125 Cp. Voß, W. (2002), pp. 337 - 343.

126 Cp. Sydow, J. (2006), pp. 1 - 5.

127 Cp. Supply Chain Digest (2005), online.

129 Cp. Sydow, J. (2006), p. 16.

130 Cp. Going-global (2007), online.

131 Going Global (2007a), online.

132 Cp. Techterms (2007), online.

133 Cp. IBM e-Business (2007), online.

134 Cp. Herden, S./Zwanziger, A. (2004), pp. 354 - 367 (Translated from German into English).

135 Cp. Kalakota, R./Robinson, M. (2001), pp. 7 - 11.

136 Cp. Own visualization of some of the applications in e-Business.

137 Cp. Primode Glossary (2007), online.

138 Cp. The website can be found at www.shopping .com.

139 Cp. Ebel, B. (2007), p. 46.

Details

Pages
160
Year
2007
ISBN (eBook)
9783640250950
File size
1 MB
Language
English
Catalog Number
v120998
Institution / College
University of Mannheim – Department of Business Administration and International Management
Grade
1,3
Tags
e- Business Mergers & Acquisitions Start-up Venture Capital Financing Venture Capital Social Networks Facebook YouTube Revenue Model Web 2.0 monetization user-generated content Facebook YouTube StudiVZ Lokalisten Wer-kennt-Wen Web 2.0 Online Advertising Myvideo

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Title: International Mergers & Acquisitions, Cooperations and Networks in the e-Business Industry