FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 4: Planning: Developing Business and Acquisition Plans: Phases 1 and 2 of the Acquisition Process

Show Answer

Share

---

All types

Filters

Study Flashcards

Question 31

Multiple Choice

Review LaterAdd Note

Review Later

All of the following are true about product life cycles except for

A) Strong sales growth and low barriers to entry often characterize the early stages of a product's introduction
B) New entrants have substantially poorer cost positions, as a result of their small market shares when compared to earlier entrants.
C) Later phases are characterized by slower market growth rates
D) During the high growth phases, firms usually experience high positive operating cash flow
E) The introduction of product enhancements can extend a firm's product life cycle

Correct Answer

verified

Show Answer

Question 32

True/False

Review LaterAdd Note

Review Later

The corporate mission statement should be defined as broadly as possible since it seeks to describe the corporation's reason for being, and it should not exclude the firm from pursuing any significant opportunities.

Correct Answer

verified

Show Answer

Question 33

Essay

Review LaterAdd Note

Years in the Making: Kinder Morgan Opportunistically Buys El Paso Corp. for $20.7 Billion Companies often hold informal merger talks for protracted periods until conditions emerge that are satisfactory to both parties. Capital requirements and regulatory hurdles often make buying another firm more attractive than attempting to build the other firm’s capabilities independently. ______________________________________________________________________________________________________ Using a combination of advanced horizontal drilling techniques and hydraulic fracturing, or “fracking” (i.e., shooting water and chemicals deep underground to blast open gas-bearing rocks), U.S. natural gas production has surged in recent years. As a result, proven gas reserves have soared such that the Federal Energy Information Administration estimates that the overall supplies of natural gas would last more than 100 years at current consumption rates. But surging supplies have pushed natural gas prices to $4 per million BTUs down from a peak of $13 in July 2008. Despite the depressed prices, energy companies around the globe have rushed to enter the business of producing shale gas. With energy prices depressed, independent players are struggling to find financing for their projects, prompting larger competitors to engage in buyouts. Exxon acquired XTO Energy in 2009, and Chesapeake Energy sold a partial stake in its shale gas reserves to Chinese companies for billions of dollars. In 2011 alone, oil and gas firms announced $172 billion worth of acquisitions in the continental United States, accounting for about two-thirds of the $261 billion spent on oil and gas acquisitions worldwide. The increase in energy supplies has strained current pipeline capacity in the United States. Today more than 50 pipeline companies transport oil and gas through networks that do not necessarily transport the fuel where it is needed from where it is being produced. For example, pipeline construction in the Marcellus shale field in Pennsylvania has not kept pace with drilling activity there, limiting the amount of gas that can be sent to the northeast. In the Bakken field in North Dakota, producers are shipping much of their new oil production by train to west coast refineries, and excess gas is being burned off. In the meantime, new oil and gas fields are being developed in Ohio, Kansas, Oklahoma, Texas, and Colorado. According to the Interstate Natural Gas Association of America Foundation, a trade group, pipeline companies are expected to have to build 36,000 miles of large-diameter, high-pressure natural gas pipelines by 2035 to meet market demands, at a cost of $178 billion. Responding to these developments, on October 17, 2011, Kinder Morgan (Kinder) agreed to buy the El Paso Corporation (El Paso) for $21.1 billion in cash and stock. Including the assumption of debt owed by El Paso and an affiliated business, El Paso Pipeline Partners, the takeover is valued at about $38 billion. This represents the largest energy deal since Exxon Mobil bought XTO Energy in late 2009. Kinder Morgan’s stock had been declining throughout 2011, and the firm was looking for a way to jumpstart earnings growth. The acquisition offers Kinder both the scale and the geographic disposition of pipelines necessary to support the burgeoning supply of shale gas and oil supplies. The acquisition makes Kinder the largest independent transporter of gasoline, diesel, and other petroleum products in the United States. It will also be the largest independent owner and operator of petroleum storage terminals and the largest transporter of carbon dioxide in the United States. The combined firms will operate the only oil sands pipeline to the west coast. To attempt to replicate the El Paso pipeline network would have been time consuming, required large amounts of capital, and faced huge regulatory hurdles. Kinder will own or operate about 67,000 miles of the more than 500,000 miles of oil and gas pipelines stretching across the United States. Kinder’s pipelines in the Rocky Mountains, the Midwest, and Texas will be woven together with El Paso’s expansive network that spreads east from the Gulf Coat to New England and to the west through New Mexico, Arizona, Nevada, and California. In buying El Paso, Kinder creates a unified network of interstate pipelines. By increasing its dependence on utilities, Kinder will reduce its exposure to the more volatile industry end user market. The acquisition also offers significant cost-cutting opportunities resulting from reconfiguring existing pipeline networks. Kinder paid 14 times El Paso’s last 12 months’ earnings before interest, taxes, depreciation, and amortization of $2.67 billion. Investors applauded the deal by boosting Kinder’s stock by 4.8% to $28.19 on the announcement date. El Paso shares climbed 25% to $24.81. For each share of El Paso, Kinder paid $14.65 in cash, .4187 of a Kinder share, and .640 of a warrant entitling the bearer to buy more Kinder shares at a predetermined price. The purchase price at closing valued the deal at $26.87 per El Paso share and constituted a 47% premium to El Paso 20-day average price prior to the announcement. Kinder’s debt will increase to $14.5 billion from $3.2 billion after the acquisition. To help pay for the deal, Kinder is seeking a buyer for El Paso’s exploration business. The combined firms will be called Kinder Morgan. Richard D. Kinder, the founder of Kinder Morgan, will be the chairman and CEO. The proposed takeover was not approved by regulators until May 2, 2012, on the condition that Kinder Morgan agree to sell three U.S. natural gas pipelines. The deal represents the culmination of years of discussion between Kinder Morgan and El Paso. Kinder, which went private in 2006 in a transaction valued at $22 billion, reemerged in an IPO in February 2011, raising nearly $2.9 billion. The IPO made the deal possible. While Kinder had for years held talks with El Paso’s management about a merger, it needed the “currency” of a publicly traded stock to complete such a deal. El Paso shareholders wanted to be able to participate in any future appreciation of the Kinder Morgan shares. Whether the combination of these two firms makes sense depends on the magnitude and timing of the expected resurgence in natural gas prices and the acceptability of shale gas and “fracking” to the regulators. -Who are Kinder Morgan's customers and what are their needs?

Oracle Continues Its Efforts to Consolidate the Software Industry Oracle CEO Larry Ellison continued his effort to implement his software industry strategy when he announced the acquisition of Siebel Systems Inc. for $5.85 billion in stock and cash on September 13, 2005. The global software industry includes hundreds of firms. During the first nine months of 2005, Oracle had closed seven acquisitions, including its recently completed $10.6 billion hostile takeover of PeopleSoft. In each case, Oracle realized substantial cost savings by terminating duplicate employees and related overhead expenses. The Siebel acquisition accelerates the drive by Oracle to overtake SAP as the world's largest maker of business applications software, which automates a wide range of administrative tasks. The consolidation strategy seeks to add the existing business of a competitor, while broadening the customer base for Oracle's existing product offering. Siebel, founded by Ellison's one-time protégé turned bitter rival, Tom Siebel, gained prominence in Silicon Valley in the late 1990s as a leader in customer relationship management (CRM) software. CRM software helps firms track sales, customer service, and marketing functions. Siebel's dominance of this market has since eroded amidst complaints that the software was complicated and expensive to install. Moreover, Siebel ignored customer requests to deliver the software via the Internet. Also, aggressive rivals, like SAP and online upstart Salesforce.com have cut into Siebel's business in recent years with simpler offerings. Siebel's annual revenue had plunged from about $2.1 billion in 2001 to $1.3 billion in 2004. In the past, Mr. Ellison attempted to hasten Siebel's demise, declaring in 2003 that Siebel would vanish and putting pressure on the smaller company by revealing he had held takeover talks with the firm's CEO, Thomas Siebel. Ellison's public announcement of these talks heightened the personal enmity between the two CEOs, making Siebel an unwilling seller. Oracle's intensifying focus on business applications software largely reflects the slowing growth of its database product line, which accounts for more than three fourths of the company's sales. Siebel's technology and deep customer relationships give Oracle a competitive software bundle that includes a database, middleware (i.e., software that helps a variety of applications work together as if they were a single system), and high-quality customer relationship management software. The acquisition also deprives Oracle competitors, such as IBM, of customers for their services business. Customers, who once bought the so-called best-of-breed products, now seek a single supplier to provide programs that work well together. Oracle pledged to deliver an integrated suite of applications by 2007. What brought Oracle and Siebel together in the past was a shift in market dynamics. The customer and the partner community is communicating quite clearly that they are looking for an integrated set of products. Germany's SAP, Oracle's major competitor in the business applications software market, played down the impact of the merger, saying they had no reason to react and described any deals SAP is likely to make as "targeted, fill-in acquisitions." For IBM, the Siebel deal raised concerns about the computer giant's partners falling under the control of a competitor. IBM and Oracle compete fiercely in the database software market. Siebel has worked closely with IBM, as did PeopleSoft and J.D. Edwards, which had been purchased by PeopleSoft shortly before its acquisition by Oracle. Retek, another major partner of IBM, had also been recently acquired by Oracle. IBM had declared its strategy to be a key partner to thousands of software vendors and that it would continue to provide customers with IBM hardware, middleware, and other applications. -Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the development of Oracle's business strategy. Be specific.

HP Implements a Transformational Strategy, Again and Again Failure to develop and implement a coherent business strategy often results in firms reacting to rather than anticipating changes in the marketplace. Firms reacting to changing events often adopt strategies that imitate their competitors. These “me too” strategies rarely provide any sustainable competitive advantage. _______________________________________________________________________________________________________ Transformational, when applied to a firm’s business strategy, is a term often overused. Nevertheless, Hewlett-Packard (HP), with its share price at a six-year low and substantially underperforming such peers as Apple, IBM, and Dell, announced what was billed as a major strategic redirection for the firm on August 18, 2011. The firm was looking for a way to jumpstart its stock. Since Leo Apotheker took over as CEO in November 2010, HP had lost 44% of its market value through August 2011. A transformational announcement appeared to be in order. HP, the world’s largest technology company by revenue, announced that, after an extensive review of its business portfolio, it had reached an agreement to buy British software maker Autonomy for $11.7 billion. The firm also put a for-sale sign on its personal computer business, with options ranging from divestiture to a spinoff to simply retaining the business. HP said the future of the PC unit, which accounted for more than $40 billion in annual revenue and about $2 billion in operating profit, would be decided over the next 12 months. Apotheker had put this business in jeopardy after he had announced that the WebOS-based TouchPad tablet would be discontinued due to poor sales. The announcement was transformational in that it would move the company away from the consumer electronics market. Under the terms of the deal, HP will pay 25.50 British pounds, or $42.11, in cash for Autonomy. The price represented a 64% premium. With annual revenue of about $1 billion (only 1% of HP’s 2010 revenue), the purchase price represents a multiple of more than 10 times Autonomy’s annual revenues. HP’s then-CEO, Leo Apotheker, indicated that the acquisition would help change HP into a business software giant, along the lines of IBM or Oracle, shedding more of the company’s ties to lower-margin consumer products. Autonomy, which makes software that searches and keeps track of corporate and government data, would expedite this change. HP said that the acquisition of Autonomy will complement its existing enterprise offerings and give it valuable intellectual property. Investors greeted the announcement by trashing HP stock, driving the share price down 20% in a single day, wiping out $16 billion in market value. While some investors may be sympathetic to moving away from the commodity-like PC business, others were deeply dismayed by the potentially “value-destroying” acquisition of Autonomy, the clumsy handling of the announcement of the wide range of options for the PC business, and HP’s disappointing earnings performance. By creating uncertainty among potential customers about the long-term outlook for the business, HP may have succeeded in scaring off potential customers. With this announcement, HP once again appeared to be lagging well behind its major competitors in implementing a coherent business strategy. It agreed to buy Compaq in 2001 in what turned out to be widely viewed as a failed performance. In contrast, IBM transformed itself by selling its PC business to China’s Lenovo in late 2004 and establishing its dominance in the enterprise IT business. HP appears to be trying to replicate IBM’s strategy. Heralded at the time as transformational, the 1997 $25 billion Compaq deal turned out to be hotly contested, marred by stiff opposition from shareholders and a bitter proxy contest led by the son of an HP cofounder. While the deal was eventually passed by shareholder vote, it is still considered controversial, because it increased the firm’s presence in the PC industry at a time when the growth rate was slowing and margins were declining, reflecting declining selling prices. HP planned to move into the lucrative cellphone and tablet computer markets with the its 2010 purchase of Palm, in which it outbid three other companies to acquire the firm for $1.2 billion, ultimately paying a 23% premium. However, sales of webOS phones and the TouchPad have been disappointing, and the firm decided to discontinue making devices based on webOS, a smartphone operating system it had acquired when it bought Palm in late 2010. In contrast to the mixed results of the Compaq and Palm acquisitions, HP’s purchase of Electronic Data Systems (EDS) for $13.9 billion in 2008 substantially boosted the firm’s software services business. IBM’s successful exit from the PC business early in 2004 and its ability to derive the bulk of its revenue from the more lucrative services business has been widely acclaimed by investors. Prospects seemed good for this HP acquisition. However, in an admission of the firm’s failure to realize EDS’s potential, HP in mid-2012 wrote off $8 billion of what it had paid for EDS. HP has purchased 102 companies since 1989, but with the exceptions of its Compaq and its $1.3 billion purchase of VeriFone, it has not paid more than $500 million in any single deal. These deals were all completed under different management teams. Carly Fiorina was responsible for the Compaq deal, while Mark Hurd pushed for the acquisitions of EDS, Palm, and 3Par. Highly respected for his operational performance, Hurd was terminated in early 2010 on sexual harassment charges. Under pressure from investors to jettison its current CEO, HP announced on September 22, 2011, that former eBay CEO, Meg Whitman, would replace Leo Apotheker as Chief Executive Officer. In yet another strategic flip-flop, HP announced on October 27, 2011, that it would retain the PC business. The firm’s internal analysis indicated that separating the PC business would have cost $1.5 billion in one-time expenses and another $1 billion in increased expenses annually. Citing the deep integration of the PC group in HP’s supply chain and procurement efforts, Whitman proclaimed the firm to be stronger with the PC business. In mid-December 2011, HP announced that it would also reverse its earlier decision to discontinue supporting webOS and stated that it would make webOS available for free under an open-source license for anyone to use. The firm will continue to make enhancements to the webOS system and to build devices dependent on it. By moving to an open-source environment, HP hopes others will adopt the operating system, make improvements, and develop mobile devices using webOS to establish an installed user base. HP could then make additional webOS devices and applications that could be sold to this user base. This strategy is similar to Google’s when it made its Android mobile software available for cellphones under an open-source license. HP’s share price plunged 11% on November 25, 2012, to $11.73 following its announcement that it had uncovered “accounting irregularities” associated with its earlier acquisition of Autonomy. The revelation required the firm to write down its investment in Autonomy by $8.8 billion, about three-fourths of the purchase price. The charge contributed to a quarterly loss of $6.9 billion for HP. Confidence in both the firm’s management and board plummeted, further tarnishing the once-vaunted HP brand. -Discuss the strategic advantages and disadvantages of diversified versus relatively focused firms? Be specific.

CenturyTel Buys Qwest Communications to Cut Costs and Buy Time as the Landline Market Shrinks • Market segmentation can be used to identify “underserved” segments which may sustain firms whose competitive position in larger markets is weak. • A firm’s competitive relative is best viewed in comparison to those firms competing in its served market rather than with industry leading firms. ____________________________________________________________________________________________ In what could best be described as a defensive acquisition, CenturyTel, the fifth largest local phone company in the United States, acquired Qwest Communications, the country’s third largest, in mid-2010 in a stock swap valued at $10.6 billion. While both firms are dwarfed in size by AT&T and Verizon, these second-tier telecommunications firms will control a larger share of the shrinking landline market. The combined firms will have about 17 million phone lines serving customers in 37 states. This compares to AT&T and Verizon with about 46 and 32 million landline customers, respectively. The deal would enable the firms to reduce expenses in the wake of the annual 10 percent decline in landline usage as people switch from landlines to wireless and cable connections. Expected annual cost savings total $575 million; additional revenue could come from upgrading Qwest’s landlines to handle DSL Internet. In 2010, about one-fourth of U.S. homes used only cell phones, and cable behemoth Comcast, with 7.6 million residential and business phone subscribers, ranked as the nation’s fourth largest landline provider. CenturyTel has no intention of moving into the wireless and cable markets, which are maturing rapidly and are highly competitive. While neither Qwest nor CenturyTel owns wireless networks and therefore cannot offset the decline in landline customers as AT&T and Verizon are attempting to do, the combined firms are expected to thrive in rural areas where they have extensive coverage. In such geographic areas, broadband cable Internet access and fiber-optics data transmission line coverage are is limited. The lack of fast cable and fiber-optics transmission makes voice over Internet protocol (VOIP)—Internet phone service offered by cable companies and independent firms such as Vonage—unavailable. Consequently, customers are forced to use landlines if they want a home phone. Furthermore, customers in these areas must use landlines to gain access to the Internet through dial-up access or through a digital subscriber line (DSL). -How would you describe CenturyTel's business strategy? Be specific.

Nokia’s Gamble to Dominate the Smartphone Market Falters The ultimate success or failure of any M&A transaction to satisfy expectations often is heavily dependent on the answer to a simple question. Was the justification for buying the target firm based on a sound business strategy? No matter how bold, innovative, or precedent-setting a bad strategy is, it is still a bad strategy. In a bold move that is reminiscent of the rollout of Linux, Nokia, a Finnish phone handset manufacturer, announced in mid-2008 that it had reached an agreement to acquire Symbian, its supplier of smartphone operating system software. Nokia also announced its intention to give away Symbian's software for free in response to Google’s decision in December 2008 to offer its Android operating system at no cost to handset makers. This switch from a model in which developers had to pay a license fee to create devices using the Symbian operating system software to a free (open source) model was designed to supercharge the introduction of innovative handheld products that relied on Symbian software. Any individual or firm can use and modify the Symbian code for any purpose for free. In doing so, Nokia is hoping that a wave of new products using Symbian software would blunt the growth of Apple’s proprietary system and Google’s open source Android system. Nokia is seeking to establish an industry standard based on the Symbian software, using it as a platform for providing online services to smartphone users, such as music and photo sharing. According to Forrester Research, the market for such services is expected to reach $92 billion in 2012 (almost twice its size when Nokia acquired Symbian), with an increasing portion of these services delivered via smartphones. In its vision for the future, Nokia seems to be positioning itself as the premier supplier of online services to the smartphone market. Its business strategy or model is to dominate the smartphone market with handsets that rely on the Symbian operating system. Nokia hopes to exploit economies of scale by spreading any fixed cost associated with online services over an expanding customer base. Such fixed expenses could include a requirement by content service providers that Nokia pay a minimum level of royalties in addition to royalties that vary with usage. Similarly, the development cost incurred by service providers can be defrayed by selling into a growing customer base. The implementation strategy involved the acquisition of the leading supplier of handset operating systems and subsequently to give away the Symbian software free. The success or failure of this vision, business strategy, and implementation strategy depends on whether Symbian can do a better job of recruiting other handset makers, service providers, and consumers than Nokia's competitors. The strategy to date seems to be unraveling. At the time of the acquisition, Symbian supplied almost 60 percent of the operating system software for smartphones worldwide. Market researcher Ovum estimates that the firm’s global market share fell to less than 50 percent in 2010 and predicts the figure could decline to one-third by 2015, reflecting the growing popularity of Google’s Android software. Android has had excellent success in the U.S. market, leapfrogging over Apple’s 24 percent share to capture 27 percent of the smartphone market, according to the NPD Group. Research-In-Motion (RIM), the maker of the Blackberry, remained the U.S. market share leader in 2010 at 33 percent. Dell Computer’s Drive to Eliminate the Middleman Historically, personal computers were sold either through a direct sales force to businesses (e.g., IBM), through company-owned stores (e.g., Gateway), or through independent retail outlets and distributors to both businesses and consumers (e.g., CompUSA). Retail chains and distributors constituted a large percentage of the customer base of other PC manufacturers such as Compaq and Gateway. Consequently, most PC manufacturers were saddled with the large overhead expense associated with a direct sales force, a chain of company-owned stores, a demanding and complex distribution chain contributing a substantial percentage of revenue, or some combination of all three. Michael Dell, the founder of Dell Computer, saw an opportunity to take cost out of the distribution of PCs by circumventing the distributors and selling directly to the end user. Dell Computer introduced a dramatically new business model for selling personal computers directly to consumers. By starting with this model when the firm was formed, Dell did not have to worry about being in direct competition with its distribution chain. Dell has changed the basis of competition in the PC industry not only by shifting much of its direct order business to the internet but also by introducing made-to-order personal computers. Businesses and consumers can specify online the features and functions of a PC and pay by credit card. Dell assembles the PC only after the order is processed and the customer’s credit card has been validated. This has the effect of increasing customer choice and convenience as well as dramatically reducing Dell’s costs of carrying inventory. The Dell business model has evolved into one focused relentlessly on improving efficiency. The Dell model includes setting up super-efficient factories, keeping parts in inventory for only a few days before they are used, and selling computers based on common industry standards like Intel chips and Microsoft operating systems. By its nature, the Dell model requires aggressive expansion. As growth in the PC market slowed in the late 1990s, the personal computer became a commodity. Since computers had become so powerful, there was little need for consumers to upgrade to more powerful machines. To offset growth in its primary market, Dell undertook a furious strategy to extend the Dell brand name into related electronics markets. The firm started to sell “low end” servers to companies, networking gear, PDAs, portable digital music players, an online music store, flat-panel televisions, and printers. In late 2002, the firm began to sell computers through the retail middleman Costco. Michael Dell believes that every product should be profitable from the outset. His focus on operating profit margins has left little for product innovation. Dell’s budget for new product R&D has averaged 1.3% of revenues in recent years, about one-fifth of what IBM and Hewlett-Packard spend. Rather than be viewed as a product innovator, Dell is pursuing a “fast follower” strategy in which the firm focuses on taking what is currently highly popular and making it better and cheaper than anyone else. While not a product innovator, Dell has succeeded in process innovation. The company has more than 550 business process patents, for everything from a method of using wireless networks in factories to a configuration of manufacturing stations that is four times as productive as a standard assembly line. Dell’s expansion seems to be focused on its industry lead in process engineering and innovation resulting in super efficient factories. The current strategy seems to be to move into commodity markets, with standardized technology that is widely available. In such markets, the firm can apply its finely honed skills in discipline, speed, and efficiency. For markets that are becoming more commodity-like but still require some R&D, Dell takes on partners. For example, in the printer market, Dell is applying its brand name to Lexmark printers. In storage products, Dell has paired up with EMC Corp. to sell co-branded storage machines. As these markets become more commodity-like, Dell will take over manufacturing of these products. This is what happened at the end of 2003 when it took over production of low-end storage production from EMC. In doing so, Dell was able to cut production costs by 25%. The success of Michael Dell’s business model is evident. Its share of the global PC market in 2003 topped 16%; the company accounts for more than one-third of the hand-held device market. At the end of 2003, Dell’s price-to earnings ratio exceeded IBM, Microsoft, Wal-Mart, and General Electric. Dell has had some setbacks. In 2001, the firm scrapped a plan to enter the mobile-phone market; in 2002 Dell wrote off its only major acquisition, a storage-technology company purchased in 1999 for $340 million. Dell also withdrew from the high-end storage business, because it decided its technology was not ready for the market. -Who are Dell's primary customers? Current and potential competitors? Suppliers? How would you assess Dell's bargaining power with respect to its customers and suppliers? What are Dell's strengths/weaknesses versus it current competitors?

From a Social Media Darling to an Afterthought—The Demise of Myspace It is critical to understand a firm’s competitive edge and what it takes to sustain it. Sustaining a competitive advantage in a fast-moving market requires ongoing investment and nimble and creative decision making. In the end, Myspace appears to have had neither. ______________________________________________________________________________ A pioneer in social networking, Myspace started in 2003 and reached its peak in popularity in December 2008. According to ComScore, Myspace attracted 75.9 million monthly unique visitors in the United States that month. It was more than just a social network; it was viewed by many as a portal where people discovered new friends and music and movies. Its annual revenue in 2009 was reportedly more than $470 million. Myspace captured the imagination of media star, Rupert Murdoch, founder and CEO of media conglomerate News Corp. News Corp seemed to view the firm as the cornerstone of its social networking strategy, in which it would sell content to users of social networking sites. To catapult News Corp into the world of social networking, Murdock acquired Myspace and its parent firm, Intermix, in 2007 for an estimated $580 million. But News Corp’s timing could not have been worse. Between mid-2009 and mid-2011, Myspace was losing more than 1 million visitors monthly, with unique visitors in May 2011 about one-half of their previous December 2008 peak. Advertising revenue swooned to $184 million in 2011, about 40% of its 2009 level. In the wake of Myspace’s deteriorating financial performance, News Corp initiated a search for a buyer in early 2011. The initial asking price was $100 million. Despite a flurry of interest in social media businesses such as LinkedIn and Groupon, there was little interest in buying Myspace. In an act of desperation, News Corp sold Myspace to Specific Media, an advertising firm, for only $35 million in mid-2011 as the value of the MySpace brand plummeted. What happened to cause Myspace to fall from grace so rapidly? A range of missteps befuddled Myspace, including a flawed business strategy, mismanagement, and underinvestment. Myspace may also have been a victim of fast-moving technology, fickle popular culture, and the hubris that comes with rapid early success. What appeared to be an unimaginative strategy and underinvestment left the social media field wide open for new entrants, such as Facebook. Myspace may also have suffered from waning interest from News Corp’s top management. As consumer interest in Myspace declined, News Corp turned its attention to its acquisition of the Wall Street Journal. Culture clash also may have been a problem when News Corp, a large, highly structured media firm, tried to absorb the brassy startup. With a big company, there are more meetings, more reporting relationships, more routine, and more monitoring by senior management of the parent firm. Myspace managers’ attention was often diverted in an effort to create synergy with other News Corp businesses. In the new era of social media, the rapid rise and fall of Myspace illustrates the ever-decreasing life cycle of such businesses. When News Corp bought Myspace, it was a thriving online social networking business. Facebook was still contained primarily on college campuses. However, it was not long before Facebook, with its smooth interface and broader offering of online services, far outpaced Myspace in terms of monthly visitors. Myspace, like so many other Internet startups, had its “fifteen minutes of fame.” Adobe’s Acquisition of Omniture: Field of Dreams Marketing? On September 14, 2009, Adobe announced its acquisition of Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO Shantanu Narayen announced that the firm was pushing into new business at a time when customers were scaling back on purchases of the company’s design software. Omniture would give Adobe a steady source of revenue and may mean investors would focus less on Adobe’s ability to migrate its customers to product upgrades such as Adobe Creative Suite. Adobe’s business strategy is to develop a new line of software that was compatible with Microsoft applications. As the world’s largest developer of design software, Adobe licenses such software as Flash, Acrobat, Photoshop, and Creative Suite to website developers. Revenues grow as a result of increased market penetration and inducing current customers to upgrade to newer versions of the design software. In recent years, a business model has emerged in which customers can “rent” software applications for a specific time period by directly accessing the vendors’ servers online or downloading the software to the customer’s site. Moreover, software users have shown a tendency to buy from vendors with multiple product offerings to achieve better product compatibility. Omniture makes software designed to track the performance of websites and online advertising campaigns. Specifically, its Web analytic software allows its customers to measure the effectiveness of Adobe’s content creation software. Advertising agencies and media companies use Omniture’s software to analyze how consumers use websites. It competes with Google and other smaller participants. Omniture charges customers fees based on monthly website traffic, so sales are somewhat less sensitive than Adobe’s. When the economy slows, Adobe has to rely on squeezing more revenue from existing customers. Omniture benefits from the takeover by gaining access to Adobe customers in different geographic areas and more capital for future product development. With annual revenues of more than $3 billion, Adobe is almost ten times the size of Omniture. Immediately following the announcement, Adobe’s stock fell 5.6 percent to $33.62, after having gained about 67 percent since the beginning of 2009. In contrast, Omniture shares jumped 25 percent to $21.63, slightly above the offer price of $21.50 per share. While Omniture’s share price move reflected the significant premium of the offer price over the firm’s preannouncement share price, the extent to which investors punished Adobe reflected widespread unease with the transaction. Investors seem to be questioning the price paid for Omniture, whether the acquisition would actually accelerate and sustain revenue growth, the impact on the future cyclicality of the combined businesses, the ability to effectively integrate the two firms, and the potential profitability of future revenue growth. Each of these factors is considered next. Adobe paid 18 times projected 2010 earnings before interest, taxes, depreciation, and amortization, a proxy for operating cash flow. Considering that other Web acquisitions were taking place at much lower multiples, investors reasoned that Adobe had little margin for error. If all went according to plan, the firm would earn an appropriate return on its investment. However, the likelihood of any plan being executed flawlessly is problematic. Adobe anticipates that the acquisition will expand its addressable market and growth potential. Adobe anticipates significant cross-selling opportunities in which Omniture products can be sold to Adobe customers. With its much larger customer base, this could represent a substantial new outlet for Omniture products. The presumption is that by combining the two firms, Adobe will be able to deliver more value to its customers. Adobe plans to merge its programs that create content for websites with Omniture’s technology. For designers, developers, and online marketers, Adobe believes that integrated development software will streamline the creation and delivery of relevant content and applications. The size of the market for such software is difficult to gauge. Not all of Adobe’s customers will require the additional functionality that would be offered. Google Analytic Services, offered free of charge, has put significant pressure on Omniture’s earnings. However, firms with large advertising budgets are less likely to rely on the viability of free analytic services. Adobe also is attempting to diversify into less cyclical businesses. However, both Adobe and Omniture are impacted by fluctuations in the volume of retail spending. Less retail spending implies fewer new websites and upgrades to existing websites, which directly impacts Adobe’s design software business, and less advertising and retail activity on electronic commerce sites negatively impacts Omniture’s revenues. Omniture receives fees based on the volume of activity on a customer’s site. Integrating the Omniture measurement capabilities into Adobe software design products and cross-selling Omniture products into the Adobe customer base require excellent coordination and cooperation between Adobe and Omniture managers and employees. Achieving such cooperation often is a major undertaking, especially when the Omniture shareholders, many of whom were employees, were paid in cash. The use of Adobe stock would have given them additional impetus to achieve these synergies in order to boost the value of their shares. Achieving cooperation may be slowed by the lack of organizational integration of Omniture into Adobe. Omniture will become a new business unit within Adobe, with Omniture’s CEO, Josh James, joining Adobe as a senior vice president of the new business unit. He will report to Narayen. This arrangement may have been made to preserve Omniture’s corporate culture. Adobe is betting that the potential increase in revenues will grow profits of the combined firms despite Omniture’s lower margins. Whether the acquisition will contribute to overall profit growth depends on which products contribute to future revenue growth. The lower margins associated with Omniture’s products would slow overall profit growth if the future growth in revenue came largely from Omniture’s Web analytic products. -What factors internal to Adobe and Omniture seem to be driving the transaction? Be specific.

Oracle Continues Its Efforts to Consolidate the Software Industry Oracle CEO Larry Ellison continued his effort to implement his software industry strategy when he announced the acquisition of Siebel Systems Inc. for $5.85 billion in stock and cash on September 13, 2005. The global software industry includes hundreds of firms. During the first nine months of 2005, Oracle had closed seven acquisitions, including its recently completed $10.6 billion hostile takeover of PeopleSoft. In each case, Oracle realized substantial cost savings by terminating duplicate employees and related overhead expenses. The Siebel acquisition accelerates the drive by Oracle to overtake SAP as the world's largest maker of business applications software, which automates a wide range of administrative tasks. The consolidation strategy seeks to add the existing business of a competitor, while broadening the customer base for Oracle's existing product offering. Siebel, founded by Ellison's one-time protégé turned bitter rival, Tom Siebel, gained prominence in Silicon Valley in the late 1990s as a leader in customer relationship management (CRM) software. CRM software helps firms track sales, customer service, and marketing functions. Siebel's dominance of this market has since eroded amidst complaints that the software was complicated and expensive to install. Moreover, Siebel ignored customer requests to deliver the software via the Internet. Also, aggressive rivals, like SAP and online upstart Salesforce.com have cut into Siebel's business in recent years with simpler offerings. Siebel's annual revenue had plunged from about $2.1 billion in 2001 to $1.3 billion in 2004. In the past, Mr. Ellison attempted to hasten Siebel's demise, declaring in 2003 that Siebel would vanish and putting pressure on the smaller company by revealing he had held takeover talks with the firm's CEO, Thomas Siebel. Ellison's public announcement of these talks heightened the personal enmity between the two CEOs, making Siebel an unwilling seller. Oracle's intensifying focus on business applications software largely reflects the slowing growth of its database product line, which accounts for more than three fourths of the company's sales. Siebel's technology and deep customer relationships give Oracle a competitive software bundle that includes a database, middleware (i.e., software that helps a variety of applications work together as if they were a single system), and high-quality customer relationship management software. The acquisition also deprives Oracle competitors, such as IBM, of customers for their services business. Customers, who once bought the so-called best-of-breed products, now seek a single supplier to provide programs that work well together. Oracle pledged to deliver an integrated suite of applications by 2007. What brought Oracle and Siebel together in the past was a shift in market dynamics. The customer and the partner community is communicating quite clearly that they are looking for an integrated set of products. Germany's SAP, Oracle's major competitor in the business applications software market, played down the impact of the merger, saying they had no reason to react and described any deals SAP is likely to make as "targeted, fill-in acquisitions." For IBM, the Siebel deal raised concerns about the computer giant's partners falling under the control of a competitor. IBM and Oracle compete fiercely in the database software market. Siebel has worked closely with IBM, as did PeopleSoft and J.D. Edwards, which had been purchased by PeopleSoft shortly before its acquisition by Oracle. Retek, another major partner of IBM, had also been recently acquired by Oracle. IBM had declared its strategy to be a key partner to thousands of software vendors and that it would continue to provide customers with IBM hardware, middleware, and other applications. -How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some combination of all three)?

Coca Cola is an example of a company that pursues both a differentiation and cost leadership strategy.

While management's upfront involvement in the acquisition process is crucial, management should largely disengage from the process until the transaction is completed.

Accounting considerations rarely affect the decision to buy another business rather than to build the business internally.

Which of the following examples represents the best application of a firm's primary core competence?

How might existing Facebook shareholders be hurt by the deal? What do current shareholders have to assume about future earnings growth to benefit from the deal?

BofA Acquires Countrywide Financial Corporation On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its acquisition of mortgage lender Countrywide Financial Corp (Countrywide) for $4 billion, a 70 percent discount from the firm’s book value at the end of 2007. Countrywide originates, purchases, and securitizes residential and commercial loans; provides loan closing services, such as appraisals and flood determinations; and performs other residential real estate–related services. This marked another major (but risky) acquisition by Bank of America's chief executive Kenneth Lewis in recent years. BofA's long-term intent has been to become the nation's largest consumer bank, while achieving double-digit earnings growth. The acquisition would help the firm realize that vision and create the second largest U.S. bank. In 2003, BofA paid $48 billion for FleetBoston Financial, which gave it the most branches, customers, and checking deposits of any U.S. bank. In 2005, BofA became the largest credit card issuer when it bought MBNA for $35 billion. The purchase of the troubled mortgage lender averted the threat of a collapse of a major financial institution because of the U.S. 2007–2008 subprime loan crisis. U.S. regulators were quick to approve the takeover because of the potentially negative implications for U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the third quarter of 2007. Countrywide's exposure to the subprime loan market (i.e., residential loans made to borrowers with poor or nonexistent credit histories) had driven its shares down by almost 80 percent from year-earlier levels. The bank was widely viewed as teetering on the brink of bankruptcy as it lost access to the short-term debt markets, its traditional source of borrowing. Bank of America deployed 60 analysts to Countrywide's headquarters in Calabasas, California. After four weeks of analyzing Countrywide's legal and financial challenges and modeling how its loan portfolio was likely to perform, BofA offered an all-stock deal valued at $4 billion. The deal valued Countrywide at $7.16 per share, a 7.6 discount to its closing price the day before the announcement. BofA issued 0.18 shares of its stock for each Countrywide share. The deal could have been renegotiated if Countrywide experienced a material change that adversely affected the business between the signing of the agreement of purchase and sale and the closing of the deal. BofA made its initial investment of $2 billion in Countrywide in August 2007, purchasing preferred shares convertible to a 16 percent stake in the company. By the time of the announced acquisition in early January 2008, Countrywide had a $1.3 billon paper loss on the investment. The acquisition provided an opportunity to buy a market leader at a distressed price. The risks related to the amount of potential loan losses, the length of the U.S. housing slump, and potential lingering liabilities associated with Countrywide’s questionable business practices. The purchase made BofA the nation's largest mortgage lender and servicer, consistent with the firm's business strategy, which is to help consumers meet all their financial needs. BofA has been one of the relatively few major banks to be successful in increasing revenue and profit following acquisitions by "cross-selling" its products to the acquired bank's customers. Countrywide's extensive retail distribution network enhances BofA's network of more than 6,100 banking centers throughout the United States. BofA had anticipated almost $700 million in after-tax cost savings in combining the two firms. Almost two-thirds of these savings had been realized by the end of 2010. In mid-2010, BofA agreed to pay $108 million to settle federal charges that Countrywide had incorrectly collected fees from 200,000 borrowers who had been facing foreclosure. -How would you classify the BofA business strategy (cost leadership, differentiation, focus or some combination)? Explain your answer.

Which of the following best defines market segmentation

BofA Acquires Countrywide Financial Corporation On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its acquisition of mortgage lender Countrywide Financial Corp (Countrywide) for $4 billion, a 70 percent discount from the firm’s book value at the end of 2007. Countrywide originates, purchases, and securitizes residential and commercial loans; provides loan closing services, such as appraisals and flood determinations; and performs other residential real estate–related services. This marked another major (but risky) acquisition by Bank of America's chief executive Kenneth Lewis in recent years. BofA's long-term intent has been to become the nation's largest consumer bank, while achieving double-digit earnings growth. The acquisition would help the firm realize that vision and create the second largest U.S. bank. In 2003, BofA paid $48 billion for FleetBoston Financial, which gave it the most branches, customers, and checking deposits of any U.S. bank. In 2005, BofA became the largest credit card issuer when it bought MBNA for $35 billion. The purchase of the troubled mortgage lender averted the threat of a collapse of a major financial institution because of the U.S. 2007–2008 subprime loan crisis. U.S. regulators were quick to approve the takeover because of the potentially negative implications for U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the third quarter of 2007. Countrywide's exposure to the subprime loan market (i.e., residential loans made to borrowers with poor or nonexistent credit histories) had driven its shares down by almost 80 percent from year-earlier levels. The bank was widely viewed as teetering on the brink of bankruptcy as it lost access to the short-term debt markets, its traditional source of borrowing. Bank of America deployed 60 analysts to Countrywide's headquarters in Calabasas, California. After four weeks of analyzing Countrywide's legal and financial challenges and modeling how its loan portfolio was likely to perform, BofA offered an all-stock deal valued at $4 billion. The deal valued Countrywide at $7.16 per share, a 7.6 discount to its closing price the day before the announcement. BofA issued 0.18 shares of its stock for each Countrywide share. The deal could have been renegotiated if Countrywide experienced a material change that adversely affected the business between the signing of the agreement of purchase and sale and the closing of the deal. BofA made its initial investment of $2 billion in Countrywide in August 2007, purchasing preferred shares convertible to a 16 percent stake in the company. By the time of the announced acquisition in early January 2008, Countrywide had a $1.3 billon paper loss on the investment. The acquisition provided an opportunity to buy a market leader at a distressed price. The risks related to the amount of potential loan losses, the length of the U.S. housing slump, and potential lingering liabilities associated with Countrywide’s questionable business practices. The purchase made BofA the nation's largest mortgage lender and servicer, consistent with the firm's business strategy, which is to help consumers meet all their financial needs. BofA has been one of the relatively few major banks to be successful in increasing revenue and profit following acquisitions by "cross-selling" its products to the acquired bank's customers. Countrywide's extensive retail distribution network enhances BofA's network of more than 6,100 banking centers throughout the United States. BofA had anticipated almost $700 million in after-tax cost savings in combining the two firms. Almost two-thirds of these savings had been realized by the end of 2010. In mid-2010, BofA agreed to pay $108 million to settle federal charges that Countrywide had incorrectly collected fees from 200,000 borrowers who had been facing foreclosure. -Wht options to outright acquisition did BofA have? Why do you believe BofA chose to acquire Countrywide rather than to pursue an alternative strategy?

What alternatives to acquisition did Facebook have in dealing with WhatsApp? Why was acquisition the preferred option?

Firms adopting a focus strategy compete primarily based on their superior understanding of how to satisfy their customers needs better than the competition.

Potential competitors include firms (both domestic and foreign) in the current market, those in related markets, current customers, and current suppliers.