Question

Answer question 1 and 2 please.

1)Based on Problems in Achieving Acquisition Success, explain (speculate if necessary) how each of the 7 problems may or may not apply to ATT’s acquisition of TWC.

2)In the lecture notes is a short list regarding Effective Acquisitions; which of these do you speculate will apply to ATT if the acquisition is approved?

Below are notes:

Problems in Achieving Acquisition Success

Research suggests that perhaps 20 percent of all mergers and acquisitions are successful, approximately 60 percent produce disappointing results, and the last 20 percent are clear failures.

Successful acquisitions generally involve a well-conceived strategy in selecting the target, the avoidance of paying too high a premium, and employing an effective integration process.

Integration Difficulties

Integration problems or difficulties that firms often encounter can take many forms. Among them are:

Melding disparate corporate cultures

Linking different financial and control systems

Building effective working relationships (especially when management styles differ)

Problems related to differing status of acquired and acquiring firms’ executives

Inadequate Evaluation of Target

Due diligence is a process through which a firm evaluates a target firm for acquisition. In an effective due-diligence process hundreds of items are examined in areas as diverse as the financing for the intended transaction, differences in cultures between the acquiring and target firm, tax consequences of the transaction, and actions that would be necessary to successfully meld the two workforces.

Due diligence is commonly performed by investment bankers, accountants, lawyers, and management consultants specializing in that activity, although firms actively pursuing acquisitions may form their own internal due-diligence team.

Firms often pay too much for acquired businesses:

Acquiring firms may not thoroughly analyze the target firm, failing to develop adequate knowledge of its true market value.

Managers’ overconfidence may cloud the judgment of acquiring firm managers.

Shareholders (owners) of the target must be enticed to sell their stock, and this usually requires that acquiring firms pay a premium over the current stock price.

In some instances, two or more firms may be interested in acquiring the same target firm. When this happens, a bidding war often ensues and extraordinarily high premiums may be required to purchase the target firm.

Large or Extraordinary Debt

In addition to overpaying for targets, many acquirers must finance acquisitions with relatively high-cost debt.

A number of well-known and well-respected finance scholars argue in favor of firms utilizing significantly high levels of leverage because debt discourages managers from misusing funds (for example, by making bad investments) because debt (and interest) repayment eliminates the firm’s “free cash flow.”

Inability to Achieve Synergy

Acquiring firms also face the challenge of correctly identifying and valuing any synergies that are expected to be realized from the acquisition. This is a significant problem because to justify the premium price paid for target firms, managers may overestimate both the benefits and value of synergy.

To achieve a sustained competitive advantage through an acquisition, acquirers must realize private synergies and core competencies that cannot easily be imitated by competitors. Private synergy refers to the benefit from merging the acquiring and target firms that is due to the unique assets that are complementary between the two firms and not available to other potential bidders for that target firm.

Too Much Diversification

In general, firms using related diversification strategies outperform those using unrelated diversification strategies. However, conglomerates (i.e., those pursuing unrelated diversification) can also be successful.

When they lack a rich understanding of business units’ strategies and objectives, top-level managers tend to emphasize the financial outcomes of strategic actions rather than the appropriateness of the strategy itself.

This forces division or business unit managers to become short-term performance-oriented.

The problem is more serious when manager compensation is tied to short-term financial outcomes.

Long-term, risky investments (such as R&D) may be reduced to boost short-term returns.

In the final analysis, long-term performance deteriorates.

The experiences of many firms indicate that over diversification may lead to ineffective management, primarily because of the increased size and complexity of the firm. As a result of ineffective management, the firm and some of its businesses may be unable to maintain their strategic competitiveness. This results in poor performance.

Managers Overly Focused on Acquisitions

If firms follow active acquisition strategies, the acquisition process generally requires significant amounts of managerial time and energy.

For the acquiring firm this takes the form of:

Searching for viable candidates

Completing effective due diligence

Preparing for negotiations with the target firm

Managing the integration process post-acquisition

The desire to merge is like an addiction in many companies: Doing deals is much more fun and interesting than fixing fundamental business problems.

Due diligence and negotiating with the target often include numerous meetings between representatives of the acquirer and target, as well as meetings with investment bankers, analysts, attorneys, and in some cases, regulatory agencies. As a result, top-level managers of acquiring firms often pay little attention to long-term, strategic matters because of time (and energy) constraints.

Too Large

Firms can reach economies of scale by growing. But after a certain size is achieved, size can become a disadvantage as firms reach a point where they suffer from what is called “diseconomies of scale.” This implies that problems related to excess growth may be similar to those that accompany over diversification.

Other actions taken to enable more effective management of increased firm size include increasing or establishing bureaucratic controls, represented by formalized supervisory and behavioral controls such as rules and policies designed to ensure consistency across different units’ decisions and actions.

On the surface (or in theory), bureaucratic controls may be beneficial to large organizations. However, they may produce overly rigid and standardized behavior among managers. The reduced managerial (and firm) flexibility can result in reduced levels of innovation and less creative (and less timely) decision making.

Effective Acquisitions

Research has identified attributes that appear to be associated consistently with successful acquisitions:

When a firm’s assets are complementary (highly related) with the acquired firm’s assets and create synergy and, in turn, unique capabilities, core competencies, and strategic competitiveness

When targets were selected and “groomed” through earlier working relationships (e.g., strategic alliances)

When the acquisition is friendly, thereby reducing animosity and turnover of key employees

When the acquiring firm has conducted due diligence

When management is focused on research and development

When acquiring and target firms are flexible/adaptable (e.g., from executive experience with acquisitions)

When integration quickly produces the desired synergy in the newly created firm, allowing the acquiring firm to keep valuable human resources in the acquired firm from leaving

Answer 1

Ans 1 The problems in achieving acquisition success which may or may not apply to ATT and TWC merger are as follows:

Problems in achieving acquisition success	Brief of the problem	Impact on ATT’s acquisition of TWC
Integration Difficulties	Merging companies corporate culture, accounting systems, and different management styles	ATT record with recent mergers and acquisitions has been mixed. Their acquisition with DirecTV did not work out as expected. The subscriber base of DirecTV fell by 554 k in 2017. There is a cultural mismatch as ATT way of thinking is radical to Warner way of functioning. ATT is trying to match the cultures by retaining the key team members of Warner like the head of the company Kevin Tsujihara.
Due diligence	Inability to accurate judge the market valuation, completion and overvaluation due to multiple bidding, overinflated stock valuation
Large or extraordinary debt	The company gets a high-cost debt to acquire the organization	ATT debt is expected to increase from $163 billion to $ 185 billion by end of 2018 after the acquisition of time Warner debts.
Inability to achieve synergy	The company may inadequately understand the unique synergy which will be achieved out of the acquisition	It is a vertical merger the benefits are limited as time Warner is primarily producing content and ATT is focused on distribution. The synergy advantage to business due to the horizontal merger is limited. ATT expected a $ 1 billion in annual run-rate cost synergies over the next 3 years. This will be driven basically by corporate and procurement expenses.
Too much diversification	Focusing on financial gains. Ineffective management due to the large scale of business leading to long-term risky investments	The ATT will be burdened with large expenses as producing content is expensive and a very competitive business. The company also has to invest in next generation 5 G business.
Managers are over-focused on the merger	Focus is on the acquisition of the new firms and companies loose perspective of long-term strategic objective because of time constraints	The company executive seems excited with mergers and they have acquired CNN, HBO, and Warner in quick succession.
Company might be too large	Bureaucracy and diseconomies of scale due to the increase in the size of the organization, a rigid structure of business management may make it unviable.	ATT will still be a small company in the industry both in its traditional form and post the merger as the field has bigger players like Google, Netflix, Amazon, Apple, etc.

Ans 2.

Effective acquisitions which will apply to ATT and TWC mergers are as follows:

1.      “When a firm’s assets are complementary (highly related) with the acquired firm’s assets and create synergy and, in turn, unique capabilities, core competencies, and strategic competitiveness”: This won’t apply as there are limited synergies as it’s a vertical merger and not a horizontal merger. The ATT is $ 1biilion cost reduction due to synergies in the next three years. The Time Warner is focused on the content and ATT is basically into the distribution.

2.      “When targets were selected and “groomed” through earlier working relationships (e.g., strategic alliances):” This is also partially strategic and the top team members are trying to merge the corporate culture successfully.

3.      “When the acquisition is friendly, thereby reducing animosity and turnover of key employees:” They have retained the head Kevin Tsujihara of the Warner group to ensure a smooth transition.

4.      “When the acquiring firm has conducted due diligence”: the due diligence has been conducted suitably.

5.      “When management is focused on research and development:” ATT as a company is focused on technology and is going to start on 5 G wireless technology. They are not going to drive any technological benefits from Warner acquisition as Warner is into producing of content.

6.      “When acquiring and target firms are flexible/adaptable (e.g., from executive experience with acquisitions):” ATT has acquired a large number of companies like HBO, CNN, and DirecTV but they had a mixed response. In the case of DirecTV, they lost 554k customers in 2017.

7.      “When integration quickly produces the desired synergy in the newly created firm, allowing the acquiring firm to keep valuable human resources in the acquired firm from leaving:” The company will not receive immediate benefits in the short run but will be able to compete with large players like Netflix, Apple, Google etc.