Discuss in general (without any calculation) whether Microsoft’s bid for Yahoo is justifiable (e.g., what the possible benefits to Microsoft from having Yahoo as a part of it are and whether the bid is too high, too low or about right given such potential benefits.)
As stated in the textbook, there are several factors that come into play behind the rationale for a corporate merger. This includes synergy between firms, tax considerations, purchase of assets below replacement costs, diversification of the business, gaining control over a larger firm, and the value of that comes with breaking up a firm into separate businesses. That being said, the question at hand is whether Microsoft’s $44.6 billion bid for Yahoo! back in 2008 was justifiable.
The most significant factor to consider is whether the merger is beneficial to both firms. If a combined firm’s value exceeds the value of the individual firms, then it is believed that a synergy exists between both firms. The textbook goes on to say that a synergic relationship between firms results from the following factors: operational economics – economies of scale in key business functions; financial economies – lower transaction costs; tax effects – lower taxes compared to the tax burden for each individual firm; differential efficiency – improved productivity for the less efficient firm; increased market power – reduced competition.
In this example, Microsoft’s wanted to merge with Yahoo! because it believed that the combined enterprise would become a dominant online advertising provider and have a larger reach of online users. In theory, the enterprise would benefit from each other’s strengths – Microsoft with search advertising (Bing) and Yahoo! with valuable digital properties (e.g. Alibaba, Yahoo! Japan). In a letter to Yahoo’s board of director’s, Microsoft’s CEO specifically stated that the merger would result in “synergies across both search and non-search related advertising.” Moreover, Microsoft’s CEO also referenced the benefits associated with operational economies, saying that “eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.” In short, this merger was seen as a synergistic move to maintain a competitive edge against Google.
With respect to the bid, Microsoft’s initially offered to Yahoo! at $31 per share in February 2008, which was a 62% premium over Yahoo's stock price (Helft & Ross-Sorkin, 2008). Three months later, Microsoft improved the offer to $33 a share, which was a 70% premium over Yahoo's stock price (Meinero, 2008). The deal ultimately fell through because Yahoo! felt that the bid undervalued them and wanted $40 per share, which was an additional $5 billion to close – in response, Microsoft rescinded their offer. I would argue that, while Microsoft’s bid was generous, Microsoft could have offered even more given the potential benefits. Looking at the market search of global search, Yahoo! and Microsoft were the key search leaders from 2000 – 2002, but Google took over after that and hasn’t slowed down (Motley Fool Staff, 2013). In the coming years, Google’s market share skyrocketed over the other competitors, so if Microsoft and Yahoo! wanted to stay competitive and have a sizable piece of the online advertising business, consolidation in the market would be inevitable.
Explain why the expansion of Sears, Roebuck & Co. into the financial services industry fails.
In 1981, Sears, Roebuck & Co., the largest retailer in the United States at that time, aimed to diversity its business operations by purchasing Dean Witter Reynolds, a financial securities firm, and Coldwell Banker, a real estate firm. The Sears executive team believed that the acquisition would allow Sears to cross-sell with the other business units within its portfolio and combat the growing threat of Walmart (Gaughan, 1999). In addition, it was believed that Sears’ customer base of 25 million credit card users could become customers of their financial and/or real estate services (Cole, 1981).
That being said, while diversification is a key motivation for mergers, diversification doesn’t always improve the combined firm’s value (Brigham & Ehrhardt, 2014). Roughly 10 years after the merger, Sears, Roebuck & Co. announced that they were breaking off its financial services operations and focusing their efforts on the retail business (Gaughan, 1999). In reflection, one of the biggest problems with the original investment was the its retail business had very few synergies with financial services and retail estate. Said another way, Sears management has extensive knowledge with managing retail and unfortunately this didn’t carry over to the financial and real estate segments. As it turned out, there wasn’t as much cross-selling opportunities and they had hoped for.
Moreover, by broadening their efforts into other business units, this allowed for other retailers, like Walmart and Target, to take market share from Sears. Ultimately Sears took their eyes off the prize.
Explain how the acquisition of NCR by AT&T is value-destructing.
In 1991, AT&T, a multinational telecommunications firms, acquired NCR, a computer manufacturing firm, for $7.4 Billion. At the time, it was believed that executive team was looking to make AT&T more competitive within the computer and data communications industry (Lazzareschi, 1991). In particular, the management team believed that it needed a technology partner in order to become a key player.
Unfortunately for AT&T, the acquisition of NCR was perceived by many financial analysts as a mistake. From the start, as rumors and official reports broke out about the acquisition, the market responded negatively. For instance, when AT&T made a public bid for NCR on 12/3/90, AT&T’s stock dropped by $2 a share. And following the merger, the NCR business unit underperformed due to slow sales in overseas markets and due to a highly competitive market (Lys & Vincent, 1995). It was reported that NCR never made their internal forecasts since the acquisition (Keller, 1995). On top of NCR’s disappointing sales numbers, its cost structure was too high (Andrews, 1996).
AT&T ultimately divested NCR in 1997 as the business unit was “[not] as successful as had hoped” and lost money (Reuters, 1997). In its effort to expand into the computer industry, AT&T lost about $10 billion on its acquisition of NCR and forego the opportunity to better invest in its core business, including fiber optics infrastructure (Keller, 1997). In reflection, the divestiture spun off an asset that was bringing down AT&T’s financials.
Discuss in general (without any calculation) whether Microsoft’s bid for Yahoo is justifiable (e.g., what the possible benefits to Microsoft from having Yahoo as a part of it are and whether the bid is too high, too low or about right given such potential benefits.)
As stated in the textbook, there are several factors that come into play behind the rationale for a corporate merger. This includes synergy between firms, tax considerations, purchase of assets below replacement costs, diversification of the business, gaining control over a larger firm, and the value of that comes with breaking up a firm into separate businesses. That being said, the question at hand is whether Microsoft’s $44.6 billion bid for Yahoo! back in 2008 was justifiable.
The most significant factor to consider is whether the merger is beneficial to both firms. If a combined firm’s value exceeds the value of the individual firms, then it is believed that a synergy exists between both firms. The textbook goes on to say that a synergic relationship between firms results from the following factors: operational economics – economies of scale in key business functions; financial economies – lower transaction costs; tax effects – lower taxes compared to the tax burden for each individual firm; differential efficiency – improved productivity for the less efficient firm; increased market power – reduced competition.
In this example, Microsoft’s wanted to merge with Yahoo! because it believed that the combined enterprise would become a dominant online advertising provider and have a larger reach of online users. In theory, the enterprise would benefit from each other’s strengths – Microsoft with search advertising (Bing) and Yahoo! with valuable digital properties (e.g. Alibaba, Yahoo! Japan). In a letter to Yahoo’s board of director’s, Microsoft’s CEO specifically stated that the merger would result in “synergies across both search and non-search related advertising.” Moreover, Microsoft’s CEO also referenced the benefits associated with operational economies, saying that “eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.” In short, this merger was seen as a synergistic move to maintain a competitive edge against Google.
With respect to the bid, Microsoft’s initially offered to Yahoo! at $31 per share in February 2008, which was a 62% premium over Yahoo's stock price (Helft & Ross-Sorkin, 2008). Three months later, Microsoft improved the offer to $33 a share, which was a 70% premium over Yahoo's stock price (Meinero, 2008). The deal ultimately fell through because Yahoo! felt that the bid undervalued them and wanted $40 per share, which was an additional $5 billion to close – in response, Microsoft rescinded their offer. I would argue that, while Microsoft’s bid was generous, Microsoft could have offered even more given the potential benefits. Looking at the market search of global search, Yahoo! and Microsoft were the key search leaders from 2000 – 2002, but Google took over after that and hasn’t slowed down (Motley Fool Staff, 2013). In the coming years, Google’s market share skyrocketed over the other competitors, so if Microsoft and Yahoo! wanted to stay competitive and have a sizable piece of the online advertising business, consolidation in the market would be inevitable.
Explain why the expansion of Sears, Roebuck & Co. into the financial services industry fails.
In 1981, Sears, Roebuck & Co., the largest retailer in the United States at that time, aimed to diversity its business operations by purchasing Dean Witter Reynolds, a financial securities firm, and Coldwell Banker, a real estate firm. The Sears executive team believed that the acquisition would allow Sears to cross-sell with the other business units within its portfolio and combat the growing threat of Walmart (Gaughan, 1999). In addition, it was believed that Sears’ customer base of 25 million credit card users could become customers of their financial and/or real estate services (Cole, 1981).
That being said, while diversification is a key motivation for mergers, diversification doesn’t always improve the combined firm’s value (Brigham & Ehrhardt, 2014). Roughly 10 years after the merger, Sears, Roebuck & Co. announced that they were breaking off its financial services operations and focusing their efforts on the retail business (Gaughan, 1999). In reflection, one of the biggest problems with the original investment was the its retail business had very few synergies with financial services and retail estate. Said another way, Sears management has extensive knowledge with managing retail and unfortunately this didn’t carry over to the financial and real estate segments. As it turned out, there wasn’t as much cross-selling opportunities and they had hoped for.
Moreover, by broadening their efforts into other business units, this allowed for other retailers, like Walmart and Target, to take market share from Sears. Ultimately Sears took their eyes off the prize.
Explain how the acquisition of NCR by AT&T is value-destructing.
In 1991, AT&T, a multinational telecommunications firms, acquired NCR, a computer manufacturing firm, for $7.4 Billion. At the time, it was believed that executive team was looking to make AT&T more competitive within the computer and data communications industry (Lazzareschi, 1991). In particular, the management team believed that it needed a technology partner in order to become a key player.
Unfortunately for AT&T, the acquisition of NCR was perceived by many financial analysts as a mistake. From the start, as rumors and official reports broke out about the acquisition, the market responded negatively. For instance, when AT&T made a public bid for NCR on 12/3/90, AT&T’s stock dropped by $2 a share. And following the merger, the NCR business unit underperformed due to slow sales in overseas markets and due to a highly competitive market (Lys & Vincent, 1995). It was reported that NCR never made their internal forecasts since the acquisition (Keller, 1995). On top of NCR’s disappointing sales numbers, its cost structure was too high (Andrews, 1996).
AT&T ultimately divested NCR in 1997 as the business unit was “[not] as successful as had hoped” and lost money (Reuters, 1997). In its effort to expand into the computer industry, AT&T lost about $10 billion on its acquisition of NCR and forego the opportunity to better invest in its core business, including fiber optics infrastructure (Keller, 1997). In reflection, the divestiture spun off an asset that was bringing down AT&T’s financials.