Exam 5: Implementation: Search Through Closing: Phases 310 of the Acquisition Process

The targeted industry and the maximum size of the potential transaction are often the most important selection criteria used in the search process.

Sleepless in Philadelphia Closings can take on a somewhat surreal atmosphere. In one transaction valued at $20 million, the buyer intended to finance the transaction with $10 million in secured bank loans, a $5 million loan from the seller, and $5 million in equity. However, the equity was to be provided by wealthy individual investors (i.e., “angel” investors) in amounts of $100,000 each. The closing took place in Philadelphia around a long conference room table in the law offices of the firm hired by the buyer, with lawyers and business people representing the buyer, the seller, and several banks reviewing the final documents. Throughout the day and late into the evening, wealthy investors (some in chauffeur-driven limousines) and their attorneys would stop by to provide cashiers’ checks, mostly in $100,000 amounts, and to sign the appropriate legal documents. The sheer number of people involved created an almost circus-like environment. Because of the lateness of the hour, it was not possible to deposit the checks on the same day. The next morning a briefcase full of cashiers’ checks was taken to the local bank. -What do you think are the major challenges faced by the buyer in financing small transactions transaction in this manner?

Discretionary assets are undervalued or redundant assets not required to run the acquired business and which can be used by the buyer to recover a portion of the purchase price.

Closing is a phase of the acquisition process that usually occurs shortly after the target has been fully integrated into the acquiring firm.

Describe what you believe to be Google's business strategy? Would you describe their strategy as cost leadership, differentiation, focus or a hybrid strategy? Explain your answer. To what extent do you believe it is driven by changes in the firm's external environment? To what extent have factors internal to the firm driven Google's business strategy?

First Union Buys Wachovia Bank: A Merger of Equals? First Union announced on April 17, 2001, that an agreement had been reached to acquire Wachovia Corporation for about $13 billion in stock, thus uniting two fiercely independent rivals. With total assets of about $324 billion, the combination created the fourth largest bank in the United States behind Citigroup, Bank of America, and J.P. Morgan Chase. The merger also represents the joining of two banks with vastly different corporate cultures. Because both banks have substantial overlapping operations and branches in many southeastern U.S. cities, the combined banks are expected to be able to add to earnings in the first 2 years following closing. Wachovia, which is much smaller than First Union, agreed to the merger for only a small 6% premium. The deal is being structured as a merger of equals. That is a rare step given that the merger of equals’ framework usually is used when two companies are similar in size and market capitalization. L. M. Baker, chair and CEO of Wachovia, will be chair of the new bank and G. Kennedy Thompson, First Union’s chair and CEO, will be CEO and president. The name Wachovia will survive. Of the other top executives, six will be from First Union and four from Wachovia. The board of directors will be evenly split, with nine coming form each bank. Wachovia shareholders own about 27% of the combined companies and received a special one-time dividend of $.48 per share because First Union recently had slashed its dividend. To discourage a breakup, First Union and Wachovia used a fairly common mechanism called a “cross option,” which gives each bank the right to buy a 19.9% stake in the other using cash, stock, and other property including such assets as distressed loans, real estate, or less appealing assets. (At less than 20% ownership, neither bank would have to show the investment on its balance sheet for financial reporting purposes.) Thus, the bank exercising the option would not only be able to get a stake in the merged bank but also would be able to unload its least attractive assets. A hostile bidder would have to deal with the idea that another big bank owned a chunk of the stock and that it might be saddled with unattractive assets. The deal structure also involved an unusual fee if First Union and Wachovia parted ways. Each bank is entitled to 6% of the $13 billion merger value, or about $780 million in cash and stock. The 6% is about twice the standard breakup fee. The cross-option and 6% fee were intended to discourage other last-minute suitors from making a bid for Wachovia. According to a First Union filing with the Securities and Exchange Commission, Wachovia rebuffed an overture from an unidentified bank just 24 hours before accepting First Union’s offer. Analysts identified the bank as SunTrust Bank. SunTrust had been long considered a likely buyer of Wachovia after having pursued Wachovia unsuccessfully in late 2000. Wachovia’s board dismissed the offer as not being in the best interests of the Wachovia’s shareholders. The transaction brings together two regional banking franchises. In the mid-1980s, First Union was much smaller than Wachovia. That was to change quickly, however. In the late 1980s and early 1990s, First Union went on an acquisition spree that made it much larger and better known than Wachovia. Under the direction of now-retired CEO Edward Crutchfield, First Union bought 90 banks. Mr. Crutchfield became known in banking circles as “fast Eddie.” However, acquisitions of the Money Store and CoreStates Financial Corporation hurt bank earnings in late 1990s, causing First Union’s stock to fall from $60 to less than $30 in 1999. First Union had paid $19.8 billion for CoreStates Financial in 1998 and then had trouble integrating the acquisition. Customers left in droves. Ill, Mr. Crutchfield resigned in 2000 and was replaced by G. Kennedy Thompson. He immediately took action to close the Money Store operation and exited the credit card business, resulting in a charge to earnings of $2.8 billion and the layoff of 2300 in 2000. In contrast, Wachovia assiduously avoided buying up its competitors and its top executives frequently expressed shock at the premiums that were being paid for rival banks. Wachovia had a reputation as a cautious lender. Whereas big banks like First Union did stumble mightily from acquisitions, Wachovia also suffered during the 1990s. Although Wachovia did acquire several small banks in Virginia and Florida in the mid-1990s, it remained a mid-tier player at a time when the size and scope of its bigger competitors put it at a sharp cost disadvantage. This was especially true with respect to credit cards and mortgages, which require the economies of scale associated with large operations. Moreover, Wachovia remained locked in the Southeast. Consequently, it was unable to diversify its portfolio geographically to minimize the effects of different regional growth rates across the United States. In the past, big bank deals prompted a rash of buying of bank stocks, as investors bet on the next takeover in the banking sector. Banks such as First Union, Bank of America (formerly NationsBank), and Bank One acquired midsize regional banks at lofty premiums, expanding their franchises. They rationalized these premiums by noting the need for economies of scale and bigger branch networks. Many midsize banks that were obvious targets refused to sell themselves without receiving premiums bigger than previous transactions. However, things have changed. Back in 1995 buyers of banks paid 1.94 times book value and 13.1 times after-tax earnings. By 1997, these multiples rose to 3.4 times book value and 22.2 times after-tax earnings. However, by 2000, buyers paid far less, averaging 2.3 times book value and 16.3 times earnings. First Union paid 2.47 times book value and 15.7 times after-tax earnings. The declining bank premiums reflect the declining demand for banks. Most of the big acquirers of the 1990s (e.g., Wells Fargo, Bank of America, and Bank One) now feel that they have reached an appropriate size. Banking went through a wave of consolidation in the late 1990s, but many of the deals did not turn out well for the acquirers’ shareholders. Consequently, most buyers were unwilling to pay much of a premium for regional banks unless they had some unique characteristics. The First Union–Wachovia deal is remarkable in that it showed how banks that were considered prized entities in the late 1990s could barely command any premium at all by early 2001. -In your judgment, was this merger a true merger of equals? Why might this framework have been used in this instance? Do you think it was a fair deal for Wachovia stockholders?

Confidentiality agreements are usually signed before any information is exchanged to protect the buyer and the seller from loss of competitive information.

Letters of intent are usually legally binding on the potential buyer but rarely on the target firm.

A corporate vision can be described narrowly or broadly. Google's website describes its mission/vision as organizing the world's information and making it universally accessible and useful. What does this mission statement tell you about what Google believes its core competence to be and what markets needs it is targeting? How useful do you find this mission in setting Google's strategy? (Hint: Discuss the advantages and disadvantages of a broad versus narrow vision statement for a corporation.) If you were the CEO of Google, what might your vision for its future be? Explain the rationale for your answer.

Total consideration is a legal term referring to the composition of what is paid for the target company and can consist of cash, stock, debt or some combination of all three.

Sony’s Strategic Missteps Realizing a complex vision requires highly skilled and consistent execution. A clear and concise business strategy is essential for setting investment priorities. Corporate financial and human resources most often need to be concentrated in support of a relatively few key initiatives to realize a firm’s vision. __________________________________________________________________________________________________ As the fifth-largest media conglomerate (measured by revenues), Sony Corporation (Sony) continues to struggle to get it right. Its products and services range from music and movies to financial services, TVs, smartphones, and semiconductors. The firm’s top-three profit contributors include its music, financial services, and movie operations; TV manufacturing has been its greatest profits drag. As the third-largest global manufacturer of TVs, behind Korea’s Samsung and LG Electronics, Sony has been unable to offset the slumping demand in the United States and Europe for Bravia TVs, recording nine consecutive yearly losses. Sony’s corporate vision is to provide consumers easy, ubiquitous access to an array of entertainment content. Sony wants to provide both the content and the means to enable consumers to access the content. However, rather than a roadmap outlining how the firm intends to achieve this vision, its business strategy lists four broad themes or areas in which it will invest. These themes include networked products and services (LCD TVs, games, mobile phones, and tablet computers), 3-D world (digital imaging), differentiated technologies, and emerging markets. The firm intends to become the leading provider of networked consumer electronics and entertainment, consisting of LCD TVs, games, and mobile phones. Sony intends to enable users of these devices to move seamlessly from one product to another to access content such as movies and television programming. Sony can draw on music from 13 U.S. labels and on movies from Sony Pictures Classics, Columbia, and TriStar Pictures. As with many companies, Sony’s vision seems to exceed its ability to execute. Derailed in recent years by an appreciating yen, a lingering global economic slowdown, an earthquake that crippled its factories, and flooding in Thailand that forced factory closings, Sony recorded its fifth consecutive annual loss for the fiscal year ending March 2012. Cumulative five-year losses totaled more than $6 billion. In 2000, the firm was worth more than $100 billion; however, by late 2012, it was valued at less than $18 billion. This compares to its major competitors, Apple and Samsung, which were valued at $364 billion and $134 billion, respectively, at that time. While whipsawed by a series of largely uncontrollable events, the firm seems to lack the focus to allow it to concentrate its prodigious resources ($17 billion in cash on the balance sheet) behind a relatively few strategic initiatives. Rather than focus its efforts, Sony’s investments have been wide ranging. In 2011 alone, the firm spent $8.5 billion to acquire nine businesses in an effort to shore up its phone and content businesses. Sony teamed with Apple, Microsoft, Research in Motion, Ericsson, and EMC Corp. to purchase patents owned by Nortel Networks Corp used in mobile phones and tablet computers for $4.5 billion in cash. Sony, along with the Blackstone Group and others, also acquired EMI Music Publishing from Citigroup for $2.2 billion. In addition, Sony bought out Ericsson’s 50% stake in their mobile phone venture for $1.5 billion in order to integrate the smartphone business with its gaming and tablet offerings. Little progress seems to have been made in shoring up its money-losing TV manufacturing business. The firm’s lack of focus or more narrowly defined priorities may be at the center of the firm’s poor financial performance. Oracle’s Efforts to Consolidate the Software Industry Key Points: • Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its business strategy. • A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing business environment. • Increasingly, the major software competitors seem to be pursuing very similar strategies. • The long-term winner often is the firm most successfully executing its chosen strategy. _____________________________________________________________________________________________ Oracle ‘s completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of proprietary database and middleware services (accounting for about three-fourths of the firm’s revenue), Oracle is now seen as a leader in enterprise resource planning, customer relationship management, and supply chain management software applications. What spawned this rapid and dramatic transformation? The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate computing market was characterized by IBM selling customers systems that included most of the hardware and software in a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative software market. Customers could choose the technology they preferred (i.e., “best of breed”) and assemble those products in their own data centers networks to support growth in the number of users and the growing complexity of user requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems) became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and more software firms entered the fray. Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such computing environments tend to be highly complex and require multiple software applications that must work together on multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of getting the disparate software applications to work together. Although some buyers still prefer to purchase the “best of breed” software, many are moving to purchase suites of applications that are compatible. In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there, Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm’s software applications business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008–2009 recession. Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in which business software is sold. Customers buy licenses to obtain the right to utilize a vendor’s software and periodically renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently, it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and potentially diluting existing shareholders. In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the additional revenue would fall to the bottom line. For example, since acquiring Sun, Oracle has rationalized and consolidated Sun’s manufacturing operations and substantially reduced the number of products the firm offers. Fewer products results in less administrative and support overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by being known as a full-service provider of integrated software solutions. Prior to the Sun acquisition, Oracle’s primary competitor in the enterprise software market was the German software giant SAP. However, the acquisition of Sun’s vast hardware business pits Oracle for the first time against Hewlett-Packard, IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a “me too” strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end service provider. Which firm is most successful in the long run may well be the one that successfully integrates their acquisitions the best. Investors’ concern about Oracle’s strategy is that the frequent acquisitions make it difficult to measure how well the company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of Oracle’s acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring new revenue streams. Ironically, in the short run, Oracle’s acquisition binge has resulted in increased complexity as each new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply be masking underlying problems brought about by this growing complexity. -In what way do you think the Oracle strategy was targeting key competitors? Be specific.

Which of the following statements are true about due diligence?

Exxon Mobil’s (Exxon) Unrelenting Pursuit of Natural Gas Believing the world will be dependent on carbon-based energy for many decades, Exxon continues to pursue aggressively amassing new natural gas and oil reserves. This strategy is consistent with its core energy extraction, refining, and distribution skills. As the world’s largest energy company, Exxon must make big bets on new reserves of unconventional gas and oil to increase future earnings. _____________________________________________________________________________________ Exxon has always had a reputation for taking the long view. By necessity, energy companies cannot respond to short-term gyrations in energy prices, given the long lead time required to discover and develop new energy sources. While energy prices will continue to fluctuate, Exxon is betting that the world will remain dependent on oil and gas for decades to come and that new technology will facilitate accessing so-called unconventional energy sources. During the last several years, Exxon continued its headlong rush into accumulating shale gas and oil properties that began in earnest in 2009 with the acquisition of natural gas exploration company XTO Energy. While natural gas prices have remained well below their 2008 level, Exxon used the expertise of the former XTO Energy personnel, who are among the most experienced in the industry in extracting oil and gas from shale rock, to identify the most attractive sites globally for future shale development. In 2010, Exxon acquired Ellora Energy Inc., which was active in the Haynesville shale fields in Texas and Louisiana, for $700 million and properties in Arkansas’s Fayetteville shale fields from PetroHawk Energy Corp. In 2011, Exxon bought TWP Inc. and Phillips Resources, which were active in the Marcellus shale basin, for a combined $1.7 billion. Exxon is betting that these properties will become valuable when natural gas prices again rise. By mid-2011, Exxon Mobil had added more than 70 trillion cubic feet of unconventional gas and liquid reserves since the XTO deal in late 2009 through acquisitions and new discoveries. Exxon is now the largest natural gas producer in the United States. The sheer size of the XTO acquisition in 2009 represented a remarkable departure for a firm that had not made a major acquisition during the previous 10 years. Following a series of unsuccessful acquisitions during the late 1970s and early 1980s, the firm seemed to have developed a phobia about acquisitions. Rather than make big acquisitions, Exxon started buying back its stock, purchasing more than $16 billion worth between 1983 and 1990, and spending about $1 billion annually on oil and gas properties and some small acquisitions. Exxon Mobil Corporation stated publicly in its 2009 annual report that it was committed to being the world’s premier petroleum and petrochemical company and that the firm’s primary focus in the coming decades would likely remain on its core businesses of oil and gas exploration and production, refining, and chemicals. According to the firm, there appears to be “a pretty bright future” for drilling in previously untapped shale energy properties—as a result of technological advances in horizontal drilling and hydraulic fracturing. No energy source currently solves the challenge of meeting growing energy needs while reducing CO2 emissions. Traditionally, energy companies have extracted natural gas by drilling vertical wells into pockets of methane that are often trapped above oil deposits. Energy companies now drill horizontal wells and fracture them with high-pressure water, a practice known as “fracking.” That technique has enabled energy firms to release natural gas trapped in the vast shale oil fields in the United States as well as to recover gas and oil from fields previously thought to have been depleted. The natural gas and oil recovered in this manner are often referred to as “unconventional energy resources.” In an effort to bolster its position in the development of unconventional natural gas and oil, Exxon announced on December 14, 2009, that it had reached an agreement to buy XTO Energy in an all-stock deal valued at $31 billion. The deal also included Exxon’s assumption of $10 billion in XTO’s current debt. This represented a 25% premium to XTO shareholders at the time of the announcement. XTO shares jumped 15% to $47.86, while Exxon’s fell by 4.3% to $69.69. The deal values XTO’s natural gas reserves at $2.96 per thousand cubic feet of proven reserves, in line with recent deals and about one-half of the NYMEX natural gas futures price at that time. Known as a wildcat or independent energy producer, the 23-year-old XTO competed aggressively with other independent drillers in the natural gas business, which had boomed with the onset of horizontal drilling and well fracturing to extract energy from older oil fields. However, independent energy producers like XTO typically lack the financial resources required to unlock unconventional gas reserves, unlike the large multinational energy firms like Exxon. The geographic overlap between the proven reserves of the two firms was significant, with both Exxon and XTO having a presence in Colorado, Louisiana, Texas, North Dakota, Pennsylvania, New York, Ohio, and Arkansas. The two firms’ combined proven reserves are the equivalent of 45 trillion cubic feet of gas and include shale gas, coal bed methane, and shale oil. These reserves also complement Exxon’s U.S. and international holdings. Exxon is the global leader in oil and gas extraction. Given its size, it is difficult to achieve rapid future earnings growth organically through reinvestment of free cash flow. Consequently, megafirms such as Exxon often turn to large acquisitions to offer their shareholders significant future earnings growth. Given the long lead time required to add to proven reserves and the huge capital requirements to do so, energy companies by necessity must have exceedingly long-term planning and investment horizons. Acquiring XTO is a bet on the future of natural gas. Moreover, XTO has substantial technical expertise in recovering unconventional natural gas resources, which complement Exxon’s global resource base, advanced R&D, proven operational capabilities, global scale, and financial capacity. In the five-year period ending in 2010, the U.S. Energy Information Administration (EIA) estimates that the U.S. total proven natural gas reserves increased by 40% to about 300 trillion cubic feet, or the equivalent of 50 billion barrels of oil. Unconventional natural gas is projected by the EIA to meet most of the nation’s domestic natural gas demand by 2030, representing a substantial change in the overall energy consumption pattern in the United States. At current consumption rates, the nation can count on natural gas for at least a century. In addition to its abundance, natural gas is the cleanest burning of the fossil fuels. A sizeable purchase price premium, the opportunity to share in any upside appreciation in Exxon’s share price, and the tax-free nature of the transaction convinced XTO shareholders to approve the deal. Exxon’s commitment to manage XTO on a stand-alone basis as a wholly owned subsidiary in which a number of former XTO managers would be retained garnered senior management support. By keeping XTO largely intact in Fort Worth, Texas, Exxon was able to minimize differences due to Exxon Mobil’s and XTO’s dissimilar corporate cultures. -How would you describe Exxon Mobil's long-term objectives, business strategy, and implementation strategy? What alternative implementation strategies could Exxon have pursued? Why do you believe it chose an acquisition strategy? What are the key risks involved in ExxonMobil's takeover of XTO Energy?

In mid-2008, Fresenius, a German manufacturer of dialysis equipment, acquired APP Pharmaceuticals for $4.6 billion. The deal includes an earn-out, under which Fresenius will pay as much as $970 million, if APP reaches certain future financial targets. What is the purpose of the earn-out? How does it affect the buyer and seller?

Which of the following is generally not true of a financing contingency?

Banks are commonly used to provide bridge or temporary financing to pay all or a portion of the purchase price and meet possible working capital requirements until permanent financing can be found.

The purchase price for a target firm may be fixed at the time of closing, subject to future adjustment, or be contingent on future performance.

Sony’s Strategic Missteps Realizing a complex vision requires highly skilled and consistent execution. A clear and concise business strategy is essential for setting investment priorities. Corporate financial and human resources most often need to be concentrated in support of a relatively few key initiatives to realize a firm’s vision. __________________________________________________________________________________________________ As the fifth-largest media conglomerate (measured by revenues), Sony Corporation (Sony) continues to struggle to get it right. Its products and services range from music and movies to financial services, TVs, smartphones, and semiconductors. The firm’s top-three profit contributors include its music, financial services, and movie operations; TV manufacturing has been its greatest profits drag. As the third-largest global manufacturer of TVs, behind Korea’s Samsung and LG Electronics, Sony has been unable to offset the slumping demand in the United States and Europe for Bravia TVs, recording nine consecutive yearly losses. Sony’s corporate vision is to provide consumers easy, ubiquitous access to an array of entertainment content. Sony wants to provide both the content and the means to enable consumers to access the content. However, rather than a roadmap outlining how the firm intends to achieve this vision, its business strategy lists four broad themes or areas in which it will invest. These themes include networked products and services (LCD TVs, games, mobile phones, and tablet computers), 3-D world (digital imaging), differentiated technologies, and emerging markets. The firm intends to become the leading provider of networked consumer electronics and entertainment, consisting of LCD TVs, games, and mobile phones. Sony intends to enable users of these devices to move seamlessly from one product to another to access content such as movies and television programming. Sony can draw on music from 13 U.S. labels and on movies from Sony Pictures Classics, Columbia, and TriStar Pictures. As with many companies, Sony’s vision seems to exceed its ability to execute. Derailed in recent years by an appreciating yen, a lingering global economic slowdown, an earthquake that crippled its factories, and flooding in Thailand that forced factory closings, Sony recorded its fifth consecutive annual loss for the fiscal year ending March 2012. Cumulative five-year losses totaled more than $6 billion. In 2000, the firm was worth more than $100 billion; however, by late 2012, it was valued at less than $18 billion. This compares to its major competitors, Apple and Samsung, which were valued at $364 billion and $134 billion, respectively, at that time. While whipsawed by a series of largely uncontrollable events, the firm seems to lack the focus to allow it to concentrate its prodigious resources ($17 billion in cash on the balance sheet) behind a relatively few strategic initiatives. Rather than focus its efforts, Sony’s investments have been wide ranging. In 2011 alone, the firm spent $8.5 billion to acquire nine businesses in an effort to shore up its phone and content businesses. Sony teamed with Apple, Microsoft, Research in Motion, Ericsson, and EMC Corp. to purchase patents owned by Nortel Networks Corp used in mobile phones and tablet computers for $4.5 billion in cash. Sony, along with the Blackstone Group and others, also acquired EMI Music Publishing from Citigroup for $2.2 billion. In addition, Sony bought out Ericsson’s 50% stake in their mobile phone venture for $1.5 billion in order to integrate the smartphone business with its gaming and tablet offerings. Little progress seems to have been made in shoring up its money-losing TV manufacturing business. The firm’s lack of focus or more narrowly defined priorities may be at the center of the firm’s poor financial performance. Oracle’s Efforts to Consolidate the Software Industry Key Points: • Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its business strategy. • A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing business environment. • Increasingly, the major software competitors seem to be pursuing very similar strategies. • The long-term winner often is the firm most successfully executing its chosen strategy. _____________________________________________________________________________________________ Oracle ‘s completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of proprietary database and middleware services (accounting for about three-fourths of the firm’s revenue), Oracle is now seen as a leader in enterprise resource planning, customer relationship management, and supply chain management software applications. What spawned this rapid and dramatic transformation? The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate computing market was characterized by IBM selling customers systems that included most of the hardware and software in a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative software market. Customers could choose the technology they preferred (i.e., “best of breed”) and assemble those products in their own data centers networks to support growth in the number of users and the growing complexity of user requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems) became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and more software firms entered the fray. Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such computing environments tend to be highly complex and require multiple software applications that must work together on multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of getting the disparate software applications to work together. Although some buyers still prefer to purchase the “best of breed” software, many are moving to purchase suites of applications that are compatible. In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there, Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm’s software applications business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008–2009 recession. Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in which business software is sold. Customers buy licenses to obtain the right to utilize a vendor’s software and periodically renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently, it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and potentially diluting existing shareholders. In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the additional revenue would fall to the bottom line. For example, since acquiring Sun, Oracle has rationalized and consolidated Sun’s manufacturing operations and substantially reduced the number of products the firm offers. Fewer products results in less administrative and support overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by being known as a full-service provider of integrated software solutions. Prior to the Sun acquisition, Oracle’s primary competitor in the enterprise software market was the German software giant SAP. However, the acquisition of Sun’s vast hardware business pits Oracle for the first time against Hewlett-Packard, IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a “me too” strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end service provider. Which firm is most successful in the long run may well be the one that successfully integrates their acquisitions the best. Investors’ concern about Oracle’s strategy is that the frequent acquisitions make it difficult to measure how well the company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of Oracle’s acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring new revenue streams. Ironically, in the short run, Oracle’s acquisition binge has resulted in increased complexity as each new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply be masking underlying problems brought about by this growing complexity. -Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the development of Oracle's business strategy. Be specific.

Which of the following is not typically true of post-closing evaluation of an acquisition?

Sony’s Strategic Missteps Realizing a complex vision requires highly skilled and consistent execution. A clear and concise business strategy is essential for setting investment priorities. Corporate financial and human resources most often need to be concentrated in support of a relatively few key initiatives to realize a firm’s vision. __________________________________________________________________________________________________ As the fifth-largest media conglomerate (measured by revenues), Sony Corporation (Sony) continues to struggle to get it right. Its products and services range from music and movies to financial services, TVs, smartphones, and semiconductors. The firm’s top-three profit contributors include its music, financial services, and movie operations; TV manufacturing has been its greatest profits drag. As the third-largest global manufacturer of TVs, behind Korea’s Samsung and LG Electronics, Sony has been unable to offset the slumping demand in the United States and Europe for Bravia TVs, recording nine consecutive yearly losses. Sony’s corporate vision is to provide consumers easy, ubiquitous access to an array of entertainment content. Sony wants to provide both the content and the means to enable consumers to access the content. However, rather than a roadmap outlining how the firm intends to achieve this vision, its business strategy lists four broad themes or areas in which it will invest. These themes include networked products and services (LCD TVs, games, mobile phones, and tablet computers), 3-D world (digital imaging), differentiated technologies, and emerging markets. The firm intends to become the leading provider of networked consumer electronics and entertainment, consisting of LCD TVs, games, and mobile phones. Sony intends to enable users of these devices to move seamlessly from one product to another to access content such as movies and television programming. Sony can draw on music from 13 U.S. labels and on movies from Sony Pictures Classics, Columbia, and TriStar Pictures. As with many companies, Sony’s vision seems to exceed its ability to execute. Derailed in recent years by an appreciating yen, a lingering global economic slowdown, an earthquake that crippled its factories, and flooding in Thailand that forced factory closings, Sony recorded its fifth consecutive annual loss for the fiscal year ending March 2012. Cumulative five-year losses totaled more than $6 billion. In 2000, the firm was worth more than $100 billion; however, by late 2012, it was valued at less than $18 billion. This compares to its major competitors, Apple and Samsung, which were valued at $364 billion and $134 billion, respectively, at that time. While whipsawed by a series of largely uncontrollable events, the firm seems to lack the focus to allow it to concentrate its prodigious resources ($17 billion in cash on the balance sheet) behind a relatively few strategic initiatives. Rather than focus its efforts, Sony’s investments have been wide ranging. In 2011 alone, the firm spent $8.5 billion to acquire nine businesses in an effort to shore up its phone and content businesses. Sony teamed with Apple, Microsoft, Research in Motion, Ericsson, and EMC Corp. to purchase patents owned by Nortel Networks Corp used in mobile phones and tablet computers for $4.5 billion in cash. Sony, along with the Blackstone Group and others, also acquired EMI Music Publishing from Citigroup for $2.2 billion. In addition, Sony bought out Ericsson’s 50% stake in their mobile phone venture for $1.5 billion in order to integrate the smartphone business with its gaming and tablet offerings. Little progress seems to have been made in shoring up its money-losing TV manufacturing business. The firm’s lack of focus or more narrowly defined priorities may be at the center of the firm’s poor financial performance. Oracle’s Efforts to Consolidate the Software Industry Key Points: • Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its business strategy. • A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing business environment. • Increasingly, the major software competitors seem to be pursuing very similar strategies. • The long-term winner often is the firm most successfully executing its chosen strategy. _____________________________________________________________________________________________ Oracle ‘s completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of proprietary database and middleware services (accounting for about three-fourths of the firm’s revenue), Oracle is now seen as a leader in enterprise resource planning, customer relationship management, and supply chain management software applications. What spawned this rapid and dramatic transformation? The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate computing market was characterized by IBM selling customers systems that included most of the hardware and software in a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative software market. Customers could choose the technology they preferred (i.e., “best of breed”) and assemble those products in their own data centers networks to support growth in the number of users and the growing complexity of user requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems) became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and more software firms entered the fray. Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such computing environments tend to be highly complex and require multiple software applications that must work together on multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of getting the disparate software applications to work together. Although some buyers still prefer to purchase the “best of breed” software, many are moving to purchase suites of applications that are compatible. In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there, Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm’s software applications business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008–2009 recession. Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in which business software is sold. Customers buy licenses to obtain the right to utilize a vendor’s software and periodically renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently, it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and potentially diluting existing shareholders. In helping to satisfy its customers’ challenges, Oracle has had substantial experience in streamlining other firms’ supply chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning unprofitable products and redundant overhead during the integration of the acquired firms. Oracle’s existing overhead structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the additional revenue would fall to the bottom line. For example, since acquiring Sun, Oracle has rationalized and consolidated Sun’s manufacturing operations and substantially reduced the number of products the firm offers. Fewer products results in less administrative and support overhead. Furthermore, Oracle has introduced a “build to order” mentality rather than a “build to inventory” marketing approach. With a focus on “build to order,” hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by being known as a full-service provider of integrated software solutions. Prior to the Sun acquisition, Oracle’s primary competitor in the enterprise software market was the German software giant SAP. However, the acquisition of Sun’s vast hardware business pits Oracle for the first time against Hewlett-Packard, IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a “me too” strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end service provider. Which firm is most successful in the long run may well be the one that successfully integrates their acquisitions the best. Investors’ concern about Oracle’s strategy is that the frequent acquisitions make it difficult to measure how well the company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of Oracle’s acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring new revenue streams. Ironically, in the short run, Oracle’s acquisition binge has resulted in increased complexity as each new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply be masking underlying problems brought about by this growing complexity. -How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some combination of all three)?