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

Ashland Chemical, the largest U.S. chemical distributor, acquired chemical manufacturer, Hercules Inc., for $3.3 billion in

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. -What factors internal to Kinder Morgan and El Paso seemed to be driving the transaction? Be specific.

Strong sales growth and low entry barriers characterize the embryonic and growth stages of a product's life cycle.

A firm's core competencies refer to those skills which are required to produce the firm's primary products but which have little or no application in producing related products.

Determining how to compete requires a firm's management to consider which of the following factors?

Maturing Businesses Strive to “Remake” Themselves-- UPS, Boise Cascade, and Microsoft UPS, Boise Cascade, and Microsoft are examples of firms that are seeking to redefine their business models due to a maturing of their core businesses. With its U.S. delivery business maturing, UPS has been feverishly trying to transform itself into a logistics expert. By the end of 2003, logistics services supplied to its customers accounted for $2.1 billion in revenue, about 6% of the firm’s total sales. UPS is trying to leverage decades of experience managing its own global delivery network to manage its customer’s distribution centers and warehouses. After having acquired the OfficeMax superstore chain in 2003, Boise Cascade announced the sale of its core paper and timber products operations in late 2004 to reduce its dependence on this highly cyclical business. Reflecting its new emphasis on distribution, the company changed its name to OfficeMax, Inc. Microsoft, after meteoric growth in its share price throughout the 1980s and 1990s, experienced little appreciation during the six-year period ending in 2006, despite a sizeable special dividend and periodic share buybacks during this period. Microsoft is seeking a vision of itself that motivates employees and excites shareholders. Steve Ballmer, Microsoft’s CEO, sees innovation as the key. However, in spite of spending more than $4 billion annually on research and development, Microsoft seems to be more a product follower than a leader. -In your opinion, what are the primary challenges for each of these firms with respect to their employees, customers, suppliers, and shareholders? Be specific.

A corporate mission statement seeks to describe the corporation's purpose for being and where the corporation hopes to go.

An acquisition plan is developed if management determines that an acquisition or merger is required to implement the firm's business strategy.

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. -How would the combined firms be able to better satisfy these needs than the competition?

Firms adopting a focus strategy tend to concentrate their efforts by selling a few products to a single market and compete primarily on price.

Which of the following are not components of the negotiation phase of the acquisition process?

Maturing Businesses Strive to “Remake” Themselves-- UPS, Boise Cascade, and Microsoft UPS, Boise Cascade, and Microsoft are examples of firms that are seeking to redefine their business models due to a maturing of their core businesses. With its U.S. delivery business maturing, UPS has been feverishly trying to transform itself into a logistics expert. By the end of 2003, logistics services supplied to its customers accounted for $2.1 billion in revenue, about 6% of the firm’s total sales. UPS is trying to leverage decades of experience managing its own global delivery network to manage its customer’s distribution centers and warehouses. After having acquired the OfficeMax superstore chain in 2003, Boise Cascade announced the sale of its core paper and timber products operations in late 2004 to reduce its dependence on this highly cyclical business. Reflecting its new emphasis on distribution, the company changed its name to OfficeMax, Inc. Microsoft, after meteoric growth in its share price throughout the 1980s and 1990s, experienced little appreciation during the six-year period ending in 2006, despite a sizeable special dividend and periodic share buybacks during this period. Microsoft is seeking a vision of itself that motivates employees and excites shareholders. Steve Ballmer, Microsoft’s CEO, sees innovation as the key. However, in spite of spending more than $4 billion annually on research and development, Microsoft seems to be more a product follower than a leader. -Comment on the likely success of each of this intended transformation?

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. -What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry consolidation? Be specific.

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. -How would the combined firms be able to better satisfy these needs than the competition?

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. -In what way do you think the Oracle strategy was targeting key competitors? Be specific.

A merger or acquisition is generally not considered an example of an implementation strategy.

The joint venture may represent an attractive alternative to a merger or acquisition.

In a conducting a self-assessment, a firm should consider all of the following except for

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). -Describe the key factors both external and internal to the firm that you believe are driving this strategy.

Pepsi Buys Quaker Oats in a Highly Publicized Food Fight On June 26, 2000, Phillip Morris, which owned Kraft Foods, announced its planned $15.9 billion purchase of Nabisco, ranked seventh in the United States in terms of sales at that time. By combining Nabisco with its Kraft operations, ranked number one in the United States, Phillip Morris created an industry behemoth. Not to be outdone, Unilever, the jointly owned British–Dutch giant, which ranked fourth in sales, purchased Bestfoods in a $20.3 billion deal. Midsized companies such as Campbell’s could no longer compete with the likes of Nestle, which ranked number three; Proctor & Gamble, which ranked number two; or Phillip Morris. Consequently, these midsized firms started looking for partners. Other companies were cutting back. The U.K.’s Diageo, one of Europe’s largest food and beverage companies, announced the restructuring of its Pillsbury unit by cutting 750 jobs—10% of its workforce. PepsiCo, ranked sixth in U.S. sales, spun off in 1997 its Pizza Hut, KFC, and Taco Bell restaurant holdings. Also, eighth-ranked General Mills spun off its Red Lobster, Olive Garden, and other brand-name stores in 1995. In 2001, Coca-Cola announced a reduction of 6000 in its worldwide workforce. As one of the smaller firms in the industry, Quaker Oats faced a serious problem: it was too small to acquire other firms in the industry. As a result, they were unable to realize the cost reductions through economies of scale in production and purchasing that their competitors enjoyed. Moreover, they did not have the wherewithal to introduce rapidly new products and to compete for supermarket shelf space. Consequently, their revenue and profit growth prospects appeared to be limited. Despite its modest position in the mature and slow-growing food and cereal business, Quaker Oats had a dominant position in the sports drink marketplace. As the owner of Gatorade, it controlled 85% of the U.S. market for sports drinks. However, its penetration abroad was minimal. Gatorade was the company’s cash cow. Gatorade’s sales in 1999 totaled $1.83 billion, about 40% of Quaker’s total revenue. Cash flow generated from this product line was being used to fund its food and cereal operations. Gatorade’s management recognized that it was too small to buy other food companies and therefore could not realize the benefits of consolidation. After a review of its options, Quaker’s board decided that the sale of the company would be the best way to maximize shareholder value. This alternative presented a serious challenge for management. Most of Quaker’s value was in its Gatorade product line. It quickly found that most firms wanted to buy only this product line and leave the food and cereal businesses behind. Quaker’s management reasoned that it would be in the best interests of its shareholders if it sold the total company rather than to split it into pieces. That way they could extract the greatest value and then let the buyer decide what to do with the non-Gatorade businesses. In addition, if the business remained intact, management would not have to find some way to make up for the loss of Gatorade’s substantial cash flow. Therefore, Quaker announced that it was for sale for $15 billion. Potential suitors viewed the price as very steep for a firm whose businesses, with the exception of Gatorade, had very weak competitive positions. Pepsi was the first to make a formal bid for the firm, quickly followed by Coca-Cola and Danone. By November 21, 2000, Coca-Cola and PepsiCo were battling to acquire Quaker. Their interest stemmed from the slowing sales of carbonated beverages. They could not help noticing the explosive growth in sports drinks. Not only would either benefit from the addition of this rapidly growing product, but they also could prevent the other from improving its position in the sports drink market. Both Coke and PepsiCo could boost Gatorade sales by putting the sports drink in vending machines across the country and selling it through their worldwide distribution network. PepsiCo’s $14.3 billion fixed exchange stock bid consisting of 2.3 shares of its stock for each Quaker share in early November was the first formal bid Quaker received. However, Robert Morrison, Quaker’s CEO, dismissed the offer as inadequate. Quaker wanted to wait, since it was expecting to get a higher bid from Coke. At that time, Coke seemed to be in a better financial position than PepsiCo to pay a higher purchase price. Investors were expressing concerns about rumors that Coke would pay more than $15 billion for Quaker and seemed to be relieved that PepsiCo’s offer had been rejected. Coke’s share price was falling and PepsiCo’s was rising as the drama unfolded. In the days that followed, talks between Coke and Quaker broke off, with Coke’s board unwilling to support a $15.75 billion offer price. After failing to strike deals with the world’s two largest soft drink makers, Quaker turned to Danone, the manufacturer of Evian water and Dannon yogurt. Much smaller than Coca-Cola or PepsiCo, Danone was hoping to hype growth in its healthy nutrition and beverage business. Gatorade would complement Danone’s bottled-water brands. Moreover, Quaker’s cereals would fit into Danone’s increasing focus on breakfast cereals. However, few investors believed that the diminutive firm could finance a purchase of Quaker. Danone proposed using its stock to pay for the acquisition, but the firm noted that the purchase would sharply reduce earnings per share through 2003. Danone backed out of the talks only 24 hours after expressing interest, when its stock got pummeled on the news. Nearly 1 month after breaking off talks to acquire Quaker Oats because of disagreements over price, PepsiCo once again approached Quaker’s management. Its second proposal was the same as its first. PepsiCo was now in a much stronger position this time, especially because Quaker had run out of suitors. Under the terms of the agreement, Quaker Oats would be liable for a $420 million breakup fee if the deal was terminated, either because its shareholders didn’t approve the deal or the company entered into a definitive merger agreement with an alternative bidder. Quaker also granted PepsiCo an option to purchase 19.9% of Quaker’s stock, exercisable only if Quaker is sold to another bidder. Such a tactic sometimes is used in conjunction with a breakup fee to discourage other suitors from making a bid for the target firm. With the purchase of Quaker Oats, PepsiCo became the leader of the sports drink market by gaining the market’s dominant share. With more than four-fifths of the market, PepsiCo dwarfs Coke’s 11% market penetration. This leadership position is widely viewed as giving PepsiCo, whose share of the U.S. carbonated soft drink market is 31.4% as compared with Coke’s 44.1%, a psychological boost in its quest to accumulate a portfolio of leading brands. -Why did food industry consolidation prompt Quaker to announce that it was for sale?