Zenner (1994) did find significant variation in returns to investors based on changes in tax laws. Manzon, Sharp, and Travlos (1994) found that cross-border acquisition announcement returns are not related to tax differences between the buyer and target country.12 12. The recent literature on emerging markets integration lends rich insight into the sources of variability in returns, volatilities, and correlations. See, for instance, Bekaert and Harvey (1995, 1997), Bekaert, Erb, Harvey, and Viskanta (1997), Bekaert, Harvey and Lumsdaine (2002), Wurgler (2000), and Errunza and Miller (2000).
13 13. Agmon and Lessard (1977) find evidence that MNC betas reflect international involvement well. In contrast, Jacquillat and Solnik (1978) and Senchak and Beedles (1980) conclude that the effect of international diversification on a firm’s beta is less than direct, or at least nonlinear.
14 14. To diversify across global industries is to base portfolio allocations on industry choice first and then to pick the most attractive stocks within the industry, irrespective of country.
15 15. See, for instance, Lessard (1976), Solnik (1976), Solnik and de Freitas (1988), and Grinold, Rudd, and Stefek (1989).
16 16. Regarding findings about the rising influence of industry in explaining the cross section of global investing returns, see Diermeier and Solnik (2001), Cavaglia, Brightman, and Aked (2000), and Lombard, Roulet, and Solnik (1999). Studies that support the continued dominance of country choice include Heston and Rowenhorst (1994), Rowenhorst (1999), Kritzman and Page (2002), Gerard, Hillion, and de Roon (2002), and Isakov and Sonney (2002).
17 17. Tobin’s Q is measured as the ratio of market value divided by book value.
CHAPTER 6 Strategy and the Uses of M&A to Grow or Restructure the Firm
INTRODUCTION
Strategy influences M&A outcomes. It should be the engine driving M&A search, analysis, deal design, negotiation, integration, and process management; this chapter explores this linkage and describes how M&A fits into the broad spectrum of transactions that can expand or restructure the firm. Lessons include these:
To be strategic is to plan moves by looking ahead. A firm’s strategy is part of the three-legged stool: mission, objectives, and strategy.
Setting strategy begins with an assessment of the firm’s resources and competitive position. The situation of the firm can be summarized in an analysis of its strengths, weaknesses, opportunities, and threats (SWOT). Numerous tools and frameworks help assess the firm’s SWOT.
Three successful strategies are (1) low cost leadership, (2) differentiation, and (3) focus. Many firms try to blend these, to be all things at once—but this can be dangerous. You must choose.
The firm can grow organically (by internal investment) or inorganically by acquisitions, joint ventures, alliances, and contractual agreements. The right choice of the method of inorganic growth depends on the need for a business relationship, the need to be in control, and the need to manage risk exposure.
The firm can restructure in a variety of ways to enhance its efficiency and create value. Key alternatives are divestiture, spin-off, carve-out, split-off, tracking stock, and liquidation. The choice of method of restructuring will depend on the relationship of the business to the core operations of the firm, the need for control, and whether the business or asset can operate as an independent entity.
Whether diversification creates value for shareholders is a matter of sharp controversy. Conventional wisdom and some research hold that strategies of focus are better than strategies of diversification. Recent research raises the possibility that the diversification-versus-focus dichotomy may be false: Instead, the right stance may be to focus on relentless restructuring, through either diversification or focus, in response to changes in the firm’s strategic environment. Continue to watch the evolving research on this question.
SETTING STRATEGY
The design of a firm’s strategy springs from an understanding of the firm’s mission, objectives, SWOT, and market position. This section describes these foundational elements in more detail.
Mission, Objectives, and Strategy
Setting strategy begins with the definition of a mission for the enterprise. A mission defines the business focus of the firm and implicitly what the enterprise will not do. Mission statements address a range of questions:
Who are we?
Whom do we serve?
What do we do?
What do we value? How do we measure ourselves?
Why do we do this? What is our cause?
To draft succinct statements based on questions such as these is very challenging, and will absorb time of the CEO, senior executives, and directors. The best mission statements are short, and therefore easily communicated and repeated at all levels of the organization. Mission statements that are long and complicated sacrifice motive power. Furthermore, great mission statements express strategic intent—that is, what the firm aims to do or be. Exhibit 6.1 gives a sample of mission statements for some major U.S. corporations: notice their brevity and expression of intent.
Often accompanying the mission statement is a list of strategic objectives— these are overarching goals that flesh out the strategic intent and set the direction of the firm. In effect, they answer the question, “Where are we headed?” These are usually stated in the most general terms and mainly frame the effort for the organization: “To be the quality and cost leader …” “To be recognized as the premier service provider …” These objectives are expressed in terms of market position. “To be a Total Quality organization …” “We aim for zero defects.” “To achieve a perfect safety record …” “To be responsible to our environment and community….” These objectives are aspirations for the operational management of the firm. “To create value …” “To deliver shareholder returns greater than those of our peer group …” “To achieve average growth of 15 percent and shareholder returns of 15 percent for the next five years….” These are examples of financial objectives. “To create the premium market franchise….” Ultimately, firms often express the aim to “be the best” or “become the best.” Expressions such as these litter the annual reports and press releases of corporations. Taken seriously, they can galvanize the organization into meaningful action.
The abstract tone of a mission statement and the many possible objectives for a firm may confuse rather than clarify aims for the executive. The key corporate objective (the “first among equals”) observed in many firms and assumed as the baseline goal in this book is to create value within ethical norms. This should serve as the key test of reasonableness for individual proposal
