A CASE of a MERGER and ACQUISITION MEGA BLIND SPOT

1. A CASE of a MERGER and ACQUISITION MEGA BLIND SPOT forthe ACADEMY OF MARKETING STUDIES Dr. J.D. Williams Kutztown University

2. ABSTRACT • M&A mania-- The world has seemed fixated on growth through M&A as evidenced by the thousands of mergers that have taken place over this past decade. • This paper has uncovered a flaw in the M&A process that has blinded the financial and managerial sectors. • While determining the M&A cost-benefits of the joint relationship, the role of marketing has been diffused or just left out.

3. INTRODUCTION & PURPOSE • Total worldwide value of M&As topped $2.7 trillion in 2005 [M&A Blind Spot: Ettenson & Knowles, 2007] • Consider the potential losses if only 20% of the M&As were conducted without marketing due diligence[Ettenson & Knowles] • Include marketing analysis into the traditional M&A models

4. INTRODUCTION & PURPOSE (cont.) MARKETING - • Fresh approach for financial M&A portfolio managers, strategic managers, & asset managers • New concept ushers in potentially lucrative & holistic application assessment for the corporate & banking industries • Will likely justify itself as highly cost effective tool & potentially offer increased typical R.O.I.

5. LITERATURE REVIEW M&As- - Cartwright, Susan; Schoenberg, Richard (2006). Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities. British Journal of Management. - DePamphilis, Donald (2008). Mergers, Acquisitions, & Other Restructuring Activities. New York: Elsevier, Academic Press.  - Ettenson, Richard & Jonathan Knowles (June 16-17, 2007). M&A Blind Spot: When Negotiating a Merger, Leave a Seat at the Table for a Marketing Expert. Wall Street Journal. - Harwood, I. A. (2006). Confidentiality Constraints within Mergers and Acquisitions: gaining insights through a 'bubble' metaphor. British Journal of Management. - Finklestein, Sydney (2007). Cross Border Mergers and Acquisitions. Dartmouth College. - King, D. R.; Slotegraaf, R.; Kesner, I. (2008). Performance Implications of Firm Resource Interactions in the Acquisition of R&D-intensive Firms. Organization Science.  - King, D. R., D. R. Dalton, C. M. Daily, & J. G. Covin, (2004). Meta-Analyses of Post-Acquisition Performance: Indications of Unidentified Moderators. Strategic Management Journal.  - Lien, Kathy (2005). Mergers And Acquisitions - Another Tool For Traders. Investopedia. - Maddigan, Ruth; Zaima, Janis (1985). The Profitability of Vertical Integration. Managerial and Decision Economics.  - Mergers and Acquisitions Lead to Long-Term Management Turmoil. Newswise. - Platt, Gordon (2007). Cross-Border Mergers Show Rising Trend As Global Economy Expands. - Rosenbaum, Joshua; Joshua Pearl (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. - Straub, Thomas (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis.  - Vermeulen, Freek (2005). How Acquisitions can Revitalize Companies. MIT Sloan Management Review. - Zax, Igor (2009). Distressed M&A: Some Strategic and Financial Trends and Considerations. - Zollo, Maurizio & D. Meier (2008). What is M&A Performance? The Academy of Management Perspectives. V. 22 No. 2. pp. 55-77.

6. LITERATURE REVIEW Marketing- - Anderson, Carol and Julian W. Vincze (2004). Strategic Marketing Management - Berry, Leonard L. (April, 2001). Harvard Business Review. - Burghard, Ed and Lisa Mackay (Dec. 2004). Marketing Management. - Cross, Robert G. and Ashlosh Dixit (2005). Customer-Centric Pricing: The Surprising Secret for Profitability. Business Horizons. - Keller, Kevin Lane and Sanjay Sood (Fall 2003). Brand Equity Dilution. MIT Sloan Management Review. - Kotler, Philip (1972). A Generic Concept of Marketing. Journal of Marketing. - Kotler, Philip (Aug. 1997). The Future of Marketing. Cambridge Marketing College. - Kotler, Philip (2004). A Framework for Marketing Management. Prentice-Hall. - Leon, George H. (Jan./Feb. 2005). You Choose, You Lose. Marketing Management. - Porter, Michael E. (1985). Competitive Advantage: Creating and Sustaining Superior – Performance. - Reece, Shelly (Jan.-Feb., 1996). The Very Model of a Modern Marketing Plan. Marketing Tools. - Roegner, Eric V., Michael V. Main, and Craig C. Zawada. (Jan./Feb. 2005). Pricing gets Creative. Marketing Management. - Walker, John S. (white paper, 2007). The Marketing Cure to the M&A Blind Spot. Ambassador Financial Group, Inc.

7. M&A DECISIONPROCESS & MARKETING • Business combinations, formed through M&A, bring together both intangible and tangible resources. - Marketing offers both • Operating synergies may take a variety of forms, whether the merger was vertical or horizontal. - Most horizontal mergers should include marketing components

8. Reasons why M&As Fail • Biased canopy of knowledge when they focused too much on the financial, accounting and management aspects of a deal and neglect the important marketing particulars (Walker, 2007) • Poor results from execution timing relative to market valuation. • To acquire a company, one has to pay more than its worth (premium, 10 - 15 percent above market value) (Dalton) • A critical question would be what percentage of M&A creates shareholder value? 90% 70 % 40% 20% • It turns out that M&A create value only about 20% of the time

9. Applying Marketing to M&A • Qualitative assesses degrees of synergy realizations, of integration process efficiency, and of strategic gap reduction Over 50% of marketing is consider soft-side performance criteria (i.e. perceptions, desires, (mind-share, heart-share), dislikes & personal values) • Objective measurement methodologies (e.g., financial and accounting figures) organizational level of analysis (e.g., improvement of the firm’s competitive position) Marketing also shares quantitative components (i.e. product production costs, break-even analysis, pricing strategies, logistic costs, & promotion cost/benefit analysis) • Process level (e.g., quality of the post acquisition plans, magnitude of premium paid, etc.) (Zollo & Meier, 2008) Marketing offers MARKET SHARE for a process or transition level contributor

10. TABLE 3A - 10 Most Active Industries by Number of Transactions in 2005 Rank Industry No. of Deals % of all M&A Deals 1Business services 1,295 17.7% 2Software 647 8.9% 3Real estate firms 406 5.6% 4 Durable goods wholesaling 256 3.6% 5Investment & commodities firms 246 3.4% 6 Health services 245 3.4% 7 Measuring, medical & photography 221 3.0% 8 Oil & gas 210 2.9% 9Insurance 207 2.8% 10Hotels & casinos 183 2.5% . Marketing functions

11. TABLE 3B - 10 Most Active Industries by Dollar Volume in 2005 • Rank Industry Value ($billions) % of Total M&A Value • Telecommunications 95.5 9.7% • Metal & metal products 73.5 7.5% • Oil and gas 67.4 6.9% • Real estate firms 62.6 6.4% • Business services 52.7 5.4% • 6 Software 49.4 5.0% • 7 Investment & commodity firms 42.4 4.3% • 8 Gen. Merchandise & apparel retailing 40.2 4.1% • 9 Hotels & casinos 40.1 4.1% • 10 Insurance 32.4 3.3% • Adopted from Mergers & Acquisitions, February 2006, p.40 Marketing functions

12. Marketing Elements for M&A Analysis • Strategic Planning • External Market Assessment of Opportunities and Threats • Internal Audit of Applied Resources • Target Market Profiling • Designing the Marketing Mix Element- Product or Service Strategy • Designing the Marketing Mix Element- - Place/Logistics Strategy • Designing the Marketing Mix Element- Promotion Mix Strategy • Designing the Marketing Mix Element- Pricing Strategy • Designing the Monitor and Control Systems • Marketing Commercialization • Market Expansion, Retraction, and New Niche Market Selection

13. TABLE 5 - Model of M&A Marketing Expectations Weighted Marketing Effective/ Acceptance Ranking Factor (1-5) Element ( poor) 1 2 3 4 5 ( excellent) 5 Marketing Leadership (XML) n . 3 Marketing Strategy (XMS) n 2 External Market Assessment (XMA) n 3 Internal Audit of Resources (XIA) n 2 Target Market Profiling (XTM) n 5 Product or Service Strategies (XPS) n 2 Place/Logistical Strategy (XL) n 4 Promotion Mix Planning (XPM) n 2 Pricing Strategies (XP) 4 Monitor & Control Systems (XMC) n 2 MKT. Commercialization (XMC) .n 3 Market Expansion, Retraction, & n Niche Market Selection (XNMS) n

14. Weighted Value of a firm’s M&A Marketing Expectations = YME, where ‘n’ represents the selected evaluation of the potential merged firms marketing component position. YME = 5 (XML)n + 3(XMS)n + 2(XMA)n + 3(XIA)n + 2(XTM)n + 5(XPS)n + 2(XL)n + 4(XPM)n + 2(XP)n +4(XMC)n + 2(XMC)n + 3(XNMS)n Establishing acceptable to unacceptable range 185 - 150 highly acceptable 149 - 130 acceptable 129 – 100 marginally acceptable 99 – 70 highly questionable 69 – 0 unacceptable

15. CONCLUSION • Typically, the pre-merger discovery process limits itself to verifying the potential of hard assets such as property, equipment, patents and existing service contracts. • A marketer would also look at ‘relational’ assets that drive cash flow, such as corporate reputation, goodwill and the brand(s) itself/themselves. (Ettenson, 2007)