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

What is the difference between a business plan and an acquisition plan?

Determining where a firm should compete requires management to consider which of the following factors?

BofA Acquires Countrywide Financial Corporation On July 1, 2008, Bank of America Corp (BofA) announced that it had completed its acquisition of mortgage lender Countrywide Financial Corp (Countrywide) for $4 billion, a 70 percent discount from the firm’s book value at the end of 2007. Countrywide originates, purchases, and securitizes residential and commercial loans; provides loan closing services, such as appraisals and flood determinations; and performs other residential real estate–related services. This marked another major (but risky) acquisition by Bank of America's chief executive Kenneth Lewis in recent years. BofA's long-term intent has been to become the nation's largest consumer bank, while achieving double-digit earnings growth. The acquisition would help the firm realize that vision and create the second largest U.S. bank. In 2003, BofA paid $48 billion for FleetBoston Financial, which gave it the most branches, customers, and checking deposits of any U.S. bank. In 2005, BofA became the largest credit card issuer when it bought MBNA for $35 billion. The purchase of the troubled mortgage lender averted the threat of a collapse of a major financial institution because of the U.S. 2007–2008 subprime loan crisis. U.S. regulators were quick to approve the takeover because of the potentially negative implications for U.S. capital markets of a major bank failure. Countrywide had lost $1.2 billion in the third quarter of 2007. Countrywide's exposure to the subprime loan market (i.e., residential loans made to borrowers with poor or nonexistent credit histories) had driven its shares down by almost 80 percent from year-earlier levels. The bank was widely viewed as teetering on the brink of bankruptcy as it lost access to the short-term debt markets, its traditional source of borrowing. Bank of America deployed 60 analysts to Countrywide's headquarters in Calabasas, California. After four weeks of analyzing Countrywide's legal and financial challenges and modeling how its loan portfolio was likely to perform, BofA offered an all-stock deal valued at $4 billion. The deal valued Countrywide at $7.16 per share, a 7.6 discount to its closing price the day before the announcement. BofA issued 0.18 shares of its stock for each Countrywide share. The deal could have been renegotiated if Countrywide experienced a material change that adversely affected the business between the signing of the agreement of purchase and sale and the closing of the deal. BofA made its initial investment of $2 billion in Countrywide in August 2007, purchasing preferred shares convertible to a 16 percent stake in the company. By the time of the announced acquisition in early January 2008, Countrywide had a $1.3 billon paper loss on the investment. The acquisition provided an opportunity to buy a market leader at a distressed price. The risks related to the amount of potential loan losses, the length of the U.S. housing slump, and potential lingering liabilities associated with Countrywide’s questionable business practices. The purchase made BofA the nation's largest mortgage lender and servicer, consistent with the firm's business strategy, which is to help consumers meet all their financial needs. BofA has been one of the relatively few major banks to be successful in increasing revenue and profit following acquisitions by "cross-selling" its products to the acquired bank's customers. Countrywide's extensive retail distribution network enhances BofA's network of more than 6,100 banking centers throughout the United States. BofA had anticipated almost $700 million in after-tax cost savings in combining the two firms. Almost two-thirds of these savings had been realized by the end of 2010. In mid-2010, BofA agreed to pay $108 million to settle federal charges that Countrywide had incorrectly collected fees from 200,000 borrowers who had been facing foreclosure. -Describe what the likely objectives of the BofA acquisition plan might have been. Be specific. What are the key assumptions implicit in BofA's acquisition plan? What are some of the key risks associated with integrating the Countrywide? In addition to the purchase price, how would you determine BofA's potential resource commitment in making this acquisition?

A price or cost leader in an industry is usually the firm with the largest market share.

A competencies should be defined as narrowly as possible.

Do you believe Facebook paid too much for WhatsApp? Why? Why not? Be specific in identifying the assumptions underlying your argument.

A differentiation strategy is one in which a firm's products are perceived by customers to be slightly different from other firms' products in the same industry.

eBay Struggles to Reinvigorate Growth Founded in September 1995, eBay views itself as the world’s online market place for the sale of goods and services to a diverse community of individuals and small businesses. Currently, eBay has sites in 24 different countries, and it offers a wide variety of tools, features, and services enabling members to buy and sell on its sites. The firm’s primary business is Markeplaces consisting of eBay, Shopping.com, and classified websites. In 2006, this business accounted for 90 percent of eBay’s sales and profits. Historically, acquisitions made by eBay have always been related to e-commerce. For example, concern about slowing growth in its core U.S. market caused eBay to acquire online payments provider, PayPal, in 2002. The firm achieved significant synergy between eBay and PayPal by facilitating payments between buyers and sellers. In late 2005, eBay announced that it had acquired Skype International SA, a firm whose software enabled PC users to make calls over the internet, for $2.6 billion. Skype had revenue of $60 million in 2005, a tiny fraction of eBay’s $4.4 billion in 2005 sales, and it was unprofitable. Skype’s existing businesses include services that give people the ability to call landline phones for about 3 cents a minute, voicemail, and providing a traditional phone number for Skype accounts. Skype is facing new competition from Google, Yahoo!, and many startups. eBay expects Skype to facilitate trade on their sites by increasing the ability of buyers and sellers to negotiate. In addition to paying eBay listing and completed-auction fees, sellers also could pay eBay a fee for getting an internet call, or lead, via Skype. eBay will also use Skype to facilitate entering new markets, such as new cars, travel, real estate, and personal and business services. Skype software gives eBay an advantage in China, Eastern Europe and Brazil, where online trust is not well-established and where haggling may be more a part of the culture. The acquisition of a telephony company represented a marked departure for eBay, which had previously acquired companies directly related to e-commerce. eBay is venturing into new territory without any overt request from or support of its buyers and sellers. Historically, buyers and sellers guided eBay into new markets through their activities, such as embracing PayPal years before eBay acquired it, or by requesting new features. In the past when eBAy has gone off on its own, such as collaborating with Christy’s for live auctions, it has been unsuccessful. Only time will tell how well this acquisition will work. -Do you believe this acquisition if related or unrelated to eBay's business? What are the implications of your answer..

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 do you think Quaker wanted to sell its consolidated operations rather than to divide the company into the food/cereal and Gatorade businesses?

HP Redirects Its Mobile Device Business Strategy with the Acquisition of Palm With global PC market growth slowing, Hewlett-Packard (HP), number one in PC sales worldwide, sought to redirect its business strategy for mobile devices. Historically, the firm has relied on such partners as Microsoft to provide the operating systems for its mobile phones and tablet computer products. However, the strategy seems to have contributed to the firm’s declining smartphone sales by limiting its ability to differentiate its products and by delaying new mobile product introductions. HP has been selling a smartphone version of its iPaq handheld device since 2007, although few consumers even knew HP made such devices, since its products were aimed at business people. Sales of iPaq products fell to $172 million in 2009 from $531 million in 2007 and to less than $100 million (excluding sales of Palm products) in 2010. With smartphone sales expected to exceed laptop sales in 2012, according to industry consultant IDC, HP felt compelled to move aggressively into the market for handheld mobile devices. The major challenge facing HP is to overcome the substantial lead that Apple, Google, and Research-In-Motion (RIM) have in the smartphone market. To implement the new business strategy, HP acquired Palm in mid-2010 in a deal valued at $1.4 billion (including warrants and convertible preferred stock). HP acquired Palm at a time when its smartphone sales were sliding, with Palm’s share of the U.S. market dropping below 5 percent in 2010. Palm was slow to recognize the importance of applications (apps) designed specifically for smartphones in driving sales. Palm has several hundred apps, while the number for Apple’s iPhone and Google’s Android are in the tens of thousands. HP is hoping to leverage Palm’s smartphone operating system (webOS) to become a leading competitor in the rapidly growing smartphone market, a market that had been largely pioneered by Palm. HP hopes that webOS will provides an ideal common “platform” to link the firm’s mobile devices and create a unique experience for the user of multiple HP mobile devices. The intent is to create an environment where users can get a common look and feel and a common set of services irrespective of the handset they choose. HP also acquired 452 patents and another 406 applications on file. Palm offers one key potential competitive advantage in that its operating system can run several tasks at once, just as a PC does; however, other smartphones are expected to have this capability in the near future. By buying Palm, HP signals a “go it alone” strategy in smartphones and tablet computers at the expense of Microsoft. HP is also hoping that by having a proprietary system, they will be able to differentiate their mobile products in a way that Apple and Google have in introducing their proprietary operating systems and distinguishing “look and feel.” Through its sales of computer servers, software, and storage systems, HP has significant connections with telecommunications carriers like Verizon that could help promote devices based on Palm’s technology. Also, because of its broad offering of PCs, printers, and other consumer electronics products, HP has leverage over electronics retailers for shelf space. -How would you characterize the HP strategy for mobility products (cost leadership, differentiation, focus, or a hybrid) and why?

HP Redirects Its Mobile Device Business Strategy with the Acquisition of Palm With global PC market growth slowing, Hewlett-Packard (HP), number one in PC sales worldwide, sought to redirect its business strategy for mobile devices. Historically, the firm has relied on such partners as Microsoft to provide the operating systems for its mobile phones and tablet computer products. However, the strategy seems to have contributed to the firm’s declining smartphone sales by limiting its ability to differentiate its products and by delaying new mobile product introductions. HP has been selling a smartphone version of its iPaq handheld device since 2007, although few consumers even knew HP made such devices, since its products were aimed at business people. Sales of iPaq products fell to $172 million in 2009 from $531 million in 2007 and to less than $100 million (excluding sales of Palm products) in 2010. With smartphone sales expected to exceed laptop sales in 2012, according to industry consultant IDC, HP felt compelled to move aggressively into the market for handheld mobile devices. The major challenge facing HP is to overcome the substantial lead that Apple, Google, and Research-In-Motion (RIM) have in the smartphone market. To implement the new business strategy, HP acquired Palm in mid-2010 in a deal valued at $1.4 billion (including warrants and convertible preferred stock). HP acquired Palm at a time when its smartphone sales were sliding, with Palm’s share of the U.S. market dropping below 5 percent in 2010. Palm was slow to recognize the importance of applications (apps) designed specifically for smartphones in driving sales. Palm has several hundred apps, while the number for Apple’s iPhone and Google’s Android are in the tens of thousands. HP is hoping to leverage Palm’s smartphone operating system (webOS) to become a leading competitor in the rapidly growing smartphone market, a market that had been largely pioneered by Palm. HP hopes that webOS will provides an ideal common “platform” to link the firm’s mobile devices and create a unique experience for the user of multiple HP mobile devices. The intent is to create an environment where users can get a common look and feel and a common set of services irrespective of the handset they choose. HP also acquired 452 patents and another 406 applications on file. Palm offers one key potential competitive advantage in that its operating system can run several tasks at once, just as a PC does; however, other smartphones are expected to have this capability in the near future. By buying Palm, HP signals a “go it alone” strategy in smartphones and tablet computers at the expense of Microsoft. HP is also hoping that by having a proprietary system, they will be able to differentiate their mobile products in a way that Apple and Google have in introducing their proprietary operating systems and distinguishing “look and feel.” Through its sales of computer servers, software, and storage systems, HP has significant connections with telecommunications carriers like Verizon that could help promote devices based on Palm’s technology. Also, because of its broad offering of PCs, printers, and other consumer electronics products, HP has leverage over electronics retailers for shelf space. -To what extent could the acquisition of Palm by HP be viewed as a "make versus buy decision" by HP?

Operating risk addresses the ability of the buyer to manage the acquired company.

HP Implements a Transformational Strategy, Again and Again Failure to develop and implement a coherent business strategy often results in firms reacting to rather than anticipating changes in the marketplace. Firms reacting to changing events often adopt strategies that imitate their competitors. These “me too” strategies rarely provide any sustainable competitive advantage. _______________________________________________________________________________________________________ Transformational, when applied to a firm’s business strategy, is a term often overused. Nevertheless, Hewlett-Packard (HP), with its share price at a six-year low and substantially underperforming such peers as Apple, IBM, and Dell, announced what was billed as a major strategic redirection for the firm on August 18, 2011. The firm was looking for a way to jumpstart its stock. Since Leo Apotheker took over as CEO in November 2010, HP had lost 44% of its market value through August 2011. A transformational announcement appeared to be in order. HP, the world’s largest technology company by revenue, announced that, after an extensive review of its business portfolio, it had reached an agreement to buy British software maker Autonomy for $11.7 billion. The firm also put a for-sale sign on its personal computer business, with options ranging from divestiture to a spinoff to simply retaining the business. HP said the future of the PC unit, which accounted for more than $40 billion in annual revenue and about $2 billion in operating profit, would be decided over the next 12 months. Apotheker had put this business in jeopardy after he had announced that the WebOS-based TouchPad tablet would be discontinued due to poor sales. The announcement was transformational in that it would move the company away from the consumer electronics market. Under the terms of the deal, HP will pay 25.50 British pounds, or $42.11, in cash for Autonomy. The price represented a 64% premium. With annual revenue of about $1 billion (only 1% of HP’s 2010 revenue), the purchase price represents a multiple of more than 10 times Autonomy’s annual revenues. HP’s then-CEO, Leo Apotheker, indicated that the acquisition would help change HP into a business software giant, along the lines of IBM or Oracle, shedding more of the company’s ties to lower-margin consumer products. Autonomy, which makes software that searches and keeps track of corporate and government data, would expedite this change. HP said that the acquisition of Autonomy will complement its existing enterprise offerings and give it valuable intellectual property. Investors greeted the announcement by trashing HP stock, driving the share price down 20% in a single day, wiping out $16 billion in market value. While some investors may be sympathetic to moving away from the commodity-like PC business, others were deeply dismayed by the potentially “value-destroying” acquisition of Autonomy, the clumsy handling of the announcement of the wide range of options for the PC business, and HP’s disappointing earnings performance. By creating uncertainty among potential customers about the long-term outlook for the business, HP may have succeeded in scaring off potential customers. With this announcement, HP once again appeared to be lagging well behind its major competitors in implementing a coherent business strategy. It agreed to buy Compaq in 2001 in what turned out to be widely viewed as a failed performance. In contrast, IBM transformed itself by selling its PC business to China’s Lenovo in late 2004 and establishing its dominance in the enterprise IT business. HP appears to be trying to replicate IBM’s strategy. Heralded at the time as transformational, the 1997 $25 billion Compaq deal turned out to be hotly contested, marred by stiff opposition from shareholders and a bitter proxy contest led by the son of an HP cofounder. While the deal was eventually passed by shareholder vote, it is still considered controversial, because it increased the firm’s presence in the PC industry at a time when the growth rate was slowing and margins were declining, reflecting declining selling prices. HP planned to move into the lucrative cellphone and tablet computer markets with the its 2010 purchase of Palm, in which it outbid three other companies to acquire the firm for $1.2 billion, ultimately paying a 23% premium. However, sales of webOS phones and the TouchPad have been disappointing, and the firm decided to discontinue making devices based on webOS, a smartphone operating system it had acquired when it bought Palm in late 2010. In contrast to the mixed results of the Compaq and Palm acquisitions, HP’s purchase of Electronic Data Systems (EDS) for $13.9 billion in 2008 substantially boosted the firm’s software services business. IBM’s successful exit from the PC business early in 2004 and its ability to derive the bulk of its revenue from the more lucrative services business has been widely acclaimed by investors. Prospects seemed good for this HP acquisition. However, in an admission of the firm’s failure to realize EDS’s potential, HP in mid-2012 wrote off $8 billion of what it had paid for EDS. HP has purchased 102 companies since 1989, but with the exceptions of its Compaq and its $1.3 billion purchase of VeriFone, it has not paid more than $500 million in any single deal. These deals were all completed under different management teams. Carly Fiorina was responsible for the Compaq deal, while Mark Hurd pushed for the acquisitions of EDS, Palm, and 3Par. Highly respected for his operational performance, Hurd was terminated in early 2010 on sexual harassment charges. Under pressure from investors to jettison its current CEO, HP announced on September 22, 2011, that former eBay CEO, Meg Whitman, would replace Leo Apotheker as Chief Executive Officer. In yet another strategic flip-flop, HP announced on October 27, 2011, that it would retain the PC business. The firm’s internal analysis indicated that separating the PC business would have cost $1.5 billion in one-time expenses and another $1 billion in increased expenses annually. Citing the deep integration of the PC group in HP’s supply chain and procurement efforts, Whitman proclaimed the firm to be stronger with the PC business. In mid-December 2011, HP announced that it would also reverse its earlier decision to discontinue supporting webOS and stated that it would make webOS available for free under an open-source license for anyone to use. The firm will continue to make enhancements to the webOS system and to build devices dependent on it. By moving to an open-source environment, HP hopes others will adopt the operating system, make improvements, and develop mobile devices using webOS to establish an installed user base. HP could then make additional webOS devices and applications that could be sold to this user base. This strategy is similar to Google’s when it made its Android mobile software available for cellphones under an open-source license. HP’s share price plunged 11% on November 25, 2012, to $11.73 following its announcement that it had uncovered “accounting irregularities” associated with its earlier acquisition of Autonomy. The revelation required the firm to write down its investment in Autonomy by $8.8 billion, about three-fourths of the purchase price. The charge contributed to a quarterly loss of $6.9 billion for HP. Confidence in both the firm’s management and board plummeted, further tarnishing the once-vaunted HP brand. -To what do you attribute the inconsistent and incoherent strategic flip-flops at Hewlett-Packard during the last decade? Be specific.

Acquisition plan objectives should be directly linked to key business plan objectives.

All of the following are true about experience curves except for

A business plan articulates a mission or vision for the firm and a strategy for realizing that mission.

The market or markets in which a firm chooses to compete should reflect the fit between the firm's primary strengths and its ability to satisfy customers needs better than the competition.

All of the following represent generic business strategies except for

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. -Who are Adobe's and Omniture's customers and what are their needs?

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. -What factors external to Adobe and Omniture seem to be driving the transaction? Be specific.