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

Which of the following are ways to implement a firm's business strategy?

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. Discussion Questions 1. To what extent could the acquisition of Palm by HP be viewed as a "make versus buy decision" by HP? 2. How would you characterize the HP strategy for mobility products (cost leadership, differentiation, focus, or a hybrid) and why? Case Study Short Essay Examination Questions 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. -How did the acquisition of Countrywide fit BofA's business strategy? Be specific.What were the key assumptions implicit the BofA's business strategy? How did the existence of BofA's mission and business strategy help the firm move quickly in acquiring Countrywide?

Case Study Short Essay Examination Questions Consolidation in the Global Pharmaceutical Industry: The Glaxo Wellcome and SmithKline Beecham Example By the mid-1980s, demands from both business and government were forcing pharmaceutical companies to change the way they did business. Increased government intervention, lower selling prices, increased competition from generic drugs, and growing pressure for discounting from managed care organizations such as health maintenance and preferred provider organizations began to squeeze drug company profit margins. The number of contact points between the sales force and the customer shrank dramatically as more drugs were being purchased through managed care organizations and pharmacy benefit managers. Drugs commonly were sold in large volumes and often at heavily discounted levels. The demand for generic drugs also was declining. The use of formularies, drug lists from which managed care doctors are required to prescribe, gave doctors less choice and made them less responsive to direct calls from the sales force. The situation was compounded further by the ongoing consolidation in the hospital industry. Hospitals began centralizing purchasing and using stricter formularies, allowing physicians virtually no leeway to prescribe unlisted drugs. The growing use of formularies resulted in buyers needing fewer drugs and sharply reduced the need for similar drugs. The industry's first major wave of consolidations took place in the late 1980s, with such mergers as SmithKline and Beecham and Bristol Myers and Squibb. This wave of consolidation was driven by increased scale and scope economies largely realized through the combination of sales and marketing staffs. Horizontal consolidation represented a considerable value creation opportunity for those companies able to realize cost synergies. In analyzing the total costs of pharmaceutical companies, William Pursche (1996) argued that the potential savings from mergers could range from 15-25% of total R&D spending, 5-20% of total manufacturing costs, 15-50% of marketing and sales expenses, and 20-50% of overhead costs. Continued consolidation seemed likely, enabling further cuts in sales and marketing expenses. Formulary-driven purchasing and declining overall drug margins spurred pharmaceutical companies to take action to increase the return on their R&D investments. Because development costs are not significantly lower for generic drugs, it became increasingly difficult to generate positive financial returns from marginal products. Duplicate overhead offered another opportunity for cost savings through consolidation, because combining companies could eliminate redundant personnel in such support areas as quality assurance, manufacturing management, information services, legal services, accounting, and human resources. The second merger wave began in the late 1990s. The sheer magnitude and pace of activity is striking. Of the top-20 companies in terms of global pharmaceutical sales in 1998, one-half either have merged or announced plans to do so. More are expected as drug patents expire for a number of companies during the next several years and the cost of discovering and commercializing new drugs continues to escalate. On January 17, 2000, British pharmaceutical giants Glaxo Wellcome PLC and SmithKline Beecham PLC agreed to merge to form what was at the time the world's largest drug company. The merger was valued at $76 billion. The resulting company was called Glaxo SmithKline and had annual revenue of $25 billion and a market value of $184 billion. The combined companies also would have a total R&D budget of $4 billion and a global sales force of 40,000. Total employees would number 105,000 worldwide. Although stressed as a merger of equals, Glaxo shareholders would own about 59% of the shares of the two companies. The combined companies would have a market share of 7.5% of the global pharmaceutical market. The companies projected annual pretax cost savings of about $1.76 billion after 3 years. The cost savings would come primarily from job cuts among middle management and administration over the next 3 years : -In your judgment,what are the likely strategic business plan objectives of the major pharmaceutical companies and why are they important?

Stakeholders only include a firm's shareholders.

An acquisition plan defines the objectives to be achieved by acquiring another firm,management's preferences as to how the acquisition process should be managed,resources required,and the roles and responsibilities of those responsible for implementing the plan.

Corporate objectives are defined as what is to be accomplished within a specific period.

Core competencies should be defined as narrowly as possible.

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. Discussion Questions 1. To what extent could the acquisition of Palm by HP be viewed as a "make versus buy decision" by HP? 2. How would you characterize the HP strategy for mobility products (cost leadership, differentiation, focus, or a hybrid) and why? Case Study Short Essay Examination Questions 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. -How would you classify the BofA business strategy (cost leadership,differentiation,focus or some combination)? Explain your answer.

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