Cost synergies in M&A

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N T E R N A T I O N E L L A

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A N D E L S H Ö G S K O L A N HÖGSKOLAN I JÖNKÖPING

K o s t n a d s s yn e r g i e r vi d M & A

Magisteruppsats inom finansiering Författare: Daniel Nowak

Robert Nyman Handledare: Gunnar Wramsby Framläggningsdatum: 5 Mars 2007

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Ö N K Ö P I N G

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N T E R N A T I O N A L

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U S I N E S S

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C H O O L Jönköping University

C o s t s yn e r g i e s i n M & A

Master thesis within finance Author: Daniel Nowak

Robert Nyman Tutor: Gunnar Wramsby

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Magisteruppsats inom finansiering

Titel: Kosnadssynergier vid M&A

Författare: Daniel Nowak, Robert Nyman

Handledare: Gunnar Wramsby

Datum: 2007-03-05

Sammanfattning

Bakgrund: Idag så står M&A gjorda av Europeiska företag för en signifikant del av det

to-tala antalet M&A (Gaughan, 2002). Ett exempel är diskussionen mellan två av Europas största lastbilstillverkare, MAN och Scania. M&A där svenska företag är inblandade har faktiskt nått en rekordnivå under 2006. Trots detta så kvarstår det fortfarande en tvetydig-het om M&A innebär direkt framgång eller snarare nederlag för de inblandade. En förklar-ing till detta är synergier i allmänhet och kostnadssynergier i synnerhet eftersom de utgör en stor del av drivkraften mellan M&A. Men fortfarande så finns där ett stort antal författa-re som hävdar att föförfatta-retagen inte lyckas att förstå och senaförfatta-re integförfatta-rera de för föförfatta-retagen spe-cifika resurser som leder till själva synergin. Det kan därför hävdas att resurser spelar en ex-tremt viktig roll i M&A och således att ”the resource based view theory” kan utgöra ett ut-märkt verktyg när man försöker analysera uppkomsten av kostnadssynergier.

Syfte: Syftet med den här studien är att beskriva uppkomsten av kostnadssynergier och att

analysera faktorer som har en inverkan på uppkomsten av kostnadssynergier.

Metod: Sex företag, verksamma i olika branscher och med gedigen M&A erfarenhet har

undersökts genom kvalitativa semi-strukturerade intervjuer. De empiriska resultaten har därefter blivit analyserade med hjälp av den teoretiska referensramen.

Slutsats: Graden av kostnadssynergier som kan och vill realiseras beror på olika faktorer

och aktiviteter. Mer exakt så har både köparens och målföretagets storlek samt deras före-tagstyp en stor inverkan. Vidare, så spelar ägarstrukturen, och eventuell budgivning från andra företag en stor roll i jakten på synergier. En så kallad ”Due Diligence” har sagts utgö-ra en viktig aktivitet, särskilt den tekniska gutgö-ranskningen men också sagts vautgö-ra mer associe-rad med legala aspekter än med identifiering av kostnadssynergier. De faktiska synergierna som verkligen var realiserade har identifierats i ett flertal primära och sekundära aktiviteter hos företagen. Huvuddelen uppnåddes dock genom skalfördelar i produktion och inköp genom att utnyttja båda företagens resurser. Dessa resurser har sedan omfördelas eller av-skaffats hos målföretag såväl som hos köparen. Der är också tydligt att bara avskaffa admi-nistrativa duplikationer inte kommer att resultera i några större kostnadssynergier. Istället är det de större inköpsvolymerna och de bättre utnyttjade resurserna i produktionen som har resulterat i de största besparingarna. Men synergier har också uppnåtts genom att omförde-la resurser och på så sätt lyckats uppnå så kalomförde-lade ”Learning curve advantages” och genom att dela med sig av olika typer av kunskaper mellan företag i så kallade konglomerat. Dessa olika typer av kostnadssynergier har dock visat sig kräva olika lång tid för att kunna bli rea-liserade. Att konsolidera inköp kan snabbt generera fördelar medans avskaffandet av iden-tiska aktiviteter inom företagen har visat sig kräva längre tid. Längst tid tar det att samman-föra produktionsaktiviteter. De problem som frekvent uppstår under integrationsarbetet är kulturkrockar samt tekniska problem i samband med integration av IT system. Alla de identifierade synergier har uteslutande uppstått i horisontella M&A, vilket stämmer överens med hur de uppstått. Det vill säga, genom att avskaffa och integrera liknande resurser och

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Master Thesis in finance

Title: Cost synergies in M&A

Author: Daniel Nowak, Robert Nyman

Tutor: Gunnar Wramsby

Date: 2007-03-05

Abstract

Background: Today, M&A carried out by European companies stands for a significant

share of the total M&A (Gaughan, 2002). One example, is the M&A between two of Europe’s superior truck manufacturers, MAN and Scania. In fact, M&A with Swedish companies have reached a level, close to all time high, during the year of 2006. How-ever, it still prevails an ambiguity whether M&A are followed by success or by failure. An explanation is synergies in general and cost synergies in particular since they are seen as the driving force behind M&A. But still several authors argue that companies fail to understand and later integrate the firm specific resources that actually create the syner-gies. It can, therefore, be argued that resources play an extremely vital role in M&A and, thus that the resource based view theory would serve as a great analysing tool when seeking to understand the essence of cost-based synergies.

Purpose: The purpose with this study is to describe the emergence of cost-based

gies and to analyze factors that have an impact on the realization of cost-based syner-gies.

Method: Six companies operating in various businesses and with a thorough M&A

ex-periences have been examined through qualitative semi-structured interviews. The

em-pirical findings have been analysed with the support of the theoretical framework.

Conclusions: The extent to which cost-based synergies can be realised depend on

vari-ous factors and activities. More precise, the size and the type of firm regarding the ac-quirer and the target firm as well as the target firm’s ownership structure and bidding competition from other firms will have an impact on the search for cost-based syner-gies. The due diligence has been argued to serve as an important activity, particularly the technical audit, but also as being more associated with legal matters than with cost syn-ergies. Nevertheless, the cost-based synergies that actually were realised can be found in a number of primary and support activities in the firms. Though, most of the synergistic gains have arisen in the areas of production and procurement through various types of economies of scale. More precise, the firms have taken advantage of both the acquirers’ as well as the target firms’ resources and, thus divested and redeployed in both direc-tions. It is also evident that merely eliminating administrative duplications will not result in any major cost synergies. Instead it is the increased purchasing volumes and better utilised resources in production that result in the major cost synergies. However, cost synergies have also been achieved by redeploying resources in order to gain learning curve advantages and by transferring firm specific knowledge between firms in a con-glomerate. These various types of synergies will require different integration times. To consolidate sourcing can be realised within a short time frame while eliminating depart-ment duplications will take longer time and merging production units will take the long-est time. The problems that have occurred when doing this have arisen from cultural clashes and when trying to integrate IT-systems. These cost synergies have exclusively been found in horizontal acquisitions, which correlates to the way the synergies have arisen. That is to say, by eliminating and integrating similar resources and activities.

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Table of Content

1

Background ... 2

1.1 Problem discussion ... 3 1.2 Purpose... 4

2

Method... 5

2.1 Research approach ... 5 2.1.1 Qualitative vs. quantitative... 5 2.1.2 Inductive vs. deductive ... 6 2.1.3 Case study... 7

2.2 Data collection and analysis... 8

2.3 Quality of research ... 9 2.3.1 Validity ... 9 2.3.2 Reliability ... 10

3

Theoretical Framework... 11

3.1 M&A motives ... 11 3.2 Directions of M&A... 11 3.3 Synergy conceptualization ... 13

3.3.1 Synergy through lower taxes ... 14

3.3.2 Synergy through revenue enhancement... 15

3.3.3 Synergy through reduction in capital needs... 15

3.3.4 Synergy through cost reduction ... 16

3.4 Generic resource based view (RBV) ... 18

3.5 The M&A process... 20

3.5.1 Strategic integration planning ... 20

3.5.2 Integration phase ... 24

3.5.3 Post integration phase ... 26

4

Empirical findings ... 27

4.1 TeliaSonera... 27 4.2 Trelleborg ... 29 4.3 Bong Ljungdahl ... 31 4.4 Nibe Industrier... 32 4.5 Sandvik ... 33

4.6 Expanda Design Group ... 35

5

Analysis ... 37

5.1 To what extent and where can cost-based synergies be achieved? ... 37

5.2 What kinds of resources can be involved and how are they exploited in order to gain cost synergies? ... 40

5.3 What types of problems can occur when aiming for cost synergies in different stages? ... 42

5.4 How can the direction of M&A influence the expected outcome of cost synergies? ... 44

6

Conclusions... 46

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Figures

Figure 1: The interactive process (Jacobsen, 2002). ... 6 Figure 2: Inductive and Deductive Approach (Wiedersheim & Eriksson

(1987). ... 7 Figure 3: Economies of scale and the optimal size (Ross et al., 2006) ... 17 Figure 4: The generic value chain (Porter, 1985). ... 22, 39

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Introduction

1

Background

Economic growth goes in cycles, so do mergers & acquisitions (M&A). Over the last cen-tury there has been a number of M&A waves and the occurrence of these tend to corre-spond with the periods of economic growth (Gaughan, 2002).

Gaughan (2002) argues further that M&A have turned from being a typically US business related phenomena, into a universal strategy. This has resulted in that the M&A carried out by European companies today stands for a significantly larger share of the total quantity. In fact, the total number of M&A activities has increased prominent during the last decade (Gupka & Gerchak, 2002). One example, which have been devoted a substantial space in the media recently, is the discussion concerning the M&A between two of Europe’s supe-rior truck manufacturers, MAN and Scania. The coverage of these two giants has implied an increased interest of the phenomena of M&A.

In addition, M&A initiatives by Swedish companies have reached a level, close to all time high, during the year of 2006. This noteworthy increase can be seen as a result of a time of prosperity, in Sweden, up to this date, lasted over the recent years. The strong liquidity in many Swedish firms has made it possible to achieve sought benefits through inorganic ex-pansion (Dagens Industri, 2006-11-07). M&A can, thereby be seen as one of the most dis-cussed topics in the world of finance.

However, M&A as a phenomena has been thoroughly examined by researchers and practi-tioners, since it is perceived as important from a strategic point of view as it involves cor-porate changes, significant transactions and large risks. As a strategy it has been present throughout the entire last century in order for companies to increase their competitiveness, which also has resulted in a small mountain of research, but also a major space in the mass media (see MAN and Scania example).

Despite all the previous research on M&A, it still prevails a big ambiguity whether M&A actually are followed by success or by failure. Sevenius (2003) affirms that researchers have not been able to make a clear-cut between success and failure, and neither been able to point out that M&A actually add value to the company. Although empirical evidence show that M&A fail, on average, companies still suffer from the “success paradox” (Cording, Christmann & Bourgois, 2002; Sevenius, 2003).

Nevertheless, the assumption of M&A is that it will strengthen or generate competitive ad-vantage, in several different ways. In other words, companies do have different motives for M&A. Even if, a company announces a specific reason in order to emphasize a certain strategy for M&A, many of the motives can be found in each transaction (Scherer in Lars-son, 1990). However, the most highlighted and cited motive by companies is to gain bene-fits through synergies (Damodaran, 1996; Gaughan, 1996). Or as argued by Sirower (1997), there must be a level of synergy in all M&A in order for them to be successful.

Kelly and Cook (1999) agrees, but affirms that even though synergies are emphasized by CEO´s as the driving force behind M&A, within the company they are played down by the operational managers, meaning that synergies are not possible to realize. Several authors as Cording et al. (2002), Capron (1999) and Ensign (1998, 2004) argue that this is the case since companies fail to understand and later integrate the firm specific resources that actu-ally create synergies. In addition, these authors argue that the result from this may not only be lost synergistic gains, but also dysfunctions as, for example, additional costs. It can,

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Introduction

resource based view theory would serve as a great analysing tool when seeking to under-stand the essence of synergies.

As synergies are the most common motive for M&A (Mukherjee, Kiymaz & Baker, 2004) and, thereby have a significant impact on the M&A success, it would be of great interest to delve deeper in the field of synergies in order to solve the mystery ones and for all. The study is further justified by the fact that little research have been undertaken on the most common synergy, namely cost-based synergies.

1.1

Problem discussion

It is evident that synergies in general and cost synergies in particular play a vital role in M&A. This is supported by Habeck, Tröger and Träm (2000) who showed in their global survey that 76 per cent of the companies placed their emphasis on efficiency synergies. More precise, Kelly and Cook (1999) found in one of their surveys that as many as 48 per cent target synergy benefits through cost reduction, while only 36 per cent focused on syn-ergies gained from revenue enhancement when acquiring other firms. In similarity, KPMG (2006) confirmed that in terms of a successful M&A, 53 per cent of the realized synergies where composed by cost synergies.

Despite these findings there is an ongoing debate whether cost synergies actually exist and to what extent. On the one hand, there are authors as Buono (2002) who argues that cost reductions are relatively easy to achieve and can be done so with a modest degree of risk. Although, Harding and Rovit (2004) state that cost synergies often are overestimated in terms of value and underestimated in terms of how difficult they are to achieve, they argue that these synergies can be realized within a comparatively short time frame. Furthermore, KPMG (2006) state that, not only the costs are difficult to foresee, but also exactly where the synergies will materialize. That is to say, there is a discrepancy between where the buy-ing firms expect to gain cost synergies and where they actually become visible after the merger. Even though, the latter authors are somewhat critical, Capron (1999) contrasts their views significantly by saying that simply divestiture or redeploying the targets firm’s assets will not reduce costs, but can instead damage capabilities since this process often implies too radical changes of the target firm’s resources. This discussion together with the obvious contradiction leads up to the first research question:

To what extent and where can cost-based synergies be achieved?

As can be understood, the firms’ different resources will play a vital role when aiming for cost synergies. This is also true according to Capron (1999), Ensign (2004) and Cording et al. (2002) together with several other authors who argue that the firm specific resources will determine which kinds of cost synergies that can be gained. For example, cost reductions through economies of scale require resources with over capacity and that these resources are related (Ensign, 1998). Additionally, and as been previously stated, Capron (1999) af-firms that the way these resources are used will have an impact on the cost-based outcome. The author argues further that the direction of the redeployment and divestment also will impact on the synergy outcome. That is to say, if the target firm’s or the acquirer’s re-sources are exploited. Therefore, research question two seeks to find out:

What kinds of resources can be involved and how are they exploited in order to gain cost synergies? Even though, there are conflicting views on how cost-based synergies are realized, there is a unanimous line of research stating that the possibility of realizing cost synergies is heavily

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Introduction

affected by the pre-merger gathering of information process about obtainable merger syn-ergies and the post-merger integration difficulties (Banal-Estanol & Seldeslachts, 2004). The authors argue further that in the ex ante phase the buyer search for information that can reveal where and to what extent the synergistic gains exist. However, getting more pre-cise information about the other firm’s resources, if possible, comes with a cost in terms of effort and time. Additionally, Cording et al. (2002) state that the process becomes more complicated by the information asymmetry that exists between the buyer and seller. The post ante difficulties arise simply because there is a number of problems associated with in-tegration and coordination of company specific resources. Frankel (2005) points out that setting aside such complications take time and requires significant amount of work load and investments. In other words, that there are several costs associated with realizing cost reductions, which is in addition difficult to foresee before the actual marriage. The third re-search question, therefore, deals with difficulties during the process or in other words tries to find out:

What types of problems can occur when aiming for cost synergies in different stages?

Furthermore, it can be argued that the likeliness of achieving cost synergies also depends on the type or the direction of M&A. For example, Larsson (1990) affirms that related and horizontal M&A are more likely to create cost synergies since the firms have more in common and will, therefore, end up with duplications of resources, which simply could be eliminated. In contrast, Cording et al. (2002) argue that these types of mergers require a higher degree of integration, which in turn results in an enhanced complexity of the inte-gration process. The result is higher costs and diminishing cost reductions. On the other hand, vertical integration are associated with other types of cost reductions, arising from, for example, improved operational coordination, avoidance of transaction costs and learn-ing curve advantages (De Wit & Meyer, 2005). Even though, we are not trylearn-ing to find a general answer to this it would be highly interesting, through research question four, to see how and if this have impacted on the examined M&A.

How can the direction of M&A influence the expected outcome of cost synergies?

As can be seen, there is no doubt that cost synergies are a very common motive in today’s M&A, but yet the appearance of these synergies could be further elaborated. It is also evi-dent that there are a number of factors that will impact on the success of achieving such benefits and that the resource based view can help in understanding the emergence of the synergies.

1.2

Purpose

The purpose with this study is to describe the emergence of cost-based synergies and to analyze factors that have an impact on the realization of cost-based synergies.

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Method

2

Method

This chapter will describe how the authors did proceed in order to achieve their purpose. It will describe data collection, data handling, analysis, and problems and weaknesses of our chosen method as well as motivations and descriptions of why we chose this method. This topic will also educate the reader about practical problems that we ran into during the study and discuss how those problems might have affected the results and what the authors did to reduce the effects of those problems.

2.1

Research approach

The following section will explain the basic approaches that are commonly used when studying a research problem.

2.1.1 Qualitative vs. quantitative

A quantitative research approach intends to be in contrast to a qualitative research ap-proach. Maxwell (1996) explains quantitative research as an approach to use when to study to what extent variable X causes Y and is thereby, in contrast to a qualitative approach, which intends to study how variable X causes Y. This means that the choice of research approach depends heavily on what is in the interest of the researcher.

Both the approaches have their strengths and weaknesses. Maxwell (1996) affirms that qualitative research gives a possibility to obtain a more in depth research with a focus on how different factors influence each other. On the other hand, a quantitative approach en-ables the researcher to generalize the result, due to a larger sample. The collected data is also analysed more efficiently with a quantitative approach. Jacobsen (2002) argues further that a quantitative approach have a clear start and finish-line, in comparison to the qualita-tive approach, which advocates an interacqualita-tive process. During the interacqualita-tive process the researchers can keep an open mind towards what is being studied and gradually update the collected data.

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Method

Figure 1, The interactive process (Jacobsen, 2002).

However, the researcher needs to consider the question whether it is possible or adequate to conduct a qualitative or quantitative research. Studying cost-based synergies in M&A can allow both a qualitative and quantitative approach, depending on what is in the interest. As the questions related to the problem in this thesis are qualitative by their nature, it became appropriate to also choose a qualitative research approach. This is in line with Johansson (2003) who argues that with a qualitative approach the authors want to answer the question concerning the characteristics of something, not to what amount. That is to say, to explain the characteristics of something and under what condition it will occur. Furthermore, due to the qualitative research approach the authors have been able to follow the interactive process in figure 1, which have facilitated the understanding of the problem.

2.1.2 Inductive vs. deductive

Wallén (1993) affirms that the choice of research approach depends heavily on the interre-lationship between theoretical and empirical data. In other words, depending on, which of these the researcher chooses as a starting point will result in either an inductive or deduc-tive approach. These two concepts are illustrated in figure 2.

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Method

Figure 2, Inductive and Deductive Approach (Wiedersheim & Eriksson (1987).

When an inductive approach is employed, the researcher starts with empirical data collec-tion and, based on that, seeks to draw theoretical conclusions (Wallén, 1993). Or in other words as argued by Hartman (1998), the researcher aim is, without having any theory or presumption to be tested or developed, through observation analysis to develop a general theory or a hypothesis. This approach has, however, been strongly criticised by the fact that conclusions are said to be drawn solely on empirical data. This is the case since the selec-tion of a specific phenomenon to be analyzed must be based on some theoretical values. An unbiased approach is, thereby, impossible to achieve (Wallén, 1993).

On the other hand, in the deductive approach, theory stands for an important and central part of the research. Here and in contrast to the inductive approach, a hypothesis or at least what to be tested is determined beforehand and is then used to guide the researcher throughout the study. The author argues further that the hypothesis is derived from, by the author composed theory and, thereby from existing knowledge. These assumptions are then empirically tested, by making use of the collected information.

Since the aim of this thesis is to delve into cost-based synergies, by first stating a number of research question based on existing theory, it is obvious that a deductive approach has been taken. That is to say, the phenomenon to be analyzed is determined beforehand and pre-sumptions, among the authors, do exist. However, instead of testing a hypothesis, which only would result in a yes or no, several research questions have been outlined. This has been done since it is in the authors’ belief that such questions can capture the researched area and steer the research in a better way, concerning the thesis scope and timeframe, than a normative hypothesis would do.

2.1.3 Case study

Case studies are one of several ways of doing research and preferred when research aims at answering the questions “why” and “how” a phenomenon occurs. The strategy is used, for instance, when explaining contemporary problem in a real-life context with the aim to learn something new and important about these problems. In order to achieve this the research

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Method

questions should focus on “what” and “where” (Yin, 2003). In addition, a case study is characterized by that the researchers view the problem from several different aspects. That is relevant when there is little theory and guidance within the researched area and if the purpose of the study includes the word “describe” (Ericsson, Wiedersheim-Paul, 2001). Moreover, Ghauri, Grönhaug and Kristianslund (1995) affirm that a case study enables a more in-depth study of the problem.

The authors of this thesis have undertaken a case study approach, in addition to the qualita-tive and deducqualita-tive research approaches discussed above. This was a decision, supported by the theory above, taken when considering the nature of the problem. It was also relevant due to the absence of theory regarding cost-based synergies, not to confuse with the sur-plus theory of M&A in general. However, the fundamental reason for the choice of the case study approach was the need for in-depth investigations in order to answer the pur-pose of the thesis.

The cases in this thesis have been chosen on the basis of cost-based synergies as a motive for M&A. The companies involved in the study are all listed on the Swedish stock ex-change. Unfortunately, the number of cases has been limited due to a lack of willingness by companies to carry out an interview. On the other hand, not to forget is the high degree of interest shown by the interviewees who did participate in X different cases. The cases are taken from companies operating within different industries, which will affect the gener-alizability of the results. The reason was that non accessibility of relevant cases within one particular industry. On the other hand it enables a comparison of the realization of cost based synergies between different industries.

2.2

Data collection and analysis

To gain a deeper understanding about M&A and cost-based synergies it requires to identify what theories these concepts can be supported by. Therefore, a thorough literature review was accomplished. This information, collected in the first phase, aimed at helping the au-thors composing a theoretical framework, which would in turn help answering the purpose of the thesis. The information was gathered from books that discuss the subject of M&A, however, these books tended to have a very broad view of M&A. Thus, cost-based syner-gies were barely considered. Therefore, scientific journals account for a large share of the information in the theoretical framework. To find these sources of data several databases were used, such as, Emerald Fulltext, ABI/Inform, Blackwell Synergy, Science Direct, JSTOR. When searching these databases the authors have used keywords, such as, M&A, synergies, cost-based synergies, cost synergies, cost reduction, vertical integration, horizon-tal integration, resource based view, related business, unrelated business. These key words have also been used in different combinations in order to achieve the most relevant infor-mation. This kind of data is gathered from secondary sources according to Ghauri, Gron-haug and Kristianslund (1995).

Furthermore, Ghauri et al. (1995) assert both advantages and disadvantages with the use of secondary sources. The main advantage is that it will help the researcher to better under-stand and formulate the problem and with a more clarified problem statement the broader is the base from where conclusions can be drawn. Moreover, secondary sources can sug-gest what method to apply to the problem and also what kind of data to collect.

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Method

On the contrary, secondary sources may also involve some drawbacks. One main issue is that the data often is collected and meant for another research problem. Therefore, it is very important to understand the problem and what to study. Other studies may also have defined variables in different ways, which makes it difficult to classify the data and thereby impede a comparison. However, to actually achieve the advantages it requires that all search should start with secondary data sources and not until they are drained the re-searcher should continue with primary data That is to say , when secondary data are not available and can not help answering the research questions. That leads to a necessity of collecting data, which are relevant for the specific study (Ghauri et al., 1995).

In addition to the numerous books and scientific journals, a number of pre-explorative studies were conducted. The authors performed very open minded interviews with compa-nies that had completed M&A during the last years. The intention was to add other views to what theories that could support cost-based synergies in M&A. The literature review and the explorative studies have thereby served as a base for the theoretical framework that has been used in order collect empirical primary data. Ericsson and Widerheim-Paul (2006) ex-plains, more precise, primary data as the first hand information collected by the authors who is performing the study.

Nevertheless, primary data collection can be divided into two different approaches, obser-vations and interviews. The former tool involves listening and watching people’s behav-iour, which may be an advantage as it capture first hand information in an natural setting. Though, it might be difficult to translate this information into something scientifically valu-able (Ghauri et al. 1995). Therefore have the authors used an interview approach when gathered the information, which would be more appropriate considering the nature of the research questions. Interviews, in turn, can be related to either unstructured or structured. Meaning to what degree the respondent is bounded to answer to the questions. In addition, Ghauri et al. (1995) discuss semi structured interviews, which differ both from structured and unstructured. This approach seemed to the most suitable considering this specific study due to that issues, questions to discuss and people to be interviewed were determined on beforehand, but on the other hand were the interviews very open and gave room for the interviewee to reason. From the interviewers point of view involved a possibility follow up the reasoning with “how” and “why” questions.

The data was collected through in-depth interviews that varied between thirty and ninety minutes. The interviews were conducted both through telephone and face-to-face. With this data and the theoretical framework the analysis could be accomplished. Meaning that explanation, description, interpretation and conclusions were drawn with the support from theories and empirical findings.

2.3

Quality of research

The quality and trustworthiness of research are often related to the concepts of validity and reliability. Therefore, have these concepts been taken into consideration in order to ensure the quality and trustworthiness of this thesis, which is supported by Maxwell (1996) and De Vaus (2001).

2.3.1 Validity

The validity intends to examine the degree of systematic error of a thesis and is a measure-ment of what is expected to measure. Further, Maxwell (1996) explains validity as the

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cor-Method

rectness of explanation, description, interpretation and conclusion. In other words, to what extent the answer is right, which in turn is a result of how accurate the collected data have been in relation to the research problem and theoretical framework.

Lundahl and Skärvad (1992) take the concept one step further and divide validity into in-ternal and exin-ternal validity. The degree of inin-ternal validity increases when for instance the questions in the interview guide is composed correctly in relation to what to be answered. To achieve a high level of inner validity it is preferable to consider different theories and sources of data. Moreover, external validity exits as a measure of generalizability of the an-swers and to what extent anan-swers correspond to the actual problem.

The validity has been carefully considered and thereof an extensive literature review, which helped the authors to compose a relevant theoretical framework where to anchor the prob-lem and to understand the complexity of the probprob-lem. Moreover, in order to achieve a suf-ficient level of validity a pre-study was carried out. The pre-study helped the authors to evaluate whether the questions were adequate or not. When the questions had been recon-sidered the sharp interviews could be accomplished. Before the interviews a question guideline was send to all the respondents so these persons would have a possibility to re-flect on the questions and thereby give a valid answer. However, due to that the respon-dents in these cases often have a very busy and time consuming position the validity may decrease. It can have implied that these persons not had the possibility to actually consider the questions on before hand. Moreover, depending on the non accessibility to the respon-dents the possibility to multiple interviews was diminished, which would have been a way to increase the validity further.

2.3.2 Reliability

In addition to validity it is fundamental to consider the trustworthiness of a study, which also is presented as the reliability. A high degree of reliability implies an errorless result and that the measure will give the same result in consistently (De Vaus, 2001). According to Lundahl and Skärvad (1992) this means more precise that the measuring is not affected by the person who that carries out the research or by the circumstances it is carried out. That is to say, a study with high reliability will give the same answer every time, which means that the answers are not affected by coincidences or random errors.

The main issue concerning interviews about a certain topic should be knowledge possessed by the respondent. Therefore, have the authors carefully explained the problem to the po-tential companies in order to find the most qualified and experienced person. From this point of view it can be said that the reliability have been high as in the most cases the com-panies do have allocated personnel who’s profession involves business development and evaluation of M&A. Moreover, that the M&A carried out by the companies had been ter-minated would also strengthen the reliability as the information would not be of very con-fidential character any longer. Though, due to human nature, which includes a tendency of denial regarding losses the respondent had an option to distort the answers in any direction outside of the interviewers control.

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Theoretical Framework

3

Theoretical Framework

The following chapter will give the reader a basic understanding of the fundamentals that this thesis is based upon.

3.1

M&A motives

Even though there probably are as many motives for M&A as there are bidders and targets, a classification where motives with different characteristics are grouped, can be helpful when analyzing M&A (Mukherjee et al., 2004). Statens offentliga utredningar (1990:1) con-firms that for analytical purposes motives can be divided into three main categories. The first group consists of theories that believe that the fundamental condition for an M&A to take place is that the buyer and seller possess different information or values the informa-tion differently. Informainforma-tion asymmetry is also considered in the next category, but a con-siderable difference is that the first group does not require any changes within the firms. This is, however, an essential ingredient in the theories in the subsequent group, which deals with gains that are due to changes or consolidation in and between the two firms. The third and last category constitutes of theories that assume that the primary purpose is something else than to maximize the value of the buyer firm and the owners wealth.

Another way of classifying the motives is outlined and compiled by Trautwein (1990). First there is a group that sees merger motives as a rational choice. Efficiency theory is one of these motive theories and deals with the emergence of synergy by effectively combining the two firms. Next, is the monopoly theory, which also deals with synergy gains, but there is a distinctive difference since this theory does not focus on efficiency gains, but merely wealth transfer from customers by increased market power. The valuation theory argues, in simi-larity to the first group previously outlined by Statens offentliga utredningar (1990:1), that managers have better or unique information about the target’s value than the stock market and based on this execute the acquisition. Furthermore, the empire-building theory argues that mergers are done in order for managers to maximize their own utility rather than their shareholders value. The subsequent theory deals with mergers as a process outcome and has its background in the literature on the strategic decision process. However, this theory has according to Trautwein (1990) only been rudimentarily developed. The last theory view mergers as a macroeconomic phenomenon and try to explain the emergence of a merger wave.

However, listening all possible motives does not make sense since they will vary with the type of business, environment and with the business cycle (Larsson, 1990). Or as Scherer (in Larsson, 1990, p.38) put it, “No simple summary can do justice to the question of merger effects and motives. One can if he looks hard enough, find facts to support almost any hypothesis”. Nevertheless, the focus and nature of this thesis makes it obvious to focus on motives in the second group discussed by Statens offentliga utredningar (1990:1), and the efficiency theory outlined by Trautwein (1990), which both deals with the potential synergistic gains that may arise from effective and efficient coordination of the merging firms.

3.2

Directions of M&A

Pursuing M&A strategies can be done in different directions depending on the main mo-tive. This means that companies can either acquire firms, which operate in the same

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indus-Theoretical Framework

try as themselves, horizontal acquisition, or firms that are positioned at different levels in the same supply chain, vertical acquisition, or firms that operate in totally different indus-tries, conglomerate acquisition. A horizontal acquisition implies that companies compete with their products in the same markets, which also means that the target firm can be a competitor. On the other hand, vertical acquisitions can imply, for instance, that a com-pany acquire another firm upstream, suppliers, or downstream the supply chain, distribu-tors. In a situation as such the acquirer and the target firm would not act as competidistribu-tors. Porter (1980) affirms that the essentials of vertical integration are to obtain more control, easier coordination and less risk as the acquired functions will be performed internally. Fi-nally, in a conglomerate acquisition it may be two completely different companies involved, competing in totally separate markets (Ross et al., 2006). Conglomerate acquisitions can be related to the diversification theory, which means in a M&A context that a company enters a new business area in order to reduce the volatility of earnings or due to that the current business have reached a maturity phase (Gaughan, 1996).

Moreover, M&A can also be classified on the basis of the degree of relatedness between the two firms. The relatedness of M&A spans from being either fully related to entirely un-related. Both vertical and horizontal acquisitions can be classified as related, whereas con-glomerate acquisitions are classified as unrelated. Additionally, Seth (1990) argues that the source of value creation differ between the different directions of acquisitions. This also means that the source of value creation depends on the degree of relatedness.

De Wit and Meyer (2005) agree on that the potential for creating synergies depends on the relatedness between businesses. Therefore, can companies can be related in different areas, which have lead to that three categories of relatedness are determined and these are re-source relatedness, product offering relatedness and activity relatedness. Related rere-sources enables leveraging of resources. Product offering relatedness create synergies trough align-ing positions in the market, the more related the products are the more synergies can be re-alized. The value chains of companies are emphasized as important when trying to obtain synergies, the companies will benefit if the relatedness of activities are high.

Rumelt, Salter and Weinhold (in Cording et al., 2002) assert that the implication of the di-versification theory is that related acquisitions should have greater potential for synergy creation than unrelated, which has lead to the “synergy paradox”. That is to say, empirical tests have not been able to prove that related M&A outperform unrelated, in terms of syn-ergy realization. Several researchers, for instance Seth (1990), argue that a related acquisi-tion strategy is in favour concerning the realizaacquisi-tion of cost-based synergies. In addiacquisi-tion, ac-cording to Devos et al. (2004) are operating synergies, leading to cost-based synergies, most likely to be found in focused mergers. A focus strategy is explained by De Wit and Meyer (2005) as an approach to optimize a company within its industry, that is to say, in a related industry.

Nevertheless, still it has not been proved that related M&A outperform unrelated, thereby is the “synergy paradox” still valid. As previously mentioned, related M&A can imply either horizontal or vertical acquisitions and it can be argued that companies do not recognize or consider the higher degree of integration that follows a related acquisition, which in turn can result in certain problems. This can be said to be even more likely in a horizontal merger where a higher degree of integration is required in order to achieve cost-based syn-ergies. For instance, it can appear, as reasoned by Banal-Estanol and Seldeslachts (2004), that the complexity of coordination will increase. Why the coordination complexity would become an aspect in the realization of cost-based synergies could be a result of different

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ac-Theoretical Framework

tivities and resources used by the involved companies. Therefore, it can be argued that the coordination of resources and activities play a vital role in M&A.

3.3

Synergy conceptualization

There is a unanimous line of research arguing that the primary objective in most M&A is the endeavour for synergy (Gaughan, 1996; Mukheertal et al., 2004). Or as Lubatkin (1983) states, if an acquisition is to be done there must be a prospect of synergism. The word it self steams from the Greek words “sun” and “ergon” that literally mean work together (Larsson, 1990). Even though, the word is old Weston (1953) was the first one to provide researchers with the, today well-known, definition of synergy as the situation by which the sum of two parts is larger than their own individual contribution. Ansoff (1965) reformu-lated the concept by illustrating the phenomena with the formula 2+2=5, meaning that the firms combined resources are greater than the sum of its parts. In correspondence, but with an enhanced focus of the actual gains, Sirower (1997, p.6) defines synergy as “In-creases in competitiveness and resulting cash flows beyond that the two companies are ex-pected to accomplish independently”. He argues further by saying that synergy is the sim-ple reason to why shareholders should approve executives to spend shareholders money to buy something that they can by more cheaply. In other words, synergies must represent something that the shareholders can not achieve their self and must mean improvements in performance greater than those already expected by the market. How the synergies actually are achieved can be explained by Ensign (2004) who argues that synergy is achieved when a firm develops strategically important linkages and interrelationships between the activities and skills or know-how of different organizational units. Taking advantage of these link-ages enables the firms to share tangible and intangible resources in order to create synergy and gain a competitive advantage. Iversen (1998) adds to the discussion by stating that syn-ergies are more likely to occur when activities are related on more then one dimension. That is to say, both in physical resources and skills of related businesses. In correspondence Porter (1985, 1996 in Iversen, 1998) argues that synergies are obtained in the interaction between resources and capabilities and can result in competitive advantage. However, competitive advantage is not to come easily. In fact Geneen (1997 in Iversen, 1998) has called synergy the most screwball buzzword of the past decade due to the enormous popu-larity and the elusiveness of the expected gains companies seek to gain.

Nevertheless, when improved performance through synergies is achieved it can be realised through various means. One way of categorising synergies is to divide them into two groups’, financial and operating synergies, where the former can show up as higher cash flows or more often take the form of lower cost of capital and the latter affects the opera-tions of the combined firm and generally show up as cash flow (Damodaran, 2005). These groups can be elaborated further into four different synergy types. Ross, Westerfield and Jordan (2006) argue that synergies can be achieved by lower taxes, revenue enhancements, reduction in capital needs or cost reductions. Devos, Kadapakkam and Krishnamurthy, (2004) as well as Damodaran, 2005 affirm that the first type can be seen as a financial syn-ergy and the subsequent ones as operating synergies.

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Theoretical Framework

3.3.1 Synergy through lower taxes

Ross et al. (2006) state that synergies gained from lower taxes is an influential reason for undertaking many acquisitions. This can in fact be achieved through a mixture of ways.

-Net operating losses

Companies that lose money on a pre-tax basis will not have to pay taxes, which can result in that they end up with tax losses that they can not take advantage of. These losses are re-ferred to as net operating losses. The combined firm can, therefore, gain benefits in terms of a lower tax bill than the two separate firms would have had, assuming that the firms had complementary tax liabilities and net operating losses (Ross et al., 2006).

-Unused debt capacity

Ross et al. (2006) argue that firms that show a low debt ratio can be seen as potential acqui-sition targets. This is because many acquiacqui-sitions are financed with debt, where the addi-tional debt may allow the acquiring firm to deduct interest payments on the newly created debt and, thereby, reduce taxes. In other words, the debt capacity can increase when the firms combine their earnings and cash flows, and by such means become more stable and predictable. This, in turn, allows them to borrow more than they could have done as sepa-rate firms, which creates a tax benefit in terms of lower cost of capital for the combined firm (Damodaran, 2005).

-Surplus funds

Damodaran, (2005) argues that a firm with excess cash, but limited project opportunities has the possibility to acquire a firm with potential high-return projects and limited cash and, thereby, yield a payoff in terms of higher value for the combined firm. This increase in value comes from the projects that can be taken with the excess cash that otherwise would not have been taken, but also through lower taxes. This is because a firm with excess funds in terms of free cash flow can be said to have the option to purchase fixed income securi-ties but more negatively from a tax and law point of view pay dividends or repurchase its own shares. Paying dividends will increase the income tax paid by some investors and stock repurchase is not a legal option if the sole purpose is to avoid taxes. However, buying shares in another firm will avoid these problems and possibly result in untaxed dividends paid to the acquirer (Ross et al., 2006).

-Asset write-ups

Ross et al. (2006) affirm that if the acquired firm’s assets are revalued to a higher value, tax deductions for depreciation will be a benefit, though this benefit often is offset by taxes due on the write-up.

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Theoretical Framework

3.3.2 Synergy through revenue enhancement

One additional very important reason for M&A outlined by Ross et al. (2006) is the poten-tial increase in revenue. However, it can be important to mention that these synergies re-quire a substantial amount of time before they can be realised (Harding & Rovert, 2004; Frankel, 2005). The former authors also argue that the probability of revenue synergies is often much lower than other synergy types, which is supported by a number of surveys that show that firms often fail or at least tend to overestimate these synergies.

-Marketing gains

It is commonly claimed that combined firms can generate higher operating revenues from improved marketing. Examples of marketing improvement areas could be a previously in-effective media programming and advertising effort, a weak existing distribution network or an unbalanced product mix (Ross et al., 2006). An additional and more precise example stated by Damodaran (2005) is a consumer product firm, which acquires an emerging mar-ket firm, with an established distribution network and brand name recognition, in order to use these strengths to increase sales of its own products.

-Market power

Another mean to increase revenue in M&A is to increase market share and market power (Ross et al., 2006). Damodaran (2005) states that it is the resulting increase in pricing power that will result in the higher margins and operating income. Therefore, this synergy type is more likely to show up in mergers of firms in the same business and more likely to yield benefits when there are relatively few firms in the business. The benefits gained here can be explained by looking at the monopoly theory discussed by Trautwein (1990).

-Strategic benefits

Some firms can gain strategic advantage through acquisitions by entering a new industry to exploit perceived opportunities. For example, a firm can use its core competence to start to produce products that build on the same technique in a new industry or take advantage of new knowledge in order to develop and extend the existing product line (Ross et al., 2006).

3.3.3 Synergy through reduction in capital needs

This synergy steams from the reduced investment need in working capital and fixed assets to maintain an efficient level of operating activity. An example could be an acquirer that can advantage of the target firm’s over capacity manufacturing facilities. By doing so the acquirer can gain excess to capacity cheaper than if the firm was the build up the facility it self and, this, reduce its investment needs. Additionally, the acquirer may be able to handle existing assets more effectively by improving the efficient handling of cash, accounts

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re-Theoretical Framework

ceivable and inventory (Ross et al., 2006). In addition, Iversen (1998) affirms that reducing the necessary level of investment can be obtained by sharing uncongestioned resources, but sharing physical resources will, however, result in congestion since these resources have fixed capacity level and firms can not expand their assets stocks instantly.

3.3.4 Synergy through cost reduction

Larsson (1990) argues that cost synergies arise when the firms manage to integrate or at least combine the firms’ resources or activities. Anand and Singh (in Cording et al., 2002) argue that synergies arising from cost-reduction actions are considered more easily captured than those related to revenue increases. This is, however, not a unified view since it re-quires effective coordination in order to actually capture the savings and not loosing them in terms of dysfunctions (Larsson, 1990). Nevertheless, Ross et al. (2006), Mukherjee et al. (2004) and Habeck et al. (2000) argue that the most common or basic reason for merging is to achieve greater operating efficiency and that this can be achieved from a number of ways.

-Economies of scale

Economies of scale relate to the average cost per unit of produced goods and services and are gained when the per-unit cost of production decreases as the level of production in-creases (Ross et al., 2006). Capron (1999) states that production linked economies of scale are often viewed as the main driver of cost cutting. Gaughan (1996) agrees and argue that this is the case since manufacturing firms often operate at a high per-unit cost for low lev-els of output. In similarity, Cabolis, Manasakis and Petrakis (n.d.) argue that in these types of mergers, rationalization is likely to come from reallocation of production. That is to say, cost savings from restructure production across firms, without increasing the joint techno-logical capabilities. However, economies of scale can also be achieved in other functional areas, through the same means, such as R&D, distribution, sales and administrative activi-ties by spreading fixed costs over a higher total volume.

In practice, scale economies are achieved by using the resource capacity more efficiently, which can be done by continuing using the existing resource, but more efficiently or elimi-nating duplications of resources (Capron, 1990). Dutz (1989), therefore, argues that achiev-ing economies of scale through acquisition is more likely in industries plagues by overca-pacity since the existence of idle assets provides the possibility to rationalisation and rear-ranging the remaining assets into a more efficient recombination. Furthermore, and as will be later outlined, this type of cost synergy is according to several authors, more likely to occur in M&A where the two firms operate in similar businesses and at the same levels in the supply chains.

Since economies of scale are associated with a higher volume, cost reductions can also arise from learning economies (Iversen, 1998). These two concepts are very similar since they both refer to the greater volume activity and can, therefore, be viewed under the same heading. Nevertheless, the main difference is that learning economies consist of declining unit costs brought about as a function of volume accumulated over time, whereas scale economies refer to the decline of unit costs as a function of the rate of output.

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Further-Theoretical Framework

cost reductions from exploiting non-tradable capacity (Iversen, 1998). Langlois (in Iversen, 1998) has identified three types of scale economies that have to do with sharing of knowl-edge in multiple uses. Firstly, division of labour, explained as a better organisation, which avoid set-up-costs involved in changing tasks. Next, larger more specialised machines, which in actuality are more dedicated machines, rather than specialised. Lastly, fixed fac-tors, that causes scale economies since fixed costs are diluted by an increased number of uses. The knowledge that is shared is thus knowledge of the extent of the market, meaning that investments in better organisation, dedicated machinery and other fixed factors require knowledge of sufficient market knowledge for a firm to undertake them. In correspon-dence, Gaughan (1996) affirms that a higher output level contribute to increased specialisa-tion of labour and management, which would not have been possible at a lower output level. He argues further that this improvement continues for a specific range of output, af-ter which per unit cost may actually arise due to diseconomies of scale. That is to say, when the firm experience higher costs and other problems as the result of coordinating a larger operational scale. Figure 3 depicts the relationship between economies and diseconomies of scale, and illustrates that the optimal level of output occurs where the per-unit costs are at a minimum. A merger with, for example a competitor will most likely increase the output level, which could result in a lower average cost.

Figure 3, Economies of scale and the optimal size (Ross et al., 2006)

Lastly, Scherer (in Capron, 1999) asserts that aiming for economies of scale may also simul-taneously serve a market power objective. This is also true according Dutz (1989) who states that market power motives often interwine with scale-based motives when acquiring a company within the same business area. The author, therefore, argues that market power may, thus not only lead up to increased revenues suggested by Ross et al. (2006), but also reduced costs due to the improved negotiation position followed by the increased market power. That is to say, the combined firm will find it easier to press prices as the purchased volume increases.

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Theoretical Framework

-Economies of scope

Capron (1999) states that cost reductions can also be achieved through economies of scope, even though this synergy type is perhaps more associated with revenue enhance-ments. Scope economies can, however, be hard to distinguish from economies of scale, which is pointed out by Teece (in Iversen, 1998) who argues that any asset that yield scale economies, can similarly provide the foundation for scope economies if it serves as an in-put into two or more production processes. Nevertheless, scope economies differ from scale advantages when they take place from a single activity that results in the production of two or more outputs (Baumol, Panzar & Willig in Iversen, 1998). Or in other words, the ability of a firm to utilize one set of inputs to provide a broader set of products and ser-vices (Gaughan, 1996). Capron (1990) agrees that the cost savings arise when the firm in-creases the variety of the activities performed and argues further that this can occur when the shared factor of production is perfectly indivisible, so that the manufacture of goods leaves excess capacity in some stages of production. The author argues further that the ex-ploitation of economies of scale and scope through acquisition can be achieved through ei-ther asset redeployment or asset divestiture, and that the latter is the most common way to achieve such benefits.

-Economies of vertical integration

This type of synergy, also referred to as operating economies, steams from the facilitated coordination of closely related operating activities between the two firms (Ross et al., 2006). In order to achieve this level of coordination it is often necessary to gain control and physically integrate key activities (De wit & Meyer, 2005). In correspondence, Porter (1980) asserts that cost savings can arise due to the internal buying and selling relationship implied by the vertical integration and, thus overcome some mobility barriers, such as access to dis-tribution channels and raw materials. In addition, Williamson (in De Wit & Meyer, 2005) argues that transaction costs can be avoided by reducing the need for contracting costs and search costs. Lastly, lower costs can be achieved through increased bargaining power and learning curve advantages (De wit & Meyer, 2005).

-Complementary resources

Here, cost reductions arise when firms acquire others to make better use of existing re-sources or to provide the missing ingredient for success (Ross et al., 2006). In correspon-dence, Ensign (2004) argues that complementary effects result when the aim is to improve capacity utilization. Combining elements to achieve better utilization can be realized when an activity is not used with equal intensity over a production or service delivery cycle, when there is a gap between the optimal size of the firm’s resources and the volume of operation in a single market or when the level of resources needed to operate in a given market fluc-tuates.

3.4

Generic resource based view (RBV)

As been understood from the section above and the cost-based synergies described, is the underlying thought that these synergies are generated through integration of resources and activities possessed by either the acquirer or the acquired firm. This reasoning is supported by several authors, there among, Porter (1985) who asserts that synergies lead to

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competi-Theoretical Framework

(1985) argues further that also an interaction between resources and capabilities will en-hance the competitive advantages. In concurrence Chatterjee and Bourgeois (2002) affirm that acquisition success is a result of to what degree companies succeed in the post acquisi-tion process concerning the interacacquisi-tion of resources. Therefore, will these interpretaacquisi-tions undeviating lead us to the resource based theory and, thereby will this thesis take a resource based view (RBV) on the emergence and realization of cost-based synergies. This corre-sponds to Cording et al. (2002), who argue that the RBV has the potential to increase and facilitate the understanding of the issues, regarding identification and integration of re-sources under the M&A process.

The resource based theory emphasizes how a company can benefit in terms of a develop-ment of competitive advantage due to its unique resources. Resources can be any assets, tangible or intangible, which in turn can give guidelines of what strategy to follow in order to achieve an increased efficiency (Pringle & Kroll, 1997). Tangible resources are means that can be physically observed and are seen as the hardware of the organization. The op-posite, intangible resource are conceived as the software of the organization, that is to say, people and knowledge. Generally, tangible resources need to be purchased, whereas intan-gible resources are developed over a period of time (De Wit & Meyer, 2005). Another way of classifying resources is done by Barney (1991), who divide them into physical, human and organizational, where physical resources are technology, plant and equipment, and ac-cess to suppliers, that is to say, tangible resources. Human resources are related to intangi-ble resources and include experience, relationships and workers. Finally, organizational re-sources are, for instance, coordinating systems, informal relations within the company and with other organisations in its environment (Barney, 1991). These resources are to a large extent conceptualized as intangible.

The discussion concerning resources in relation to M&A is confirmed by Capron (1999) who asserts that there is a significant risk of damaging the M&A performance, which in-cludes the capturing of synergies, if the resources involved are not considered and properly used. Moreover, Ensign (2004) insists on that companies do need to consider resources explicitly in order to achieve synergy and competitive advantage. This implies that compa-nies have to combine resources in different areas and activities. Furthermore, it is empha-sized that the RBV, as a strategic planning tool, can help companies to identify potential opportunities for improvement where the current resources and capabilities are not fully utilized, in other words to identify unused capacity. More precise, according to Ensign (2004), it is possible to use the RBV in order to determine what resources that could and should be shared.

The view on resources in a context of M&A does not only imply the identification of a company’s specific resources, in addition, it also considers the integration and post integra-tion activities of resources. However, first of all, before a company can start to discuss how different resources can be combined there have to be resources available. That is to say, the company needs to undertake a M&A by following a process in order to obtain the best per-formance.

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Theoretical Framework

3.5

The M&A process

M&A is a complicated set of actions that will continue over a considerable period of time. These actions that are carried out, in different phases, will here be pointed out as the M&A process. Three different phases can be distinguished from the process, thus not mutually exclusive, namely strategic integration planning, integration, and post integration.

Strategic integration planning can be explained as the phase where the acquiring company agree upon what to look for, and where, regarding the achievement of cost-based synergies. This process implies valuation of a significant amount of information that has been gath-ered concerning the target company. That is to say, as affirmed by Appelbaum, Gandell, Yortis, Proper and Jobin (2000), this is solely a preparatory phase, but of course of signifi-cant importance.

When it comes to the actual integration phase the discussion concerns to what direction and to what degree the integration should be carried out and how to integrate the types of interactions. In addition, the integration phase can be considered as operative comparing to the one above. This implies an increased importance of managers’ performance, which is corresponding to the reasoning by Appelbaum et al. (2000) who view this as a change and further argue that managers need to be problem solvers. The integration phase considers the cost of restructuring the companies that is required in order to actually make it possible to obtain the planned cost-based synergies.

The work in the post integration phase concerns the emergence and the identification of possible dysfunctions or negative synergies that arise due to the faulty exploitation of re-sources. These dysfunctions will most likely have a severe impact on the cost-based synergy realization.

3.5.1 Strategic integration planning

Frankel (2005) argues that integration planning is all about scoping out the nature of both firms, and identify where and how they should be integrated. This process has two distinct steps, where the first one deals with the importance of understanding each business, how it works and what its key components are. The second step argues that the firm must know exactly how to integrate the businesses. However, Frankel (2005) together with many other text book authors, fail to provide the reader with a framework for how this can and should be achieved.

As previously been stated, a thorough understanding of a firm’s resources is of significant sense in order to understand how value can be captured when activities and skills or know-how are shared between organizations (Ensign, 2004). Or more precise, it is the strategi-cally important linkages and interrelationships between the activities and skills or know-how in specific organizational units that have the potential to create synergies. In similarity, Ensign (1998) argues that just comparing two business units as a whole will not tap the whole potential of synergy realization. Therefore, in order to identify possibilities for re-source sharing a firm should adopt a research based approach to strategic planning.

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Theoretical Framework

cant sense to look for unused or under-utilized resources, which utilization can be im-proved by combining an activity or skill. The author argues further that especially the unique resources are important since they have the potential to lead to a competitive ad-vantage. Furthermore, a resource based approach can help in determining the direction in which resources should be shared. That is to say, whether the acquirer’s or the target firm’s resources should be exploited, depending on availability, capability and competence. In ad-dition to the performance benefits that can be achieved, a resource based approach can also help in recognizing the limitations that may be the result from sharing. In general, these limitations are often related to the unsuitability of resource sharing opportunities and the lack of sufficient managerial capacity that is needed in order to cope with the extended coordination activities. Additionally, Wiklund and Karlsson (in Iversen, 1998) argue that a resource perspective is important in order to determine the limitations in terms of flexibil-ity and specificflexibil-ity of resources. Flexibilflexibil-ity refers to the abilflexibil-ity to change input factors, change the area of application or change the way the actual conversation process is under-taken. Specificity, on the other hand, deals with the asset’s degree of dedication to a par-ticular use, either the degree of efficiency in the production of other resources or in serving other market segments. Concerning the latter, Ensign (2004) argues that intangible re-sources tend to be more flexible and have less specificity in relation to tangible rere-sources.

3.5.1.1 Porters value chain, a mean to identify resources

Both tangible and intangible resources have according to Gaughan (1996), Ensign (2004) and Porter (1985) the potential to result in synergies from for example, cost reductions. However, the question on how to find these resources have up to now remained unan-swered. This question mark can now be straighten by looking closer at the tool that Porter (1985) provided researches and practitioners with. That is to say, the generic value chain. In fact Porter (1985) argues that the value chain should act as a starting point when analyzing both tangible and intangible interrelationship. This is also true according to Ensign (1998) and Ensign (2004) who argue that the value chain serves as a great analyzing tool when searching for interrelationships in merging firms. Porter (1985) argues that this is the case since it facilitates for firms to, for example, separate and isolate activities that represent a significant or growing proportion of costs.

As can be seen in figure 4, the value chain is divided into a number of different activities. This is done since the only way to truly understand a firm is to look at its many discrete and distinctive activities. In fact, a firm’s value chain and the way it performs individual ac-tivities are a reflection of its history, its strategy and the underlying economics of the activi-ties themselves.

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Theoretical Framework

Figure 4, The generic value chain (Porter, 1985).

These above activities can be further divided into two types, namely primary activities and support activities.

-Primary activities,

Inbound logistics: the receiving and warehousing of raw materials, and their distribution to manufacturers as they are required.

Operations: the process of transforming inputs to finished products and services. Outbound logistics: the warehousing and distribution of finished goods.

Marketing and sales: the identification of customer needs and the generation of sales. Service: the support to customers after the products and services have been sold to them.

-These primary activities are linked within the firm with support activities, Firm infrastructure: organizational structure, control systems and company culture.

Human resource management: employee recruiting, hiring, training, development and competi-tion.

Technology development: technologies to support value-creating activities. Procurement: purchasing inputs such as materials, supplies, and equipment.

These activities are then used in order to facilitate the identification process of interrela-tionships that have the potential to generate synergies. In terms of tangible interrelation-ships, Porter (1985) affirms that a business unit can potentially share any value activity with another business unit, including primary and secondary activities. The author argues further

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