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Exhibit 17.7 Disaster deal #3: AT&T/NCR. As you read about these dismal transactions, can you speculate on the reasons for failure? On their faces, they seemed like strategically sound transactions. While one might question AT&T‟s push into personal computers, the other two deals were simple horizontal mergers (i.e., an extension of the existing business into new product lines or geographic markets). In hindsight, each deal failed for different reasons, but there are some common issues. The lessons learned are critical for all managers considering growth by acquisition. We now examine these colossal failures in more detail. In the Daimler/Chrysler merger, there were culture issues from the start, and it quickly became apparent that co-CEOs were not the way to manage a $130 billion global giant. Chrysler CEO Robert Eaton left quietly at the beginning of 2000, and there were other departures of high-level American executives. Morale suffered as employees in the United States realized that the so-called merger of
equals was taking on a distinctive German flavor, and in November 2000 the last remaining Chrysler executive, James Holden, the company‟s U.S. president, was fired. Rather than deal with these issues head-on, Daimler CEO Jürgen Schrempp took a hands-off approach as Chrysler‟s operations slowly spiraled downward. The company lost several top designers, delaying new product introductions and leaving Chrysler with an aging line of cars at a time when its competitors were firing on all cylinders. The delay in merging operations meant cost savings were smaller than anticipated, as were the benefits from sharing technology. Finally, analysts suggested that Daimler paid top dollar for Chrysler at a time when the U.S. automobile industry was riding a wave of unprecedented economic prosperity. As car sales began to sag at the end of 2000, all three U.S. manufacturers were facing excess capacity and offering huge incentives to move vehicles. This was not the ideal environment for quickly restructuring Chrysler‟s troubled operations, and Daimler was facing a 35% drop in projected operating profit between 1998 and 2001. Several shared-platform vehicles were introduced in 2004, including the Crossfire, which combined German engineering with American design. However, too much damage had already occurred and a single car was not going to fix it. DaimlerChrysler continued to lose money until 2007, when Daimler had finally had enough and sold 80% of Chrysler to Cerberus Capital Management. Cerberus could not turn Chrysler around, and in early 2009, the once-proud company filed for bankruptcy protection. What doomed the Quaker/Snapple deal? One factor was haste. Quaker was so worried about becoming a takeover target in the rapidly consolidating food industry that it ignored evidence of slowing growth and decreasing profitability at Snapple. The market‟s concern was reflected in Quaker‟s stock price drop of 10% on the acquisition announcement. In spite of this, Quaker‟s managers proceeded, pushing the deal through on the promise that Snapple would be the beverage industry‟s next Gatorade. This claim unfortunately ignored the realities on the ground: Snapple had onerous contracts with its bottlers, fading marketing programs, and a distribution system that could not support a national brand. There was also a major difference between Snapple‟s quirky, offbeat corporate culture and the more structured environment at Quaker. Most important, Quaker failed to account for the possible entrance of Coca-Cola and Pepsi into the ready-to-drink tea segment—and there were few barriers to entry—which ultimately increased competition and killed margins. In this case, Quaker‟s management was guilty of two mistakes: failure to analyze Snapple‟s products, markets, and competition correctly and overconfidence in their ability to deal with the problems. Either way, their lapses cost Quaker‟s shareholders billions. Analysts believe that the merger between AT&T and NCR failed due to managerial hubris, overpayment, and a poor understanding of NCR‟s products and markets. A clash of culture between the two firms proved to be the final nail in the coffin. In 1990 AT&T‟s research division, Bell Labs, was one of the world‟s premier laboratories. With seven Nobel Prizes and countless patents to its name, it was where the transistor and the UNIX operating system had been invented. AT&T‟s executives mistakenly believed that this research prowess and $20 billion of annual long-distance telephone revenues, along with the NCR acquisition, would guarantee the company‟s success in the PC business. They were confident enough to increase their original offer price by $1.4 billion. The problem was that by this time, PCs had become a commodity and were being assembled at low cost around the world using off-the-shelf components. Unlike the microprocessor and software innovations of Intel and Microsoft, AT&T‟s research skills held little profit potential for the PC business. AT&T hoped to use NCR‟s global operations to expand its core telecom business. But NCR‟s strengths were in developed countries, while the fastest-growing markets for communications
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
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Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
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Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
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More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
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For most start-up businesses, howev
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form, even at the risk of some unli
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likely that our consultants will be
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Thus, the corporation and LLC, with
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It is not possible to fully describ
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usiness corporation for all purpose
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a cash-basis taxpayer to be taxed a
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The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
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paying for the privilege. If the st
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The second tax scenario attaches to
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include that nullity in his taxable
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then the capital gain to be taxed h
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Most relevant to Morris is Section
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To begin with, the ESOP will have t
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general partner of a limited partne
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small businesses) is also subject t
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oth Lisa and Brad would be free to
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Assume that a limited liability com
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corporations, and had been audited
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There is plenty of blame from the c
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• An important study about top ma
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• The federal government made at
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$79.7 million for other services, a
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Budgets offer a variety of benefits
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determine the impact of specific pr
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Exhibit 11.2 Budget variance report
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udget, we just add more to it next
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income statement. The financial bud
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For a manufacturing company, cost o
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C&G‟s Gift Shop has a policy to m
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Meeting cash obligations as they co
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was unusually low, say, due to the
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A fixed budget, sometimes called a
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A large part of the budget selling
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• Centralized resource allocation
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Merewitz, Leonard, and Stephen H. S
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This chapter starts with a discussi
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Interestingly the numbers for quart
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Exhibit 12.4 Scenarion analysis.
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Pitfalls Although this analytic tec
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Exhibit 12.6 Variable cost element
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Variable Cost as a Function of Outp
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If scenario 2 yields a lower profit
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Microsoft certainly does not price
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If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
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Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
Page 427 and 428: Notice that the put option payoff r
Page 429 and 430: Bank, owns a large block of NASDAQ
Page 431 and 432: can be tailored so that the money r
Page 433 and 434: Finally, the last step is to choose
Page 435: 3 Fischer Black, who co-invented th
Page 439 and 440: not include assets that the firm ha
Page 441 and 442: Thus, a business valuation will usu
Page 443 and 444: Negative • Acme is highly depende
Page 445 and 446: Exhibit 16.3 Acme Manufacturing, In
Page 447 and 448: Profitability ratios reflect the re
Page 449 and 450: When we talk about the value of a b
Page 451 and 452: This example illustrates that with
Page 453 and 454: Income Approach: Discounted Cash Fl
Page 455 and 456: Exhibit 16.5 Acme Manufacturing, In
Page 457 and 458: Victoria explains that the second p
Page 459 and 460: Victoria analyzes Acme‟s audited
Page 461 and 462: In summary, the discounted cash flo
Page 463 and 464: Adjustment for Illiquidity As previ
Page 465 and 466: 51% position sells for a higher pri
Page 467 and 468: examples. The proper application of
Page 471 and 472: The subject of this chapter is grow
Page 473 and 474: Finally, an acquisition can be effe
Page 475 and 476: M&A activity has been the focus of
Page 477: companies continue to make the same
Page 481 and 482: Anatomy of a Successful Acquirer: T
Page 483 and 484: employees kept their original jobs
Page 485 and 486: where ΔCF t is the incremental cas
Page 487 and 488: where it‟s ultimately buried. Suc
Page 489 and 490: The following example summarizes th
Page 491 and 492: make sure that you are at least awa
Page 493 and 494: acquisition, there is no immediate
Page 495 and 496: its vascular business, which was so
Page 497 and 498: While all employees should be part
Page 499 and 500: makes strategic and financial sense
Page 501 and 502: Bhagat, Sanjai, Ming Dong, David Hi
Page 505 and 506: The 2008 financial crisis underscor
Page 507 and 508: Source: Plunkett’s Outsourcing &
Page 509 and 510: To summarize: Trends • Large numb
Page 511 and 512: Companies are becoming increasingly
Page 513 and 514: What steps should a company follow
Page 515 and 516: • Results of meetings with vendor
Page 517 and 518: • Breach of contract and remedies
Page 519 and 520: Assuming the project or service rev
Page 521 and 522: The answer is: profits. The company
Page 523: 19 Information Technology and You D
Page 527 and 528: People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
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On laptop computers and PDAs, the s
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Operating System An operating syste
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the spreadsheet software together w
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Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
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There are several different approac
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One of the major attractions of the
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While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
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While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
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Exhibit 20.5 illustrates a differen
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Productivity Tools Workers expect t
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Client-server technology is based o
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Today, most programmers write in C+
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Exhibit 20.6 is a model of a typica
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No treatment of relational database
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Online analytical processing (OLAP)
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server) and the rest on the users
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the other operational departments w
Page 587:
The world of business has changed d
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Chaffey, Dave, E-Commerce and E-Com
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According to the results of the sur
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understand the financial situation
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MBA graduates who are hoping to ent
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Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
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MBA student: “Well, I go to [Grea
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Aiming for Your Goals For career ch
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Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
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like, or moving ahead in the compan
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Accrual accounting: An accounting m
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Cash flow: Cash that is spent or re
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Distribution channel: A chain of in
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Goodwill: As it relates to valuatio
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Management’s discussion and analy
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Ordinary annuity: An annuity that p
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Securities and Exchange Commission
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Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
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Application systems ARPAnet Arthur
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Bell Labs Benefit measurement Beta
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goal orientation legal and contract
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segment information note share-base
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process of purpose of real world us
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uy/build decision capital budget in
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written resume Careers in corporate
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Cell Center for Research in Securit
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Compensation and ownership Competit
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Corporate culture Corporate debt in
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profit planning from an internal pe
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Data Data access and OLAP Database
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Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
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Hypertext links Hypertext markup la
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Information technology and the firm
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International Accounting Standards
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Last-in-first out (LIFO) vs. curren
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Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
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Motivation to outsource Multiple IR
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Nonrecurring items defined disclosu
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Operational complexity Operational
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Outsourcing metrics Overhead Over-t
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Personal end game Personal expense
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Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
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Summarizing nonrecurring items and
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acquisition the business dividends
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Timmon‟s Model of Opportunity Rec
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U.S. immigration quotas U.S. Intern
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discounting with discount rate form
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