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MERGERS AND ACQUISITIONS
The strategy of M&A is closely related to the previous topic. It is, in fact, a main means to achieve diversification. There are subtle differences be- tween the terms mergers, acquisitions, and takeovers. According to Hitt et al. (2001), strategically, a merger is a balanced integration of two firms’ operations to combine resources and capabilities for creating a stronger
 
competitive advantage, whereas an acquisition is the purchase of a tar- get firm as a subsidiary business with the intent of enhancing a core competency of the acquirer. When the target firm did not solicit the ac- quisition, it is called a takeover.
Many rationales have been suggested as the drivers for M&A. Assum- ing a rational managerial approach, thus excluding the motives of “em- pire building” and “risk reduction” for maximizing a manager’s personal utility, a primary reason for M&A might be to achieve greater “market power” (Haspeslagh, 1999). Market power exists when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of the competitors (Hitt et al., 2001). Many media companies may have attractive core competen- cies such as the ownership of valuable content or talents and distribution outlets, but lack the size to benefit from these unique resources and capa- bilities. M&As offer an opportunity to achieve greater market power through the increase of firm size (e.g., mergers of MSOs). An attempt to reduce barriers to entry might be another driver for the formation of M&As. For example, market barriers may arise when well-established competitors are able to enjoy significant scale economies and/or brand loyalty. Facing these barriers, a new entrant may find the acquisition of an established company to be more effective than an attempt to enter the market as a competitor offering a good or service that is unfamiliar to current buyers (Hitt et al., 2001; e.g., GE’s acquisition of NBC). In addi- tion, because developing new products internally and successfully intro- ducing them into the marketplace often requires significant investments of a firm’s resources and makes it difficult to earn a profitable return quickly (Shank & Govindarajan, 1992), M&As are another means through which a firm can gain access to new products and to current products that are new to the firm. Compared to internal development processes, M&As provide a more predictable return and faster market en- try (McCardle & Viswanathan, 1994; Rappaport & Sirower, 1999) (e.g., the merger between AOL and Time Warner gave Time Warner immediate access to many Internet subscribers). Again, because it is harder for com- panies to develop products that differ from their current lines for new geographical markets in which they lack experience, a firm is more likely to use M&A rather than internal development as a strategy when engag- ing in international product diversification (Hitt, Hoskisson, & Ireland, 1990; Hitt, Hoskisson, Ireland, & J. S. Harrison, 1991; e.g., News Corp.’s acquisition of DirecTV via Hughes gave News Corp. a presence in the U.S. direct broadcast satellite [DBS] market). Finally, a firm may use M&A as a way to restrict its dependence on a single or a few products or markets, thus reducing its reliance on the financial performance of individual sec- tors (e.g., NBC’s merger with Universal gave NBC the important access to a major studio).
Various issues have been pointed out as potential problems for the
strategies of mergers and acquisitions. Hitt et al. (2001) specifically identified seven pitfalls to watch for: integration difficulties, inadequate
 
evaluation of target firms, large or extraordinary debt, inability to achieve synergy, overdiversification, excessive focus on acquisitions by management, and oversized corporations. The high-profile restructur- ing efforts of AOL Time Warner and AT&T illustrate some of these post-M&A challenges.