Network Approach to Mergers & Acquisitions

Today's New York Times has an article, "U.S. Merger Activity in '13 Back at the Trillion-Dollar Level," by David Gelles, which immediately caught my attention.

My supernetwork research group has been working on modeling potential synergies associated with Mergers & Acquisitions (M&As) using networks in order to ascertain whether a pending deal may be worthwhile or costly.

The Times article also included a great graphic which I have reposted below:

First, you may notice that many of the industries that were especially active with respect to M&As in 2013 are actually network industries (wireless, transportation and infrastructure, power, telecommunications, and I would argue even banks as financial networks). Hence, it makes (alot of) sense that any quantification of possible synergies associated with mergers and acquisitions should be network-based.

Interestingly, a few weeks ago, I was interviewed for a piece by Mark Huffman on cardhub.com in its Ask the Experts series on the topic: Should American Airline, US Airways Merger Be Blocked? The merger did go through.

The comments on the Times article by readers were also quite good and several alluded to criteria associated with M&As (and not just having the lawyers earn $$$ from the deals).

In our work on M&As, we have pursued not only criteria of (possible) cost reduction but also risk reduction as well as environmental impacts. Some of our papers are noted below with associated links: A System-Optimization Perspective for Supply Chain Network Integration: The Horizontal Merger Case, Anna Nagurney, Transportation Research E 45: (2009) pp 1-15.

Environmental and Cost Synergy in Supply Chain Network Integration in Mergers and Acquisitions, Anna Nagurney and Trisha Woolley, in Sustainable Energy and Transportation Systems, Proceedings of the 19th International Conference on Multiple Criteria Decision Making, Lecture Notes in Economics and Mathematical Systems, M. Ehrgott, B. Naujoks, T. Stewart, and J. Wallenius, Editors, Springer, Berlin, Germany (2010) pp 51-78.

Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration, Zugang Liu and Anna Nagurney, Journal of Financial Decision Making 7(2): (2011) pp 1-18.

I also wrote on the merger paradox in the paper below:
Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights into the Merger Paradox: A Supply Chain Network Perspective, Computational Management Science 7: (2010) pp 377-401.

Computational Social Science and Supply Chain Networks

I had a great time giving a seminar yesterday on Grand Challenges and Opportunities in Supply Chain Networks: From Analysis to Design in the Computational Social Science Initiative Seminar Series at UMass Amherst.  The presentation took place on the 9th floor of the Campus Center in the middle of the campus and the view was fabulous on a bright, sunny, and actually warm day in February.

Yahoo is giving financial support for the seminar series and it was nice that lunch was provided by UMass catering.

Several of my doctoral students from the Isenberg School of Management came and it was great to see sociologists, computer scientists, and engineers in the audience, as well.

I focused on the importance of capturing the behaviors of the decision-makers in the context of supply chains and also overviewed the Braess paradox (classic (1968) version) and showed photos of Professor Braess visiting the Isenberg School, after our translation of his paper from German to English, along with Tina Wakolbinger, appeared in Transportation Science.  I showed how we used evolutionary variational inequalities to demonstrate how the Braess paradox only occurred on the classic Braess network for a range of demands. This was work that I did while I was  a 2005-2006 Fellow at the Radcliffe Institute for Advanced Study at Harvard University. My co-authors on this paper were Professor David Parkes of Harvard and Professor Patrizia Daniele of the University of Catania. The paper appeared in Computational Management Science. 

In addition, I had to mention our work on the integration of social networks with supply chains and with financial networks, as well as the evolution of the product flows, relationship levels, and prices over time. This was also work done with Tina Wakolbinger.


Coincidentally, Tina Wakolbinger, who is now a Full Professor (I am so proud of my former students)  is flying into Boston today to take part in the Dynamics of Disasters symposium that I organized for the AAAS meeting that is taking place in Boston, February 14-18, 2013. Our symposium will be at the Hynes Center tomorrow afternoon and I can hardly wait -- the panelists and discussants are simply superb -- Professor David McLaughlin, Professor Laura McLay, and Professor Panos M. Pardalos, with Professors Tina Wakolbinger and Jose Holquin-Veras as discussants.

The questions from the audience at my seminar were really good (Thank you!) and ranged from questions on existence and uniqueness of solutions and multiple equilibria as well as stability analysis, ongoing and future research, as well as how the methodologies that we have been instrumental in co-developing (projected dynamical systems, for example) have migrated to different disciplines, including neuroscience. I had highlighted the wide range of supply chains that we had worked on from electric power ones with empirical results for New England to humanitarian and healthcare ones for critical needs products and pharmaceutical products, respectively, and blood supply chains.  I even spoke on network synergies and assessment in the context of mergers and acquisitions. M&As have been big news lately with the American Airlines and USAir merger (still needs approval by regulators), Berkshire Hathaway and Heinz -- breaking related news on this one, and others, including Dell.

I was also asked about our work on supply chains in nature, so I had the opportunity to speak on work that we have done with Professor Christian Mullon of France on the network economics of ecological systems with data from marine ecosystems. I mentioned his forthcoming book, which he graciously forwarded a recent draft of to me. The book, which should be available this July, is called Network Economics of Marine Ecosystems and their Exploitation,  He acknowledges me in the book for "inspiration." To see network economics, variational inequalities, and projected dynamical systems being utilized in this novel application domain is simply thrilling.

I concluded my lecture by showing by latest book, Networks Against Time: Supply Chain Analytics for Perishable Products, hardcopies of which had arrived on Valentine's Day, to the audience.

Special thanks to Professors Ryan Acton and James Kitts for the great hosting!

Risk Reduction and Cost Synergy via Supply Chain Network Integration

Nothing like waking up and having a message from a publisher that the galleys of your paper are ready for proofing.

Plus, when there are no changes needed, and the paper looks great, it makes it all even sweeter.

This morning, my co-author, Dr. Zugang "Leo" Liu, and I were delighted to experience the above and our paper, Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration, is the lead paper in the December 2011 issue of the Journal of Financial Decision Making and appears in volume 7(2), (2011), pp 1-18.

I had blogged about our research on which this paper is based in a post: Supply Chain Risk, Mergers and Acquisitions, and Synergy.

In this paper, we developed a network model that captures the costs and the risks associated not only with the production, transportation, and storage activities in supply chains, but also with the merger / acquisition (M&A) itself. The framework allows one to estimate the expected total cost and the total risk of the supply chains before and after the merger. In addition, we provided three synergy measures that can assist decision-makers in the evaluation of potential gains of M&As from different perspectives. The measures are: the expected total cost synergy, the absolute risk synergy, and the relative risk synergy.

The first measure quantifies the expected total cost savings obtained by the merger; the second measure represents the reduction of the absolute risk achieved through the merger, and the third measure reflects the reduction of the relative risk through the merger.

Our results provide interesting managerial insights for executives who are faced with M&A decisions. The first set of examples showed that, if the expected total costs and the risks of the merger are negligible, both the total cost and the total risk would be reduced through the merger. In addition, the risk reduction achieved through the merger was more prominent when the uncertainty of link costs was higher. Our second set of examples showed that the cost and the risk of merger could have a significant impact on the total cost and the total risk of the post-merger firm, and should be carefully evaluated. Our examples also demonstrated that whether a merger makes sense economically may depend on the priority concerns of the decision-makers, and on the measures used to evaluate the gains. For instance, a merger that could not lower the expected total cost might still be able to reduce the total risk, and, hence, may be considered beneficial to the firms' stakeholders.

With all the articles appearing recently in The Wall Street Journal on Mergers & Acquisitions (horizontal as well as vertical) it is exciting to be doing research that is both interesting and timely and that includes networks applied in new ways!

High Tech Mergers Are HOT Again

USAToday.com is reporting that high tech mergers, both in number and in value, are on the increase. Especially attractive, as acquisitions, are firms associated with mobile computing, cloud computing, and search engines. In the past year, SAP, IBM, Apple, and Google have acquired firms and Oracle's success may be due, in part, to its earlier wise acquisitions.

Interestingly, the article also notes that the Chinese are eager to acquire firms. One of the major drivers in mergers and acquisitions (M&A) this time around is the desire to obtain access to new global markets, coupled with bigger firms acquiring smaller, agile firms with technological know-how and cutting-edge technological expertise and products. Moreover, many of the leading high tech companies are sitting on a lot of cash and interest rates are lower than a year ago signaling an improved economic climate for such transactions.

Our research on the integration of multiproduct firms, and the quantification of associated synergy, entitled,"Multiproduct Supply Chain Horizontal Network Integration: Models, Theory, and Computational Results," was just published in the International Journal of Operational Research, volume 17 (2010), pp 333-349. The results therein can be applied to assess the synergy of mergers and acquisitions of firms with similar or distinct portfolios of products and with access to different markets.

Another recent M&A study of ours, which is in press, also in a peer-reviewed journal, Computational Management Science, entitled, "Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights into the Merger Paradox: A Supply Chain Network Perspective," shows the impacts on profits of different acquisitions in industries in which the firms compete directly and feed the same markets.

The Pooling of Resources for Humanitarian Operations

The New York Times has a very interesting, provocative article on the pooling of resources for humanitarian operations and, in particular, as applied to Haiti, but the topic is broader and relevant in other disaster and humanitarian relief contexts. The article is focused on the pooling of financial resources and notes that the Red Cross, although it did not have a large presence in Haiti prior to the earthquake, because of its brand name recognition, has received many more financial donations than has Partners in Health, which has had a large presence in Haiti, even before the earthquake struck on January 12, 2010.

The issue of financial donations to relief organizations and providing stakeholders with proper accounting of donations is an important one and two of my former doctoral students, who are now professors, Dr. Tina Wakolbinger and Dr. Fuminori Toyasaki, are actively researching this topic.

I would argue that cooperation among humanitarian organizations in relief operations is critical and I have written on this topic earlier in this blog. In particular, as was evident in Haiti, there were numerous demand points (and there still are) for such products as water, food, medicines, and tents and the networks of different organizations were not working together in a synergistic manner. Some of the issues were obviously ones of lack of communication and coordination. Nevertheless, when it comes to the pooling of resources, including financial ones, by being able to represent the various activities of the humanitarian organizations as networks, one can actually quantify the synergistic gains from cooperation.

In joint work with Dr. Trisha Woolley and Dr. Patrick Qiang, we have developed a synergy measure that can be used to assess the benefits of cooperation by sharing of network resources. The work is documented in a study entitled, "Multiproduct Supply Chain Horizontal Network Integration: Models, Theory, and Computational Results," which is in press in the journal International Transactions in Operational Research. I presented this work earlier at the humanitarian logistics conference that I had organized, under the auspices of the Rockefeller Foundation, that took place at its Bellagio Center.