Welcome everyone to the second week of our mergers and acquisitions course. This week, we will talk about the major cause of an M&A transaction. This is the reason of the motive, the idea behind this. But before we dealt with that in some detail, we have to make a review of one of the most important things that is observed here in a more general business way. This is the idea of strategy because oftentimes M&A's, they are the outgrowth, the logical outgrowth or the development strategy of a company. Or sometimes, they may be actually the strategy itself. So, the company keeps developing by just buying others and disposing of some of their assets and companies or subsidiaries that are not key to the company's success. And in order to be better informed and better understand that, we have to have an overview of strategy. This is not a course in strategy but we still have to discuss major ideas of this very important business discipline. Well, so I'll put it here, strategy. Well, what is this all about in a nutshell? First of all, strategy is always associated with something long term. This is the art of the long view if you will. There is one book that I recommend in M&A's that is entitled, The Art of the Long View. So, this is not something that is aimed at a short-term profit, that is rather the longer term breadth of the company. What else is important here? We have to say that strategy has certain important components namely planning, then implementation, and I will put another one. I will put that in the red because this is very important, that this is not a part of that but this is key to successful strategy. This is cultural fit. And I'll explain what it means in just a few minutes. And then also, I will put a line here and then we'll proceed. Why is it planning? Why is it an important part? Because if we talk about something long term, we cannot just go ahead and do things when they arrive. We have to have this plan and strategic planning is one of the most important parts in making strategy a realistic and potentially successful. Then, if we ever slowly start to implement them. We start to proceed, we start to complete certain actions or sometimes project or so. Why did I put cultural fit in a red? Because most often, if planning and actions, they are sort of not friendly for the company as it lives, then it's unlikely that there will be a success. Let me give you an example, supposedly you have a large old fashioned company that is managed in a hierarchical way. So there is a boss up there and they'll all decisions they go down and they are quite formal. There are certain meetings, committees that all must be approved of. Do you think that this is realistic in such a company to engage in creation of new internet linked or IT solutions? This is unlikely because the people who do that, they are creative, they prefer much leaner organization. They sometimes prefer to work the way they like. But the result is that they produce good products. So on the other hand, if you talk about, let's say making weapons, although this is project-oriented companies so you have some products that must be delivered at a certain point in time and a certain quality. Then within this project, you create a project team and if it's sort of managed in a broader way that might be a failure. So, these are just a few examples and I'm not delving deeper in that because this is not, like I said, a strategy course. But when we talk about culture, some observations about M&A's. If one company buys another company, then there's a combined company and the cultures of these two companies, the bidder and target, may be quite different. Now, this is a huge challenge. You may do all the things right but then these people may not be willing or may not be, they not may work together effectively and that will completely erase all the potential gains that you planned in this transaction. So, some other important observation. Strategy is a process. So, it's not just fixed and it's specifically right in recent years and now, because we see the changes are so fast and so drastic, that if you had some curved strategy then you are likely to become obsolete. You are likely to lose your advantages and then yield to others. Now, what is the goal of a strategy? Well, the goal as always is money. So, you have to beat your competitors and make more money. So, we talk about beating competitors and making superior profits. And what is the tool of that? Well, the general tool is, the so-called sustainable competitive advantage. So, this is certain thing that you do better than others. Let's say you do, for example there are two major generics sustainable competitive advantage, cost leadership and differentiation advantage. So in one area, you do basically the same thing as everyone else does but cheaper. So, we have a huge advantage. We'll save you words about that in just a few minutes in the next episode or you do something very special that no one else can match and then you obviously also have an advantage. So here, basically the general idea of a strategy is to find, identify certain positive NPV projects to put it in the financial world. And then, to successfully implement them and by doing so, with the use of these advantages, you beat your competitors and you make superior profits. So, this is all about how it goes. It's clearly easier said than done but we have to keep this in mind. Now, for us however, we would like to see what is strategy and the M&A's? How are these two things linked? Because we are in the M&A course. Well the first thing is that sometimes people believe that the M&A strategy is better than organic growth. So, M&A may be better, why? Well, because the huge plus is that it is faster. The huge minus is that you see in other company, well its potential structural or cultural misfit. So, you cannot reach the planned goal. And, I would mention here that the M&A strategy does not preclude organic growth. However, focus is shifted here because for both organic growth and M&A's, you need money. So, the money you make and the money you borrow, the money you raise, you can invest that in two different ways. One, to feed organic growth, the other is to buy some of the companies. And recently, a lot of companies embark on the M&A strategy. Why? Because we see that now changes fast and they have deals with whatever, with technology. We have IT. We have internet. We have all these things. So, we can see that oftentimes this is better right now in recent years, although sometimes some companies may go without that for a while. And also, I would like to point out one very important thing that I will just, again put in red, that M&A's are affected by culture. We talked about that before and we will keep talking about these things as key success factors. Well, examples are plentiful. So especially, it's especially clear on the surface when you talk about the mergers of two companies from different countries, because there are certain national or country specific cultural features and then sometimes people cannot work effectively together. If you take, for example people from Japanese culture or from European culture. European culture is close to American culture. But oriental culture is sometimes different and that precludes efficient combinations. Well, that's basically some observations and from now on, in the next episode, we will talk about some challenges to strategy because if we keep them in mind, if we'll take them into account, we are much more likely to successfully proceed.