Merger between Sentinel Capital Partners and TGI Essay.

 

Corporate Level Strategy: Merger between Sentinel Capital Partners and TGI Fridays (2014)

In 2014, Carlson announced that it had sold its subsidiary TGI Friday’s Inc. to Sentinel Capital Partners. The merger was intended to free up resources at Carlson to help the organization focus accelerating the growth of its hospital and travel businesses. For Sentinel, the merger was expected to enable the company to extend its franchising investment portfolio (Carlson par. 1-5). The present paper offers an analysis of the merger.Merger between Sentinel Capital Partners and TGI Essay.

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1) Provide a Profile of the acquiring company (What business are they in? Is this a private or public company? Names of key executives? What is their position in the market?)

Sentinel is a private equity company that is focused on managing recapitalizations, mergers, acquisitions, restructuring, buy-outs, corporate divestitures, industry consolidations, going-private transactions, and other corporate situations. Founded in 1995 and with its address in New York City, the company invests in middle-market companies operating in the USA and Canada.Merger between Sentinel Capital Partners and TGI Essay. It operates its businesses in the healthcare, industrial, franchising, restaurant, food, distribution, consumer, defense, business service, and aerospace sectors (Sentinel Capital Partners par. 1). It targets companies that report revenues of at least $6 million and invests up to $125 million in each transaction. Sentinel’s annual revenue is reported at approximately $1.03 billion. The company’s mission is to general attractive investment returns through the provision of private equity to talented management teams with the intention of enabling them to build great business entities. Since inception the company has raised about $5.2 billion of capital. The company was founded by David Lobel and John McCormack who act as the managing partner and senior partner respectively. In addition, it engages six senior partners, four principals, five vice-presidents, four senior associates, and eight associates (Sentinel Capital Partners par. 1).Merger between Sentinel Capital Partners and TGI Essay.

2) Provide a profile of the target company (What business were they in? Was this a privateor public company? Names of key executives? What was their position in the market?)

TGI Friday’s is a chain of restaurants operated under the franchise name TGI Friday’s Inc. The chain of restaurants markets alcoholic and non-alcoholic beverages, desserts, entres, sandwiches, salads, seafood, sizzlings, and appetizers. The company was founded in 1969 and operates in the consumer discretionary services industry under the leisure facilities and services subsector as a private company(Bloomberg par. 1). It has more than 900 restaurants that operate in 60 countries across the world with sales valued at $2.7 billion in 2013. Also, it employs more than 70,000 personnel (Carlson par. 5). It has its company headquarters in Arlington, Texas. The company’s executive team includes Raymond Blanchette III as the Chief Executive Officer, Jerry Comstock Jr. as the President and Chief Operating Officer, and Stephanie Perdue as the Chief Marketing Officer (Bloomberg par. 1).Merger between Sentinel Capital Partners and TGI Essay.

3) Explain the purpose for the merger or acquisition. Describe the kind of synergies that

existed for both companies.

The merger was made with the objective of improving the financial performance of the two companies. To be more precise, Carlson (the company that initially owned TGI Friday’s Inc.) needed to free up resources to enable it improve financial performance while Sentinel sought to extend its franchising investment portfolio. To be more precise, the companies involved in the merger deal sought to produce more revenue than would have been possible if they had acted independently. In addition, the merger combined talent as Sentinel was able to use its rich investment and management experience to ensure that TGI Friday’s Inc. was successful as a business. Besides that, the merger was expected to reduce costs as Sentinel managed related businesses that would ease the supply chain (Gaughan, 2017). In this respect, the merger allowed for synergies that increased revenues, combined talent and reduced costs.Merger between Sentinel Capital Partners and TGI Essay.

4) What kind of corporate-level strategy was the Acquiring company pursuing in the transaction? Provide evidence to support your answer. Use the strategies discussed in class.

The transaction pursued two kinds of corporate strategy. Firstly, vertical integration as Sentinel already managed businesses in the hospitality industry and acquiring TGI Friday’s Inc. allowed the company to operate in additional levels in the supply chain. This means that its businesses that produced materials for restaurants would be able to supply TGI Friday’s Inc. thus integrating the economies to eliminate some steps and avoiding time-consuming tasks such as price shopping and negotiating supply chain contracts. Secondly, related diversification as it allowed Sentinel to expand more into the restaurant industry even as TGI Friday’s Inc. was financially protected by injection of capital (Gaughan, 2017). As a result, the transaction pursued vertical integration and related diversification as corporate strategies.Merger between Sentinel Capital Partners and TGI Essay.

5) How did the Acquiring company pay for the merger or acquisition? Provide evidence.

Sentinel acquired part of TGI Friday’s Inc. from Carlson in 2014 in a deal whose amount was not publicly reported but estimated to be worth more than $800 million. The deal allowed Sentinel to be the majority shareholder in TGI Friday Inc. (PitchBook par. 1).

6) What is the current status of the merger or acquisition?

The deal that saw Sentinel acquire a majority stake of TGI Friday’s Inc. at more than $800 million in 2014 was scrapped towards mid-2020. The Coronavirus epidemic decimated much of Sentinel’s business to include TGI Friday’s Inc. thus causing Sentinel to explore options to offload some of its portfolio. As such, Sentinel and TGI Friday’s Inc. reached a deal with Allegro Merger to sell its majority stake at $380 million (PitchBook par. 1).Merger between Sentinel Capital Partners and TGI Essay.

®Corporate Level Strategy and Restructuring

®Learning Objectives

®Define corporate-level strategy and explain the major responsibilities for a corporate-level manager.

®Distinguish between concentration, vertical integration and diversification strategies.

®Describe the advantages and disadvantages of a concentration strategy.

®Know the meaning of forward and backward integration.

®Explain the reasons firm’s diversify.

®Understand the sources of synergy that can be obtained from diversification, and what undermines its use.

®Know the reasons for mergers and acquisitions, and some of the problems attached to this strategy.

®List and explain the most common restructuring approaches including turnaround, downsizing, refocusing, bankruptcy, and leveraged buyouts.

®Create a BCG portfolio matrix.

®What is Corporate-level strategy?

It is a company-wide plan to select specific markets or industries in which to compete. Merger between Sentinel Capital Partners and TGI Essay.

This strategy addresses the long-term direction of the company as a whole.

The CEO and top management are responsible for developing corporate-level strategy.

®Critical questions that corporate-level strategy must answer

®What business or businesses should the company be in?

®How should the company allocate its resources to its various lines of businesses?

®What level of diversification is needed?

®What type of diversification is needed?

®How should the company be organized?

®Corporate-level strategy

The following are the responsibilities that the CEO and top management have in developing a corporate-level strategy.

®Corporate-level Strategy Formulation Responsibilities

®Direction Setting

­Establishment and communication of organizational mission, vision, enterprise strategy and long-term goal

®Development of Corporate-level Strategy

­Broad approach to corporate-level strategy—concentration, vertical integration, diversification, international expansion

­Selection of resources and capabilities in which to develop corporate-level distinctive competencies

®Selection of Businesses and Portfolio Management

­Buy and sell businesses

­Allocation of resources to business units for capital equipment, R&D, etc.

®Corporate-level Strategy Formulation Responsibilities

®Selection of Tactics for Diversification and Growth

­Choice among methods of diversification—internal venturing, acquisitions, joint ventures

®Management of Resources

­Acquisition of resources and/or development of competencies leading to a sustainable competitive advantage for the entire corporation

­Hire, fire and reward business-unit managers

­Ensure that the business units (divisions) within the corporation are well managed, including strategic management.  Provide training where appropriate

­Develop a high-performance corporate management structure

­Develop control systems to ensure that strategies remain relevant and that the corporation continues to progress towards its goals

®Corporate-level Strategies

®Concentration strategy

This is a strategy where the company focuses on a single product or market.

The company chooses to pursue a large share of one segment of the industry or a few sub-segments instead of the whole industry.

®Advantages and Disadvantages of Concentration

®Advantages 

­Allows an organization to master one business

­Less strain on resources, allowing more of an opportunity to develop a sustainable competitive advantage

­Lack of ambiguity concerning strategic direction

­Often found to be a profitable strategy, depending on the industry

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®Disadvantages 

­Dependence on one area is problematic if the industry is unstable

­Primary product may become obsolete

­Difficult to grow when the industry matures

­Significant changes in the industry can be very hard to deal with

­Cash flow can be a serious problem

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®Vertical Integration Strategy

This is a strategy where the company operates at more than one level of the distribution channel (supply chain).

That is, the company owns its upstream suppliers and downstream buyers.

®Advantages and Disadvantages of Vertical Integration

®Internal Benefits

­Integration economies can eliminate steps, reduce duplication and cut costs

­Improved coordination reduces inventory and other costs

­Avoids time-consuming tasks, such as price shopping, communicating design details and negotiating contracts

®Internal Costs

­Need for overhead to coordinate vertical integration

­Burden of excess capacity if not all output is used

­Poorly organized firms do not enjoy enough synergy to compensate for the higher costs

®Advantages and Disadvantages of Vertical Integration

®Competitive Benefits

­Avoid getting shut out of the market for rare inputs

­Improve marketing or technological intelligence

­Can create differentiation through coordinated effort

­Superior control of firm’s market environment

­Increased ability to create credibility for new products

­Synergies could be created by coordinating vertical activities carefully

®Competitive Dangers

­Obsolete processes may be perpetuated

­Reduces strategic flexibility due to being “locked in” to a business

­May link to unprofitable adjacent businesses

­Lose access to information from suppliers or customers

­May not be potential for synergy because vertically integrated businesses are so different

­May use the wrong method of vertical integration (i.e., full integration instead of contracting)

®Vertical Integration and Transactions costs

One of the co-founders of U.S. Steel, Andrew Carnegie, helped build his company by acquiring the major suppliers and distributors in the steel supply and distribution chain.Merger between Sentinel Capital Partners and TGI Essay.

Their overall goal was to ensure a consistent and reliable delivery of raw materials and distribution of finished steel products.  The company also wanted to ensure an overall lower cost of doing business.

®Transactions costs

Every company has a supply chain, and it has to develop contractual arrangements with the companies in its chain – raw material providers, manufacturers, wholesalers, retailers – to buy and sell its products.  The contractual arrangements create costs referred to as transactions costs.

These are costs associated with engaging in an economic exchange with another company.  There are 3 types of costs:Merger between Sentinel Capital Partners and TGI Essay.

1.Search and information cost

2.Bargaining cost

3.Policing and enforcement cost

®Transactions Costs

While pursuing these contractual arrangements with other companies in the supply chain there are factors that influence the effectiveness of the relationship.  The forces of supply and demand in the industry, the balance of power between the company and others in the supply chain does influence costs and prices in the supply chain.Merger between Sentinel Capital Partners and TGI Essay.

®Transactions Costs

For example, where there is a high volume of business activity between a buyer and a seller in the supply chain, this could lead to frequent negotiation between the two parties or exploitation of the agreement, leading to higher transactions costs .

Also, where there is only a single supplier or a single buyer in the supply chain, one may take undue advantage leading to more negotiation of costs and prices thereby leading to higher transactions costs.

®Vertical Integration and Transactions Costs

So, when companies pursue a vertical integration strategy one of the outcomes is the reduction or elimination of transactions costs.Merger between Sentinel Capital Partners and TGI Essay.

When a company controls the supply chain, it is able to set prices at non-negotiable rates thereby controlling costs throughout the chain.

Example: auto manufacturers and parts suppliers.

Example: Avendra LLC

®Transactions Costs

®Transactions costs economics

­Study of economic transactions and their costs

­Transactions costs are reflected by the time and resources devoted to contract creation and enforcement

®Make or Buy Decisions

­Firms should usually buy what they need in the market as long as they do not have to expend an undue amount of time or other resources in contract creation and enforcement

­A market failure means that these costs are high and it is in the best interests of the firm to vertically integrate instead of buying from the market

®Transactions costs tend to be high when:

­The future is highly uncertain

­There are only one or a small number of suppliers

­One party to the transaction has superior information

­Asset specificity–asset investment that can be used for only one purpose

®Substitutes for Full Vertical Integration

®Taper Integration

­Produce some in-house and buy the rest

®Quasi Integration

­Purchase most of what you need from a supplier in which the purchaser holds an ownership stake (i.e., stock)

®Long-term Contracts

­Helps achieve some of the benefits of vertical integration, such as more assurance of supply or more control over quality

®Diversification Strategy

Diversification occurs when a business develops a new product or expands into a new market. Often, businesses diversify to manage risk by minimizing potential harm to the business during economic downturns. The basic idea is to expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable.Merger between Sentinel Capital Partners and TGI Essay.

®Definition of diversification

Process of enlarging or varying the range of products/services or region of operations of a company.

®Diversification strategy

Two broad categories of diversification:

Related Diversification: engaging in activities that are similar/closer to your core business or products or services.

Unrelated Diversification: engaging in activities dissimilar to your core business.

®Reasons for Diversification

®Strategic Reasons

­Risk reduction through investments in dissimilar businesses or less dynamic environments

­Stabilization or improvement in earnings

­Improvement in growth

­Use of excess cash from slower-growing traditional areas (a form of organizational slack)

­Application of resources, capabilities or core competencies to related areas

­Generation of synergy through economies of scope

­Use of excess debt capacity (also a form of organizational slack)

­Ability to learn new technologies

­Increase in market power

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®Reasons for Diversification

®Motives of the CEO

­Desire to increase the value of the firm

­Desire to increase personal power and status

­Desire to increase personal rewards such as salary and bonuses

­Craving for a more interesting and challenging management environment

®What is synergy?

 

It is the combination of two or more organizations or products (and services) where the effect (outcome) is greater than the sum of their separate parts (or effects).Merger between Sentinel Capital Partners and TGI Essay.

®Requirements for the Creation of Synergy

®Relatedness

­Tangible–same physical resources for multiple purposes

­Intangible–capabilities developed in one area can be used elsewhere

®Fit

­Strategic–matching of organizational capabilities–complementary resources and skills (based on relatedness, as described above)

­Organizational–similar processes, cultures, systems and structures

­Dominant logic–the way managers deal with managerial tasks, the things they value, and their general management approach

®Managerial actions to share resources or skills

®Benefits must exceed costs of integration

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®Potential Sources of Synergy from Related Diversification

®Operations Synergies

­Common parts designs:  Larger purchased quantities allows lower cost per unit

­Common processes and equipment:  Combined equipment purchases and engineering support allow lower costs

­Common new facilities:  Larger facilities may allow economies of scale

­Shared facilities and capacity:  Improved capacity utilization allows lower per unit overhead costs

­Combined purchasing activities:  Increased influence leading to lower costs, and lower cost shipping arrangements

­Shared computer systems:  Lower per unit overhead costs and can spread the risk of investing in higher priced systems

­Combined training programs:  Lower training costs per employee

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®Potential Sources of Synergy from Related Diversification

®R&D / Technology

­Shared R&D programs:  Spread overhead cost and risk of R&D to more than one business

­Technology transfer:  Faster, lower cost adoption of technology at the second business

­Development of new core businesses:  Access to capabilities and innovation not available in the market

­Multiple use of creative researchers:  Opportunities for innovation across business via individual experience and business analogy

®Potential Sources of Synergy from Related Diversification

®Marketing

­Shared brand names:  Build market influence faster and at lower cost through a common name

­Shared advertising and promotion:  Lower unit costs and tie-in purchases

­Shared distribution channels:  Bargaining power to improve access and lower costs

­Cross-selling and bundling:  Lower costs and more integrated view of the marketplace

®Management

­Similar industry experience:  Faster response to industry trends

­Transferable core skills:  Experience with previously tested, innovative strategies and skills in strategy and program development

®Forces that Undermine Synergies

®Management Ineffectiveness

­Too little effort to coordinate between businesses means synergies will not be created

­Too much effort to coordinate between businesses can stifle creativity

®Administrative Costs

­Additional layers of management and staff add costs

­Executives in larger organizations are often paid higher salaries

­Delays from and expense of meetings and planning sessions necessary for coordination

­Extra travel and communications costs to achieve coordination

®Forces that Undermine Synergies

®Poor Strategic Fit

­Relatedness without strategic fit decreases the opportunity for synergy

­Overstated (or imaginary) opportunities for synergies

­Industry evolution that undermines strategic fit

­Overvaluing potential synergies often results in paying too much for a target firm or in promising too much improvement to stakeholders

®Poor Organizational Fit

­Incompatible cultures and management styles

­Incompatible strategies, priorities, and reward systems

­Incompatible production processes and technologies

­Incompatible computer and budgeting systems

®Unrelated Diversification

®Conglomerates

­Large, unrelated diversified firms

®Popularity of Unrelated Diversification in the 50s, 60s and early 70s

­Rigid antitrust enforcement

­Financial theories supported the idea that risk could be reduced by investing in businesses in unrelated businesses with uneven revenue streams

®Most Research Suggests that Unrelated Diversification is Not High Performing

­Places unusual demands on managers

­Trend is towards reducing diversification (refocusing)

­In spite of the negative evidence, some firms have been successful with this strategy

®Mergers and Acquisitions

®M&A Basics

­Mergers occur any time two organizations combine into one

­Acquisitions occur when one firm buys another firm

­Most mergers are in the form of an acquisition, so these terms are often used as synonyms

­M&As tend to depress profitability, reduce innovation and increase leverage, at least in the short run

®Industry Consolidation

­Occurs as competitors merge together

­A dominant trend in the U.S. and elsewhere

®Corporate Raiders

­Engage in acquisitions, typically against the will of target companies (called hostile)

­Hostile acquisitions tend to be more expensive

­May motivate target firm managers to be more responsive to stockholder interests (reduce agency costs)

®Examples of famous U.S. corporate raiders

®Carl Icahn

®Ron Perelman

®T. Boone Pickens

®Kirk Kerkorian

®Sir James Goldsmith

®Victor Posner

®Problems with Mergers and Acquisitions

®High Costs

­High Premiums Typically Paid By Acquiring Firms

­Increased Interest Costs from Higher Leverage

­High Advisory Fees and Other Transaction Costs

­Poison Pills—things target companies do so they are less attractive to takeover

®Strategic Problems

­High Turnover Among the Managers of the Acquired Firm

­Short-Term Managerial Distraction—takes managers away from the critical tasks of the core businesses

­Long-Term Managerial Distraction—lose sight of the factors that lead to success in their core businesses

­Less Innovation

­No Organizational Fit—cultures or systems don’t combine well

­Increased Risk—increased leverage.  Also the risk of unsuccessful management

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®Successful Mergers and Acquisitions

®Low debt

®Friendly negotiations

®Complementary resources (relatedness)

®Cultures and management styles are similar (organizational fit)

®Post-merger sharing of resources

®Due diligence before merger

®Learning occurs

®Corporate-level Distinctive Competencies

®Come from achieving shared advantage across the businesses of a multibusiness firm

­Integrated managerial skills

­Attracting and retaining competent top managers

­Shared use of resources that are hard to acquire except through experience

­A well-developed strategic planning system

­Shared use of resources that contribute significantly to perceived customer benefits

­Excellent R&D

­Resources that can be widely applied across businesses

­Excellence in tax management

®Restructuring

Restructuring involves redesigning one or more aspects of a company for the purpose of making it more profitable.

The aspects of the company typically impacted are  the organizational form (legal status), the ownership form (public vs. private), the operations, or the management.

®Restructuring

Often this means a radical change in how business has been conducted in the past.

The change is usually motivated by:

®Shareholder agitation

®Credit downgrade

®Over-leverage

®Significant problems putting the business at risk

®Strategic Restructuring

®Retrenchment (Downsizing)

­Turnaround through workforce reductions, plant closings, outsourcing, cost controls, etc.

­Downsizing is dangerous to the health of an organization

®Refocusing (Downscoping)

­Reducing diversification through selling off nonessential businesses

­Divestiture–reverse acquisition

­Spin-off–current shareholders are issued stock

®Chapter 11 Reorganization

­Legal filing allowing protection from creditors and others while problems are worked out

­Should probably be a strategy of last resort

®Strategic Restructuring

®Leveraged Buyouts

­Private purchase of a business unit by managers, employees, unions or private investors

­High levels of debt

­Asset sales typically lead to a smaller, more focused firm

­Stifle innovation

®Changes to Organizational Design

­Switch to a new organizational structure

­More decentralized or more centralized, depending on needs

­Linked also to changes in the culture of a firm

­Reengineering involves radical redesign of core business processes to achieve dramatic improvements in efficiency and quality

®These Restructuring Approaches are Often Combined

®The Boston Consulting Group Matrix

®This is a chart created by Bruce Henderson in 1970 for the Boston Consulting Group company.

®It is a tool used to present a Company’s products and services in a graphical form based on the product’s relative market share and the rate of growth in the industry.

®It is a 2×2 matrix with industry growth on the y-axis and relative market share on the x-axis.

®Boston Consulting Group (BCG) Matrix

®Major Concepts in Chapter 6

®Corporate-level strategy focuses on the selection of businesses in which the firm will compete, and on the tactics used to enter and manage those businesses

®Primary corporate-level responsibilities include establishing direction for the whole organization, formulation of a corporate strategy, selection of businesses, selection of growth tactics, and resource management

®Concentration is associated with a focus on one business area, which allows the company to specialize; however, the firm is dependent on one business for its growth and profitability

®Major Concepts

®Vertical integration allows a firm to become its own supplier or customer, which can provide more control over processes and quality.  However, the firm is still dependent on one business

®According to the theory of transaction-cost economics, firms should generally purchase what they need from the market, unless transactions costs are high.

®Unrelated diversification was popular in the past due to financial theories and rigid antitrust enforcement; however, unrelated firms are hard to manage and there is a recent trend towards refocusing

®Major Concepts

®Mergers and acquisitions are the quickest way to diversify; however, they are fraught with difficulties, and most of them fail to meet expectations

®Restructuring approaches include retrenchment (downsizing), refocusing (downscoping), Chapter 11 reorganization, leveraged buyouts (LBOs) and changes to organizational design