Chapter 1 Introduction
1.5 Research Limitations
Analysis of this thesis is purely based on public information, so it might lack insiders’ unique vision of evaluating strategic moves. Besides, the thesis focuses on
case studies of three megadeals in the information and communications technology
industry. This might constraints the findings on generalizability for small-sized
companies. Conducting interviews and surveys on the involved management teams might be beneficial to realize companies’ concerns and motivations in depth. Collecting
and comparing more detailed data of various-sized deals would improve thoroughness of the discoveries.
Chapter 2 Literature Review
2.1 Urbanization
Smith (1776) stated that the division of labor is not originally the effect of human
wisdom, but the necessary consequence of human nature. Based on this proposition, O’Sullivan (2000) explained why a city exists from an economic point of view. Because an individual can’t be self-sufficient, humans need to exchange their labor for the needs.
When more and more people aggregate in physical proximity, opportunities to satisfy the needs and exchange labor become much more abundant. The proximity gradually evolves into a city. In addition, comparative advantages between different regions lead to the development of market cities. Internal scale economics triggers the formation of industrial cities. Agglomerative economics stimulates the growth of urbanization.
The National Research Council (2003) of the United States described the process of urbanization as a population shift from agriculture-centric settlements toward industry-and-service-centric settlements. Levels of urbanization are usually classified according to numbers of population, population density, percentage of urban to overall population, economic activities, etc. Intervals of levels are adjusted over time to reflect changing patterns of settlement. The World Bank (2009) analyzed the global urbanization trend from the 3-D aspects—density, distance and division. The United
Nations (2015) indicated the global urban population exceeded the rural in 2007 for the first time in history and expected the trend to continue.
Coming with the unprecedented growth of global urbanization, demands from cities for natural resources and public services also increase dramatically. Cities are under substantial stress to search for the optimal balance between the economic and environmental trade-off. On one hand, cities are assumed to be the hubs boosting economic development by utilizing limited resources efficiently, so the residents can enjoy a prosperous life with great quality. On the other hand, while cities only occupy less than 5% of the global land, they constitute more than 66% of energy consumption and produce over 70% carbon emissions (Global Environment Facility, 2014). Cities are recognized to be responsible for pursuing sustainability, especially after the Paris Agreement ratified by 173 parties of the United Nations in 2016. How to achieve both the economic and environmental goals simultaneously under numerous constraints?
Technology might be the key.
2.2 Smart City
Technology used to be viewed in several futuristic studies as the outcome of cities’
civilization development that will eventually depress the growth of cities. Toffler (1980)
predicted advanced telecommunications technologies will enable people to move back to the rural areas and work in electronic cottages instead of cities. People might migrate less because of business, but travel more for leisure. Gaspar & Glaeser (1998) disapproved this kind of opinions by investigating if improvement in information technology will decline face-to-face interactions and obsolete cities. Their study indicates telecommunications might be more a complement to rather than a strong substitute for face-to-face interactions and cities. Graham (1997) clarified transport and telecommunications flows incline to reinforce each other in reality.
Telecommunications technology further creates the demand for physical co-presence from distant interactions. Actually, technology shapes cities to become more aggregate centers of human activities.
As the global urbanization trend becomes stronger, technology is considered as an essential element of cities’ growth, especially to close the gap between economic
development and environmental sustainability. Technological breakthroughs over periods turn imaginative ideas into “smarter” and feasible solutions. When technologies are highly correlated with and leveraged into citizens’ daily life, cities’ core operational
systems can be advanced to provide customized services, reduce safety threats, eliminate traffic congestion, speed up communications connectivity, enhance business efficiency, lower water waste and smooth energy consumption (IBM, 2009). At this
moment, a city transforms to a smart city.
The definition of smart city evolves rapidly. Albino et al. (2015) summarized various definitions of smart city and mentioned scopes of smart city have been extended from technology to including people and community needs. Ramaprasad et al. (2017) used an otology to characterize the logic of smart city’s definitions. They revealed the social science field further exploits smart city to address social and human concerns and ecological issues. The United Nations adopts the following comprehensive definition established by The International Telecommunication Union to describe smart
city (United Nations Human Settlements Programme, 2016):
“A smart sustainable city is an innovative city that uses information and communication technologies (ICTs) and other means to improve quality of life,
efficiency of urban operation and services, and competitiveness, while ensuring that it
meets the needs of present and future generations with respect to economic, social, environmental as well as cultural aspects”.
Among various definitions, the consistency is that technology is a necessary component to construct a smart city. To create the values of smart city, technology is greatly utilized to overcome sociological, economical, psychological and ecological challenges resulting from urbanization.
2.3 Strategy
As cities are transforming to be smarter, technology is changing people’s behavioral patterns. Meanwhile, technology is disrupting industries and reshuffling business competition. To respond to the structural conversion, companies have to review market dynamics, scrutinize operations and redesign business models.
Inevitably, companies must formulate new strategies.
Strategy analyses always start with understanding the external environment—the competitive landscape. Martin (2005) depicted history of the Structure-Conduct-Performance (S-C-P) Paradigm developed by industrial economists. The S-C-P
framework argues that basic conditions of an industry affect industry structure, industry structure determines firms’ behaviors, and firms’ behaviors eventually determine
profitability of the industry. The S-C-P approach provides companies a complicated tool to analyze imperfections of the market. Porter (1979) simplified the S-C-P Paradigm to his prestigious Five-Forces Framework. This new framework assists companies in systematically identifying the five major participants of business competition. Brandenburger & Nalebuff (1995) applied game theoretic concept to analyze dynamics of industries. They established the Value Net Framework and introduced complementors as a new player in business games. The Value Net Framework encourages companies to think about both cooperative and competitive
approaches to change the games, not just to play the games.
After realizing external factors, strategy analyses continue with positioning and aligning activities. In the article “What is strategy?” Porter (1996) clarified the
differences between operational effectiveness and strategic positioning. The former represents performing similar activities better than rivals do. The latter is performing similar activities in different approaches or even performing different activities. In short, strategy is about being different to deliver unique values. Besides, trade-offs are vital to strategy. Strategy is to make hard decisions on trade-offs, so companies can acquire sustainable advantages by creating consistent, reinforcing and optimizing fits among their activities.
Strategy formulation should correspond with companies’ organizations. Vancil &
Lorange (1975) decomposed strategy implementation for a diversified corporation into three levels—corporate strategy, business strategy and functional strategy. Planning processes of strategy in complex organizations require formal interactions across different levels of the organizational hierarchy. Salimian et al. (2012) summarized literature of the three strategy levels. Corporate strategy is designed for multi-business corporations to create values, configure organizations, coordinate businesses and allocate resources among different business units. Corporate strategy focuses on where to battle and involves decisions in diversification, merger and acquisition, divestiture
and internationalization. Business strategy is also recognized as competitive strategy.
It focuses on how to contest and relates to strategic positioning, competitive advantage and business model for competition. Functional strategy focuses on how to implement practices of each functional team like marketing, manufacturing, finance, supply chain, human resource, etc., so the overall activities are aligned to support business strategy.
In other words, corporate strategy governs business strategy and the latter sequentially regulates functional strategy in diversified companies. Once the battlefields are locked down by corporate strategy, companies strive to win the competition via business strategy which is achieved by implementing functional strategy.
Porter (1987) illustrated corporate strategy is to make the value of a company as a whole greater than the sum of its business units. This indicates corporate strategy is to create synergy. Only when interrelationships between different businesses are
meaningful for producing synergy, corporate strategy is successful in adding shareholders’ values. Otherwise, corporate strategy might just purely perform as
portfolio management that shareholders can also achieve by themselves through properly diversifying capital in an efficient financial market.
2.4 Merger and Acquisition
Merger and acquisition is one of the tactics used by companies for corporate strategy. Gomez et al. (2011) explained the differences between merger and acquisition.
Merger is that two companies combine into a single entity rather than remain owned separately and operate independently. The single entity comprises activities of the two combined firms. Acquisition is that one company takes over another company. By establishing the ownership, the acquiring company can control and dominate the acquired firm.
Gaughan (2007) elaborated some popular strategic motivations of companies to
execute merger and acquisition. When timing is a very sensitive factor to achieve companies’ strategic goals, M&A will be implemented instead of relying on organic
growth. M&A is also a preferred choice for expansion into an unfamiliar geographic region, elevation in market share and enhancement of market power. M&A provides companies an opportunity to diversify into another fast-growing or more profitable business. M&A can be an instrument to secure key resources like raw materials,
channels, patents, talents and research and development, so companies can gain long-term competitive advantages. Furthermore, M&A might increase shareholders’ values
by creating synergy. Synergy can be constituted from operations and corporate finance via M&A. By merging and acquiring another firm, a company might be able to increase
revenue and reduce cost rather than two organizations operate irrelevantly. Besides, if cash flows of two companies are not perfectly correlated, M&A might benefit the
combined entity with lower cost of capital because of reduced risks. Another financial synergy can be tax saving, though it’s not a very popular motivation stimulating
companies to employ M&A.
Gaughan also categorized M&A activities into three types based on their integrating direction on industry value chain. When two companies competing in the same business agree to combine together, this M&A is horizontal merger because it represents horizontal integration of the industry. When two companies with upstream-downstream relationship in an industry, their combination is vertical merger which results in vertical integration of the industry. If a company intends to combine another firm which is neither in competition nor in upstream-downstream relationship, it’s practicing conglomerate merger via M&A. Under this scenario, the company is doing unrelated diversification from one industry to another different industry.
M&A for horizontal integration, vertical integration and unrelated diversification
might correspond to stages of an industry life cycle. Carlton & Perloff (2005) illustrated how development of an industry can affect companies’ decisions on vertical integration
or specialization. Deans et al. (2002) depicted how industry concentration varies with stages of industry consolidation and predicted an industry will go through all four stages
even quicker in the future. In summary, when a young industry is small, specializing in an activity does not pay for a firm, so all firms in the industry are vertically integrated to handle the entire production process. As an industry grows, firms are vertically disintegrated because transaction costs of each unit falls. Specialization in an activity starts to make business sense. If economy of scale significantly influences production costs, different firms will be more willing to combine together to obtain synergy in operational efficiency. M&A for horizontal integration might occur. As an industry matures or declines, its size shrinks. Firms will return back to be vertically integrated or look for opportunities of unrelated diversification to keep growth momentum.
Historically, M&As tend to occurs in cyclic waves. The Boston Consulting Group (2007) summarized six M&A waves from 1897 to 2006 and identified the major factors promoting each wave. The 6th wave ended suddenly because of the global financial crisis in 2008. Harford (2005) identified economic, regulatory and technological shocks drive M&A waves when sufficient overall capital liquidity is available. However, if macro-level liquidity does not exist, these shocks won’t cause M&A activities aggregate in time. Therefore, capital liquidity is the necessary component for economic, regulatory and technological shocks to drive M&A waves. Harford’s research provides hints to explain why M&As rebounded in the past few years. As central banks keep quantitative easing measures to recover the global economy from the financial crisis,
the 7th M&A wave starts. Meanwhile, technological breakthroughs disrupt various
industries. Companies abruptly acknowledge they have been unconsciously losing their foundations. It’s time to reconsider their corporate strategies. M&A seems to be a
feasible and efficient shortcut for long-term value creation.
2.5 Moving Forward
While macroeconomic conditions spur the 7th wave, technology M&As flourish.
Technology not only carries formidable threats but also highlights vast opportunities.
Urbanization is enlarging cities. The demand for smart city is emerging. Technology building smart city is advancing. Corporate strategy is changing. Under this atmosphere, companies are eagerly participating in technology M&A, no matter they belong to the tech sector or the non-tech sectors.
In a young and small industry, firms are prone to be vertically integrated. To grasp opportunities of smart city, empirical cases of recent technology M&A activities show that except for vertical integration, companies are also aggressively handling horizontal integration and unrelated diversification. These M&As will eventually alter orders of industries and sway competitive landscapes. This thesis will focus on the information and communications technology industry and try to clarify strategic motivations and
competitive consequences of the technology M&As for forming smart city.
Chapter 3 Case Analysis
3.1 The Semiconductor Industry
Motivated by the vigorous demand of personal computers, the semiconductor industry burgeoned with a compound annual growth rate greater than 15% during the 1980s and 1990s (U.S. Department of Commerce, 2016). Popularity of communications devices and consumer electronics further stimulated the market expansion. However,
based on the larger market foundation and restrained by the burst of Dot-com Bubble and the 2008 financial crisis, the industry’s 5-year compound annual growth rates on
average approached to 5% in the past two decades.
Roughly speaking, the global semiconductor revenues grew quite stably, from $45
billion in 1988 to $412 billion in 2017 as shown in Figure 2. However, if viewed with a finer scope, the industry’s year-over-year growth rates fluctuate dramatically. The
volatility gets amplified by the global economic booms and recessions. Severe cyclicality of revenues affects operating models chosen by semiconductor companies.
Figure 2: 1988-2017 Worldwide Semiconductor Revenues
Source: McKinsey & Company (2015b) and Semiconductor Industry Association (2016a, 2018)
Integrated Circuits (ICs), the finished products of the semiconductor industry, can be categorized into two types: standard chips and specialized chips. Standard chips usually are common components used in various electrical systems, such as Dynamic Random Access Memory (DRAM) and Flash Memory. Different manufacturers can produce identical standard chips with almost no differentiation in functionality.
Moreover, standard chips can be designed to be totally footprint-compatible, so they can be easily replaced by other brands without causing any issue of systems’ operations.
The homogeneous characteristic makes standard chips traded like commodities in the
market. They are demanded in large volumes, but constitute lower profit margins due to the competition over price. Specialized chips are proprietary products of companies.
Their performances, functionalities and footprints differ significantly. Once specialized chips are locked down by electrical system designers, signal routings of the whole circuitry on the Printed Circuit Boards (PCBs) are uniquely optimized to match characteristics of the selected chips. No identical substitution exists to make the same system work properly without any modification. Normally specialized chips require more research and development resources and they are what companies can differentiate themselves from others. Demands for specialized chips can be high or low in volumes, which is up to demands of the electrical systems. Specialized chips are usually purchased directly from IC suppliers via individual case-sensitive contracts.
ICs are non-perishable products with high ratios of economic value to weight.
Transportation costs are relatively insignificant, so the semiconductor industry is a global market where companies located in diverse geographic zones compete or collaborate jointly. Companies in the industry require talented scientists and engineers to highly engage in research and development for patent creation, technology advancement, and product development. With appropriate designs, ICs are durable goods that can work reliably for years. However, rapid breakthroughs in technologies and expectation on improved customers’ experiences result in frequent replacements of
system devices, which in turn causes ICs being obsoleted much earlier than they start to malfunction. Therefore, prices of ICs decline quickly over time. Besides, severe
cyclicality of demands promotes disequilibrium between demand and supply, which consequently leads to prominent fluctuations on IC’s prices.
Figure 3: Value Chain and Operating Models of the Semiconductor Industry
Source: Semiconductor Industry Association (2016b)
As Figure 3 indicates, value chain of the semiconductor industry can be briefly categorized into five activities: research & development, design, manufacturing, assembling, testing & packaging, and distribution. Advanced fundamental research &
development studies are usually conducted by non-profit institutions, like CEA-Lti from France, IMEC from Belgium, ITRI from Taiwan, and two U.S.-based organizations, SEMATECH, and Semiconductor Research Corporation. Based on innovations discovered by the research and development institutions, ICs are designed
to optimize cooperation of electronics components and routings of circuits, so the whole circuitries can perform desired functionalities. Manufacturing realizes circuit designs.
This step creates circuit traces and sculptures electronics components on silicon wafers.
After complex circuities are miniatured on chips, the integrated circuits are assembled, tested, and packaged to ensure performances meeting electrical, mechanical and thermal specifications. Finally, finished ICs are distributed to Original Equipment Manufacturers (OEMs) and Original Design Manufacturers (ODMs) to be integrated into electrical systems for miscellaneous applications.
Each activity of the value chain requests specialized skills and technologies.
Besides, required capital investments differ significantly along the entire value chain.
Fundamental research & development is usually supported by governments, academia and dominant companies due to uncertainties of commercializing pioneering
innovations with decent returns. IC design requires talented engineers to create proprietary designs which outperform competitors’. IC design also highly relies on
engineers to acquire patents for protecting and differentiating companies. As for manufacturing, it consumes tremendous financial resources for capital reinvestments to establish competitive advantages and prevent from potential entrants. Besides, engineers have to expertize in fine tuning all kinds of manufacturing parameters to boost yield rates and attain leadership of learning curves. The step of assembling,