Download - 1 Acquisition and Restructuring Strategies Chapter 7 How can we grow our business?

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Acquisition and Restructuring Acquisition and Restructuring StrategiesStrategies

Chapter 7Chapter 7

How can we grow our business?

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Mergers and AcquisitionsMergers and Acquisitions Merger:Merger: a strategy through which two firms a strategy through which two firms

agree to integrate theiragree to integrate their operations on a operations on a relatively co-equal basisrelatively co-equal basis

Acquisition:Acquisition: a strategy through which one firm a strategy through which one firm buys a controlling interest in another firm with buys a controlling interest in another firm with the intent of making the acquired firm a the intent of making the acquired firm a subsidiary business within its own portfoliosubsidiary business within its own portfolio

Takeover:Takeover: a special type of an acquisition a special type of an acquisition strategy wherein the target firm did not solicit the strategy wherein the target firm did not solicit the acquiring firm’s bidacquiring firm’s bid

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AcquisitionsAcquisitions

Reasons for Making AcquisitionsReasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

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Reasons for Making Acquisitions:Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services when a firm is able to sell its goods or services

above competitive levels orabove competitive levels or

– when the costs of its primary or support activities when the costs of its primary or support activities are below those of its competitorsare below those of its competitors

– usually is derived from the size of the firm and its usually is derived from the size of the firm and its resources and capabilities to compete resources and capabilities to compete

Market power is increased byMarket power is increased by– horizontal acquisitionshorizontal acquisitions

– vertical acquisitionsvertical acquisitions

– related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power

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Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors

– differentiated products by competitorsdifferentiated products by competitors

– enduring relationships with customers that create enduring relationships with customers that create product loyalties with competitorsproduct loyalties with competitors

Acquisition of an established companyAcquisition of an established company – may be more effective than entering the market as a may be more effective than entering the market as a

competitor offering an unfamiliar good or service that competitor offering an unfamiliar good or service that is unfamiliar to current buyersis unfamiliar to current buyers

– provides a new entrant with immediate market accessprovides a new entrant with immediate market access

Overcome Barriers to EntryOvercome Barriers to Entry

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Significant investments of a firm’s Significant investments of a firm’s resources are required toresources are required to– Develop new products internallyDevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in– more predictable returns more predictable returns – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities

Cost of New Product Development and Speed Cost of New Product Development and Speed to Marketto Market

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An acquisition’s outcomes can be estimated An acquisition’s outcomes can be estimated more easily and accurately compared to the more easily and accurately compared to the outcomes of an internal product development outcomes of an internal product development processprocess

Therefore managers may view acquisitions Therefore managers may view acquisitions as lowering riskas lowering risk

Lower Risk Compared to Developing New Lower Risk Compared to Developing New ProductsProducts

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It may be easier to develop and introduce It may be easier to develop and introduce new products in markets currently served new products in markets currently served by the firmby the firm

It may be difficult to develop new products It may be difficult to develop new products for markets in which a firm lacks experiencefor markets in which a firm lacks experience– it is uncommon for a firm to develop new it is uncommon for a firm to develop new

products internally to diversify its product linesproducts internally to diversify its product lines– acquisitions are the quickest and easiest way to acquisitions are the quickest and easiest way to

diversify a firm and change its portfolio of diversify a firm and change its portfolio of businessbusiness

Increased DiversificationIncreased Diversification

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Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or dependence on one or more products or marketsmarkets

Reducing a company’s dependence on Reducing a company’s dependence on specific markets alters the firm’s competitive specific markets alters the firm’s competitive scopescope

Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope

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Acquisitions may gain capabilities that the Acquisitions may gain capabilities that the firm does not possessfirm does not possess

Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base

– reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities

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AcquisitionsAcquisitions

Problems With AcquisitionsProblems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

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Problems With AcquisitionsProblems With Acquisitions

Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships building effective working relationships

(particularly when management styles differ)(particularly when management styles differ)– resolving problems regarding the status of the resolving problems regarding the status of the

newly acquired firm’s executivesnewly acquired firm’s executives– loss of key personnel weakens the acquired loss of key personnel weakens the acquired

firm’s capabilities and reduces its valuefirm’s capabilities and reduces its value

Integration DifficultiesIntegration Difficulties

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Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction

– differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm

– tax consequences of the transactiontax consequences of the transaction

– actions that would be necessary to successfully meld the two actions that would be necessary to successfully meld the two workforcesworkforces

Ineffective due-diligence process mayIneffective due-diligence process may– result in paying excessive premium for the target companyresult in paying excessive premium for the target company

Inadequate Evaluation of TargetInadequate Evaluation of Target

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Firm may take on significant debt to Firm may take on significant debt to acquire a companyacquire a company

High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that preclude needed investment in activities that

contribute to the firm’s long-term successcontribute to the firm’s long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt

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Synergy exists when assets are worth Synergy exists when assets are worth more when used in conjunction with each more when used in conjunction with each other than when they are used separatelyother than when they are used separately

Firms experience transaction costs when Firms experience transaction costs when they use acquisition strategies to create they use acquisition strategies to create synergysynergy

Firms tend to underestimate indirect costs Firms tend to underestimate indirect costs when evaluating a potential acquisitionwhen evaluating a potential acquisition

Inability to Achieve SynergyInability to Achieve Synergy

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Diversified firms must process more Diversified firms must process more information of greater diversity information of greater diversity

Scope created by diversification may Scope created by diversification may cause managers to rely too much on cause managers to rely too much on financial rather than strategic controls to financial rather than strategic controls to evaluate business units’ performancesevaluate business units’ performances

Acquisitions may become substitutes for Acquisitions may become substitutes for innovationinnovation

Too Much DiversificationToo Much Diversification

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Managers in target firms may operate in a state of Managers in target firms may operate in a state of virtual suspended animation during an virtual suspended animation during an acquisitionacquisition

Executives may become hesitant to make Executives may become hesitant to make decisions with long-term consequences until decisions with long-term consequences until negotiations have been completednegotiations have been completed

Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among top-level executives in a target firmtop-level executives in a target firm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions

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Additional costs may exceed the benefits of the Additional costs may exceed the benefits of the economies of scale and additional market powereconomies of scale and additional market power

Larger size may lead to more bureaucratic Larger size may lead to more bureaucratic controls controls

Formalized controls often lead to relatively rigid Formalized controls often lead to relatively rigid and standardized managerial behaviorand standardized managerial behavior

Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large

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Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

AttributesAttributes ResultsResults

Complementary Complementary Assets or ResourcesAssets or Resources

Buying firms with assets that meet current Buying firms with assets that meet current needs to build competitivenessneeds to build competitiveness

Friendly Friendly AcquisitionsAcquisitions

Friendly deals make integration go more Friendly deals make integration go more smoothlysmoothly

Careful Selection Careful Selection ProcessProcess

Deliberate evaluation and negotiations are Deliberate evaluation and negotiations are more likely to lead to easy integration and more likely to lead to easy integration and building synergiesbuilding synergies

Maintain Financial Maintain Financial SlackSlack

Provide enough additional financial Provide enough additional financial resources so that profitable projects would resources so that profitable projects would not be foregonenot be foregone

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Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

AttributesAttributes ResultsResults

Low-to-Moderate Low-to-Moderate DebtDebt

Merged firm maintains financial flexibilityMerged firm maintains financial flexibility

FlexibilityFlexibility Has experience at managing change and is Has experience at managing change and is flexible and adaptableflexible and adaptable

Sustain Emphasis Sustain Emphasis on Innovation on Innovation

Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategyfirm’s overall strategy

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Restructuring ActivitiesRestructuring Activities DownsizingDownsizing

– Wholesale reduction of employeesWholesale reduction of employees

DownscopingDownscoping– Selectively divesting or closing non-core Selectively divesting or closing non-core

businessesbusinesses– Reducing scope of operationsReducing scope of operations– Leads to greater focusLeads to greater focus

Leveraged Buyout (LBO)Leveraged Buyout (LBO)– A party buys a firm’s entire assets in order to A party buys a firm’s entire assets in order to

take the firm private.take the firm private.

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LowerLowerperformanceperformance

HigherHigherperformanceperformance

Higher riskHigher risk

Loss ofLoss ofhuman capitalhuman capital

Restructuring and OutcomesRestructuring and Outcomes

Emphasis onEmphasis onstrategic controlsstrategic controls

High debt costsHigh debt costs

Reduced debtReduced debtcostscosts

Reduced laborReduced laborcostscosts

DownsizingDownsizing

DownscopingDownscoping

LeveragedLeveragedbuyoutbuyout