Competing for ADVANTAGE

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Chapter 9Acquisition and Restructuring Strategies

PART IIICREATING COMPETITIVE ADVANTAGE

The Strategic Management Process

Merger and Acquisition Strategies

Very popular strategies Especially cross-border acquisitions Offensive and defensive motives

Problematic High failure rates Complex strategic decisions Impacted by economic volatility Uncertain returns

Mergers, Acquisitions, and Takeovers – The Differences

Key Terms

Merger

Strategy through which two firms agree to integrate their operations on a relatively co-equal basis

Acquisition

Strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio or melding it with another division

Mergers, Acquisitions, and Takeovers – The Differences

Key Terms

Takeover

Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid

Hostile takeover

Unfriendly takeover strategy that is unexpected and undesired by the target firm

Reasons for Acquisitions

Sources of Market Power

Size of the firm Resources and

capabilities to compete in the market

Share of the market

Types of Acquisitions to Increase Market Power

Horizontal Acquisitions

Vertical Acquisitions

Related Acquisitions

Horizontal Acquisitions

Acquisition of a company competing in the same industry

Increase market power by exploiting cost-based and revenue-based synergies

Character similarities between the firms lead to smoother integration and higher performance

Vertical Acquisitions

Acquisition of a supplier or distributor of one or more products or services

Increase market power by controlling more of the value chain

Related Acquisitions

Acquisition of a firm in a highly related industry

Increase market power by leveraging core competencies to gain a competitive advantage

Entry Barriers that Acquisitions Overcome

Economies of scale in established competitors

Differentiated competitor products

Enduring relationships and product loyalties between customers and competitors

Cross-Border Acquisitions

Acquisitions made between companies with headquarters in different countries

New Product Development

Significant investments of a firm’s resources are required to: develop new products

internally

introduce new products into the marketplace

Profitability or adequate returns on investments are not certain

Increase Speed to Market

Acquisitions are used for rapid market entry critical to

successful competition in the highly uncertain and complex global environment faced by

firms today.

Reshape the Firm’s Competitive Scope

Acquisitions quickly and easily: Change a firm's portfolio of

businesses

Establish new lines of products in markets where the firm lacks experience

Alter the scope of a firm’s activities

Create strategic flexibility

Learn and Develop New Capabilities

Acquisitions are used to: Gain capabilities that the firm

does not possess

Broaden the firm’s knowledge base

Reduce inertia

Problems in Achieving Acquisition Success

Integration Challenges

Melding two disparate corporate cultures Working relationships

Financial and control systems

Uncertainty for acquired firm’s employees

Retaining crucial knowledge held by key personnel

Merging acquired capabilities into internal processes and procedures

Private Synergy

Occurs when the combination and integration of acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating the assets of any other companies.

Possible when the two firms' assets are complimentary in unique ways.

Yields a competitive advantage that is difficult to understand or imitate.

Transaction Costs

Direct expenses Legal fees

Charges from investment bankers who complete due diligence

Indirect expenses Managerial time to evaluate target firms

and complete negotiations

Loss of key managers after an acquisition

Additional costs Managerial time in meetings

Resources used to integrate processes

Due Diligence

Process through which a potential acquirer evaluates a target firm for acquisition

Associates the purchase price of an acquisition to an estimated, realistic achievable value

Large or Extraordinary Debt

Increases the likelihood of bankruptcy

Can lower the firm’s credit rating

Precludes needed investments in activities that contribute to long-term success (opportunity costs)

Too Much Diversification

Overwhelming information processing requirements

Overuse of financial controls to evaluate unit performance

Decline in internal innovation

Management Acquisition Activities

Searching for viable acquisition candidates

Completing effective due-diligence processes

Preparing and conducting negotiations

Managing integration processes after acquisition is completed

Firm Becomes Too Large

Key Terms

Bureaucratic controls

Formalized supervisory and behavioral rules and policies designed to ensure decision and action consistency across different units of a firm

Attributes and Results of Successful Acquisitions

Restructuring

Key Terms

Restructuring

Strategy through which a firm changes its set of businesses or financial structure

Restructuring –Three Strategies

Downsizing

Downscoping

Leveraged Buyouts

Downsizing

Key Terms

Downsizing

Strategy that involves a reduction in the number of a firm's employees (and sometimes in the number of operating units) that may or may not change the composition of businesses in the company's portfolio

Downscoping

Key Terms

Downscoping

Strategy of eliminating businesses that are unrelated to a firm's core businesses through divesture, spin-off, or some other means

Leveraged Buyouts

Key Terms

Leveraged buyouts (LBOs)

Restructuring strategy whereby a party buys all of a firm's assets in order to take the firm private (or no longer trade the firm's shares publicly)

Private equity firms

Firms that facilitate or engage in taking public firms or business units of public firms private

Characteristics of Leveraged Buyouts

High debt Significant risk Related downscoping Managerial incentives

Restructuring and Outcomes

ETHICAL QUESTION

What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical

than takeovers? Why or why not?

ETHICAL QUESTION

One of the outcomes associated with market power is that the firm is able to

sell its good or service above competitive levels. Is it ethical for firms to pursue

market power? Does your answer to this question differ

by the industry in which the firm competes? For example, are the ethics of pursuing market power different for firms producing and selling medical equipment

compared with those producing and selling sports clothing?

ETHICAL QUESTION

What ethical considerations are associated with downsizing decisions?

If you were part of a corporate downsizing, would you feel that your

firm had acted unethically? If you believe that downsizing has an

unethical component to it, what should firms do to avoid using this

technique?

ETHICAL QUESTION

What ethical issues are involved with conducting a robust due-diligence

process?

ETHICAL QUESTION

Some evidence suggests that there is a direct relationship between a firm’s size and the level of compensation its top executives receive. If this is so,

what inducement does this relationship provide to top-level

managers? What can be done to influence this relationship so that it serves shareholders’ best interests?