acquisition and retructuring

8/12/2019 Acquisition and Retructuring

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Acquisitions and Restructuring

Very popular strategy during the 20

th

Century.

55,000 acquisitions in the 1980s worth $1.3 trillion.

Pace of acquisitions picked up in the 1990s.

40-45 of acquisitions in recent years involved cross-border transactions.


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Acquisition Types:

Mergers:

Two firms join and integrate operations as co-equals. ChryslerDiamler Benz example.

Acquisitions:

One firm buys a controlling interest in another firm with the intent to

make the other firm a division or subsidiary of the acquiring firm. In general these agreements are friendly but do not result in a co-equal

relationship. Novells acquisition of German-based SuSE gives Novell an in-house

source for Linux desktop and server operating systems.

Hostile Takeovers:

Acquisition bid is unsolicited. Generally results in incumbent management being removed.Yahoos takeover bid for HotJobs to thwart TMP Worldwide

(a rival of Yahoo).


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Acquisitions

Rationales for Making Acquisitions

Increase

market power

Overcome

entry barriers

Cost of new

product development

Increase speed

to market

Increase

diversification

Reshape firms

competitive scope

Lower risk compared

to developing new

products

Learn and develop

new capabilities


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Market Power


Gain size to exploit core competencies. Usually a horizontal acquisition but may involve vertical or related

acquisitions (DisneyFox Family Worldwide). Time-Warner merger, financial and banking industry consolidation

Overcome Entry Barriers Overcome barriers by acquiring firm in the industry. Whirlpools acquisition of Phillips Electronics appliance business

Cost and speed of new product development and introduction

Acquisitions can provide access to new products much more quicklyand at a lower cost than internal development of new products.

Many firms in the pharmaceutical industry use acquisitions to entermarkets quickly, to overcome the high costs of developing productsinternally, and to increase the predictability of returns on theirinvestments.


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Acquisitions may reduce the risk of new product introductionversus internal development.

The outcome of an acquisition can be more easily estimated thanthe investments required to develop new products internally.

R&D expenditures are, by definition, risky in nature.

Lower risk of new product development

Proprietary knowledge and technology may not be transferable to otherindustries.

Difficult to develop new products for other markets when the firm has little

to do with existing products.

Increase diversification


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Reshape competitive scope Often used when industry outlook is poor or firm performance is declining. GMs acquisition of EDS and Hughes Aircraft.

Learn and develop new capabilities

Acquire capabilities that the firm does not currently have. Research has shown that firms can broaden their technology base,

acquire new capabilities and overcome inertia through acquisitions. Miller Brewing Companys acquisition of Kraft helped to reduce the

inertia present in its General Foods division


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Acquisitions

Problems With Acquisitions

Integration

difficulties

Inadequate

evaluation of target

High degree of Leverage

Inability toachieve synergy

Too much

diversification

Managers overlyfocused on acquisitions

Resulting firm

is too large


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Corporate Restructuring

Unraveling of the conglomerate diversification wave of the 1970s and early1980s.

Two primary types (voluntary and involuntary). Over the past two decades over 2/3 of all acquired businesses have been

divested, millions of employees have been removed through downsizing. Over $1.2 trillion has changed hands in the U.S. alone.

Four primary triggers for restructuring activity: Environmental Governance Strategy Performance


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Antecedents of Restructuring

Environment

Governance

Restructuring

PerformanceFinancial

Restructuring

Strategy


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Environmental

- Competition- Takeover threats- tax motivations

Governance

- Weak governance

Ineffective management Complacent board Inadequate incentives Lack of ownership concentration (institutional investor

activism).


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Strategy- Poor strategy or implementation- Overdiversification- Leverage

Performance- Poor or declining performance- Difference between desired and actual performance- Assets are undervalued- Perceived threat of takeover


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Financial restructuring

Modes of restructuring

- LBOs (divisional MBOs)- Employee stock options plans (ESOPs)- Equity financed share repurchases

- Targeted share repurchases (greenmail)- Leveraged recapitalizations

Leveraged cash-outs Leveraged share repurchases Securities swaps (debt for equity)


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Asset restructuring

Modes of restructuring

- Downsizing

Employee layoffs

Mixed results 89% cite expense reduction (46% succeeded) 67% for competitive advantage (19% succeeded) Which employees leave or stay?

- Downscoping

Divestitures (sell-offs, spin-offs, split-ups) Plant closings Liquidations


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Divestitures (sell-offs versus spin-offs)

Spin-off represents a pro-rata distribution of shares of asubsidiary to shareholders.

Occurs within the hierarchy. Terms and valuation of the assets are set internally Parent stockholders create new board and TMT. Parent can maintain ties with spun-off unit.

Spin-off

Sell-off

Sell-offs: Assets are sold to another firm for cash and/or

securities. Occurs outside the hierarchy. Value determined by market forces. Acquiring firm absorbs and governs the sold-off assets as

part of its hierarchy.


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Strategy

Restructuring outcomes

Focus on related or unrelated units (less total diversification) Innovation

Employee effects

Trust of management Poor communication Motivation Turnover

Performance (market)

Generally positive (except when fighting a takeover) Determined by use of funds

acquisition and retructuring

Documents