Comm 401 chapter 7 good one.docx
Chapter 7: Merger and Acquisition (Restructuring) Strategies
Acquisition is increasingly popular
Acquisition strategies are increasingly popular due to
Deregulation of many industries in different economies
Resulting increase in number and size of domestic and cross-border acquisitions, especially from
A strategy through which two firms agree to integrate their operations on a relatively coequal
basis. Few true mergers actually occur, because one party is usually dominant in regard to
market share or firm size.
A strategy through which one firm buys a controlling, or 100 percent, interest in another firm with
the intent of making the acquired firm a subsidiary business within its portfolio.
A special type of an acquisition strategy wherein the target firm does not solicit the acquiring
Reasons for acquisition strategies
Firms use acquisition strategies to
Increase market power
•Exists when a firm is able to sell its goods or services above competitive levels or when
the costs of its primary or support activities are lower than those of its competitors.
Overcome entry barriers to new markets or regions
•Acquiring an established company – will be more effective than entering the market as
competitor offering a product that is unfamiliar to current buyers.
Avoid product development cost; increased speed to market
•Acquisitions provide more predictable returns as well as faster market entry. Returns are
more predictable because the performance of the acquired firm’s products can be
assessed prior to completing the acquisition.
Reduce the risk of entering a new business
•Acquisition seems less risky because outcomes can be estimated more easily and
accurately than the outcomes of an internal product development process.
Become more diversified
•It is difficult for companies to develop products that differ from their current lines for
markets in which they lack experience.
Avoid excessive competition
•May use acquisition to lessen their dependence on one or more products or markets. ---
Shaping the firm’s competitive scope.
Learn and develop new capabilities
•To gain access to capacities they lack.
To increase market power
Firms use: horizontal, vertical, and related types of acquisitions.
oHorizontal acquisitions: the acquisition of a company competing in the same industry as the
oVertical acquisitions: refers to a firm acquiring a supplier or distributor of one or more of its goods or
oRelated acquisitions: a firm in a highly related industry is called a related acquisition. Create value
through the synergy that can be generated by integrating some of their resources and capabilities.
To overcome entry barriers
Completing a cross border acquisition of a local target allows a firm to quickly enter fast-growing economies.
oCross-border acquisitions: acquisitions made between companies with headquarters in different
Problems in achieving acquisition success
Problems with using an acquisition strategy include
•Melding two corporate cultures, linking different financial and control systems, building
effective working relationships, and resolving problems regarding the status of the newly
acquired fir’s executives.
Inadequate evaluation of target
•Due diligence: is a process through which a potential acquirer evaluates a target firm for
•Failure to complete an effective due-diligence process may readily result in the acquiring
firm paying an excessive premium for the target company.
Large or extraordinary debt
•Must be certain that their purchases do not crate a debt load that overpowers the
company’s ability to remind solvent.
Inability to achieve synergy
•Synergies are created by the efficiencies derived from economies of scale and
economies of scope and by sharing resources across the business in the merged firm.
•Competitive advantage through an acquisition strategy only when a transaction
generates private synergy: created when combining and integrating the acquiring and
acquired firms’ assets yield capabilities and core competencies that could not be
developed by combining and integrating either firm’s assets with a another company.
Difficult for competitors to understand and imitate.
Too much diversification
•Because related diversification requires more information processing this additional
information processessing firms become over diversified.
•Over diversiversification leads to a decline in performance, after which business units
are often diversified.
•A divestment tends to reshape a firm’s competitive scope.
•Costs associated with acquisitions may result in fewer allocations to activities, such as
R&D, that are linked to innovation. Innovation skills begin to atrophy.
Managers overly focused on acquisitions
•Activities with which managers become involved including searching for viable
acquisition candidates, completing effective due-diligence processes, preparing for
negotiations, and managing the integration process after completing the acquisition.
•These activities required a considerable amount of time and energy.
•This energy could have been used in other matters that are necessary for long-term
competitive success, such as identifying and taking advantage of other opportunities and
interacting with important external stakeholders.
Too large, resulting in bureaucracy
•The complexities generated by the larger size often-lead managers to implement more
bureaucratic controls to manage the combined firm’s operations.
•Bureaucratic controls are formalized supervisory and behavioral rules and policies
designed to ensure consistency of decisions and action across different units of a firm.
Rigid and standardized managerial behavior.
The acquiring and target firms have complementary resources that can be the basis of core
competencies in the newly created firm
The acquisition is friendly, thereby facilitating integration of the two firms’ resources
The target firm is selected and purchased based on thorough due diligence
The acquiring and target firms have considerable slack in the form of cash or debt capacity
The merged firm maintains a low or moderate level of debt by selling off portions of the
acquired firm or some of the acquiring firm’s poorly performing units
The acquiring and acquired firms have experience in terms of adapting to change; and
R&D and innovation are emphasized in the new firm.
•Restructuring is a strategy through which a firm changes its set of businesses or its financial structure.
•Firms use 3 types of restructuring strategies: downsizing, downscoping, and leveraged buyouts.
oDownsizing: is a reduction in the number of a firm’s employees and, sometimes, in the number
of its operating units, but it may or may not change the composition of businesses in the
oDownscoping: refers to divestiture, spin-off, or some other means of eliminating businesses
that are unrelated to a firm’s core businesses.
oLeveraged Buyouts: is a restructuring strategy whereby a party (typically a private equity firm)
buys all of a firm’s assets in order to take the firm private. Once the transition is completed, the
company’s stock is no longer traded publicly.
•A firm is purchased (largely through debt) so that it can become a private entity
•To improve efficiency, performance so firm can be sold successfully in 5-8 years
3 types of LBOs
•Management buyouts (MBOs)