MergerandAcuisition

8/10/2019 MergerandAcuisition

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PowerPoint Presentation by Charlie Cook

The University of West Alabama

Strategic ManagementCompetitiveness and Globalization:

Concepts and Cases

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

Seventh edition

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

2007 Thomson/South-Western.

All rights reserved.

CHAPTER 7

Acquisition and Mergers

Management of Strategy

Concepts and Cases


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2007 Thomson/South-Western. All rights reserved. 72

KNOWLEDGEOBJECTIVES

1. Explain the popularity of acquisition strategies in firms competing in

the global economy.

2. Discuss reasons why firms use an acquisition strategy to achieve

strategic competitiveness.3. Describe seven problems that work against developing a

competitive advantage using an acquisition strategy.

4. Name and describe attributes of effective acquisitions.

5. Define the restructuring strategy and distinguish among itscommon forms.

6. Explain the short- and long-term outcomes of the different types of

restructuring strategies.

Studying this chapter should provide you with the strategic

management knowledge needed to:


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Mergers, Acquisitions, and Takeovers:What are the Differences?

Merger

Two firms agree to integrate their operations on a

relatively co-equal basis.

AcquisitionOne firm buys a controlling, or 100% interest in

another firm with the intent of making the acquired

firm a subsidiary business within its portfolio.

Takeover

A special type of acquisition when the target firm did

not solicit the acquiring firms bid for outright

ownership.


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FIGURE7.1

Reasons forAcquisitions and

Problems inAchieving Success


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Reasons for Acquisitions

Learning and

developing

new capabilities

Reshaping firms

competitive scope

Increased

diversification Lower risk than

developing new

products

Cost of new

product

development

Overcoming

entry barriers

Increase speed

to market

Increased

market power

Making an

Acquisition


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Acquisitions: Increased Market Power

Factors increasing market power when:There is the ability to sell goods or services above

competitive levels.

Costs of primary or support activities are below those

of competitors.A firms size, resources and capabilities gives it a

superior ability to compete.

Acquisitions intended to increase market power

are subject to:Regulatory review

Analysis by financial markets


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Acquisitions: Increased Market Power(contd)

Market power is increased by:

Horizontal acquisitions:other firms in the same

industry

Vertical acquisitions:suppliers or distributors of the

acquiring firm

Related acquisitions:firms in related industries


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Market Power Acquisitions

Acquisition of a company in the

same industry in which the

acquiring firm competes

increases a firms market power

by exploiting:

Cost-based synergies

Revenue-based synergies

Acquisitions with similarcharacteristics result in higher

performance than those with

dissimilar characteristics.

HorizontalAcquisitions


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Market Power Acquisitions (contd)

Acquisition of a supplier or

distributor of one or more of the

firms goods or services

Increases a firms market

power by controlling additional

parts of the value chain.


VerticalAcquisitions


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Market Power Acquisitions (contd)

Acquisition of a company in a

highly related industry

Because of the difficulty in

implementing synergy,

related acquisitions are often

difficult to implement.


VerticalAcquisitions

RelatedAcquisitions


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Acquisitions: Overcoming Entry Barriers

Entry BarriersFactors associated with the market or with the firms

operating in it that increase the expense and difficulty

faced by new ventures trying to enter that market

Economies of scale Differentiated products

Cross-Border Acquisitions

Acquisitions made between companies with

headquarters in different countries

Are often made to overcome entry barriers.

Can be difficult to negotiate and operate because of the

differences in foreign cultures.


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Acquisitions: Lower Risk Compared toDeveloping New Products

An acquisitions outcomes can be estimated

more easily and accurately than the outcomes of

an internal product development process.

Managers may view acquisitions as lowering risk

associated with internal ventures and R&D

investments.

Acquisitions may discourage or suppress innovation.


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Acquisitions: Increased Diversification

Using acquisitions to diversify a firm is thequickest and easiest way to change its portfolio

of businesses.

Both relateddiversification and unrelated

diversification strategies can be implemented

through acquisitions.

The more relatedthe acquired firm is to the

acquiring firm, the greateris the probability thatthe acquisition will be successful.


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Acquisitions: Reshaping the Firms

Competitive Scope

An acquisition can:

Reduce the negative effect of an intense rivalry on a

firms financial performance.

Reduce a firms dependence on one or more

products or markets.

Reducing a companys dependence on specific

markets alters the firms competitive scope.


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Acquisitions: Learning and Developing NewCapabilities

An acquiring firm can gain capabilities that the

firm does not currently possess:

Special technological capability

A broader knowledge base

Reduced inertia

Firms should acquire other firms with differentbut related and complementary capabilities in

order to build their own knowledge base.


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Problems in Achieving Acquisition Success

Too large

Managers

overly focused on

acquisitionsExtraordinary debt

Inadequate

target evaluation

Too much

diversification

Inability to

achieve synergy

Integration

difficulties

Problems

with

Acquisitions


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Problems in Achieving Acquisition Success:Large or Extraordinary Debt

High debt (e.g., junk bonds) can:

Increase the likelihood of bankruptcy

Lead to a downgrade of the firms credit rating

Preclude investment in activities that contribute to the

firms long-term success such as:

Research and development

Human resource training

Marketing


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Problems in Achieving Acquisition Success:Inability to Achieve Synergy

Synergy

When assets are worth more when used in

conjunction with each other than when they are used

separately.

Firms experience transaction costs when they use

acquisition strategies to create synergy.

Firms tend to underestimate indirect costs whenevaluating a potential acquisition.


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Problems in Achieving Acquisition Success:Inability to Achieve Synergy (contd)

Private synergy

When the combination and integration of the

acquiring and acquired firmsassets yields

capabilities and core competencies that could not bedeveloped by combining and integrating either firms

assets with another company.

Advantage: It is difficult for competitors to

understand and imitate. Disadvantage: It is also difficult to create.


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Problems in Achieving Acquisition Success:Too Much Diversification

Diversified firms must process more information

of greater diversity.

Increased operational scope created by diversification

may cause managers to rely too much on financialrather than strategic controls to evaluate business

unitsperformances.

Strategic focus shifts to short-term performance.

Acquisitions may become substitutes for innovation.


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Problems in Achieving Acquisition Success:Managers Overly Focused on Acquisitions

Managers invest substantial time and energy in

acquisition strategies in:

Searching for viable acquisition candidates.

Completing effective due-diligence processes.

Preparing for negotiations.

Managing the integration process after the acquisition

is completed.


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Problems in Achieving Acquisition Success:Managers Overly Focused on Acquisitions

Managers in target firms operate in a state of

virtual suspended animation during an

acquisition.

Executives may become hesitant to make decisionswith long-term consequences until negotiations have

been completed.

The acquisition process can create a short-term

perspective and a greater aversion to risk amongexecutives in the target firm.


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Problems in Achieving Acquisition Success:Too Large

Additional costs of controls may exceed the

benefits of the economies of scale and additional

market power.

Larger size may lead to more bureaucratic

controls.

Formalized controls often lead to relatively rigid

and standardized managerial behavior. The firm may produce less innovation.


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Effective Acquisition Strategies

ComplementaryAssets /Resources

Buying firms with assets that meetcurrent needs to build competitiveness.

Friendly

AcquisitionsFriendly deals make integration go more

smoothly.

Careful Selection

Process

Deliberate evaluation and negotiations

are more likely to lead to easy

integration and building synergies.

Maintain Financial

Slack

Provide enough additional financial

resources so that profitable projectswould not be foregone.


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Attributes of Effective Acquisitions

Attributes Results

Low-to-ModerateDebt

Merged firm maintains

financial flexibility

Flexibility Has experience atmanaging change and is

flexible and adaptable

Sustain

Emphasis

onInnovation

Continue to invest in R&D

as part of the firms overall

strategy


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Restructuring

A strategy through which a firm changes its setof businesses or financial structure.

Failure of an acquisition strategy often precedes a

restructuring strategy.

Restructuring may occur because of changes in theexternal or internal environments.

Restructuring strategies:

Downsizing

Downscoping

Leveraged buyouts


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Types of Restructuring: Downsizing

A reduction in the number of a firm

s employeesand sometimes in the number of its operating

units.

May or may not change the composition of

businesses in the companys portfolio.

Typical reasons for downsizing:

Expectation of improved profitability from cost

reductions

Desire or necessity for more efficient operations


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Types of Restructuring: Downscoping

A divestiture, spin-off or other means ofeliminating businesses unrelated to a firms core

businesses.

A set of actions that causes a firm to strategically

refocus on its core businesses.May be accompanied by downsizing, but not

eliminating key employees from its primary

businesses.

Smaller firm can be more effectively managed by the

top management team.


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Restructuring: Leveraged Buyouts (LBO)

A restructuring strategy whereby a party buys allof a firms assets in order to take the firm private.

Significant amounts of debt may be incurred to

finance the buyout.

Immediate sale of non-core assets to pare down debt.

Can correct for managerial mistakes

Managers making decisions that serve their own

interests rather than those of shareholders.

Can facilitate entrepreneurial efforts and

strategic growth.


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2007 Th /S th W t All i ht d 7 34

FIGURE7.2 Restructuring and Outcomes

Documents

MergerandAcuisition