acquisition as a strategy

8/3/2019 Acquisition as a Strategy

1/19

PRESENTED BY:-

VAIJANTI YADAV

20100150


2/19

AcquisitionsAcquisition:a strategy through which one firm buys a

controlling interest in another firm with the intent ofmaking the acquired firm a subsidiary business within

its own portfolio

2


3/19

EXAMPLE OF ACQUISITION TATA-CORUS

Tata acquired Corus which is four time larger than its sizeand the largest steel producer in U.K.The deal whichcreates the worlds fifth largest steel maker ,is Indiaslargest ever foreign takeover and follows Mittals steel $31billion acquisition of rival Arcellor in the same year.

Tata acquired Corus on the 2nd of April for a price of $ 12

billion .The price per share was 608 pence, which is 33.6%higher than the first over which was 455 pence.


4/19

Reasons for Making Acquisitions

4

Acquisitions

Increasemarket power

Overcomeentry barriers

Cost of newproduct development Increase speed

to market

Increasediversification

Reshape firmscompetitive scope

Lower risk comparedto developing new

products

Learn and developnew capabilities


5/19

Reasons for Making Acquisitions:

Factors increasing market power 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 belowthose of its competitors usually is derived from the size of the firm and its resources

and capabilities to compete

Market power is increased by

horizontal acquisitions vertical acquisitions related acquisitions

Example: British Petroleums acquisition of U.S. Amoco

5

Increased Market Power


6/19


Barriers to entry include economies of scale in established competitors differentiated products by competitors enduring relationships with customers that create product

loyalties with competitors acquisition of an established company

may be more effective than entering the market as a competitoroffering an unfamiliar good or service that is unfamiliar to currentbuyers

Cross-border acquisition

Example:Belgian-Dutch Fortis acquisition ofAmerican Bankers Insurance Group

6

Overcome Barriers to Entry


7/19


Significant investments of a firms resources arerequired to develop new products internally

introduce new products into the marketplaceAcquisition of a competitor may result in

lower risk compared to developing new products

increased diversification

reshaping the firms competitive scope learning and developing new capabilities

faster market entry

rapid access to new capabilities

7

Cost of New Product Development

and Increased Speed to Market


8/19


An acquisitions outcomes can be estimated moreeasily and accurately compared to the outcomesof an internal product development process

Therefore managers may view acquisitions aslowering risk

Example:Watson Pharmaceuticals acquisitionof TheraTech

8

Lower Risk Compared to Developing

New Products


9/19


It may be easier to develop and introduce newproducts in markets currently served by the firm

It may be difficult to develop new products formarkets in which a firm lacks experience

it is uncommon for a firm to develop new productsinternally to diversify its product lines

acquisitions are the quickest and easiest way todiversify a firm and change its portfolio of businesses.

Example: CNETs acquisition ofmySimon

9

Increased Diversification


10/19


Firms may use acquisitions to reduce theirdependence on one or more products or markets

Reducing a companys dependence on specificmarkets alters the firms competitive scope.

Example: General Electrics acquisition of NBC

10

Reshaping the Firms Competitive Scope


11/19


Acquisitions may gain capabilities that the firmdoes not possess

Acquisitions may be used to

acquire a special technological capability

broaden a firms knowledge base

reduce inertia

11

Learning and Developing New Capabilities


12/19

Problems With Acquisitions

12

Acquisitions

Integrationdifficulties

Inadequateevaluation of target

Large orextraordinary debt

Inability toachieve synergy

Too muchdiversification

Managers overlyfocused on acquisitions

Resulting firmis too large


13/19


Integration challenges include

melding two disparate corporate cultures

linking different financial and control systems building effective working relationships (particularly

when management styles differ)

resolving problems regarding the status of the newly

acquired firms executives.

Example: Intels acquisition of DECs semiconductor

division

13

Integration Difficulties


14/19


Firm may take on significant debt to acquire acompany

High debt can increase the likelihood of bankruptcy

lead to a downgrade in the firms credit rating

preclude needed investment in activities that contribute

to the firms long-term success.

Example:AgriBioTechs acquisition of dozens ofsmall seed firms

14

Large or Extraordinary Debt


15/19


Synergy exists when assets are worth more whenused in conjunction with each other than whenthey are used separately

Firms experience transaction costs (e.g., legal fees)when they use acquisition strategies to createsynergy

Firms tend to underestimate indirect costs ofintegration when evaluating a potentialacquisition.

Example:Quaker Oats and Snapple

15

Inability to Achieve Synergy


16/19


Diversified firms must process more informationof greater diversity

Scope created by diversification may causemanagers to rely too much on financial rather thanstrategic controls to evaluate business unitsperformances

Acquisitions may become substitutes forinnovation.

Example:GE--prior to selling businesses andrefocusing

16

Too Much Diversification


17/19


Managers in target firms may operate in a state ofvirtual suspended animation during an acquisition

Executives may become hesitant to make decisionswith long-term consequences until negotiationshave been completed

Acquisition process can create a short-term

perspective and a greater aversion to risk amongtop-level executives in a target firm.

Example:Ford and Jaguar

17

Managers Overly Focused on Acquisitions


18/19


Larger size may lead to more bureaucratic controls

Formalized controls often lead to relatively rigid

and standardized managerial behavior Firm may produce less innovation

18

Too Large


19/19

THANK YOU

acquisition as a strategy

Documents