Competing For Advantage

Part III – Creating Competitive Advantage

Chapter 9 – Acquisition and Restructuring Strategy

The Strategic Management Process

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Mergers, Acquisitions, and Takeovers: What Are 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.

Mergers, Acquisitions, and Takeovers – What Are 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

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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

The increase of 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

Increase of market power by controlling more of the value chain

Related Acquisitions

Acquisition of a firm in a highly related industry

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

Entry Barriers that Acquisitions Overcome Entry Barriers that Acquisitions Overcome

Economies of scale in established competitors

Differentiated products by competitors

Enduring relationships with customers that create product loyalties with 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

Acquisition of a Competitor – Outcomes

Lower risk compared to developing new products

Increased diversification

Reshaping the firm’s competitive scope

Learning and developing new capabilities

Faster market entry

Rapid access to new capabilities

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

Reshaping 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

Reshaping the Firm’s Competitive Scope

Acquisitions are often used:

In reaction to reduced profitability in a competitive environment of intense rivalry

To reduce overdependence on a single product or market

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

Reasons for Acquisitions

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Integration Challenges

Integration involves a large number of activities

Two disparate corporate cultures must be melded

Effective working relationships must be built

Different financial and control systems must be linked

The status of the acquired firms employees and executives must be determined

Turnover of key personnel must be minimized to retain crucial knowledge

Acquired capabilities must be merged 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 with any other company

Is possible when the two firms' assets are complimentary in unique ways

Yields a competitive advantage that is difficult to understand or imitate

Transaction Costs

Transaction costs – direct and indirect expenses incurred when firms use acquisition strategies to create synergy

These costs must be added to the purchase price of an acquisition to adequately evaluate its potential value

Firms tend to underestimate these costs, which negatively impacts anticipated revenue projections and expected cost-based synergies

Transaction Costs

Direct costs include legal fees and charges from investment bankers who complete due diligence for the acquiring firm

Indirect costs include managerial time to evaluate target firms and complete negotiations, as well as the loss of key managers after an acquisition

Additional costs include the actual time and resources used for integration processes

Due Diligence

Due diligence – process through which a potential acquirer evaluates a target firm for acquisition

Failure to complete an effective due-diligence process may easily result in the acquiring firm paying an excessive premium for the target company

Due Diligence

Evaluation requires that hundreds of issues be closely examined, including:

Financing for the intended transaction

Differences in cultures between the acquiring firm and target firm

Tax consequences of the transaction

Actions that would be necessary to successfully meld the two workforces

Large or Extraordinary DebtLarge or Extraordinary Debt

High debt can:

Increase the likelihood of bankruptcy

Lead to a downgrade in the firm’s credit rating

Preclude needed investment in activities that contribute to the firm’s long-term success

Too Much Diversification

Diversified firms must process more information of greater diversity

Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate performance of business units

Acquisitions may become substitutes for innovation

Managers Too Focused on Acquisitions

Activities managers undertake when executing an acquisition strategy:

Searching for viable acquisition candidates

Completing effective due-diligence processes

Preparing for negotiations

Managing the integration process after the acquisition is completed

Managers Too Focused on Acquisitions

Managerial attention can be diverted from other matters necessary for long-term competitive success (such as identifying other activities, interacting with important external stakeholders, or fixing fundamental internal problems)

A short-term perspective and greater risk aversion can result for target firm's managers

Firms Become Too Large

Key Terms

Bureaucratic Controls – formalized supervisory and behavioral rules and policies designed to ensure that decisions and actions across different units of a firm are consistent

Firms Become Too Large

Additional costs 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

Firm may produce less innovation

Effective Acquisitions

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Restructuring

Key Terms

Restructuring – strategy through which a firm changes its set of businesses or its 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)

Leveraged Buyouts

Management buyouts

Employee buyouts

Whole-firm buyouts

Outcomes from Restructuring

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Ethical Questions

What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical than takeovers? Why or why not?

Ethical Questions

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 differ based on 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 Questions

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 Questions

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

Ethical Questions

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?