Download - Acquisition as a Strategy
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PRESENTED BY:-
VAIJANTI YADAV
20100150
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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
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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.
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Reasons for Making Acquisitions
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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
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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
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Increased Market Power
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Reasons for Making Acquisitions:
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
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Overcome Barriers to Entry
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Reasons for Making Acquisitions:
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
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Cost of New Product Development
and Increased Speed to Market
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Reasons for Making Acquisitions:
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
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Lower Risk Compared to Developing
New Products
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Reasons for Making Acquisitions:
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
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Increased Diversification
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Reasons for Making Acquisitions:
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
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Reshaping the Firms Competitive Scope
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Reasons for Making Acquisitions:
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
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Learning and Developing New Capabilities
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Problems With Acquisitions
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Acquisitions
Integrationdifficulties
Inadequateevaluation of target
Large orextraordinary debt
Inability toachieve synergy
Too muchdiversification
Managers overlyfocused on acquisitions
Resulting firmis too large
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Problems With Acquisitions
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
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Integration Difficulties
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Problems With Acquisitions
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
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Large or Extraordinary Debt
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Problems With Acquisitions
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
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Inability to Achieve Synergy
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Problems With Acquisitions
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
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Too Much Diversification
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Problems With Acquisitions
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
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Managers Overly Focused on Acquisitions
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Problems With Acquisitions
Larger size may lead to more bureaucratic controls
Formalized controls often lead to relatively rigid
and standardized managerial behavior Firm may produce less innovation
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Too Large
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THANK YOU