mgnt428 ch07 acquisitions & restructuring strategies - lachowicz
TRANSCRIPT
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Hitt Chapter 7Hitt Chapter 7
Acquisitions andAcquisitions and
Restructuring StrategiesRestructuring Strategies
MGNT428: Business Policy & StrategyMGNT428: Business Policy & Strategy
Dr. Tom Lachowicz, InstructorDr. Tom Lachowicz, Instructor
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Chapter Learning Objectives Chapter Learning Objectives
To be able to:
Explain the popularity of
acquisition strategies in
firms competing in the
global economy.
Discuss reasons firms use
an acquisition strategy to
achieve strategic
competitiveness.
Describe seven problems
that work against
developing a competitive
advantage using an
acquisition strategy.
Name and describe
attributes of effective
acquisitions.
Define the restructuring
strategy and distinguishamong its common forms.
Explain the short- and long-
term outcomes of the
different types of
restructuring strategies.
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Figure 1.1Figure 1.1
Copyright 2004 South-Western. All rights reserved.
The StrategicThe Strategic
ManagementManagement
ProcessProcess
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Mergers, Acquisitions, and Takeovers:Mergers, Acquisitions, and Takeovers:
What are the Differences?What are the Differences?
Merger A strategy through which two firms agree to integrate their
operations on a relatively co-equal basis Acquisition
A strategy through which one 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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Acquisitions:Acquisitions:
Increased Market PowerIncreased Market Power
Factors increasing market power When there is the ability to sell goods or services
above competitive levels
When costs of primary or support activities are belowthose of competitors
When a firms size, resources and capabilities gives ita superior ability to compete
Acquisitions intended to increase marketpower are subject to: Regulatory review
Analysis by financial markets
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Acquisitions:Acquisitions:
Increased Market Power (contd)Increased Market Power (contd)
Market power is increased by:
Horizontal acquisitions Vertical acquisitions
Related acquisitions
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Market Power AcquisitionsMarket 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 similar
characteristics result in higher
performance than those with
dissimilar characteristics
HorizontalHorizontalAcquisitionsAcquisitions
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Market Power Acquisitions (contd)Market Power Acquisitions (contd)
Acquisition of a supplier or
distributor of one or more of
the firms goods or services
Increases a firms marketpower by controlling
additional parts of the
value chain
HorizontalHorizontalAcquisitionsAcquisitions
VerticalVerticalAcquisitionsAcquisitions
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Market Power Acquisitions (contd)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
HorizontalHorizontalAcquisitionsAcquisitions
VerticalVerticalAcquisitionsAcquisitions
RelatedRelatedAcquisitionsAcquisitions
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Acquisitions:Acquisitions:
Overcoming Entry BarriersOvercoming Entry Barriers
Factors associated with the market or with
the firms currently 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
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Acquisitions: Cost of NewAcquisitions: Cost of New--ProductProduct
Development andDevelopment andIncreased Speed to MarketIncreased Speed to Market
Internal development of new products is
often perceived as high-risk activity
Acquisitions allow a firm to gain access to new and
current products that are new to the firm
Returns are more predictable because of the acquiredfirms experience with the products
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Acquisitions: Lower Risk Compared toAcquisitions: Lower Risk Compared to
Developing New ProductsDeveloping 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
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Acquisitions: Increased DiversificationAcquisitions: Increased Diversification
Using acquisitions to diversify a firm is the
quickest and easiest way to change its portfolio
of businesses
Both related diversification and unrelated
diversification strategies can be implemented
through acquisitions
The more related the acquired firm is to theacquiring firm, the greater is the probability that
the acquisition will be successful
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Acquisitions: Reshaping the FirmsAcquisitions: Reshaping the Firms
Competitive ScopeCompetitive 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 onspecific markets alters the firms
competitive scope
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Acquisitions: Learning and DevelopingAcquisitions: Learning and Developing
New CapabilitiesNew Capabilities
An acquiring firm can gain capabilities that
the firm does not currently possess: Special technological capability
Broaden a firms knowledge base
Reduce inertia
Firms should acquire other firms with
different but related and complementarycapabilities in order to build their own
knowledge base
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Acquisitions
Reasons forReasons for
AcquisitionsAcquisitions
and Problemsand Problemsin Achievingin Achieving
SuccessSuccess
Adapted from Figure 7.1Adapted from Figure 7.1
Integration
difficulties
Inadequate
evaluation of targetLarge or
extraordinary debt
Inability to
achieve synergy
Too much
diversification
Managers overly
focused on
acquisitions
Too large
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Problems in Achieving AcquisitionProblems in Achieving Acquisition
Success:Success: Integration DifficultiesIntegration Difficulties
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 newlyacquired firms executives
Loss of key personnel weakens the acquired firms
capabilities and reduces its value
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Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:
Inadequate Evaluation of the TargetInadequate Evaluation of the Target
Due Diligence The process of evaluating a target firm for acquisition
Ineffective due diligence may result in paying an excessivepremium for the target company
Evaluation requires examining: Financing of the intended transaction
Differences in culture between the firms
Tax consequences of the transaction
Actions necessary to meld the two workforces
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Problems in Achieving AcquisitionProblems in Achieving Acquisition
Success:Success: Large or Extraordinary DebtLarge or Extraordinary Debt
High debt 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 AcquisitionProblems in Achieving Acquisition
Success:Success: Inability to Achieve SynergyInability to Achieve Synergy
Synergy exists 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 AcquisitionProblems in Achieving Acquisition
Success:Success: Too Much DiversificationToo 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 business
units performances
Acquisitions may become substitutes for
innovation
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Problems in Achieving AcquisitionProblems in Achieving Acquisition
Success:Success: Managers Overly Focused onManagers Overly Focused on
AcquisitionsAcquisitions
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:Problems in Achieving Acquisition Success:
Managers Overly Focused on AcquisitionsManagers 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
decisions with long-term consequences until
negotiations have been completed
The acquisition process can create a short-term
perspective and a greater aversion to risk
among executives in the target firm
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Problems in Achieving AcquisitionProblems in Achieving Acquisition
Success:Success: Too LargeToo 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 rigidand standardized managerial behavior
Firm may produce less innovation
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Table 7.1Table 7.1
Attributes ofAttributes of
SuccessfulSuccessful
AcquisitionsAcquisitions
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RestructuringRestructuring
A strategy through which a firm changes
its set of businesses or financial structure Failure of an acquisition strategy often precedes a
restructuring strategy
Restructuring may occur because of changes in the
external or internal environments
Restructuring strategies: Downsizing
Downscoping
Leveraged buyouts
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Types of Restructuring: DownsizingTypes of Restructuring: Downsizing
A reduction in the number of a firms
employees and 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 costreductions
Desire or necessity for more efficient
operations
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Types of Restructuring: DownscopingTypes of Restructuring: Downscoping
A divestiture, spin-off or other means of
eliminating 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
Firm can be more effectively managed by the top
management team
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Restructuring: Leveraged BuyoutsRestructuring: Leveraged Buyouts
A restructuring strategy whereby a partybuys all of a firms assets in order to takethe firm private
Significant amounts of debt are usually incurred tofinance the buyout
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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Restructuring and OutcomesRestructuring and Outcomes
Adapted from Figure 7.2Adapted from Figure 7.2