Inorganic Growth Strategies

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Inorganic Growth Strategies:

Structure of the Session:

1. An opening question How can you link this topic with our discussion on
co-operative strategies?

2. Opening Case Refer pages 152 & 153 of your textbook

3. Understanding various concepts linked with this topic

4. Strategic Focus Refer pages 160 & 161 of your textbook

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Inorganic Growth Strategies:

Broadly, the following concepts are important:

1) Merger

2) Acquisition

3) Takeover

In the above context, what can be restructuring and why it is important for any
company?

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Inorganic Growth Strategies:

A brief background These strategies are popular globally In the context of

our economy, these strategies have been on a rise after liberalisation

Some factors attract companies to engage in M&A It can be positive

synergies, lower valuations, weak currency, etc.

Creating value through inorganic growth strategies like acquisition can be

difficult
For instance, two companies are involved One is the acquired and
the other is the acquiring company

There can be a scepticism about the success of an acquisition

Example: Tatas acquisition of Corus in 2007

Data suggest that 20% of all M&As are successful, 60% produce
disappointing results and 20% are clear failures
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Inorganic Growth Strategies:

Merger: A coequal basis wherein two companies merge (or integrate) and
become one

Their independent status before merger becomes non-existent

Example: In professional services, merger of Towers Perrin Foster and Crosby Inc.
Watson Wyatt Worldwide Inc.

Now it is Willis Towers Watson

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Inorganic Growth Strategies:

Acquisition: It involves 100% purchase or control of a company (acquired) by

another company (acquiring)

This kind of an acquisition is a friendly acquisition because a fair bidding

process is involved In contrast, a takeover is an unfriendly acquisition

Example: Referring again to our example of Tata Corus deal Two main
bidders were Tata (Indian company) and CSN (Brazilian company)

Though the process was fair, the deal became an expensive one for Tata Something
referred as winners curse

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Inorganic Growth Strategies:

Types of Acquisitions: Broadly, there are two types of acquisitions

Horizontal and Vertical

Horizontal Acquisitions Acquiring a company operating in the same

industry. Example: Acquisition of Ispat by JSW

These acquisitions are complementary hence considered to be most effective

Vertical Acquisitions Acquiring a supplier or a distributor. The attempt is

to improvise value chain. Example: RILs acquisition of IPCL (Indian
Petrochemicals Corporation Limited) in 2002

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Inorganic Growth Strategies:

Benefits of Acquisitions:

Overcoming barriers to entry Immediate access to a market via acquisition

MNCs targeting emerging economies like BRICS In this context, what is

cross-border acquisition?

Acquisition of companies with headquarters in different countries.

Example: Tata Motors acquisition of JLR and Land Rover

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Inorganic Growth Strategies:

Benefits of Acquisitions:

The choice between acquisition or developing new products The Case of

Pfizer
Acquisition should be strategic (synergies of cost and revenue) or
defensive (temporary increase in sales)?

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Inorganic Growth Strategies:

Benefits of Acquisitions:

In order to get the desired benefits of acquisitions, the companies should:

1. Make the right selection / target

2. Avoid paying a high premium

3. Ensure a smooth integration

It is important to avoid a marriage of incompatibles

How due diligence becomes important?

Is private synergy created?

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Inorganic Growth Strategies:

Successful Acquisition:

Success Depends Upon:

Complementary Assets

Friendly Acquisition

Effective due diligence

Favourable debt position

Consistent R&D and Innovation

Good Change Management

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Inorganic Growth Strategies:

Restructuring:

Focus on your core business, but dont be distracted, let other people buy
assets that arent right for you

Generally, restructuring involves change in set of businesses or its financial

structure

Restructuring can be an outcome of a failed M&A or also because of some

compelling external environment conditions

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Inorganic Growth Strategies:

Restructuring:

Restructuring can take the form of a pure restructuring wherein the company
does not change its business portfolio Rather, status of different business
units or reporting relationships are altered

Example: Restructuring of L&T in 2011 Restructuring of different business

verticals

Downsizing and Downscoping are two important forms of restructuring

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Inorganic Growth Strategies:

Restructuring:

What is Downsizing?

This may not change the composition of businesses but definitely this impacts
on employees of a company It is a reduction in the number of employees of
a company (or its operating units to avoid duplication of processes)

It is a legitimate restructuring strategy Can be a result of an expensive

acquisition

Some companies avoid doing this Nucor (American Steel Company) is a

good example

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Inorganic Growth Strategies:

Restructuring:

What is Downscoping?

Elimination of unrelated businesses within a company. Example: Ballarpur

Industries divested from their glass business

Downscoping compared to downsizing creates more positive impetus towards

a companys performance

Downsizing and downscoping are not mutually exclusive and can be

undertaken simultaneously

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