Chapter 7

Strategic Acquisition and Restructuring

Prepared by: Mohd Fahmi Abd Rahim Shameel Anuwar Samsuddin Ili Kamilah Mohd Raffee Noor Osmera Abu Hassan

HISTORY OF MERGER AND ACQUISITION

EXTRACTED FROM WIKIPEDIA.COM

The first wave( 1897-1904): during this period, merger occurred between firms that were monopoly in the same industries. The first wave was mostly horizontal mergers that happened in heavy manufacturing industries. Most mergers were failed due to the fact that greater efficiency couldnt be reached and the supreme court passed an act that anticompetitive mergers could be stopped
The second wave( 1916-1929): most mergers happened between oligopolies due to the economic boom. Lot of technological developments such as railroads and transportation by motor vehicles let mergers occurred. Government had a policy that also encouraged companies to work together. The types of mergers were mainly horizontal and conglomerate mergers. Food products, primary metals, petroleum products, transportations equipments and chemicals were the industries that chose to merge. Also, investment banks started helping firms to merge and acquisitive. The wave was stopped by the Great Depression. The third wave( 1965-1969): the type of merger that occurred during this phrase were mainly conglomerate mergers which were motivated by extreme high stock price, strict antitrust laws and interest rate. Investment banks didnt play the vital role because mergers were all financed from equities. The poor performance of conglomerate mergers resulted in the end of the third wave. The fourth wave(1981-1989): the target firms were often larger in size than the third wave mergers. Industries that went mergers were oil and gas, pharmaceutical, banking and airline. Foreign takeovers had been common since this phrase. The antitakeover law led to the end of this wave. The fifth wave(1992-2000): globalization, stock market boom and deregulation caused the rise of the fifth wave merger which mainly involved banking and telecommunications industries. Most mergers were equity financed and firms mainly looked for long term profit motives. The stock market bubble led to the end of the merger.

The need to differentiate. . . .

Merger
A strategy through which a two firms agree to integrate their operations on relatively coequal basis

Acquisition
A strategy through which one firm buys a controlling, or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary business within a portfolio

Takeover
A special type of acquisition wherein the target firm does not solicit the acquiring firms bid; thus, takeovers are unfriendly acquisitions

REASONS FOR ACQUISITION

Market Power Increased market power when a firm is able to sell its goods and services above competitors level Also achieved when the costs of its activities are lower than competitors. Three types of acquisition to increase market power; horizontal, vertical and related acquisitions

Entry Barriers

Due to economies of scale and differentiated products, it is much easier and cheaper to acquire current players By acquiring existing firms, acquirer have immediate access to a market Cross-border acquisition - where acquisition made between companies with head-office in different countries

Cost and speed

Internal development of product perceived to be high risk in nature( esp. R&D cost ), therefore acquiring will lead to new and current product s performance easily predicted and assessed. Firms then able to enter market quickly and have predictability of returns to their investment

Risk

Avoiding or lowering internal risks i.e. internal product development vs. predictable acquired product Should always be strategic in nature rather than short term results oriented

REASONS FOR ACQUISITION

Increased diversification and portfolios; in terms of products and source of business Diversification could be seen in a context of related and unrelated strategies. Mixed portfolios will reduce dependencies on certain volatile business (i.e. act as back-up business)

Mixed Portfolios

Reshaping

By mixing its portfolios of revenues, firms try to reshape their competitive edge and reduce risk that effects its profitability Through re-shaping exercise, firms use acquisition to strengthen its competitive scope and products

New capabilities

Acquisition used to gain access to new capabilities. Firms intention to acquire diverse talents; i.e. especially through cross-border acquisitions

PROBLEMS IN ACHIEVING ACQUISITION SUCCESS Integration difficulties

Involves complex activities i.e. clash of cultures, diverse financial and control systems, effective working relationships, status of executives

Inadequate evaluation of target

Due diligence process assessment made in financially, operations, cultural, tax effects and regulations. Inadequate assessment will lead to premium payment made for the acquisition or empty shell exposed in the long run

Large or extraordinary debt

Firms have to be diligent and ensure solvency position remain intact. Financing acquisition with large debt will dampen their capital to expand and remain competitive

Inability to achieve synergy

Underestimation of indirect costs incurred from combining and integrating activities Firms inability to share and compliment resources effectively

PROBLEMS IN ACHIEVING ACQUISITION SUCCESS Too much diversification

Firms tend to become over diversified, problems of managing and information processing may arise. Lead to decline in performance in the long run as financial short term results is favored. Focus of business strategies and objectives diverted Tendency to reduce allocation for internal innovation (R&D)

Overly focused on acquisition

High amount of energy and time used for acquisition process; searching potentials, due diligence, negotiations and integrations

Too Large
Lead to additional cost to manage, bureaucratic controls, rigid and standardized managerial behavior thus reducing flexibility and innovations

CHARACTERISTIC OF EFFECTIVE ACQUISITIONS

Attributes

Results

Acquired firm has assets or resources that are complementary to the acquiring firms core business Acquisition is friendly Acquiring firm conducts effective due diligence to select target firms and evaluate the target firms health (financial, cultural and human resources) Acquiring firm has financial slack (cash or a favorable debt position) Merged firm maintain low to moderate debt position) Acquiring firm has sustained and consistent on R&D and innovation Acquiring firm manages changes well and is flexible and adaptable

High probability of synergy and competitive advantage by maintaining strength Faster and more effective integration and possibly lower premiums Firms with strongest complementary are acquired and overpayment is avoided Financial (debt or equity) is easier and less costly to obtain Lower financing cost, lower risk (i.e. of bankruptcy), and avoidance of trade-offs that are associated with high debts Maintain long term competitive advantage in markets Faster and more effective integration facilities achievement of synergy

RESTRUCTURING

Changes made by firm to its set of businesses or its financial structure

To deal with acquisition which falls below expectation Also an alternative ways for firms to effectively deal with environmental changes It will then lead to better positioning of the firm, especially to create or enhance value to stakeholders 3 types of restructuring activities; downsizing, down scoping and leveraged buyouts

TYPES OF RESTRUCTURING ACTIVITIES

Downsizing
Reduction in the number of a firms employees or number of operating units which may or may not change the composition of companys portfolio Intentional in nature, pro-active management strategies, may due to premium paid for the acquisition process prove to be too high Aim to improve process and enhance value; especially if multiple function can be harmonize and consolidated To be efficient, procedural justice and fairness have to be practiced

Down scoping
Refocus exercise by eliminating business unrelated to its core business. Management tend to be more effective, better understanding on operation and management of less diversified company Avoid being conglomerates , focusing on core competencies and improve competitiveness

Leveraged buyout
A party buys all of a firms assets in order to take the firm private Strategy to correct managerial mistakes or the firms management are making decision not for the interest of shareholders. It may also be used to build firm resources and expand Types - Management buyout (MBOs), Employees buyout (EBOs) and whole-firm buyout

OUTCOMES OF RESTRUCTURING
Short term Outcomes
Reduced Labor cost (Downsizing) Reduced debt cost (Down Scoping and Leveraged Buyout) Emphasis on strategic controls (Down Scoping and Leveraged Buyout) High debt cost (Leveraged Buyout)

Long Term Outcomes

Loss of human capital (Downsizing) Lower performance (Downsizing) Higher Performance (Down Scoping and Leveraged Buyout) Higher Risk (Leveraged Buyout)

Thank you!