HITT CHAPTER 7

ACQUISITIONS AND
RESTRUCTURING STRATEGIES

Exam 3 MGT 3136 Sec 2

MERGERS, ACQUISITIONS, AND TAKEOVERS:

WHAT ARE THE DIFFERENCES?

Merger

Acquisition

A strategy through which two firms agree to integrate their

operations on a relatively co-equal basis
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

ACQUISITIONS:
INCREASED 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

below those of competitors

When

a firms size, resources and capabilities

gives it a superior ability to compete

ACQUISITIONS:
INCREASED MARKET POWER (CONTD)

Market power is increased by:

Horizontal

acquisitions

Vertical

acquisitions

Related

acquisitions

MARKET POWER ACQUISITIONS

Horizontal
Acquisition
s

Acquisition of a company in the same

industry in which the acquiring firm
competes increases a firms market
power by exploiting:
Cost-based synergies ( using existing
resource, distribution network,
elimination of redundant activities,
economies of scale).
Revenue-based synergies ( selling more
products to existing customers).

Acquisitions with similar characteristics

result in higher performance than
those with dissimilar characteristics

MARKET POWER ACQUISITIONS (CONTD)

Horizontal
Acquisition
s
Vertical
Acquisition
s

Acquisition of a supplier or
distributor of one or more
of the firms goods or
services
Increases a firms market
power by controlling
additional parts of the
value chain

MARKET POWER ACQUISITIONS (CONTD)

Horizontal
Acquisition
s
Vertical
Acquisition
s
Related
Acquisition
s

Acquisition of a company
in a highly related industry
Because of the difficulty in
implementing synergy,
related acquisitions are
often difficult to implement
Microsoft- Nokia
Synergy - Whole is
greater than the sum of
its parts
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ACQUISITIONS:
OVERCOMING 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
Purchase

made by companies whos HQ is located

in different countries- Tata- Jaguar, Landrover.

ACQUISITIONS: COST OF NEW-PRODUCT

DEVELOPMENT AND
INCREASED 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

Gain access to Acquired firms products which were unfamiliar before.

A

university with no Law department can acquire another university which has
a law department, and hence can continue with the law department service.

With the help of the acquired firm, company can develop new products more
efficiently.
A

Bakery shop can acquire another bakery shop and with the help of the
acquired firms expertise in baking

Returns

are more predictable because of the acquired firms experience

with the products
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ACQUISITIONS: LOWER RISK COMPARED

TO DEVELOPING 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 DIVERSIFICATION

Using acquisitions to diversify a firm is the

quickest and easiest way to change its
portfolio of businesses
Acquiring

new firm is easier than diversifying

products which differ from regular product line.

Both related diversification and unrelated

diversification strategies can be implemented
through acquisitions

The more related the acquired firm is to the

acquiring firm, the greater is the probability
that the acquisition will be successful
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ACQUISITIONS: RESHAPING THE FIRMS

COMPETITIVE SCOPE

An acquisition can:
Reduce

the negative effect of an intense rivalry on a

firms financial performance

In highly competitive industry, firms who cant compete based

on price face financial risks compared to the competitors. With
the acquisition of new firms, a firm can reshape its business
model and can come back harder on competitors.

Reduce

a firms dependence on one or more products or

markets

A firm can attract new products, reshape existing products

(Tata Jaguar), target acquired companys customers

Reducing a companys dependence on specific

markets alters the firms competitive scope

Scope increases with geographic expansion through cross border

acquisition.
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ACQUISITIONS: LEARNING AND DEVELOPING NEW

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
complementary capabilities in order to build their own knowledge
base
A

number of large pharmaceutical firms are acquiring the ability to create

large molecule drugs, also known as biological drugs, by buying biotechnology firms. Thus, these firms are seeking access to both the pipeline of
possible drugs and the capabilities that these firms have to produce them.
Such capabilities are important for large pharmaceutical firms because these
biological drugs are more difficult to duplicate by chemistry alone (the
historical basis on which most pharmaceutical firms have expertise).
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PROBLEMS IN ACHIEVING ACQUISITION

SUCCESS: INTEGRATION DIFFICULTIES

Integration challenges include: ( see example of UPS in

the book) , MCD and Burger King.
Melding
Linking

two disparate corporate cultures

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

Loss

of key personnel weakens the acquired firms

capabilities and reduces its value
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PROBLEMS IN ACHIEVING ACQUISITION

SUCCESS: INADEQUATE EVALUATION OF THE
TARGET

Due Diligence
The

process of evaluating a target firm for acquisition

Ineffective due diligence may result in paying an excessive
premium for the target company ( Investment banking
corporates- Morgan Stanley, Goldman Sachs, Deutsche Bank)

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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DUE DILIGENCE

Firms may engage in bidding war even though realizing

that their current bid exceeds the real parameter set by
due diligence companies.

In terms of high/increasing stock prices, due dilligence

process is relaxed often resulting in overpayments, and
may effect a firms long term performance.

Without due diligence, purchase price may be

determined by other comparable acquisition prices
according to industry standards rather than by a rigorous
assessment of where, when and how management can
drive real performance gains.

PROBLEMS IN ACHIEVING ACQUISITION

SUCCESS: LARGE OR EXTRAORDINARY DEBT

High debt can:

Increase

the likelihood of bankruptcy

Lead to a downgrade of the firms credit rating
Preclude/disqualify/discontinue 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 ACQUISITION

SUCCESS: TOO MUCH DIVERSIFICATION

Over diversification may result in decline in performance; each firm has different
capabilities to manage diversification; because of over diversification, smaller
numbers of business units are created and managing those large number of small
units may become complicated.

Scope created by diversification may cause managers to rely too much on financial
rather than strategic controls to evaluate business units performances ( when they
dont have rich understanding of target firms business/objectives and values.
Managers

over dependence on financial control mechanism such as ROI may prioritize only
those businesses which have short term returns and may discourage long term investments.

Acquisitions may become substitutes for innovation

Costs

associated with acquisitions may result in fewer allocations to activities, such as

R&D, that are linked to innovation
Without internal innovation skills, the only option available to a firm to gain access to
innovation is to complete still more acquisitions.
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PROBLEMS IN ACHIEVING ACQUISITION

SUCCESS: TOO 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 rigid and

standardized managerial behavior

Firm may produce less innovation because of

diminished strategic flexibility.
a

strategy in which acquisitions are undertaken as a substitute for

organic growth has a bad track record in terms of adding value

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ATTRIBUTES OF
SUCCESSFUL
ACQUISITIONS

Table 7.1
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RESTRUCTURING

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

Let people buy the items which are not right for you.

Restructuring strategies:
Downsizing
Downscoping
Leveraged

buyouts
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TYPES 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 cost reductions

Desire or necessity for more efficient operations
Downsizing may be necessary because acquisitions often
create a situation in which the newly formed firm has
duplicate organizational functions such as sales,
manufacturing, distribution, human resource
management, and so forth

Procedural justice and fairness option

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TYPES OF RESTRUCTURING:
DOWNSCOPING

A divestiture, spin-off or other means of

eliminating businesses unrelated to a firms
core businesses
Down

scoping has a more positive effect than

downsizing.
Over diversification-less diversification.

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 ( downsizing + down scoping but not
eliminating key employees)
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RESTRUCTURING: LEVERAGED
BUYOUTS

A restructuring strategy whereby a party buys all

of a firms assets in order to take the firm private
Significant

amounts of debt are usually incurred to

finance the buyout
Acquiring firms own asset + target firms assets are
used as a collateral.
any interest that accrues during the buyout will be
compensated by the future cash flow of the
acquired company.

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 OUTCOMES

Adapted from Figure 7.2

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