Strategic Management

Part II: Strategic Actions:

Strategy Formulation
Chapter 7: Merger and Acquisition
Strategies

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copied or duplicated, or posted to a publicly accessible website, in whole
or in part.

The Strategic Management Process

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Chapter 7: Acquisition and Restructuring

Strategies
Overview: Six content areas
Popularity of acquisition strategies for firms competing
in the global economy
Why firms use acquisition strategies
Seven problems working against developing a
competitive advantage using an acquisition strategy
Attributes of effective acquisitions
Restructuring strategy vs. common forms
Short & long-term outcomes of different restructuring
strategies

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Global Merger and Acquisition (M&A) Activity

During a Global Crisis
Number of cross-border increased through early
2000s
Benefits for companies and societies
Activity tends to be cyclical
Heavily influenced by external environment
Tight credit markets
Political changes in foreign countries orientation toward M&A

Recent declines
$42 trillion in 2007; $29 trillion in 2008
First three months of 2009 down 77 percent from same
period in 2008

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Introduction:
Popularity of M&A Strategies
Popular strategy among U.S. firms for many years
Can be used because of uncertainty in the
competitive landscape
Increase market power because of competitive threat
Spread risk due to uncertain environment
Shift core business into different markets
Due to industry or regularity changes

Intent: increase firms strategic competitiveness

and value the reality, however, is returns are
close to zero

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Introduction:
Merger vs. Acquisition vs. Takeover

(Contd)

Merger
Two firms agree to integrate their operations on a relatively coequal basis
Acquisition
One firm buys a controlling, 100 percent interest in another firm
with the intent of making the acquired firm a subsidiary business
within its portfolio.
A merger is a combination of two companies to form a new
company, while an acquisition is the purchase of one company
by another in which no new company is formed.
Takeover
Special type of acquisition strategy wherein the target firm did
not solicit the acquiring firm's bid
Hostile Takeover: Unfriendly takeover that is unexpected and
undesired by the target firm
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Reasons for Acquisitions

1. Increased market power
Sources of market power include
Size of the firm, resources and capabilities to compete in the market and share of
the market
Horizontal Acquisitions
Acquirer and acquired companies compete in the same industry
i.e., McDonalds acquisition of Boston Market
Companies that operate a horizontal-acquisition strategy take over or merge with
companies in a similar market sector and at the same stage of production. The aim
is to acquire additional products or services to offer their customers, or to increase
market share by acquiring competitors.
Vertical Acquisitions
Firm acquires a supplier or distributor of one or more of its goods or services;
leads to additional controls over parts of the value chain
i.e., Walt Disney Companys acquisition of Fox Family Worldwide.
By operating a vertical-acquisition strategy, companies aim to secure access to
essential supplies, components or distribution channels by acquiring or merging
with suppliers or members of the distribution channel. Vertical acquisition also
weakens competition or creates barriers to market entry by depriving competitors
of access to essential supplies.
Related Acquisitions
Firm acquires another company in a highly related industry

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Reasons for Acquisitions

(Contd)

1. Increased market power

2. Overcoming entry barriers
Cross-border acquisition: headquarters in different
country. A merger and acquisition, strictly defined,
occurs when an operating enterprise acquires control
over the whole or a part of the business of another
enterprise.

3. Cost of new product development and increased

speed to market
4. Lower risk compared to developing new products
5. Increased diversification
6. Reshaping firms competitive advantage
7. Learning and developing new capabilities

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Reasons
for
Acquisition
s and
Problems
in
Achieving
Success

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Problems in Achieving
Acquisition Success
1. Integration difficulties: Integration problems or difficulties that companies often
encounter can take many forms. Major amongst them are linking different financial and
control systems, building effective working relationships (especially when management
styles differ), problems related to differing status of acquired and acquiring companies'
executives and melding disparate corporate cultures.

2. Inadequate evaluation of target: Acquiring companies may not thoroughly analyze the
target company, failing to develop adequate knowledge of its true market value.
3. Large or extraordinary debt:
Junk bonds: financing option whereby risky acquisitions are financed with money
(debt) that provides a large potential return to lenders (bondholders)
Many acquirers, in addition to overpaying for targets, may be forced, due to market
conditions, to finance acquisitions with relatively high-cost debt. Top-level managers
were encouraged to finance acquisitions with high-cost debt because of the
managerial discipline that accompanied such use. A number of well-known and wellrespected finance scholars argue in favor of companies utilizing significantly high
levels of leverage because debt discourages managers from misusing funds

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Problems in Achieving
Acquisition Success

(Contd)

4. Inability to achieve synergy

Synergy: Value created by units exceeds value of units
working independently
Achieved when the two firms' assets are complementary in
unique ways
Yields a difficult-to-understand or imitate competitive
advantage

Private synergy: Occurs when the combination and

integration of acquiring and acquired firms' assets
yields capabilities and core competencies that could not
be developed by combining and integrating the assets
with any other company

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Problems in Achieving
Acquisition Success

(Contd)

5. Too 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 performance of business units
Acquisitions may become substitutes for innovation

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Problems in Achieving
Acquisition Success

(Contd)

6. Managers overly focused on acquisitions

Necessary activities with an acquisition strategy
Search for viable acquisition candidates
Complete effective due-diligence processes
Prepare for negotiations

Managing the integration process after the acquisition

Diverts attention from matters necessary for long-term
competitive success (I.e., identifying other activities,
interacting with important external stakeholders, or fixing
fundamental internal problems)
A short-term perspective and greater risk aversion can result
for target firm's managers

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Problems in Achieving
Acquisition Success

(Contd)

7. Too large
Bureaucratic controls
Formalized supervisory and behavioral rules and policies
designed to ensure consistency of decisions and actions
across different units of a firm formalized controls decrease
flexibility

Additional costs 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

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Effective Acquisitions
Complementary assets or resources
Friendly acquisitions facilitate integration of firms
Effective due-diligence process (assessment of target firm by
acquirer, such as books, culture, etc.)
Financial slack:
Extra money that a company has available in case of a downturn in
sales, revenue, or profit. Financial slack may help a companyma
ke it through a difficult period. It is the equivalent of a company's s
avings.
Low debt position
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
Innovation
Flexibility and adaptability
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Restructuring
Restructuring defined: Firm changes set of
businesses or financial structure
Three restructuring strategies
1. Downsizing
Reduction in number of firms employees (and possibly
number of operating units) that may or may not change the
composition of businesses in the company's portfolio

2. Downscoping
Eliminating businesses unrelated to firms core businesses
through divesture, spin-off, or some other means

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Restructuring

(Contd)

Three restructuring strategies

(Contd)

3. Leveraged buyouts (LBOs)

One party buys all of a firm's assets in order to take the firm
private (or no longer trade the firm's shares publicly)
Private equity firm: Firm that facilitates or engages in taking
a public firm private
Three types of LBOs
Management buyouts
Employee buyouts
Whole-firm buyouts

Why LBOs?
Protection against a capricious financial market
Allows owners to focus on developing innovations/bring them to
market
A form of firm rebirth to facilitate entrepreneurial efforts

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Restructuring
Restructuring Outcomes
Short-term
Reduced costs: labor and debt
Emphasis on strategic controls

Long-term
Loss of human capital
Performance: higher/lower
Higher risk

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Restructuring and Outcomes

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.