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ACQUISITIONS AND RESTRUCTURING

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Mergers, Acquisitions, and Takeovers:
What are the Differences?

MergerA strategy through which two firms agree to integrate their operations on a relatively co-equal basisAcquisitionA 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 portfolioTakeoverA special type of acquisition when the target firm did not solicit the acquiring firms bid for outright ownership

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Reasons for Acquisitions and Problems in Achieving Success

Acquisitions

Cost new product development/increased speed to market

Increased diversification

Increased market power

Avoiding excessive competition

Overcoming entry barriers

Learning and developing new capabilities

Lower risk compared to developing new products

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Acquisitions: Increased Market Power

Factors increasing market powerWhen there is the ability to sell goods or services above competitive levelsWhen costs of primary or support activities are below those of competitorsWhen a firms size, resources and capabilities gives it a superior ability to competeAcquisitions intended to increase market power are subject to:Regulatory reviewAnalysis by financial markets

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Acquisitions: Increased Market Power (contd)

Market power is increased by:Horizontal acquisitionsVertical acquisitionsRelated acquisitions

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Market 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 synergiesRevenue-based synergiesAcquisitions with similar characteristics result in higher performance than those with dissimilar characteristics

Horizontal Acquisitions

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Market Power Acquisitions (contd)

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

Horizontal Acquisitions

Vertical Acquisitions

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Market Power Acquisitions (contd)

Acquisition of a company in a highly related industryBecause of the difficulty in implementing synergy, related acquisitions are often difficult to implement

Horizontal Acquisitions

Vertical Acquisitions

Related Acquisitions

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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 marketEconomies of scale Differentiated productsCross-Border Acquisitions

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Acquisitions: Cost of New-Product Development and Increased Speed to Market

Internal development of new products is often perceived as high-risk activityAcquisitions allow a firm to gain access to new and current products that are new to the firmReturns 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 processManagers 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 businessesBoth related diversification and unrelated diversification strategies can be implemented through acquisitionsThe 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 performanceReduce a firms dependence on one or more products or marketsReducing a companys dependence on specific markets alters the firms competitive scope

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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 capabilityBroaden a firms knowledge baseReduce inertiaFirms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base

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Reasons for Acquisitions and Problems in Achieving Success

Acquisitions

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Too much diversification

Managers overly focused on acquisitions

Too large

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Problems in Achieving Acquisition Success: Integration Difficulties

Integration challenges include:Melding two disparate corporate culturesLinking different financial and control systemsBuilding effective working relationships (particularly when management styles differ)Resolving problems regarding the status of the newly acquired firms executivesLoss 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 DiligenceThe process of evaluating a target firm for acquisitionIneffective due diligence may result in paying an excessive premium for the target companyEvaluation requires examining:Financing of the intended transactionDifferences in culture between the firmsTax consequences of the transactionActions necessary to meld the two workforces

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Problems in Achieving Acquisition Success: Large or Extraordinary Debt

High debt can:Increase the likelihood of bankruptcyLead to a downgrade of the firms credit ratingPreclude investment in activities that contribute to the firms long-term success such as:Research and developmentHuman resource trainingMarketing

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Problems in Achieving Acquisition Success: Inability to Achieve Synergy

Synergy exists when assets are worth more when used in conjunction with each other than when they are used separatelyFirms experience transaction costs when they use acquisition strategies to create synergyFirms tend to underestimate indirect costs when evaluating a potential acquisition

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Problems in Achieving Acquisition Success: Too Much Diversification

Diversified firms must process more information of greater diversityScope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units performancesAcquisitions may become substitutes for innovation

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Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions

Managers invest substantial time and energy in acquisition strategies in:Searching for viable acquisition candidatesCompleting effective due-diligence processesPreparing for negotiationsManaging the integration process after the acquisition is completed

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Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions

Managers in target firms operate in a state of virtual suspended animation during an acquisitionExecutives may become hesitant to make decisions with long-term consequences until negotiations have been completedThe 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 Acquisition Success: Too Large

Larger size may lead to more bureaucratic controlsFormalized controls often lead to relatively rigid and standardized managerial behaviorFirm may produce less innovationAdditional costs of controls may exceed the benefits of the economies of scale and additional market power

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Table 7.1

Attributes of Successful Acquisitions

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Restructuring

A strategy through which a firm changes its set of businesses or financial structureFailure of an acquisition strategy often precedes a restructuring strategyRestructuring may occur because of changes in the external or internal environmentsRestructuring strategies:DownsizingDownscopingLeveraged 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 unitsMay or may not change the composition of businesses in the companys portfolioTypical reasons for downsizing:Expectation of improved profitability from cost reductionsDesire or necessity for more efficient operations

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Types of Restructuring: Downscoping

A divestiture, spin-off or other means of eliminating businesses unrelated to a firms core businessesA set of actions that causes a firm to strategically refocus on its core businessesMay be accompanied by downsizing, but not eliminating key employees from its primary businessesFirm can be more effectively managed by the top management team

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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 privateSignificant amounts of debt are usually incurred to finance the buyoutCan correct for managerial mistakesManagers making decisions that serve their own interests rather than those of shareholdersCan facilitate entrepreneurial efforts and strategic growth

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Restructuring and Outcomes

Adapted from Figure 7.2