acquision as strategy

8/3/2019 Acquision as Strategy

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2004 by South-Western/Thomson Learning 1

Acquisition and Restructuring

Strategies

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 8


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Chapter 2

Strategic Leadership

Chapter 4

The Internal

Organization

Chapter 6

Competitive Rivalry and

Competitive Dynamics

Chapter 9

International Strategy

Chapter 1

Introduction to

Strategic Management

Chapter 3

The External

Environment

Chapter 5

Business-Level

Strategy

Chapter 8Acquisitions and

Restructuring Strategies

Chapter 11

Corporate Governance

Strategic Intent

Strategic Mission

Chapter 7

Corporate-Level Strategy

Chapter 10

Cooperative Strategy

Chapter 12

Strategic Entrepreneurship

Strategic

Analysis

Strategic

Thinking

Creating

Competitive

Advantage

Monitoring

And Creating

Entrepreneurial

Opportunities

The Strategic Management Process

Chapter 8Acquisition and

Restructuring Strategies


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Mergers, Acquisitions and

Takeovers Merger:a strategy through which two firms

agree to integrate their operations on arelatively co-equal basis

Acquisition:a strategy through which one firmbuys a controlling interest in another firm withthe intent of making the acquired firm asubsidiary business within its own portfolio

Takeover:a special type of an acquisitionstrategy wherein the target firm did not solicit theacquiring firms bid


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Acquisitions

Reasons for Making Acquisitions

Increase

market power

Overcome

entry barriers

Cost of new

product development Increase speed

to market

Increase

diversification

Reshape firms

competitive scope

Lower risk compared

to developing new

products

Learn and develop

new capabilities


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Reasons for Making Acquisitions:

Factors increasing market power

when a firm is able to sell its goods or servicesabove competitive levels or

when the costs of its primary or supportactivities are below those of its competitors

usually is derived from the size of the firm andits resources and capabilities to compete

Market power is increased by

horizontal acquisitions

vertical acquisitions

related acquisitions

Increased Market Power


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Barriers to entry include

economies of scale in established competitors

differentiated products by competitors

enduring relationships with customers that

create product loyalties with competitors

acquisition of an established company

may be more effective than entering the marketas a competitor offering an unfamiliar good or

service that is unfamiliar to current buyers

Cross-border acquisition

Overcome Barriers to Entry


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Significant investments of a firms resourcesare required to develop new products internally

introduce new products into the marketplace

Acquisition of a competitor may result in lower risk compared to developing new products

increased diversification

reshaping the firms competitive scope

learning and developing new capabilities

faster market entry

rapid access to new capabilities

Cost of New Product Development and

Increased Speed to Market


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An acquisitions outcomes can be

estimated more easily and accuratelycompared to the outcomes of an internal

product development process

Therefore managers may view acquisitionsas lowering risk

Lower Risk Compared to Developing

New Products


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It may be easier to develop and introducenew products in markets currently servedby the firm

It may be difficult to develop new productsfor markets in which a firm lacks experience

it is uncommon for a firm to develop new

products internally to diversify its product lines acquisitions are the quickest and easiest way to

diversify a firm and change its portfolio ofbusinesses

Increased Diversification


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Firms may use acquisitions to reduce theirdependence on one or more products ormarkets

Reducing a companys dependence on

specific markets alters the firms

competitive scope

Reshaping the Firms Competitive Scope


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Acquisitions may gain capabilities that thefirm does not possess

Acquisitions may be used to

acquire a special technological capability

broaden a firms knowledge base

reduce inertia

Learning and Developing New Capabilities


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Acquisitions

Problems With Acquisitions

Integration

difficulties

Inadequate

evaluation of target

Large orextraordinary debt

Inability to

achieve synergy

Too muchdiversification

Managers overly

focused on acquisitions

Resulting firm

is too large


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Integration challenges include

melding two disparate corporate cultures

linking different financial and control systems

building effective working relationships(particularly when management styles differ)

resolving problems regarding the status of thenewly acquired firms executives

loss of key personnel weakens the acquiredfirms capabilities and reduces its value

Integration Difficulties


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Evaluation requires that hundreds of

issues be closely examined, including

financing for the intended transaction

differences in cultures between the acquiring

and target firm

tax consequences of the transaction

actions that would be necessary to

successfully meld the two workforces

Ineffective due-diligence process may

result in paying excessive premium for the

target company

Inadequate Evaluation of Target


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Firm may take on significant debt toacquire a company

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

Large or Extraordinary Debt


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Synergy exists when assets are worthmore when used in conjunction with eachother than when they are used separately

Firms experience transaction costs (e.g.,legal fees) when they use acquisitionstrategies to create synergy

Firms tend to underestimate indirect costsof integration when evaluating a potentialacquisition

Inability to Achieve Synergy


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Diversified firms must process moreinformation of greater diversity

Scope created by diversification maycause managers to rely too much onfinancial rather than strategic controls toevaluate business units performances

Acquisitions may become substitutes forinnovation

Too Much Diversification


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Managers in target firms may operate in astate of virtual suspended animationduring an acquisition

Executives may become hesitant to makedecisions with long-term consequencesuntil negotiations have been completed

Acquisition process can create a short-term perspective and a greater aversion torisk among top-level executives in a targetfirm

Managers Overly Focused on Acquisitions


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Additional costs may exceed the benefitsof the economies of scale and additionalmarket power

Larger size may lead to more bureaucraticcontrols

Formalized controls often lead to relatively

rigid and standardized managerialbehavior

Firm may produce less innovation

Too Large


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Attributes of Effective

Acquisitions

Attributes Results

Complementary

Assets or Resources

Buying firms with assets that meet current

needs to build competitiveness

Friendly

Acquisitions

Friendly deals make integration go more

smoothly

Careful Selection

Process

Deliberate evaluation and negotiations are

more likely to lead to easy integration and

building synergies

Maintain Financial

Slack

Provide enough additional financial

resources so that profitable projects would

not be foregone


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Attributes of Effective

Acquisitions

Attributes Results

Low-to-Moderate

Debt

Merged firm maintains financial flexibility

Flexibility Has experience at managing change and is

flexible and adaptable

Sustain Emphasis

on Innovation

Continue to invest in R&D as part of the

firms overall strategy


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Restructuring Activities

Downsizing Wholesale reduction of employees

Downscoping Selectively divesting or closing non-core

businesses

Reducing scope of operations

Leads to greater focus Leveraged Buyout (LBO)

A party buys a firms entire assets in order to

take the firm private.


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Lower

performance

Higherperformance

Higher risk

Loss of

human capital

Restructuring and Outcomes

Emphasis onstrategic controls

High debt costs

Reduced debt

costs

Reduced labor

costsDownsizing

Downscoping

Leveraged

buyout

Alternatives Short-Term Outcomes Long-Term Outcomes

acquision as strategy

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