acquisition and restructuring strategies

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.

CHAPTER 7CHAPTER 7

Acquisition andAcquisition andRestructuring Restructuring StrategiesStrategies

© 2007 Thomson/South-Western. All rights reserved. 7–2

KKNOWLEDGENOWLEDGE O OBJECTIVESBJECTIVES

1.1. Explain the popularity of acquisition strategies in firms competing in Explain the popularity of acquisition strategies in firms competing in the global economy.the global economy.

2.2. Discuss reasons why firms use an acquisition strategy to achieve Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness.strategic competitiveness.

3.3. Describe seven problems that work against developing a Describe seven problems that work against developing a competitive advantage using an acquisition strategy.competitive advantage using an acquisition strategy.

4.4. Name and describe attributes of effective acquisitions.Name and describe attributes of effective acquisitions.

5.5. Define the restructuring strategy and distinguish among its Define the restructuring strategy and distinguish among its common forms.common forms.

6.6. Explain the short- and long-term outcomes of the different types of Explain the short- and long-term outcomes of the different types of restructuring strategies.restructuring strategies.

Studying this chapter should provide you with the strategic management knowledge needed to:


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

Two firms agree to integrate their operations on a Two firms agree to integrate their operations on a relatively co-equal basis.relatively co-equal basis.

• AcquisitionAcquisition One firm buys a controlling, or 100% interest in another One firm buys a controlling, or 100% interest in another

firm with the intent of making the acquired firm a firm with the intent of making the acquired firm a subsidiary business within its portfolio.subsidiary business within its portfolio.

• TakeoverTakeover A special type of acquisition when the target firm did A special type of acquisition when the target firm did

not solicit the acquiring firm’s bid for outright ownership.not solicit the acquiring firm’s bid for outright ownership.


FIGUREFIGURE 7.17.1

Reasons for Reasons for Acquisitions and Acquisitions and Problems in Problems in Achieving Achieving SuccessSuccess


Reasons for AcquisitionsReasons for Acquisitions

Learning andLearning anddevelopingdeveloping

new capabilitiesnew capabilities

Reshaping firm’sReshaping firm’scompetitive scopecompetitive scope

IncreasedIncreaseddiversificationdiversification Lower risk thanLower risk than

developing newdeveloping newproductsproducts

Cost of newCost of newproduct product

developmentdevelopment

OvercomingOvercomingentry barriersentry barriers

Increase speedIncrease speedto marketto market

IncreasedIncreasedmarket powermarket power

Making anMaking anAcquisitionAcquisition


M&A : Background & ScenarioM&A : Background & Scenario

• In 1990, only six developing and transition countries had made any outward investment.

• In 2005, the number increased to 25.

• Between 1987 and 2005, the share of global M&As by MNCs from developing and transition countries rose from 4% to 13% in value terms, and their share in greenfield and expansion projects exceeded 15 percent in 2005.


• A survey shows that 81% of the companies have considered M&As and 30% have actually done a transaction in the past 3 years. Over 70% say that they expect to do a deal in the next 3 years. All this denotes that we are set for an M&A boom in the years to come. Global M&A volumes of $10bn a day, India’s $18bn for the year 2005 indicates that there is still a long way to go. The trend is clearly on the way up.

• M&A in 2006-07 - $ 3.6 Trillion

• M&A in 2005-06 - $ 3.55 Trillion (data by Bloomberg)

• October 2006 M&A deals - $ 262 Billion

• The Asian M&A market saw 5792 deals worth $ 255.07 billion

• China alone was the largest market with 1862 deals worth $54.76 billion

M&A : Background & ScenarioM&A : Background & Scenario…...Contd…...Contd..


• Corporate India has gone on an acquisition spree, powered by the urge to go global, strong market fundamentals and the drive to dish out cost-competitive products. Acquisitions were not limited to the domestic market, but spread out in the global arena also.

• Though India's public sector took the lead in investing abroad, especially looking for oil assets, the private sector is now going full speed ahead, driving overseas investments e.g.

•Arcelor acquired by Mr. Lakshmi Mittal.

•Mahindra & Mahindra's takeover of 90 percent stake in Schoneweiss, a family-owned German company.

•Tata's takeover of Corus & Tetley Tea Co.

•Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison - Essar to Vodafone for a whopping $11.1 billion.

Indian Scenario - Major DealsIndian Scenario - Major Deals


• Swiss cement major, Holcim, which acquired a 67 per cent stake in Ambuja Cement India Ltd (ACIL).

• Videocon Group's acquisition of Thomson's colour picture tube business in China, Poland, Mexico, and Italy for a total of $290 million.

• The other large overseas deal was by pharmaceuticals Matrix Laboratories, which acquired 100 per cent of the Belgian Pharma Co., Docpharma for $263 million).

• Birla-Hindalco Indian business conglomerate Aditya Birla group-owned flagship company Hindalco Industries Ltd. Took over Atlanta-based aluminum giant Novelis Inc. for US$ 6.4 billion

Indian Scenario - Major Deals Indian Scenario - Major Deals …….…….ContdContd.-.-

• Indian firms concluded 70 M&A deals between April and September, spending $14 billion and would have saved as much as Rs.6500 crore ($1.66 billion) because of the over 10% rupee appreciation against the greenback, an Assocham Eco Pulse study said.


Coping With China's Financial PowerToday, Beijing continues to subsidize exports heavily. It does so directly, through favorable loans to businesses and favorable exchange rates to foreign buyers of Chinese goods. And it does so indirectly, through what economists call "financial repression," whereby the government imposes controls on the investment of Chinese citizens that allow it to funnel capital into Chinese businesses. The People's Bank of China has gathered a good portion of the enormous trade profits and cash inflows that have resulted.

At the end of 2009, it held $2.4 trillion worth of foreign exchange. This is the largest amount of foreign exchange owned by any central bank in the world -- and it does not even reflect the reserves held by China's major commercial banks. What is more, the figure is likely to grow by another $300 billion in 2010.


GOING OUTDuring the go-out policy's first ten years, Asia was always an area of great interest for Chinese companies; Africa and Latin America have increasingly become so. The government has heavily promoted investments in oil and gas, mining and metals, and financial services, but also in virtually every other economic sector. Over time, the Chinese government has placed more emphasis on acquiring know-how: one of the objectives of the China National Offshore Oil Corporation (CNOOC) in trying to take over the U.S. energy giant Unocal in 2005 was to acquire technology for energy exploration and production.


Chinese companies have encountered fierce resistance to several high-profile attempts to acquire foreign firms, especially in the United States. Lenovo's friendly purchase of IBM's personal-computer business for $1.7 billion in 2005 seems like an exception. That same year, Chevron launched a major public relations campaign to mobilize Americans' xenophobia against CNOOC, which was trying to acquire the California-based Unocal. In short order, Chevron convinced CNOOC that the U.S. Congress would oppose the sale and got it to drop its $19 billion bid. When, in February 2008, the Australian natural-resource firm BHP Billiton attempted to take over the Australian firm Rio Tinto, the Chinese government made $40 billion available to the Aluminum Corporation of China (Chinalco) to outbid it. It was seeking to thwart the deal because it believed that consolidation between BHP Billiton and Rio Tinto, two major suppliers of iron ore, a key ingredient in the production of the steel essential to China's infrastructure, might cause iron ore prices to shoot up. Two years later, Chinalco has managed to secure only a modest minority position in Rio Tinto's common stock, and BHP Billiton is now on track to combine its operations and Rio Tinto's in a joint venture. The Australians' chauvinistic desire to keep their largest companies out of China's sphere of influence has been a major force in this multiyear struggle. In Australia and elsewhere, Chinese companies are making some progress on small natural-resource deals, but they have encountered resistance to high-profile takeover attempts in developed economies.


Chinese FDI is also limited by skepticism about overseas investment opportunities among Chinese businesses. Many have grown wary after the dramatic failure of deals that seemed promising at first. In October 2004, the Shanghai Automotive Industry Corporation paid $500 million for a 51 percent stake in the South Korean carmaker SsangYong Motor with grand plans for building a Chinese car that utilized South Korean technology and for turning the Shanghai Automotive Industry Corporation into a Fortune 500 company.

The Shenzhen-based insurance firm Ping An hoped to gain expertise in asset management by investing in the Dutch company Fortis Group in late 2007, but in short order that attempt turned into a $3.3 billion write-off. That year, TCL, a major Chinese television manufacturer, encountered similar misfortunes in a joint venture with Thomson Electronics in France, suffering major losses in Europe that eventually forced it to downsize, close, or sell most of its European operations.


Similarly, a key dimension of China's go-out policy is to award grants, aid, and concessional loans to foreign governments in support of specific projects and to require in exchange that they hire only specified Chinese companies to do the work. Numbers published by China's Ministry of Finance suggest that outright grants and foreign aid (excluding military assistance) from Beijing totaled less than $2 billion last year (compared with $28 billion for the United States). Pure aid from China takes the form of medical and technical assistance, scholarships, investments in Chinese-language programs, or funds for turnkey plants.

For instance, the Export-Import Bank of China is providing 85 percent of the $1 billion of financing for a new port in Hambantota, Sri Lanka, which the state-owned enterprise China Harbour Engineering is building. The Chinese government has similarly supported the development of port facilities in Bangladesh, Myanmar (also known as Burma), and Pakistan; railroad lines in Nepal; roads and sports stadiums all over Africa; and other big infrastructure projects throughout Latin America.


An estimated 70.2 million hectares of agricultural land worldwide have been sold or leased to foreign private and public investors since 2000, according to new research conducted by the Worldwatch Institute .

The bulk of these acquisitions, which are called “land grabs” by some observers, took place between 2008 and 2010, peaking in 2009.Although data for 2010 indicate that the amount of acquisitions dropped considerably after the 2009 peak, it still remains well above pre-2005 levels, writes Worldwatch author Cameron Scherer. Although definitions vary, “land grab” here refers to the large-scale purchase of agricultural land by foreign investors.


Africa has seen the greatest share of land involved in these acquisitions, with 34.3 million hectares sold or leased since 2000. East Africa accounts for the greatest investment, with 310 deals covering 16.8 million hectares. Increased investment in Africa’s agricultural land reflects a decade-long trend of strengthening economic relationships between Africa and the rest of the world, with foreign direct investment to the continent growing 259 per cent between 2000 and 2010.Asia and Latin America come in second and third for most heavily targeted regions, with 27.1 million and 6.6 million hectares of land deals, respectively.Investor countries, in contrast, are spread more evenly around the globe. Of the 82 listed investor countries in the Land Matrix Project database, Brazil, India, and China account for 16.5 million hectares, or around 24 percent of the total hectares sold or leased worldwide. When the East Asian nations of Indonesia, Malaysia, and South Korea are included, this group of industrializing countries has been involved in 274 land deals covering 30.5 million hectares.


Creating an active competitive Creating an active competitive

environment, and in aiding the process of environment, and in aiding the process of

creating globally competitive firms with creating globally competitive firms with

enhanced investment & technological enhanced investment & technological

capabilities.capabilities.

Objective of our competition policyObjective of our competition policy


• The Act also envisages establishment of the Competition The Act also envisages establishment of the Competition

Commission. Commission.

• However, the Commission set up under the Act is not yet However, the Commission set up under the Act is not yet

fully operational for the present.fully operational for the present.

• While some issues relating to its functioning are being While some issues relating to its functioning are being

addressed, it is carrying out only advocacy functions, as of addressed, it is carrying out only advocacy functions, as of

now and thus competition issues continue to be now and thus competition issues continue to be

adjudicated by MRTPC.adjudicated by MRTPC.

Progress made in Progress made in Indian competitive PolicyIndian competitive Policy


Acquisitions: Increased Market PowerAcquisitions: Increased Market Power

• Factors increasing market power when:Factors increasing market power when: There is the ability to sell goods or services above There is the ability to sell goods or services above

competitive levels.competitive levels. Costs of primary or support activities are below those Costs of primary or support activities are below those

of competitors.of competitors. A firm’s size, resources and capabilities gives it a A firm’s size, resources and capabilities gives it a

superior ability to compete.superior ability to compete.

• Acquisitions intended to increase market power Acquisitions intended to increase market power are subject to:are subject to: Regulatory reviewRegulatory review Analysis by financial marketsAnalysis by financial markets


Acquisitions: Increased Market Power Acquisitions: Increased Market Power (cont’d)(cont’d)

• Market power is increased by:Market power is increased by:

Horizontal acquisitions:Horizontal acquisitions: other firms in the same other firms in the same industryindustry

Vertical acquisitions:Vertical acquisitions: suppliers or distributors of the suppliers or distributors of the acquiring firm acquiring firm

Related acquisitions:Related acquisitions: firms in related industries firms in related industries


Market Power AcquisitionsMarket Power Acquisitions

• Acquisition of a company in the Acquisition of a company in the same industry in which the same industry in which the acquiring firm competes acquiring firm competes increases a firm’s market power increases a firm’s market power by exploiting:by exploiting:

Cost-based synergiesCost-based synergies

Revenue-based synergiesRevenue-based synergies

• Acquisitions with similar Acquisitions with similar characteristics result in higher characteristics result in higher performance than those with performance than those with dissimilar characteristics.dissimilar characteristics.

Horizontal Horizontal AcquisitionAcquisition

ss


Market Power Acquisitions (cont’d)Market Power Acquisitions (cont’d)

• Acquisition of a supplier or Acquisition of a supplier or distributor of one or more of the distributor of one or more of the firm’s goods or servicesfirm’s goods or services

Increases a firm’s market Increases a firm’s market power by controlling additional power by controlling additional parts of the value chain.parts of the value chain.


ssVertical Vertical

AcquisitionAcquisitionss


Market Power Acquisitions (cont’d)Market Power Acquisitions (cont’d)

• Acquisition of a company in a Acquisition of a company in a highly related industryhighly related industry

Because of the difficulty in Because of the difficulty in implementing synergy, implementing synergy, related acquisitions are often related acquisitions are often difficult to implement.difficult to implement.


ssVertical Vertical

AcquisitionAcquisitionss

Related Related AcquisitionAcquisition

ss


Acquisitions: Overcoming Entry BarriersAcquisitions: Overcoming Entry Barriers

• Entry BarriersEntry Barriers Factors associated with the market or with the firms Factors associated with the market or with the firms

operating in it that increase the expense and difficulty operating in it that increase the expense and difficulty faced by new ventures trying to enter that marketfaced by new ventures trying to enter that market

• Economies of scaleEconomies of scale

• Differentiated productsDifferentiated products

• Cross-Border AcquisitionsCross-Border Acquisitions Acquisitions made between companies with Acquisitions made between companies with

headquarters in different countriesheadquarters in different countries• Are often made to overcome entry barriers.Are often made to overcome entry barriers.• Can be difficult to negotiate and operate because of the

differences in foreign cultures.


Acquisitions: Cost of New-Product Acquisitions: Cost of New-Product Development and Increased Speed to Development and Increased Speed to MarketMarket• Internal development of new products is often Internal development of new products is often

perceived as high-risk activity.perceived as high-risk activity.

Acquisitions allow a firm to gain access to new and Acquisitions allow a firm to gain access to new and current products that are new to the firm.current products that are new to the firm.

Returns are more predictable because of the acquired Returns are more predictable because of the acquired firms’ experience with the products.firms’ experience with the products.


Acquisitions: Lower Risk Compared to Acquisitions: Lower Risk Compared to Developing New ProductsDeveloping New Products

• An acquisition’s outcomes can be estimated An acquisition’s outcomes can be estimated more easily and accurately than the outcomes of more easily and accurately than the outcomes of an internal product development process.an internal product development process.

Managers may view acquisitions as lowering risk Managers may view acquisitions as lowering risk associated with internal ventures and R&D associated with internal ventures and R&D investments.investments.

Acquisitions may discourage or suppress innovation.Acquisitions may discourage or suppress innovation.


Acquisitions: Increased DiversificationAcquisitions: Increased Diversification

• Using acquisitions to diversify a firm is the Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio quickest and easiest way to change its portfolio of businesses.of businesses.

• Both Both relatedrelated diversification and diversification and unrelatedunrelated diversification strategies can be implemented diversification strategies can be implemented through acquisitions.through acquisitions.

• The The more relatedmore related the acquired firm is to the the acquired firm is to the acquiring firm, acquiring firm, the greaterthe greater is the probability that is the probability that the acquisition will be successful.the acquisition will be successful.


Acquisitions: Reshaping the Firm’s Acquisitions: Reshaping the Firm’s Competitive ScopeCompetitive Scope

• An acquisition can:An acquisition can:

Reduce the negative effect of an intense rivalry on a Reduce the negative effect of an intense rivalry on a firm’s financial performance.firm’s financial performance.

Reduce a firm’s dependence on one or more products Reduce a firm’s dependence on one or more products or markets.or markets.

• Reducing a company’s dependence on specific Reducing a company’s dependence on specific markets alters the firm’s competitive scope.markets alters the firm’s competitive scope.


Acquisitions: Learning and Developing Acquisitions: Learning and Developing New CapabilitiesNew Capabilities• An acquiring firm can gain capabilities that the An acquiring firm can gain capabilities that the

firm does not currently possess:firm does not currently possess:

Special technological capabilitySpecial technological capability

A broader knowledge baseA broader knowledge base

Reduced inertiaReduced inertia

• Firms should acquire other firms with different Firms should acquire other firms with different but related and complementary capabilities in but related and complementary capabilities in order to build their own knowledge base.order to build their own knowledge base.


Problems in Achieving Acquisition Problems in Achieving Acquisition SuccessSuccess

Too largeToo large

Managers Managers overly focused onoverly focused on

acquisitionsacquisitionsExtraordinary debtExtraordinary debt

InadequateInadequatetarget evaluationtarget evaluation

Too muchToo muchdiversificationdiversification

Inability toInability toachieve synergyachieve synergy

IntegrationIntegrationdifficultiesdifficulties

ProblemsProblemswithwith

AcquisitionsAcquisitions


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Integration DifficultiesSuccess: Integration Difficulties• Integration challenges include:Integration challenges include:

Melding two disparate corporate culturesMelding two disparate corporate cultures

Linking different financial and control systemsLinking different financial and control systems

Building effective working relationships (particularly Building effective working relationships (particularly when management styles differ)when management styles differ)

Resolving problems regarding the status of the newly Resolving problems regarding the status of the newly acquired firm’s executivesacquired firm’s executives

Loss of key personnel weakens the acquired firm’s Loss of key personnel weakens the acquired firm’s capabilities and reduces its valuecapabilities and reduces its value


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Inadequate Evaluation of the Success: Inadequate Evaluation of the TargetTarget• Due DiligenceDue Diligence

The process of evaluating a target firm for acquisitionThe process of evaluating a target firm for acquisition• Ineffective due diligence may result in paying an excessive Ineffective due diligence may result in paying an excessive

premium for the target company.premium for the target company.

• Evaluation requires examining:Evaluation requires examining: Financing of the intended transactionFinancing of the intended transaction

Differences in culture between the firmsDifferences in culture between the firms

Tax consequences of the transactionTax consequences of the transaction

Actions necessary to meld the two workforcesActions necessary to meld the two workforces


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Large or Extraordinary DebtSuccess: Large or Extraordinary Debt• High debt (e.g., junk bonds) can:High debt (e.g., junk bonds) can:

Increase the likelihood of bankruptcyIncrease the likelihood of bankruptcy

Lead to a downgrade of the firm’s credit ratingLead to a downgrade of the firm’s credit rating

Preclude investment in activities that contribute to the Preclude investment in activities that contribute to the firm’s long-term success such as:firm’s long-term success such as:

• Research and developmentResearch and development

• Human resource trainingHuman resource training

• MarketingMarketing


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Inability to Achieve SynergySuccess: Inability to Achieve Synergy

• SynergySynergy

When assets are worth more when used in When assets are worth more when used in conjunction with each other than when they are used conjunction with each other than when they are used separately.separately.

• Firms experience transaction costs when they use Firms experience transaction costs when they use acquisition strategies to create synergy.acquisition strategies to create synergy.

• Firms tend to underestimate indirect costs when Firms tend to underestimate indirect costs when evaluating a potential acquisition.evaluating a potential acquisition.


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Inability to Achieve Synergy Success: Inability to Achieve Synergy (cont’d)(cont’d)• Private synergyPrivate synergy

When the combination and integration of the acquiring When the combination and integration of the acquiring and acquired firms’ assets yields capabilities and core and acquired firms’ assets yields capabilities and core competencies that could not be developed by competencies that could not be developed by combining and integrating either firm’s assets with combining and integrating either firm’s assets with another company.another company.

• Advantage: It is difficult for competitors to Advantage: It is difficult for competitors to understand and imitate.understand and imitate.

• Disadvantage: It is also difficult to create.Disadvantage: It is also difficult to create.


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Too Much DiversificationSuccess: Too Much Diversification• Diversified firms must process more information Diversified firms must process more information

of greater diversity.of greater diversity. Increased operational scope created by diversification Increased operational scope created by diversification

may cause managers to rely too much on financial may cause managers to rely too much on financial rather than strategic controls to evaluate business rather than strategic controls to evaluate business units’ performances.units’ performances.

Strategic focus shifts to short-term performance.Strategic focus shifts to short-term performance.

Acquisitions may become substitutes for innovation.Acquisitions may become substitutes for innovation.


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Managers Overly Focused on Success: Managers Overly Focused on AcquisitionsAcquisitions• Managers invest substantial time and energy in Managers invest substantial time and energy in

acquisition strategies in:acquisition strategies in:

Searching for viable acquisition candidates.Searching for viable acquisition candidates.

Completing effective due-diligence processes.Completing effective due-diligence processes.

Preparing for negotiations.Preparing for negotiations.

Managing the integration process after the acquisition Managing the integration process after the acquisition is completed.is completed.


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Managers Overly Focused on Success: Managers Overly Focused on AcquisitionsAcquisitions• Managers in target firms operate in a state of Managers in target firms operate in a state of

virtual suspended animation during an virtual suspended animation during an acquisition.acquisition. Executives may become hesitant to make decisions Executives may become hesitant to make decisions

with long-term consequences until negotiations have with long-term consequences until negotiations have been completed.been completed.

The acquisition process can create a short-term The acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among executives in the target firm.executives in the target firm.


Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Too LargeSuccess: Too Large

• Additional costs of controls may exceed the Additional costs of controls may exceed the benefits of the economies of scale and additional benefits of the economies of scale and additional market power.market power.

• Larger size may lead to more bureaucratic Larger size may lead to more bureaucratic controls.controls.

• Formalized controls often lead to relatively rigid Formalized controls often lead to relatively rigid and standardized managerial behavior.and standardized managerial behavior.

• The firm may produce less innovation.The firm may produce less innovation.


TABLETABLE 7.17.1 Attributes of Successful AcquisitionsAttributes of Successful Acquisitions

Attributes1. Acquired firm has assets or resources that are complementary to the acquiring firm’s

core business2. Acquisition is friendly3. Acquiring firm conducts effective due diligence to select target firms and evaluate the

target firm’s health (financial, cultural, and human resources)4. Acquiring firm has financial slack (cash or a favorable debt position) 5. Merged firm maintains low to moderate debt position6. Acquiring firm has sustained and consistent emphasis on R&D and innovation7. Acquiring firm manages change well and is flexible and adaptable

Results1. High probability of synergy and competitive advantage by maintaining strengths2. Faster and more effective integration and possibly lower premiums3. Firms with strongest complementarities are acquired and overpayment is avoided4. Financing (debt or equity) is easier and less costly to obtain5. Lower financing cost, lower risk (e.g., of bankruptcy), and avoidance of trade-offs that

are associated with high debt6. Maintain long-term competitive advantage in markets7. Faster and more effective integration facilitates achievement of synergy


Effective Acquisition StrategiesEffective Acquisition Strategies

Complementary Complementary Assets /ResourcesAssets /Resources

Buying firms with assets that meet Buying firms with assets that meet current needs to build competitiveness.current needs to build competitiveness.

FriendlyFriendlyAcquisitionsAcquisitions

Friendly deals make integration go more Friendly deals make integration go more smoothly.smoothly.

Careful Selection Careful Selection ProcessProcess

Deliberate evaluation and negotiations Deliberate evaluation and negotiations are more likely to lead to easy are more likely to lead to easy integration and building synergies.integration and building synergies.

Maintain Financial Maintain Financial SlackSlack

Provide enough additional financial Provide enough additional financial resources so that profitable projects resources so that profitable projects would not be foregone.would not be foregone.


Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

AttributesAttributes ResultsResults

Low-to-ModerateLow-to-Moderate DebtDebt

Merged firm maintains Merged firm maintains financial flexibilityfinancial flexibility

FlexibilityFlexibility Has experience at Has experience at managing change and is managing change and is flexible and adaptableflexible and adaptable

SustainSustainEmphasisEmphasis

onon InnovationInnovation

Continue to invest in R&D Continue to invest in R&D as part of the firm’s overall as part of the firm’s overall strategystrategy


RestructuringRestructuring

• A strategy through which a firm changes its set A strategy through which a firm changes its set of businesses or financial structure.of businesses or financial structure. Failure of an acquisition strategy often precedes a Failure of an acquisition strategy often precedes a

restructuring strategy.restructuring strategy.

Restructuring may occur because of changes in the Restructuring may occur because of changes in the external or internal environments.external or internal environments.

• Restructuring strategies:Restructuring strategies: DownsizingDownsizing

DownscopingDownscoping

Leveraged buyoutsLeveraged buyouts


Types of Restructuring: DownsizingTypes of Restructuring: Downsizing

• A reduction in the number of a firm’s employees A reduction in the number of a firm’s employees and sometimes in the number of its operating and sometimes in the number of its operating units.units. May or may not change the composition of May or may not change the composition of

businesses in the company’s portfolio.businesses in the company’s portfolio.

• Typical reasons for downsizing:Typical reasons for downsizing: Expectation of improved profitability from cost Expectation of improved profitability from cost

reductionsreductions

Desire or necessity for more efficient operationsDesire or necessity for more efficient operations


Types of Restructuring: DownscopingTypes of Restructuring: Downscoping

• A divestiture, spin-off or other means of A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core eliminating businesses unrelated to a firm’s core businesses.businesses.

• A set of actions that causes a firm to strategically A set of actions that causes a firm to strategically refocus on its core businesses.refocus on its core businesses. May be accompanied by downsizing, but not May be accompanied by downsizing, but not

eliminating key employees from its primary eliminating key employees from its primary businesses.businesses.

Smaller firm can be more effectively managed by the Smaller firm can be more effectively managed by the top management team.top management team.


Restructuring: Leveraged Buyouts Restructuring: Leveraged Buyouts (LBO)(LBO)• A restructuring strategy whereby a party buys all A restructuring strategy whereby a party buys all

of a firm’s assets in order to take the firm private.of a firm’s assets in order to take the firm private. Significant amounts of debt may be incurred to Significant amounts of debt may be incurred to

finance the buyout.finance the buyout.

Immediate sale of non-core assets to pare down debt.Immediate sale of non-core assets to pare down debt.

• Can correct for managerial mistakesCan correct for managerial mistakes Managers making decisions that serve their own Managers making decisions that serve their own

interests rather than those of shareholders.interests rather than those of shareholders.

• Can facilitate entrepreneurial efforts and Can facilitate entrepreneurial efforts and strategic growth.strategic growth.


FIGUREFIGURE 7.27.2 Restructuring and OutcomesRestructuring and Outcomes


Marx Marx Modern Social ExperienceModern Social Experience

AlienationAlienation The estrangement of human beings The estrangement of human beings from the products of their labour, themselves and from the products of their labour, themselves and others, which is the outcome of others, which is the outcome of forced labourforced labour


AlienationAlienation

Marx’s analysis of capitalism was thus the analysis Marx’s analysis of capitalism was thus the analysis of the alienation of individuals and classes (both of the alienation of individuals and classes (both workers and capitalists) losing control over their workers and capitalists) losing control over their own existence in a system subject to economic own existence in a system subject to economic laws over which they had no control. laws over which they had no control.


Eye of the storm: crux of crisisEye of the storm: crux of crisis

Complete alienation of the Complete alienation of the populationpopulation

PLUSPLUS Complete lack of legitimate, Complete lack of legitimate,

functioning institutionsfunctioning institutions

EQUALSEQUALS

Crisis is systemic, with two root causes:

Lack of a legitimate, valid social contract



For Marx, the history of mankind has a double For Marx, the history of mankind has a double aspect: it was the history of increasing control of aspect: it was the history of increasing control of man over nature and at the same time, it was the man over nature and at the same time, it was the history of the increasing alienation of other history of the increasing alienation of other competitor. competitor.



When people are alienated they feel powerless, When people are alienated they feel powerless, isolated, and feel the social world is isolated, and feel the social world is meaningless. They look at social institutions as meaningless. They look at social institutions as beyond their control, and consider them beyond their control, and consider them oppressive. oppressive.



For Marx, all major spheres of capitalist society—For Marx, all major spheres of capitalist society—religion, state, economy—were marked by a religion, state, economy—were marked by a condition of alienation. Alienation thus confronts condition of alienation. Alienation thus confronts man in the whole world of institutions in which man in the whole world of institutions in which she is enmeshed. she is enmeshed.



Marx believed that the capacity for labor is one of Marx believed that the capacity for labor is one of the most distinctive human characteristics. All the most distinctive human characteristics. All other species are objects in the world; people other species are objects in the world; people alone are subjects, because they consciously act alone are subjects, because they consciously act on and create the world, thus shaping their lives, on and create the world, thus shaping their lives, cultures, and the self in the process. cultures, and the self in the process.



Economic alienation under capitalism means Economic alienation under capitalism means that man is alienated in daily activities—in the that man is alienated in daily activities—in the very work by which he/she fashions a living. very work by which he/she fashions a living. There are four aspects to economic There are four aspects to economic alienation. Man is alienated from :alienation. Man is alienated from :The object of laborThe object of laborThe process of productionThe process of productionHimself/HerselfHimself/HerselfFellow human beingsFellow human beings



"Work is external to the worker…it is not part of his "Work is external to the worker…it is not part of his nature; consequently he does not fulfill himself in nature; consequently he does not fulfill himself in his work but denies himself…"In work, the his work but denies himself…"In work, the worker does not belong to himself, but to another worker does not belong to himself, but to another person.”person.”


Franchising TermsFranchising Terms

• FranchisingFranchising A marketing system revolving around a two-party legal agreement, A marketing system revolving around a two-party legal agreement,

whereby the franchisee conducts business according to the terms whereby the franchisee conducts business according to the terms specified by the franchisorspecified by the franchisor

• Franchise contractFranchise contract The legal agreement between franchisor and franchiseeThe legal agreement between franchisor and franchisee

• FranchiseFranchise The privileges conveyed in the franchise contractThe privileges conveyed in the franchise contract

…continued

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Franchising TermsFranchising Terms

• FranchiseeFranchisee An entrepreneur whose power is limited by a An entrepreneur whose power is limited by a

contractual agreement with a franchisorcontractual agreement with a franchisor

• FranchisorFranchisor The party in the franchise contract that specifies the The party in the franchise contract that specifies the

methods to be followed and the terms to be met by the methods to be followed and the terms to be met by the other partyother party

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The Franchising Boom!!!The Franchising Boom!!!

• Sales of $1 trillion in virtually every product Sales of $1 trillion in virtually every product or service imaginable.or service imaginable.

• More than 4,500 franchisers operating some More than 4,500 franchisers operating some 600,000 outlets worldwide.600,000 outlets worldwide.

• Franchise sales account for 44% of total Franchise sales account for 44% of total retail sales.retail sales.

• A new franchise opens somewhere in the A new franchise opens somewhere in the world every six-and-a-half minutes.world every six-and-a-half minutes.

Boom!


Types of FranchisingTypes of Franchising• Trade-nameTrade-name

• Product distributionProduct distribution

• Pure (or Comprehensive or Business Format)Pure (or Comprehensive or Business Format)


Benefits of FranchisingBenefits of Franchising

• Management training and supportManagement training and support• Brand name appealBrand name appeal• Standardized quality of goods and servicesStandardized quality of goods and services• National advertising programNational advertising program• Financial assistanceFinancial assistance


Benefits of FranchisingBenefits of Franchising(continued)(continued)

• Proven products and business formatsProven products and business formats• Centralized buying powerCentralized buying power• Site selection and territorial protectionSite selection and territorial protection• Greater chance for successGreater chance for success


Drawbacks of FranchisingDrawbacks of Franchising

• Franchise fees and profit sharingFranchise fees and profit sharing• Strict adherence to standardized operationsStrict adherence to standardized operations• Restrictions on purchasingRestrictions on purchasing• Limited product lineLimited product line• Unsatisfactory training programsUnsatisfactory training programs• Market saturationMarket saturation• Less freedomLess freedom


Ten Myths of FranchisingTen Myths of Franchising1. Franchising is the safest way to go into business 1. Franchising is the safest way to go into business

because franchises never fail.because franchises never fail.2. I’ll be able to open my franchise for less money than the 2. I’ll be able to open my franchise for less money than the

franchiser estimates. franchiser estimates. 3. The bigger the franchise organization, the more 3. The bigger the franchise organization, the more

successful I’ll be. successful I’ll be. 4. I’ll use 80 percent of the franchiser’s business system, 4. I’ll use 80 percent of the franchiser’s business system,

but I’ll improve upon by substituting my experience and but I’ll improve upon by substituting my experience and know-how. know-how.


Ten Myths of FranchisingTen Myths of Franchising

5. All franchises are the same.5. All franchises are the same.

6. I don’t have to be a hands-on manager. I can be an 6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful. absentee owner and still be very successful.

7. Anyone can be a satisfied, successful franchise owner. 7. Anyone can be a satisfied, successful franchise owner.

(continued)(continued)


Ten Myths of FranchisingTen Myths of Franchising

8. Franchising is the cheapest way to get into business for 8. Franchising is the cheapest way to get into business for yourself. yourself.

9. The franchiser will solve my business problems for me; 9. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee. after all, that’s why I pay an ongoing royalty fee.

10. Once I open my franchise, I’ll be able to run things the 10. Once I open my franchise, I’ll be able to run things the way way II want to. want to.



Detecting Dishonest FranchisersDetecting Dishonest Franchisers

• Claims that the contract is “standard; no need to read it.”Claims that the contract is “standard; no need to read it.”• Failure to provide a copy of the required disclosure Failure to provide a copy of the required disclosure

documents.documents.• Marginally successful prototype or no prototype.Marginally successful prototype or no prototype.• Poorly prepared operations manual.Poorly prepared operations manual.• Promises of future earnings with no documentation.Promises of future earnings with no documentation.• High franchisee turnover or termination rate.High franchisee turnover or termination rate.• Unusual amount of litigation by franchisees.Unusual amount of litigation by franchisees.


Detecting Dishonest FranchisersDetecting Dishonest Franchisers

• Attempts to discourage your attorney from evaluating the Attempts to discourage your attorney from evaluating the contract before signing it.contract before signing it.

• No written documentation.No written documentation.• A high pressure sale. A high pressure sale. • Claims to be exempt from federal disclosure laws.Claims to be exempt from federal disclosure laws.• ““Get rich quick” schemes, promising huge profits with minimal Get rich quick” schemes, promising huge profits with minimal

effort.effort.• Reluctance to provide a list of existing franchisees.Reluctance to provide a list of existing franchisees.• Evasive, vague answers to your questions.Evasive, vague answers to your questions.



The The RightRight Way to Buy a Franchise Way to Buy a Franchise

• Evaluate yourself - What do you like and dislike?Evaluate yourself - What do you like and dislike?• Research your market.Research your market.• Consider your franchise options.Consider your franchise options.• Get a copy of the franchiser’s Uniform Franchise Get a copy of the franchiser’s Uniform Franchise

Offering Circular (UFOC) and read it.Offering Circular (UFOC) and read it.• Talk to existing franchisees.Talk to existing franchisees.• Ask the franchiser some tough questions.Ask the franchiser some tough questions.• Make your choice.Make your choice.


Factors That Make a Franchise Factors That Make a Franchise AppealingAppealing• Unique concept or marketing approachUnique concept or marketing approach• ProfitabilityProfitability• Registered trademarkRegistered trademark• Business system that worksBusiness system that works• Solid training programSolid training program• AffordabilityAffordability• Positive relationship with franchiseesPositive relationship with franchisees


Trends Shaping FranchisingTrends Shaping Franchising

• Changing face of franchiseesChanging face of franchisees• International opportunitiesInternational opportunities• Smaller, nontraditional locationsSmaller, nontraditional locations• Conversion franchisingConversion franchising• Multiple-unit franchisingMultiple-unit franchising• Master franchisingMaster franchising• Piggybacking (Combination franchising)Piggybacking (Combination franchising)• Serving baby boomersServing baby boomers

acquisition and restructuring strategies

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