aquisition and restructuring

Ch7-1

Chapter 7Chapter 7

Acquisition and Restructuring Strategies

Acquisition and Restructuring Strategies

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

©2000 South-Western College Publishing©2000 South-Western College Publishing

Ch7-2

Mergers and AcquisitionsMergers and AcquisitionsMergers and AcquisitionsMergers and Acquisitions

MergerMergerA transaction where two firms agree to integrate their A transaction where two firms agree to integrate their operations on a relatively coequal basis because they operations on a relatively coequal basis because they have resources and capabilities that together may have resources and capabilities that together may create a stronger competitive advantagecreate a stronger competitive advantage

AcquisitionAcquisitionA transaction where one firm buys another firm A transaction where one firm buys another firm with the intent of more effectively using a core with the intent of more effectively using a core competence by making the acquired firm a competence by making the acquired firm a subsidiary within its portfolio of businessessubsidiary within its portfolio of businesses

TakeoverTakeoverAn acquisition where the target firm did not solicit An acquisition where the target firm did not solicit the bid of the acquiring firmthe bid of the acquiring firm

Ch7-3

Problems inProblems inAchieving SuccessAchieving Success

Problems inProblems inAchieving SuccessAchieving Success

IntegrationIntegrationdifficultiesdifficulties

Inadequate Inadequate evaluation of targetevaluation of target

Too muchToo muchdiversificationdiversification

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Too largeToo large

IncreasedIncreasedmarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Lower riskLower riskcompared to developing compared to developing

new productsnew products

Cost of newCost of newproduct developmentproduct development

Increased speedIncreased speedto marketto market

IncreasedIncreaseddiversificationdiversification

Avoid excessiveAvoid excessivecompetitioncompetition

AcquisitionsAcquisitions

Reasons forReasons forAcquisitions Acquisitions

Ch7-4

Reasons for AcquisitionsReasons for AcquisitionsReasons for AcquisitionsReasons for Acquisitions

Example:Example: Belgian-Dutch Fortis’ acquisition of American Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance GroupBanker’s Insurance Group

Example:Example: Watson Pharmaceuticals’ acquisition of TheraTechWatson Pharmaceuticals’ acquisition of TheraTech

Example: Example: British Petroleum’s acquisition of U.S. AmocoBritish Petroleum’s acquisition of U.S. Amoco

Increased Market PowerIncreased Market PowerAcquisition intended to reduce the competitive balance of Acquisition intended to reduce the competitive balance of the industrythe industry

Overcome Barriers to EntryOvercome Barriers to EntryAcquisitions overcome costly barriers to entry which may make Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive“start-ups” economically unattractive

Buying established businesses reduces risk of start-up Buying established businesses reduces risk of start-up venturesventures

Lower Cost and Risk of New Product DevelopmentLower Cost and Risk of New Product Development

Ch7-5Example:Example: General Electric’s acquisition of NBCGeneral Electric’s acquisition of NBC

Example:Example: Kraft Food’s acquisition of Boca BurgerKraft Food’s acquisition of Boca Burger

Example:Example: CNET’s acquisition of mySimonCNET’s acquisition of mySimon

Reasons for AcquisitionsReasons for AcquisitionsReasons for AcquisitionsReasons for Acquisitions

Increased Speed to MarketIncreased Speed to MarketClosely related to Barriers to Entry, allows market entry Closely related to Barriers to Entry, allows market entry in a more timely fashionin a more timely fashion

DiversificationDiversification

Quick way to move into businesses when firm currently lacks Quick way to move into businesses when firm currently lacks experience and depth in industryexperience and depth in industry

Reshaping Competitive ScopeReshaping Competitive ScopeReshaping Competitive ScopeReshaping Competitive ScopeFirms may use acquisitions to restrict its dependence on a Firms may use acquisitions to restrict its dependence on a single or a few products or marketssingle or a few products or markets

Ch7-6

Problems with AcquisitionsProblems with Acquisitions

Example:Example: Marks and Spencer’s acquisition of Brooks BrothersMarks and Spencer’s acquisition of Brooks Brothers

Example:Example: Intel’s acquisition of DEC’s semiconductor divisionIntel’s acquisition of DEC’s semiconductor division

Example:Example: AgriBioTech’s acquisition of dozens of small seed AgriBioTech’s acquisition of dozens of small seed firmsfirms

Integration DifficultiesIntegration DifficultiesDiffering financial and control systems can make integration Differing financial and control systems can make integration of firms difficultof firms difficult

Inadequate Evaluation of TargetInadequate Evaluation of Target““Winners Curse” bid causes acquirer to overpay for firmWinners Curse” bid causes acquirer to overpay for firm

Large or Extraordinary DebtLarge or Extraordinary DebtLarge or Extraordinary DebtLarge or Extraordinary Debt

Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows

Ch7-7

Example:Example: Ford and JaguarFord and Jaguar

Example:Example: Quaker Oats and SnappleQuaker Oats and Snapple

Example:Example: GE--prior to selling businesses and refocusingGE--prior to selling businesses and refocusing

Inability to Achieve SynergyInability to Achieve SynergyJustifying acquisitions can increase estimate of Justifying acquisitions can increase estimate of expected benefitsexpected benefits

Problems with AcquisitionsProblems with Acquisitions

Overly DiversifiedOverly DiversifiedAcquirer doesn’t have expertise required to manage Acquirer doesn’t have expertise required to manage unrelated businessesunrelated businesses

Managers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers may fail to objectively assess the value of Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategyoutcomes achieved through the firm’s acquisition strategy

Too LargeToo LargeLarge bureaucracy reduces innovation and flexibilityLarge bureaucracy reduces innovation and flexibility

Ch7-8

Attributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective Acquisitions

Complementary Assets or ResourcesComplementary Assets or ResourcesBuying firms with assets that meet current Buying firms with assets that meet current needs to build competitivenessneeds to build competitiveness

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Friendly AcquisitionsFriendly AcquisitionsFriendly AcquisitionsFriendly AcquisitionsFriendly deals make integration go more smoothlyFriendly deals make integration go more smoothly

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Careful Selection ProcessCareful Selection ProcessCareful Selection ProcessCareful Selection ProcessDeliberate evaluation and negotiations is more likely Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergiesto lead to easy integration and building synergies

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Maintain Financial SlackMaintain Financial SlackMaintain Financial SlackMaintain Financial SlackProvide enough additional financial resources so Provide enough additional financial resources so that profitable projects would not be foregonethat profitable projects would not be foregone

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Ch7-9

Attributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective Acquisitions

Low-to-Moderate DebtLow-to-Moderate DebtLow-to-Moderate DebtLow-to-Moderate DebtMerged firm maintains financial flexibilityMerged firm maintains financial flexibility

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

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Emphasize Innovation Emphasize Innovation Emphasize Innovation Emphasize Innovation Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategyfirm’s overall strategy

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Ch7-10

Example:Example: Procter & Gamble’s cutting of its Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobsworldwide workforce by 15,000 jobs

Restructuring ActivitiesRestructuring ActivitiesRestructuring ActivitiesRestructuring Activities

Example:Example: Disney’s selling of Fairchild PublicationsDisney’s selling of Fairchild Publications

DownsizingDownsizingWholesale reduction of employeesWholesale reduction of employees

DownscopingDownscopingDownscopingDownscoping

Reducing scope of operationsReducing scope of operations

Selectively divesting or closing non-core businessesSelectively divesting or closing non-core businesses

Leads to greater focusLeads to greater focus

Ch7-11

Leveraged Buyout (LBO)Leveraged Buyout (LBO)A party buys a firm’s entire assets in order to take the A party buys a firm’s entire assets in order to take the firm private. firm private.

Example:Example: Forsmann Little’s buyout of Dr. PepperForsmann Little’s buyout of Dr. Pepper

Restructuring ActivitiesRestructuring ActivitiesRestructuring ActivitiesRestructuring Activities

Ch7-12

DownsizingDownsizingDownsizingDownsizing


LeveragedLeveragedBuyoutBuyout


AlternativesAlternatives Short-Term Short-Term OutcomesOutcomes

Long-Term Long-Term OutcomesOutcomes

Restructuring and OutcomesRestructuring and Outcomes

Ch7-13

Loss of Loss of Human CapitalHuman Capital

Lower Lower PerformancePerformance

Lower Lower PerformancePerformance

DownsizingDownsizingDownsizingDownsizing

Reduced Reduced Labor CostsLabor Costs

Reduced Reduced Labor CostsLabor Costs




Ch7-14

Higher Higher PerformancePerformance


Reduced Reduced Debt CostsDebt CostsReduced Reduced

Debt CostsDebt Costs

Emphasis on Emphasis on Strategic ControlsStrategic Controls



Downsizing

Reduced Labor Costs

Loss of Human Capital

Lower Performance




High Debt High Debt CostsCosts

High Debt High Debt CostsCosts



Downscoping



Reduced Debt Costs



Higher RiskHigher RiskHigher RiskHigher Risk

Downsizing

Reduced Labor Costs

Loss of Human Capital

Lower Performance




aquisition and restructuring

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