07[2] acquisition and mergers - ridwaniskandar blog · 3. describe seven problems that work against...
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©© 2007 Thomson/South2007 Thomson/South--Western.Western.All rights reserved.All rights reserved.
PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama
Strategic ManagementStrategic ManagementCompetitiveness 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
CHAPTER 7CHAPTER 7
Acquisition and MergersAcquisition and Mergers
Management of StrategyManagement of StrategyConcepts and CasesConcepts and Cases
© 2007 Thomson/South-Western. All rights reserved. 7–2
KKNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES
1.1. Explain the popularity of acquisition strategies in firms competExplain the popularity of acquisition strategies in firms competing ining inthe global economy.the global economy.
2.2. Discuss reasons why firms use an acquisition strategy to achieveDiscuss reasons why firms use an acquisition strategy to achievestrategic competitiveness.strategic competitiveness.
3.3. Describe seven problems that work against developing aDescribe seven problems that work against developing acompetitive 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 itsDefine the restructuring strategy and distinguish among itscommon forms.common forms.
6.6. Explain the shortExplain the short-- and longand long--term outcomes of the different types ofterm outcomes of the different types ofrestructuring strategies.restructuring strategies.
Studying this chapter should provide you with the strategicmanagement knowledge needed to:
© 2007 Thomson/South-Western. All rights reserved. 7–3
Mergers, Acquisitions, and Takeovers:Mergers, Acquisitions, and Takeovers:What are the Differences?What are the Differences?••MergerMergerTwo firms agree to integrate their operations on aTwo firms agree to integrate their operations on a
relatively corelatively co--equal basis.equal basis.
••AcquisitionAcquisitionOne firm buys a controlling, or 100% interest inOne firm buys a controlling, or 100% interest in
another firm with the intent of making the acquiredanother firm with the intent of making the acquiredfirm a subsidiary business within its portfolio.firm a subsidiary business within its portfolio.
••TakeoverTakeoverA special type of acquisition when the target firm didA special type of acquisition when the target firm did
not solicit the acquiring firmnot solicit the acquiring firm’’s bid for outrights bid for outrightownership.ownership.
© 2007 Thomson/South-Western. All rights reserved. 7–4
FIGUREFIGURE 7.17.1
Reasons forReasons forAcquisitions andAcquisitions andProblems inProblems inAchieving SuccessAchieving Success
© 2007 Thomson/South-Western. All rights reserved. 7–5
Reasons for AcquisitionsReasons for Acquisitions
Learning andLearning anddevelopingdeveloping
new capabilitiesnew capabilities
Reshaping firmReshaping firm’’sscompetitive scopecompetitive scope
IncreasedIncreaseddiversificationdiversification Lower risk thanLower risk than
developing newdeveloping newproductsproducts
Cost of newCost of newproductproduct
developmentdevelopment
OvercomingOvercomingentry barriersentry barriers
Increase speedIncrease speedto marketto market
IncreasedIncreasedmarket powermarket power
Making anMaking anAcquisitionAcquisition
© 2007 Thomson/South-Western. All rights reserved. 7–6
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 aboveThere is the ability to sell goods or services above
competitive levels.competitive levels.Costs of primary or support activities are below thoseCosts of primary or support activities are below those
of competitors.of competitors.A firmA firm’’s size, resources and capabilities gives it as size, resources and capabilities gives it a
superior ability to compete.superior ability to compete.
••Acquisitions intended to increase market powerAcquisitions intended to increase market powerare subject to:are subject to:Regulatory reviewRegulatory reviewAnalysis by financial marketsAnalysis by financial markets
© 2007 Thomson/South-Western. All rights reserved. 7–7
Acquisitions: Increased Market PowerAcquisitions: Increased Market Power(cont(cont’’d)d)
••Market power is increased by:Market power is increased by:
Horizontal acquisitions:Horizontal acquisitions: other firms in the sameother firms in the sameindustryindustry
Vertical acquisitions:Vertical acquisitions: suppliers or distributors of thesuppliers or distributors of theacquiring firmacquiring firm
Related acquisitions:Related acquisitions: firms in related industriesfirms in related industries
© 2007 Thomson/South-Western. All rights reserved. 7–8
Market Power AcquisitionsMarket Power Acquisitions
••Acquisition of a company in theAcquisition of a company in thesame industry in which thesame industry in which theacquiring firm competesacquiring firm competesincreases a firmincreases a firm’’s market powers market powerby exploiting:by exploiting:
CostCost--based synergiesbased synergies
RevenueRevenue--based synergiesbased synergies
••Acquisitions with similarAcquisitions with similarcharacteristics result in highercharacteristics result in higherperformance than those withperformance than those withdissimilar characteristics.dissimilar characteristics.
HorizontalHorizontalAcquisitionsAcquisitions
© 2007 Thomson/South-Western. All rights reserved. 7–9
Market Power Acquisitions (contMarket Power Acquisitions (cont’’d)d)
••Acquisition of a supplier orAcquisition of a supplier ordistributor of one or more of thedistributor of one or more of thefirmfirm’’s goods or servicess goods or services
Increases a firmIncreases a firm’’s markets marketpower by controlling additionalpower by controlling additionalparts of the value chain.parts of the value chain.
HorizontalHorizontalAcquisitionsAcquisitions
VerticalVerticalAcquisitionsAcquisitions
© 2007 Thomson/South-Western. All rights reserved. 7–10
Market Power Acquisitions (contMarket Power Acquisitions (cont’’d)d)
••Acquisition of a company in aAcquisition of a company in ahighly related industryhighly related industry
Because of the difficulty inBecause of the difficulty inimplementing synergy,implementing synergy,related acquisitions are oftenrelated acquisitions are oftendifficult to implement.difficult to implement.
HorizontalHorizontalAcquisitionsAcquisitions
VerticalVerticalAcquisitionsAcquisitions
RelatedRelatedAcquisitionsAcquisitions
© 2007 Thomson/South-Western. All rights reserved. 7–11
Acquisitions: Overcoming Entry BarriersAcquisitions: Overcoming Entry Barriers
••Entry BarriersEntry BarriersFactors associated with the market or with the firmsFactors associated with the market or with the firms
operating in it that increase the expense and difficultyoperating in it that increase the expense and difficultyfaced by new ventures trying to enter that marketfaced by new ventures trying to enter that market••Economies of scaleEconomies of scale
••Differentiated productsDifferentiated products
••CrossCross--Border AcquisitionsBorder AcquisitionsAcquisitions made between companies withAcquisitions 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.
© 2007 Thomson/South-Western. All rights reserved. 7–12
Acquisitions: Cost of NewAcquisitions: Cost of New--ProductProductDevelopment and Increased Speed to MarketDevelopment and Increased Speed to Market
••Internal development of new products is oftenInternal development of new products is oftenperceived as highperceived as high--risk activity.risk activity.
Acquisitions allow a firm to gain access to new andAcquisitions allow a firm to gain access to new andcurrent products that are new to the firm.current products that are new to the firm.
Returns are more predictable because of the acquiredReturns are more predictable because of the acquiredfirmsfirms’’experience with the products.experience with the products.
© 2007 Thomson/South-Western. All rights reserved. 7–13
Acquisitions: Lower Risk Compared toAcquisitions: Lower Risk Compared toDeveloping New ProductsDeveloping New Products
••An acquisitionAn acquisition’’s outcomes can be estimateds outcomes can be estimatedmore easily and accurately than the outcomes ofmore easily and accurately than the outcomes ofan internal product development process.an internal product development process.
Managers may view acquisitions as lowering riskManagers may view acquisitions as lowering riskassociated with internal ventures and R&Dassociated with internal ventures and R&Dinvestments.investments.
Acquisitions may discourage or suppress innovation.Acquisitions may discourage or suppress innovation.
© 2007 Thomson/South-Western. All rights reserved. 7–14
Acquisitions: Increased DiversificationAcquisitions: Increased Diversification
••Using acquisitions to diversify a firm is theUsing acquisitions to diversify a firm is thequickest and easiest way to change its portfolioquickest and easiest way to change its portfolioof businesses.of businesses.
••BothBoth relatedrelated diversification anddiversification and unrelatedunrelateddiversification strategies can be implementeddiversification strategies can be implementedthrough acquisitions.through acquisitions.
••TheThe more relatedmore related the acquired firm is to thethe acquired firm is to theacquiring firm,acquiring firm, the greaterthe greater is the probability thatis the probability thatthe acquisition will be successful.the acquisition will be successful.
© 2007 Thomson/South-Western. All rights reserved. 7–15
Acquisitions: Reshaping the FirmAcquisitions: Reshaping the Firm’’ssCompetitive ScopeCompetitive Scope
••An acquisition can:An acquisition can:
Reduce the negative effect of an intense rivalry on aReduce the negative effect of an intense rivalry on afirmfirm’’s financial performance.s financial performance.
Reduce a firmReduce a firm’’s dependence on one or mores dependence on one or moreproducts or markets.products or markets.
••Reducing a companyReducing a company’’s dependence on specifics dependence on specificmarkets alters the firmmarkets alters the firm’’s competitive scope.s competitive scope.
© 2007 Thomson/South-Western. All rights reserved. 7–16
Acquisitions: Learning and Developing NewAcquisitions: Learning and Developing NewCapabilitiesCapabilities••An acquiring firm can gain capabilities that theAn 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 differentFirms should acquire other firms with differentbut related and complementary capabilities inbut related and complementary capabilities inorder to build their own knowledge base.order to build their own knowledge base.
© 2007 Thomson/South-Western. All rights reserved. 7–17
Problems in Achieving Acquisition SuccessProblems in Achieving Acquisition Success
Too largeToo large
ManagersManagersoverly focused onoverly focused on
acquisitionsacquisitionsExtraordinary debtExtraordinary debt
InadequateInadequatetarget evaluationtarget evaluation
Too muchToo muchdiversificationdiversification
Inability toInability toachieve synergyachieve synergy
IntegrationIntegrationdifficultiesdifficulties
ProblemsProblemswithwith
AcquisitionsAcquisitions
© 2007 Thomson/South-Western. All rights reserved. 7–18
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Integration DifficultiesIntegration 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 (particularlyBuilding effective working relationships (particularlywhen management styles differ)when management styles differ)
Resolving problems regarding the status of the newlyResolving problems regarding the status of the newlyacquired firmacquired firm’’s executivess executives
Loss of key personnel weakens the acquired firmLoss of key personnel weakens the acquired firm’’sscapabilities and reduces its valuecapabilities and reduces its value
© 2007 Thomson/South-Western. All rights reserved. 7–19
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Inadequate Evaluation of the TargetInadequate Evaluation of the Target••Due DiligenceDue DiligenceThe process of evaluating a target firm for acquisitionThe process of evaluating a target firm for acquisition
••Ineffective due diligence may result in paying an excessiveIneffective due diligence may result in paying an excessivepremium 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
© 2007 Thomson/South-Western. All rights reserved. 7–20
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Large or Extraordinary DebtLarge 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 firmLead to a downgrade of the firm’’s credit ratings credit rating
Preclude investment in activities that contribute to thePreclude investment in activities that contribute to thefirmfirm’’s longs long--term success such as:term success such as:
••Research and developmentResearch and development
••Human resource trainingHuman resource training
••MarketingMarketing
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Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Inability to Achieve SynergyInability to Achieve Synergy
••SynergySynergy
When assets are worth more when used inWhen assets are worth more when used inconjunction with each other than when they are usedconjunction with each other than when they are usedseparately.separately.
••Firms experience transaction costs when they useFirms experience transaction costs when they useacquisition strategies to create synergy.acquisition strategies to create synergy.
••Firms tend to underestimate indirect costs whenFirms tend to underestimate indirect costs whenevaluating a potential acquisition.evaluating a potential acquisition.
© 2007 Thomson/South-Western. All rights reserved. 7–22
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Inability to Achieve Synergy (contInability to Achieve Synergy (cont’’d)d)
••Private synergyPrivate synergyWhen the combination and integration of theWhen the combination and integration of the
acquiring and acquired firmsacquiring and acquired firms’’assets yieldsassets yieldscapabilities and core competencies that could not becapabilities and core competencies that could not bedeveloped by combining and integrating either firmdeveloped by combining and integrating either firm’’ssassets with another company.assets with another company.
••Advantage: It is difficult for competitors toAdvantage: It is difficult for competitors tounderstand and imitate.understand and imitate.
••Disadvantage: It is also difficult to create.Disadvantage: It is also difficult to create.
© 2007 Thomson/South-Western. All rights reserved. 7–23
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Too Much DiversificationToo Much Diversification••Diversified firms must process more informationDiversified firms must process more information
of greater diversity.of greater diversity.Increased operational scope created by diversificationIncreased operational scope created by diversification
may cause managers to rely too much on financialmay cause managers to rely too much on financialrather than strategic controls to evaluate businessrather than strategic controls to evaluate businessunitsunits’’performances.performances.
Strategic focus shifts to shortStrategic focus shifts to short--term performance.term performance.
Acquisitions may become substitutes for innovation.Acquisitions may become substitutes for innovation.
© 2007 Thomson/South-Western. All rights reserved. 7–24
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions••Managers invest substantial time and energy inManagers invest substantial time and energy in
acquisition strategies in:acquisition strategies in:
Searching for viable acquisition candidates.Searching for viable acquisition candidates.
Completing effective dueCompleting effective due--diligence processes.diligence processes.
Preparing for negotiations.Preparing for negotiations.
Managing the integration process after the acquisitionManaging the integration process after the acquisitionis completed.is completed.
© 2007 Thomson/South-Western. All rights reserved. 7–25
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions
••Managers in target firms operate in a state ofManagers in target firms operate in a state ofvirtual suspended animation during anvirtual suspended animation during anacquisition.acquisition.Executives may become hesitant to make decisionsExecutives may become hesitant to make decisions
with longwith long--term consequences until negotiations haveterm consequences until negotiations havebeen completed.been completed.
The acquisition process can create a shortThe acquisition process can create a short--termtermperspective and a greater aversion to risk amongperspective and a greater aversion to risk amongexecutives in the target firm.executives in the target firm.
© 2007 Thomson/South-Western. All rights reserved. 7–26
Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:Too LargeToo Large
••Additional costs of controls may exceed theAdditional costs of controls may exceed thebenefits of the economies of scale and additionalbenefits of the economies of scale and additionalmarket power.market power.
••Larger size may lead to more bureaucraticLarger size may lead to more bureaucraticcontrols.controls.
••Formalized controls often lead to relatively rigidFormalized controls often lead to relatively rigidand standardized managerial behavior.and standardized managerial behavior.
••The firm may produce less innovation.The firm may produce less innovation.
© 2007 Thomson/South-Western. All rights reserved. 7–27
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
© 2007 Thomson/South-Western. All rights reserved. 7–28
Effective Acquisition StrategiesEffective Acquisition Strategies
ComplementaryComplementaryAssets /ResourcesAssets /Resources
Buying firms with assets that meetBuying firms with assets that meetcurrent needs to build competitiveness.current needs to build competitiveness.
FriendlyFriendlyAcquisitionsAcquisitions
Friendly deals make integration go moreFriendly deals make integration go moresmoothly.smoothly.
Careful SelectionCareful SelectionProcessProcess
Deliberate evaluation and negotiationsDeliberate evaluation and negotiationsare more likely to lead to easyare more likely to lead to easyintegration and building synergies.integration and building synergies.
Maintain FinancialMaintain FinancialSlackSlack
Provide enough additional financialProvide enough additional financialresources so that profitable projectsresources so that profitable projectswould not be foregone.would not be foregone.
© 2007 Thomson/South-Western. All rights reserved. 7–29
Attributes of Effective AcquisitionsAttributes of Effective Acquisitions
AttributesAttributes ResultsResults
LowLow--toto--ModerateModerateDebtDebt
Merged firm maintainsMerged firm maintainsfinancial flexibilityfinancial flexibility
FlexibilityFlexibility Has experience atHas experience atmanaging change and ismanaging change and isflexible and adaptableflexible and adaptable
SustainSustainEmphasisEmphasisonon InnovationInnovation
Continue to invest in R&DContinue to invest in R&Das part of the firmas part of the firm’’s overalls overallstrategystrategy
© 2007 Thomson/South-Western. All rights reserved. 7–30
RestructuringRestructuring
••A strategy through which a firm changes its setA strategy through which a firm changes its setof businesses or financial structure.of businesses or financial structure.Failure of an acquisition strategy often precedes aFailure of an acquisition strategy often precedes a
restructuring strategy.restructuring strategy.
Restructuring may occur because of changes in theRestructuring may occur because of changes in theexternal or internal environments.external or internal environments.
••Restructuring strategies:Restructuring strategies:DownsizingDownsizing
DownscopingDownscoping
Leveraged buyoutsLeveraged buyouts
© 2007 Thomson/South-Western. All rights reserved. 7–31
Types of Restructuring: DownsizingTypes of Restructuring: Downsizing
••A reduction in the number of a firmA reduction in the number of a firm’’s employeess employeesand sometimes in the number of its operatingand sometimes in the number of its operatingunits.units.May or may not change the composition ofMay or may not change the composition of
businesses in the companybusinesses in the company’’s portfolio.s portfolio.
••Typical reasons for downsizing:Typical reasons for downsizing:Expectation of improved profitability from costExpectation of improved profitability from cost
reductionsreductions
Desire or necessity for more efficient operationsDesire or necessity for more efficient operations
© 2007 Thomson/South-Western. All rights reserved. 7–32
Types of Restructuring:Types of Restructuring: DownscopingDownscoping
••A divestiture, spinA divestiture, spin--off or other means ofoff or other means ofeliminating businesses unrelated to a firmeliminating businesses unrelated to a firm’’s cores corebusinesses.businesses.
••A set of actions that causes a firm to strategicallyA set of actions that causes a firm to strategicallyrefocus on its core businesses.refocus on its core businesses.May be accompanied by downsizing, but notMay be accompanied by downsizing, but not
eliminating key employees from its primaryeliminating key employees from its primarybusinesses.businesses.
Smaller firm can be more effectively managed by theSmaller firm can be more effectively managed by thetop management team.top management team.
© 2007 Thomson/South-Western. All rights reserved. 7–33
Restructuring: Leveraged Buyouts (LBO)Restructuring: Leveraged Buyouts (LBO)
••A restructuring strategy whereby a party buys allA restructuring strategy whereby a party buys allof a firmof a firm’’s assets in order to take the firm private.s assets in order to take the firm private.Significant amounts of debt may be incurred toSignificant amounts of debt may be incurred to
finance the buyout.finance the buyout.
Immediate sale of nonImmediate sale of non--core assets to pare down debt.core assets to pare down debt.
••Can correct for managerial mistakesCan correct for managerial mistakesManagers making decisions that serve their ownManagers making decisions that serve their own
interests rather than those of shareholders.interests rather than those of shareholders.
••Can facilitate entrepreneurial efforts andCan facilitate entrepreneurial efforts andstrategic growth.strategic growth.
© 2007 Thomson/South-Western. All rights reserved. 7–34
FIGUREFIGURE 7.27.2 Restructuring and OutcomesRestructuring and Outcomes