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©2004 by South-Western/Thomson Learning 1

Acquisition and Restructuring Acquisition and Restructuring StrategiesStrategies

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 8Chapter 8

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Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 1Chapter 1Introduction toIntroduction to

Strategic ManagementStrategic Management

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisitions andAcquisitions and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11Corporate GovernanceCorporate Governance

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship

StrategicAnalysis

StrategicThinking

CreatingCompetitiveAdvantage

MonitoringAnd CreatingEntrepreneurialOpportunities

The Strategic Management ProcessThe Strategic Management Process

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

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Discussion QuestionsDiscussion Questions

1. What is the difference between a merger and an acquisition? To what does restructuring refer?

2. Why do firms pursue mergers and acquisitions?

3. What are the problems associated with mergers and acquisitions?

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Discussion Questions (cont.)Discussion Questions (cont.)4. If mergers and acquisitions are normally a

break-even strategy for the acquiring firm, why is there so much M&A activity? What are the attributes of effective acquisitions?

5. What are the advantages and disadvantages of downsizing? Why has downscoping often led to increases in value?

6. When should a leveraged buyout be pursued?

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Discussion Question 1Discussion Question 1

What is the difference between a merger and an acquisition? To what does restructuring refer?

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Mergers, Acquisitions and Mergers, Acquisitions and TakeoversTakeovers Merger:Merger: a strategy through which two firms a strategy through which two firms

agree to integrate theiragree to integrate their operations on a operations on a relatively co-equal basisrelatively co-equal basis

Acquisition:Acquisition: a strategy through which one firm a strategy through which one firm buys a controlling interest in another firm with buys a controlling interest in another firm with the intent of making the acquired firm a the intent of making the acquired firm a subsidiary business within its own portfoliosubsidiary business within its own portfolio

Takeover:Takeover: a special type of an acquisition a special type of an acquisition strategy wherein the target firm did not solicit the strategy wherein the target firm did not solicit the acquiring firm’s bidacquiring firm’s bid

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Why do firms pursue mergers and acquisitions?

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AcquisitionsAcquisitions

Reasons for Making AcquisitionsReasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

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Reasons for Making Acquisitions:Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services when a firm is able to sell its goods or services

above competitive levels orabove competitive levels or– when the costs of its primary or support when the costs of its primary or support

activities are below those of its competitorsactivities are below those of its competitors– usually is derived from the size of the firm and usually is derived from the size of the firm and

its resources and capabilities to compete its resources and capabilities to compete Market power is increased byMarket power is increased by– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power

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Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors

– differentiated products by competitorsdifferentiated products by competitors

– enduring relationships with customers that create enduring relationships with customers that create product loyalties with competitorsproduct loyalties with competitors

acquisition of an established company acquisition of an established company – may be more effective than entering the market as may be more effective than entering the market as

a competitor offering an unfamiliar good or a competitor offering an unfamiliar good or service that is unfamiliar to current buyersservice that is unfamiliar to current buyers

Cross-border acquisitionCross-border acquisition

Overcome Barriers to EntryOvercome Barriers to Entry

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Significant investments of a firm’s resources Significant investments of a firm’s resources are required toare required to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities

Cost of New Product Development and Cost of New Product Development and Increased Speed to MarketIncreased Speed to Market

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An acquisition’s outcomes can be An acquisition’s outcomes can be estimated more easily and accurately estimated more easily and accurately compared to the outcomes of an internal compared to the outcomes of an internal product development processproduct development process

Therefore managers may view acquisitions Therefore managers may view acquisitions as lowering riskas lowering risk

Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products

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It may be easier to develop and introduce It may be easier to develop and introduce new products in markets currently served new products in markets currently served by the firmby the firm

It may be difficult to develop new products It may be difficult to develop new products for markets in which a firm lacks experiencefor markets in which a firm lacks experience– it is uncommon for a firm to develop new it is uncommon for a firm to develop new

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

diversify a firm and change its portfolio of diversify a firm and change its portfolio of businessesbusinesses

Increased DiversificationIncreased Diversification

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Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or dependence on one or more products or marketsmarkets

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

Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope



Acquisitions may gain capabilities that the Acquisitions may gain capabilities that the firm does not possessfirm does not possess

Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base

– reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities

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What are the problems associated with mergers and acquisitions?

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AcquisitionsAcquisitions

Problems With AcquisitionsProblems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

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Problems With AcquisitionsProblems With Acquisitions

Integration challenges includeIntegration 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 building effective working relationships

(particularly when management styles differ)(particularly when management styles differ)– resolving problems regarding the status of the resolving problems regarding the status of the

newly acquired firm’s executivesnewly acquired firm’s executives– loss of key personnel weakens the acquired loss of key personnel weakens the acquired

firm’s capabilities and reduces its valuefirm’s capabilities and reduces its value

Integration DifficultiesIntegration Difficulties

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Evaluation requires that hundreds of issues Evaluation requires that hundreds of issues be closely examined, includingbe closely examined, including– financing for the intended transactionfinancing for the intended transaction

– differences in cultures between the acquiring and differences in cultures between the acquiring and target firmtarget firm

– tax consequences of the transactiontax consequences of the transaction

– actions that would be necessary to successfully actions that would be necessary to successfully meld the two workforcesmeld the two workforces

Ineffective due-diligence process mayIneffective due-diligence process may– result in paying excessive premium for the target result in paying excessive premium for the target

companycompany

Inadequate Evaluation of TargetInadequate Evaluation of Target

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Firm may take on significant debt to Firm may take on significant debt to acquire a companyacquire a company

High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that preclude needed investment in activities that

contribute to the firm’s long-term successcontribute to the firm’s long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt

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Synergy exists when assets are worth Synergy exists when assets are worth more when used in conjunction with each more when used in conjunction with each other than when they are used separatelyother than when they are used separately

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

Firms tend to underestimate indirect costs Firms tend to underestimate indirect costs of integration when evaluating a potential of integration when evaluating a potential acquisitionacquisition

Inability to Achieve SynergyInability to Achieve Synergy

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Diversified firms must process more Diversified firms must process more information of greater diversity information of greater diversity

Scope created by diversification may Scope created by diversification may cause managers to rely too much on cause managers to rely too much on financial rather than strategic controls to financial rather than strategic controls to evaluate business units’ performancesevaluate business units’ performances

Acquisitions may become substitutes for Acquisitions may become substitutes for innovationinnovation

Too Much DiversificationToo Much Diversification

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Managers in target firms may operate in a Managers in target firms may operate in a state of virtual suspended animation state of virtual suspended animation during an acquisitionduring an acquisition

Executives may become hesitant to make Executives may become hesitant to make decisions with long-term consequences decisions with long-term consequences until negotiations have been completeduntil negotiations have been completed

Acquisition process can create a short-Acquisition process can create a short-term perspective and a greater aversion to term perspective and a greater aversion to risk among top-level executives in a target risk among top-level executives in a target firmfirm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions



Additional costs may exceed the benefits Additional costs may exceed the benefits of the economies of scale and additional of the economies of scale and additional market powermarket power

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

Formalized controls often lead to relatively Formalized controls often lead to relatively rigid and standardized managerial rigid and standardized managerial behaviorbehavior

Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large

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If mergers and acquisitions are normally a break-even strategy for the acquiring firm, why is there so much M&A activity? What are the attributes of effective acquisitions?

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Attributes of Effective Attributes of Effective AcquisitionsAcquisitions

AttributesAttributes ResultsResults

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 Attributes of Effective AcquisitionsAcquisitions

AttributesAttributes ResultsResults

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 firm’s overall strategy

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What are the advantages and disadvantages of downsizing? Why has downscoping often led to increases in value?

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Restructuring ActivitiesRestructuring Activities DownsizingDownsizing– Wholesale reduction of employeesWholesale reduction of employees

DownscopingDownscoping– Selectively divesting or closing non-core Selectively divesting or closing non-core

businessesbusinesses– Reducing scope of operationsReducing scope of operations– Leads to greater focusLeads to greater focus

Leveraged Buyout (LBO)Leveraged Buyout (LBO)– A party buys a firm’s entire assets in order to A party buys a firm’s entire assets in order to

take the firm private.take the firm private.

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LowerLowerperformanceperformance

HigherHigherperformanceperformance

Higher riskHigher risk

Loss ofLoss ofhuman capitalhuman capital

Restructuring and OutcomesRestructuring and Outcomes

Emphasis onEmphasis onstrategic controlsstrategic controls

High debt costsHigh debt costs

Reduced debtReduced debtcostscosts

Reduced laborReduced laborcostscosts

DownsizingDownsizing

DownscopingDownscoping

LeveragedLeveragedbuyoutbuyout

Alternatives Short-Term Outcomes Long-Term Outcomes

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When should a leveraged buyout be pursued?

ch08 discussion light

Business

acquisitions acquisitions

acquisitions outcomes

new products

product lines acquisitions

acquisition strategy

strategic management

strategic leadership

competitive dynamics