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CHAPTER 7STRATEGIC ACQUISITION AND RESTRUCTURING
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THE STRATEGIC MANAGEMENT PROCESS
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KNOWLEDGE
OBJECTIVES● Explain the popularity of merger and acquisition strategies in firms competing in the global economy.
● Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness.
● Describe seven problems that work against achieving success when using an acquisition strategy.
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KNOWLEDGE
OBJECTIVES● Name and describe the attributes of effective acquisitions.
● Define the restructuring strategy and distinguish among its common forms.
● Explain the short- and long-term outcomes of the different types of restructuring strategies.
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• Source of firm growth and above-average returns
POPULARITY OF MERGER AND ACQUISITION
STRATEGIES
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• Heavily influenced by external environment
• Tight credit markets• Political changes in foreign countries’ orientation toward M&A
• During the recent financial crisis, tightened credit markets made it more difficult for firms to complete “megadeals” (> $10 billion)
POPULARITY OF MERGER AND ACQUISITION
STRATEGIES
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• Cross-border acquisitions heighten during currency imbalances, from strong currency countries to weaker currency countries
• Firms use M&A strategies to create value for all stakeholders
• M&A value creation applies equally to all strategies (business-level, corporate-level, international, and cooperative)
POPULARITY OF MERGER AND ACQUISITION
STRATEGIES
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• Can be used because of uncertainty in the competitive landscape• Increase market power because of
competitive threat• Spread risk due to uncertain
environment• Shift core business into different
markets• Manage industry and regulatory
changesIntent:
Increase firm’s strategic competitiveness and value; historically returns are close to zero so it rarely works as planned
POPULARITY OF MERGER AND ACQUISITION
STRATEGIES
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MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE
DIFFERENCES? MERGER
Two firms agree to integrate their operations on a relatively co-equal basis There are few TRUE mergers because one firm usually dominates in terms of market share, size, or asset value
ACQUISITION One firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio
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MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE
DIFFERENCES? TAKEOVER
Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
HOSTILE TAKEOVERUnfriendly takeover that is undesired by the target firm
RATIONALE FOR STRATEGY Pre-announcement returns of hostile
takeovers are largely anticipated and associated with a significant increase in the bidder’s and target’s share price
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REASONS FOR ACQUISITIONS AND
PROBLEMS IN ACHIEVING SUCCESSReasons for
Acquisitions and
Problems in Achieving Success
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REASONS FOR ACQUISITIONS
Increased Market Power Market power is increased by:
●Horizontal acquisitions: other firms in the same industry
McDonald’s acquisition of Boston Market (successful?)
●Vertical acquisitions: suppliers or distributors of the acquiring firm
Walt Disney Company’s acquisition of Fox Family Worldwide
●Related acquisitions: firms in related industries
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REASONS FOR ACQUISITIONS
Increased Market Power
Horizontal Acquisitions
• Acquirer and acquired companies compete in the same industry
• Firm’s market power is increased by exploiting: Cost-based synergies Revenue-based
synergies• Acquisitions with similar
characteristics result in higher performance than those with dissimilar characteristics
Similar characteristics:
• Strategy• Managerial styles• Resource allocation
patterns• Previous alliance
management experience
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REASONS FOR ACQUISITIONS
Increased Market Power
Horizontal Acquisitions
Vertical Acquisitions
• Acquisition of a supplier or distributor of one or more of the firm’s goods or services Increases a firm’s
market power by controlling additional parts of the value chain
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REASONS FOR ACQUISITIONS
Increased Market Power
Horizontal Acquisitions
Vertical Acquisitions
Related Acquisitions
• Acquisition of a company in a highly related industry
• Value creation takes place through the synergy that is generated by integrating resources and capabilities Because of the difficulty in
implementing synergy, related acquisitions are often difficult to implement
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PROBLEMS WITH ACQUISITIONS
IntegrationDifficulties
InadequateTarget Evaluation
Large orExtraordinary Debt
Inability toAchieve Synergy
Too MuchDiversification
Managers Overly Focused on
Acquisitions
Too Large
PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
● Acquisition strategies are not problem-free, even when pursued for value-creating reasons.
● Research suggests:20% of all mergers and acquisitions are successful60% produce disappointing results20% are clear failures, with technology acquisitions reporting even higher failure rates
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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
Too Much DiversificationDiversified firms must process more information of greater diversity.• Increased operational scope created by
diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances
• Strategic focus shifts to short-term performance
• Acquisitions may become substitutes for innovation
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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
Too Much DiversificationOverdiversification
• Related diversification requires more information processing than does unrelated diversification
• Due to the additional information processing, related diversified firms become overdiversified with fewer business units than do unrelated diversifiers
• Overdiversification leads to a decline in performance, after which business units are often divested
• Even when a firm is not overdiversified, a high level of diversification can have a negative effect on its long-term performance
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EFFECTIVE ACQUISITIONS
Attributes of Successful
Acquisitions
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EFFECTIVE ACQUISITION STRATEGIES
Complementary Assets/Resources
Buying firms with assets that meet current needs to build competitiveness
FriendlyAcquisitions
Friendly deals make integration go more smoothly
Due Diligence/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 may be capitalized upon rather than forgone
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EFFECTIVE ACQUISITION STRATEGIES
Attributes
Results
Low-to-Moderate Debt
Merged firm maintains financial flexibility
Flexibility Has experience at managing change and is flexible and adaptable
SustainedEmphasison Innovation
Continue to invest in R&D as part of the firm’s overall strategy
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RESTRUCTURINGA strategy through which a firm changes its set of businesses or financial structure• Failure of an acquisition strategy
often precedes a restructuring strategy
• Restructuring may occur because of changes in the external or internal environments
Restructuring strategies:• Downsizing• Downscoping• Leveraged buyouts
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RESTRUCTURING• Reduction in the number
of a firm’s employees and in the number of its operating units, but it does not change the essence of the business
DOWNSIZING
• Refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses
DOWNSCOPING
• A party buys all of the assets of a business, financed largely with debt, and takes the firm private
LEVERAGED BUYOUT
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RESTRUCTURING• Tactical• Short-term • Cut labor costs• Acquisition failed to
create anticipated value
• Paid too much for target
DOWNSIZING
• Strategic• Long-term• Focus on core
businesses• More positive effect
on firm performance than downsizing
DOWNSCOPING
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RESTRUCTURING
Restructuring and
Outcomes