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Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 9 – Acquisition and Restructuring Strategy
The Strategic Management Process
Insert Figure 1.6
Mergers, Acquisitions, and Takeovers: What Are the Differences?
Key Terms
Merger - strategy through which two firms agree to integrate their operations on a relatively co-equal basis.
Acquisition - strategy through which 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.
Mergers, Acquisitions, and Takeovers – What Are the Differences?
Key Terms
Takeover – special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
Hostile Takeover – unfriendly takeover strategy that is unexpected and undesired by the target firm
Reasons for Acquisitions
Insert Figure 9.1
Sources of Market Power
Size of the firm
Resources and capabilities to compete in the market
Share of the market
Types of Acquisitions to Increase Market Power
Horizontal Acquisitions
Vertical Acquisitions
Related Acquisitions
Horizontal Acquisitions
Acquisition of a company competing in the same industry
The increase of market power by exploiting cost-based and revenue-based synergies
Character similarities between the firms lead to smoother integration and higher performance
Vertical Acquisitions
Acquisition of a supplier or distributor of one or more products
Increase of market power by controlling more of the value chain
Related Acquisitions
Acquisition of a firm in a highly related industry
Increase of market power by leveraging core competencies to gain a competitive advantage
Entry Barriers that Acquisitions Overcome Entry Barriers that Acquisitions Overcome
Economies of scale in established competitors
Differentiated products by competitors
Enduring relationships with customers that create product loyalties with competitors
Cross-Border Acquisitions
Acquisitions made between companies with headquarters in different countries
New Product Development
Significant investments of a firm’s resources are required to:
Develop new products internally
Introduce new products into the marketplace
Acquisition of a Competitor – Outcomes
Lower risk compared to developing new products
Increased diversification
Reshaping the firm’s competitive scope
Learning and developing new capabilities
Faster market entry
Rapid access to new capabilities
Increase Speed to Market
Acquisitions are used for rapid market entry critical to successful competition in the highly uncertain and complex global environment faced by firms today
Reshaping the Firm’s Competitive Scope
Acquisitions quickly and easily:
Change a firm's portfolio of businesses
Establish new lines of products in markets where the firm lacks experience
Alter the scope of a firm’s activities
Create strategic flexibility
Reshaping the Firm’s Competitive Scope
Acquisitions are often used:
In reaction to reduced profitability in a competitive environment of intense rivalry
To reduce overdependence on a single product or market
Learn and Develop New Capabilities
Acquisitions are used to:
Gain capabilities that the firm does not possess
Broaden the firm’s knowledge base
Reduce inertia
Reasons for Acquisitions
Insert Figure 9.1
Integration Challenges
Integration involves a large number of activities
Two disparate corporate cultures must be melded
Effective working relationships must be built
Different financial and control systems must be linked
The status of the acquired firms employees and executives must be determined
Turnover of key personnel must be minimized to retain crucial knowledge
Acquired capabilities must be merged into internal processes and procedures
Private Synergy
Occurs when the combination and integration of acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating the assets with any other company
Is possible when the two firms' assets are complimentary in unique ways
Yields a competitive advantage that is difficult to understand or imitate
Transaction Costs
Transaction costs – direct and indirect expenses incurred when firms use acquisition strategies to create synergy
These costs must be added to the purchase price of an acquisition to adequately evaluate its potential value
Firms tend to underestimate these costs, which negatively impacts anticipated revenue projections and expected cost-based synergies
Transaction Costs
Direct costs include legal fees and charges from investment bankers who complete due diligence for the acquiring firm
Indirect costs include managerial time to evaluate target firms and complete negotiations, as well as the loss of key managers after an acquisition
Additional costs include the actual time and resources used for integration processes
Due Diligence
Due diligence – process through which a potential acquirer evaluates a target firm for acquisition
Failure to complete an effective due-diligence process may easily result in the acquiring firm paying an excessive premium for the target company
Due Diligence
Evaluation requires that hundreds of issues be closely examined, including:
Financing for the intended transaction
Differences in cultures between the acquiring firm and target firm
Tax consequences of the transaction
Actions that would be necessary to successfully meld the two workforces
Large or Extraordinary DebtLarge or Extraordinary Debt
High debt can:
Increase the likelihood of bankruptcy
Lead to a downgrade in the firm’s credit rating
Preclude needed investment in activities that contribute to the firm’s long-term success
Too Much Diversification
Diversified firms must process more information of greater diversity
Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate performance of business units
Acquisitions may become substitutes for innovation
Managers Too Focused on Acquisitions
Activities managers undertake when executing an acquisition strategy:
Searching for viable acquisition candidates
Completing effective due-diligence processes
Preparing for negotiations
Managing the integration process after the acquisition is completed
Managers Too Focused on Acquisitions
Managerial attention can be diverted from other matters necessary for long-term competitive success (such as identifying other activities, interacting with important external stakeholders, or fixing fundamental internal problems)
A short-term perspective and greater risk aversion can result for target firm's managers
Firms Become Too Large
Key Terms
Bureaucratic Controls – formalized supervisory and behavioral rules and policies designed to ensure that decisions and actions across different units of a firm are consistent
Firms Become Too Large
Additional costs may exceed the benefits of the economies of scale and additional market power
Larger size may lead to more bureaucratic controls
Formalized controls often lead to relatively rigid and standardized managerial behavior
Firm may produce less innovation
Effective Acquisitions
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Restructuring
Key Terms
Restructuring – strategy through which a firm changes its set of businesses or its financial structure
Restructuring – Three Strategies
Downsizing
Downscoping
Leveraged Buyouts
Downsizing
Key Terms
Downsizing – strategy that involves a reduction in the number of a firm's employees (and sometimes in the number of operating units) that may or may not change the composition of businesses in the company's portfolio
Downscoping
Key Terms
Downscoping – strategy of eliminating businesses that are unrelated to a firm's core businesses through divesture, spin-off, or some other means
Leveraged Buyouts
Key Terms
Leveraged Buyouts (LBOs) – restructuring strategy whereby a party buys all of a firm's assets in order to take the firm private (or no longer trade the firm's shares publicly)
Leveraged Buyouts
Management buyouts
Employee buyouts
Whole-firm buyouts
Outcomes from Restructuring
Insert Figure 9.2
Ethical Questions
What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical than takeovers? Why or why not?
Ethical Questions
One of the outcomes associated with market power is that the firm is able to sell its good or service above competitive levels. Is it ethical for firms to pursue market power? Does your answer differ based on the industry in which the firm competes? For example, are the ethics of pursuing market power different for firms producing and selling medical equipment compared with those producing and selling sports clothing?
Ethical Questions
What ethical considerations are associated with downsizing decisions? If you were part of a corporate downsizing, would you feel that your firm had acted unethically? If you believe that downsizing has an unethical component to it, what should firms do to avoid using this technique?
Ethical Questions
What ethical issues are involved with conducting a robust due-diligence process?
Ethical Questions
Some evidence suggests that there is a direct relationship between a firm’s size and the level of compensation its top executives receive. If this is so, what inducement does this relationship provide to top-level managers? What can be done to influence this relationship so that it serves shareholders’ best interests?