The Internet: Driving Merger and Acquisitions in the Global Economy

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Mergers, Acquisitions, and Takeovers: What are the Differences?MergerTwo firms agree to integrate their operations on a relatively co-equal basis.AcquisitionOne firm buys a controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.TakeoverA special type of acquisition when the target firm did not solicit the acquiring firms bid for outright ownership.

Reasons for Acquisitions

Acquisitions: Increased Market PowerFactors increasing market power when:There is the ability to sell goods or services above competitive levels.Costs of primary or support activities are below those of competitors.A firms size, resources and capabilities gives it a superior ability to compete.Acquisitions intended to increase market power are subject to:Regulatory reviewAnalysis by financial markets

Acquisitions: Increased Market Power (contd)Market power is increased by:Horizontal acquisitions: other firms in the same industryVertical acquisitions: suppliers or distributors of the acquiring firm Related acquisitions: firms in related industries

Horizontal AcquisitionsAcquisition of a company in the same industry in which the acquiring firm competes increases a firms market power by exploiting:Cost-based synergiesRevenue-based synergiesAcquisitions with similar characteristics result in higher performance than those with dissimilar characteristics.

Vertical AcquisitionAcquisition of a supplier or distributor of one or more of the firms goods or servicesIncreases a firms market power by controlling additional parts of the value chain.Related AcquisitionAcquisition of a company in a highly related industryBecause of the difficulty in implementing synergy, related acquisitions are often difficult to implement.

Acquisitions: Overcoming Entry BarriersEntry BarriersFactors associated with the market or with the firms operating in it that increase the expense and difficulty faced by new ventures trying to enter that marketEconomies of scaleDifferentiated productsCross-Border AcquisitionsAcquisitions made between companies with headquarters in different countriesAre often made to overcome entry barriers.Can be difficult to negotiate and operate because of the differences in foreign cultures.

Acquisitions: Cost of New-Product Development and Increased Speed to MarketInternal development of new products is often perceived as high-risk activity.Acquisitions allow a firm to gain access to new and current products that are new to the firm.Returns are more predictable because of the acquired firms experience with the products.

Acquisitions: Lower Risk Compared to Developing New ProductsAn acquisitions outcomes can be estimated more easily and accurately than the outcomes of an internal product development process.Managers may view acquisitions as lowering risk associated with internal ventures and R&D investments.Acquisitions may discourage or suppress innovation.

Acquisitions: Increased DiversificationUsing acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses.Both related diversification and unrelated diversification strategies can be implemented through acquisitions.The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful.

Acquisitions: Reshaping the Firms Competitive ScopeAn acquisition can:Reduce the negative effect of an intense rivalry on a firms financial performance.Reduce a firms dependence on one or more products or markets.Reducing a companys dependence on specific markets alters the firms competitive scope.

Acquisitions: Learning and Developing New CapabilitiesAn acquiring firm can gain capabilities that the firm does not currently possess:Special technological capabilityA broader knowledge baseReduced inertiaFirms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base.

Problems in Achieving Acquisition Success

Problems in Achieving Acquisition Success: Integration DifficultiesIntegration challenges include:Melding two disparate corporate culturesLinking different financial and control systemsBuilding effective working relationships (particularly when management styles differ)Resolving problems regarding the status of the newly acquired firms executivesLoss of key personnel weakens the acquired firms capabilities and reduces its value

Problems in Achieving Acquisition Success: Inadequate Evaluation of the TargetDue DiligenceThe process of evaluating a target firm for acquisitionIneffective due diligence may result in paying an excessive premium for the target company.Evaluation requires examining:Financing of the intended transactionDifferences in culture between the firmsTax consequences of the transactionActions necessary to meld the two workforces

Problems in Achieving Acquisition Success: Large or Extraordinary DebtHigh debt (e.g., junk bonds) can:Increase the likelihood of bankruptcyLead to a downgrade of the firms credit ratingPreclude investment in activities that contribute to the firms long-term success such as:Research and developmentHuman resource trainingMarketing

Problems in Achieving Acquisition Success: Inability to Achieve SynergySynergyWhen assets are worth more when used in conjunction with each other than when they are used separately.Firms experience transaction costs when they use acquisition strategies to create synergy.Firms tend to underestimate indirect costs when evaluating a potential acquisition.

Problems in Achieving Acquisition Success: Inability to Achieve Synergy (contd)Private synergyWhen the combination and integration of the acquiring and acquired firms assets yields capabilities and core competencies that could not be developed by combining and integrating either firms assets with another company.Advantage: It is difficult for competitors to understand and imitate.Disadvantage: It is also difficult to create.

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.

Problems in Achieving Acquisition Success: Managers Overly Focused on AcquisitionsManagers invest substantial time and energy in acquisition strategies in:Searching for viable acquisition candidates.Completing effective due-diligence processes.Preparing for negotiations.Managing the integration process after the acquisition is completed.

Problems in Achieving Acquisition Success: Managers Overly Focused on AcquisitionsManagers in target firms operate in a state of virtual suspended animation during an acquisition.Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed.The acquisition process can create a short-term perspective and a greater aversion to risk among executives in the target firm.

Problems in Achieving Acquisition Success: Too LargeAdditional costs of controls 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.The firm may produce less innovation.

Attributes of Successful AcquisitionsAttributesAcquired firm has assets or resources that are complementary to the acquiring firms core businessAcquisition is friendlyAcquiring firm conducts effective due diligence to select target firms and evaluate the target firms health (financial, cultural, and human resources)Acquiring firm has financial slack (cash or a favorable debt position) Merged firm maintains low to moderate debt positionAcquiring firm has sustained and consistent emphasis on R&D and innovationAcquiring firm manages change well and is flexible and adaptable ResultsHigh probability of synergy and competitive advantage by maintaining strengthsFaster and more effective integration and possibly lower premiumsFirms with strongest complementarities are acquired and overpayment is avoidedFinancing (debt or equity) is easier and less costly to obtainLower financing cost, lower risk (e.g., of bankruptcy), and avoidance of trade-offs that are associated with high debtMaintain long-term competitive advantage in marketsFaster and more effective integration facilitates achievement of synergy

Effective Acquisition StrategiesComplementary Assets /ResourcesBuying firms with assets that meet current needs to build competitiveness.Friendly AcquisitionsFriendly deals make integration go more smoothly.Careful Selection ProcessDeliberate evaluation and negotiations are more likely to lead to easy integration and building synergies.Maintain Financial SlackProvide enough additional financial resources so that profitable projects would not be foregone.

Attributes of Effective AcquisitionsAttributesResultsLow-to-Moderate DebtMerged firm maintains financial flexibilityFlexibilityHas experience at managing change and is flexible and adaptableSustain Emphasis on Innovation Continue to invest in R&D as part of the firms overall strategy

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:DownsizingDownscopingLeveraged buyouts

Types of Restructuring: DownsizingA reduction in the number of a firms employees and sometimes in the number of its operating units.May or may not change the composition of businesses in the companys portfolio.Typical reasons for downsizing:Expectation of improved profitability from cost reductionsDesire or necessity for more efficient operations

Types of Restructuring: DownscopingA divestiture, spin-off or other means of eliminating businesses unrelated to a firms core businesses.A set of actions that causes a firm to strategically refocus on its core businesses.May be accompanied by downsizing, but not eliminating key employees from its primary businesses.Smaller firm can be more effectively managed by the top management team.

Restructuring: Leveraged Buyouts (LBO)A restructuring strategy whereby a party buys all of a firms assets in order to take the firm private.Significant amounts of debt may be incurred to finance the buyout.Immediate sale of non-core assets to pare down debt.Can correct for managerial mistakesManagers making decisions that serve their own interests rather than those of shareholders.Can facilitate entrepreneurial efforts and strategic growth.

Restructuring and Outcomes

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