Acquisation and Restructring With Example

8/4/2019 Acquisation and Restructring With Example.

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ACQUISITIONS & RESTRUCTURINGSTRATERGIES

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Flow of presentation:

Introduction to merger and acquisition

Reason for acquisition

Problems in achiveing success

Restructuring and its types

Restructuring out comes

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Mergers, Acquisitions, and Takeovers:What are the Differences?

Merger A strategy through which two firms agree to integrate their

operations on a relatively co-equal basis

Acquisition A strategy through which one firm buys a controlling, or 100%

interest in another firm with the intent of making the acquired firma subsidiary business within its portfolio

Takeover A special type of acquisition when the target firm did not solicit

the acquiring firms bid for outright ownership

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Acquisitions:Increased Market Power

Factors increasing market power When there is the ability to sell goods or

services above competitive levels

When costs of primary or support activities arebelow those of competitors

When a firms size, resources and capabilitiesgives it a superior ability to compete

Acquisitions intended to increase marketpower are subject to: Regulatory review

Analysis by financial markets

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Acquisitions:Increased Market Power (contd)

Market power is increased by:

Horizontal acquisitions

Vertical acquisitions

Related acquisitions

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Market Power Acquisitions

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Acquisition of a company in thesame industry in which theacquiring firm competesincreases a firms market power

by exploiting:

Cost-based synergies

Revenue-based synergies

Acquisitions with similar

characteristics result in higherperformance than those withdissimilar characteristics

HorizontalAcquisitions


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TATA MOTORS LTD-JAGUAR AND LAND ROVER(JLR)

for US$ 2.3 billion

a global footprint and enter the high-end

premier segment of the globalautomobile market

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Market Power Acquisitions (contd)

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Acquisition of a supplier ordistributor of one or more ofthe firms goods or services

Increases a firms marketpower by controllingadditional parts of thevalue chain


VerticalAcquisitions


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CARNEGIE STEEL Acquired steel mill- iron ore mill coal mine-ship transport ofiron ore road transport of coal

created talent internally

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Market Power Acquisitions (contd)

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Acquisition of a companyin a highly related industry

Because of the difficulty in

implementing synergy,related acquisitions are oftendifficult to implement


VerticalAcquisitions

RelatedAcquisitions


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TATA- CORUS

Corus at 455 pence per share in an all cash deal USD 8.04billion

Brazilian steel company CSN

Final deal was of offering 608 pence per share, valuingCorus at $11.3bn

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Acquisitions:Overcoming Entry Barriers

Factors associated with the market orwith the firms currently operating in itthat increase the expense and difficulty

faced by new ventures trying to enterthat market

VODAFONE-HUTCH ESSAR

Cross-Border Acquisitions

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Acquisitions: Cost of New-Product Developmentand

Increased Speed to Market

Internal 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 acquiredfirms experience with the products

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Acquisitions: Lower Risk Compared toDeveloping New Products

An acquisitions outcomes can be estimated

more easily and accurately than the

outcomes of an internal product developmentprocess

Managers may view acquisitions as loweringrisk

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Acquisitions: Increased Diversification

Using acquisitions to diversify a firm is thequickest and easiest way to change itsportfolio of businesses

Both related diversification and unrelateddiversification strategies can beimplemented through acquisitions

The more related the acquired firm is to theacquiring firm, the greater is the probabilitythat the acquisition will be successful

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Acquisitions: Reshaping the Firms

Competitive Scope

An 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

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Bharti airtel Zain

deal $10.7 billion

a large global player

This acquisition will take its footprint to 15 African countries.

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Acquisitions: Learning and Developing NewCapabilities

An acquiring firm can gain capabilities thatthe firm does not currently possess:

Special technological capability Broaden a firms knowledge base

Reduce inertia

Firms should acquire other firms with

different but related and complementarycapabilities in order to build their ownknowledge base

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Acquisitions

Problems inAchieving Success

Integrationdifficulties

Inadequateevaluation of target Large orextraordinary debt Inability toachieve synergy

Too muchdiversification

Managers overlyfocused onacquisitions

Too large


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Problems in Achieving Acquisition Success:Integration Difficulties

Integration challenges include:

Melding two disparate corporate cultures

Linking different financial and control systems Building effective working relationships (particularly when

management styles differ)

Resolving problems regarding the status of the newlyacquired firms executives

Loss of key personnel weakens the acquired firmscapabilities and reduces its value

Eg: United Parcel Service (UPS).

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Problems in Achieving Acquisition Success:Inadequate Evaluation of the Target

Due Diligence The process of evaluating a target firm for acquisition

Ineffective due diligence may result in paying an excessive

premium for the target company

Evaluation requires examining: Financing of the intended transaction

Differences in culture between the firms

Tax consequences of the transaction

Actions necessary to meld the two workforces

Eg : Boston and Citibank

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Problems in Achieving Acquisition Success:Large or Extraordinary Debt

High debt can: Increase the likelihood of bankruptcy

Lead to a downgrade of the firms credit rating Preclude investment in activities that contribute to the

firms long-term success such as:

Research and development

Human resource training

Marketing

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Problems in Achieving Acquisition Success:Too Much Diversification

Diversified firms must process more informationof greater diversity

Scope created by diversification may causemanagers to rely too much on financial ratherthan strategic controls to evaluate businessunits performances

Acquisitionsmay become substitutes forinnovation

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Problems in Achieving Acquisition Success:Managers Overly Focused on Acquisitions

Managers invest substantial time and energyin acquisition strategies in:

Searching for viable acquisition candidates

Completing effective due-diligence processes

Preparing for negotiations

Managing the integration process after the acquisitionis completed

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Problems in Achieving Acquisition Success:Managers Overly Focused on Acquisitions

Managers in target firms operate in a state ofvirtual suspended animation during an

acquisition Executives may become hesitant to make

decisions with long-term consequences untilnegotiations have been completed

The acquisition process can create a short-termperspective and a greater aversion to riskamong executives in the target firm

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Problems in Achieving Acquisition Success:Too Large

Additional costs of controls may exceed thebenefits of the economies of scale andadditional market power

Larger size may lead to more bureaucraticcontrols

Formalized controls often lead to relatively rigidand standardized managerial behavior

Firm may produce less innovation

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Restructuring

A strategy through which a firm changesits set of businesses or financialstructure

Failure of an acquisition strategy often precedesa restructuring strategy

Restructuring may occur because of changes inthe external or internal environments

Restructuring strategies: Downsizing

Downscoping

Leveraged buyouts

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Types of Restructuring: Downsizing

A reduction in the number of a firms

employees and sometimes in the numberof its operating units

May or may not change the composition ofbusinesses in the companys portfolio

E.g: Kodak

Typical reasons for downsizing:

Expectation of improved profitability from costreductions

Desire or necessity for more efficient operations

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Types of Restructuring:Downscoping

A divestiture, spin-off or other means ofeliminating businesses unrelated to afirms core businesses

A set of actions that causes a firm tostrategically refocus on its corebusinesses May be accompanied by downsizing, but not

eliminating key employees from its primarybusinesses

Firm can be more effectively managed by thetop management team

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Restructuring: Leveraged Buyouts

A restructuring strategy whereby a partybuys all of a firms assets in order totake the firm private

Significant amounts of debt are usually incurredto finance the buyout

Can correct for managerial mistakes Managers making decisions that serve their own

interests rather than those of shareholders

Can facilitate entrepreneurial efforts andstrategic growth

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Example:TATA-TATLEY

Tata Tea one of the largest company in the world wassheltered from competition by a protectionist Indiangovernment for most of its history.

In 1999, Tata Tea company faced several new challenges:

Upcoming deregulation.

Changing consumer tastes.

Ban on tea imports scheduled to be lifted in 2001

Majority of the companys tea is sold in India, with 12%

total international sales only.

Tatas gross margin is 36%, while Tetleys is amore efficient 55%

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TATA choose to acquire Tetley.

The major challenge was financing

The value of Tata Tea was $114 million. Tetley was valued at $450 million.

The solution was provided by Leverage

Buy outingthe Deal.

The company recovered all its dept by February 4, 2005

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Restructuring and Outcomes

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Adapted from Figure 7.2


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Acquisation and Restructring With Example