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Chapter 7
Acquisition and Restructuring Strategies
Diane M. Sullivan, Ph.D. 2011
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 CengageSections modified from Gentner (2009)
The Strategic Management Process
Insert figure 1.1 graphic Firms determine the
mechanism(s) for implementing corporate-level strategies
3 possible mechanisms:
1) Mergers
2) Acquisitions
3) Restructuring
Goals:
1) Diversifying
2) Achieving growth
3) Meeting competitive challenges
Mergers & Acquisitions: Key Definitions
Merger Strategy where firms integrate their operations on a coequal basis
Example : 1997 Guinness merged with Grand Metropolitan, to form Diageo, plc, the world’s largest spirits company
Takeover
A special type of acquisition strategy where the acquired firm does not
solicit the acquiring firm’s bid Example: Guinness took over Arthur Bell to pursue Spirits
Acquisition (our main focus today) Strategy where one firm buys a controlling (or 100%) interest in another
firm and makes the acquired firm a subsidiary
Acquisitions are more common than mergers or takeovers
Acquisition: Examples Example Horizontal Acquisition
2004: Oracle acquired PeopleSoft to facilitate growth by acquiring a rival; gained access to customers, sales force, and software applications
Example Vertical Acquisition 2007: CVS Corp. acquired a PBM customer,
Caremark RX, Inc.
Buyer Target
Competitors
OraclePeople-
Soft
Forward Integration (firm buys customer)
Buyer
CVS
Target
Care-mark
The Triple Sevens of Acquisitions 7 reasons firms pursue acquisitions 7 problems with acquisitions 7 ways to increase likelihood of success
7 Reasons Firms Pursue Acquisition Strategies
1. Increased Market Power
2. Overcoming Entry Barriers
3. Cost of new product development and increased speed to market
4. Lower risk compared to developing new products
5. Increased diversification
6. Reshaping firm’s competitive advantage
7. Learning and developing new capabilities
7 Reasons Firms Pursue Acquisition Strategies
1. Increased Market Power (main reason) Sources of market power include
Size of the firm, resources and capabilities to compete in the market, share of the market
These are achieved through:1. Horizontal Acquisitions
Acquirer and acquired companies compete in the same industry Example: McDonald’s acquisition of Boston Market in 2000
2. Vertical Acquisitions Firm acquires a supplier or distributor of one or more of its goods or
services; leads to additional controls over parts of the value chain Example: Google’s purchase of DoubleClick in 2007
3. Related Acquisitions Firm acquires another company in a highly related industry Example: Chapter 6 – P&G and Gillette
2. Overcoming Barriers to Entry
Acquiring established firms may help overcome Economies of scale enjoyed by competitors
Differentiated products by competitors
Competitors that enjoy customer loyalties
Acquisitions may be more effective than entering the market as a new competitor with an unfamiliar good
Acquisitions can provide a new entrant with immediate market access
7 Reasons Firms Pursue Acquisition Strategies
3. Cost of New Product Development & Increased Speed to Market Significant investments are required to
Develop new products internally
Introduce new products into the marketplace
Acquisition of a competitor may result in Lower costs relative to developing internally
Faster market entry
Rapid access to new capabilities
Often benefits firms in knowledge-intensive industries (e.g., pharmaceuticals)
7 Reasons Firms Pursue Acquisition Strategies
4. Lower Risk Compared to Developing New Products Outcomes more easily and accurately estimated compared to
internal product development process
Therefore acquisitions viewed as lowering risk More predictable returns and lower risk
5. Increased Diversification If lack experience, acquisitions easiest way to gain expertise
Faster to diversify and change a firm’s portfolio
Example: Conglomerates (e.g., Jarden Corporation)
7 Reasons Firms Pursue Acquisition Strategies
6. Reshaping a Firm’s Competitive Scope To lessen dependence on a particular market Example 1: GE reducing dependence on electronics market by making
acquisitions in financial services Example 2: Microsoft trying to reduce dependence on software, to enter
search engine and web content markets
7. Learning and Developing New Capabilities Acquisitions help gain capabilities firm does not possess Acquisitions may be used to
Acquire a special technological capability (e.g., IBM moving into software) Broaden a firm’s knowledge base
Reduce inertia
7 Reasons Firms Pursue Acquisition Strategies
Headline: March 29, 2011
Most M&As Fail to add value!
20% successful; 60% produce disappointing results; 20% clear
failures
7 Problems in Achieving Acquisition Success
1. Integration difficulties
2. Inadequate evaluation of target
3. Large or extraordinary debt
4. Inability to achieve synergy
5. Too much diversification
6. Managers overly focused on acquisitions
7. Too large
1. Integration Difficulties Melding two companies can be difficult
Corporate culture clashes Different financial and control systems Status of newly acquired executives
Example: UPS and Mailboxes, Inc.
2. Inadequate Evaluation of Target A lack of due diligence may result in paying a premium Especially problematic when firms are performing well Investment banks can help in obtaining effective valuation
Must assess both business model and financial value
Enter the dot com boom! Example: 1999 Yahoo! acquired Geocities.com for
$3.57 billion and it never turned a profit!
7 Problems in Achieving Acquisition Success
3. Large or Extraordinary Debt When firm’s take on high levels of debt to acquire a firm
Increases the likelihood of bankruptcy Leads to a downgrade in the firm’s credit rating Precludes investments that may contribute to long-term success
4. Inability to Achieve Synergy Synergy exists when assets are worth more when used
together versus when used separately Firms also incur “transaction costs” to create synergy that
when estimated inaccurately can lead to problems If unable to achieve expected synergy, acquisitions can fail
Example: PepsiCo, Inc.
7 Problems in Achieving Acquisition Success
5. Too much Diversification Managers absorptive capacities can lessen their abilities
manage highly diversified firms Diversification is often substituted for innovation
6. Managers Overly Focused on Acquisitions Focusing too much on acquisitions at the expense of
managing the firm’s day-to-day activities
7. Too Large Large companies require more standardized management
Bureaucratic controls This can lessen innovative capacities and reduce firm performance
7 Problems in Achieving Acquisition Success
How Can Firms Increase Likelihood of Success?
7 considerations to increase M&A success1. Complementary assets or resources
2. Friendly acquisitions facilitate integration of firms
3. Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.)
4. Financial slack
5. Low debt position
6. Innovation
7. Flexibility and adaptability
1. Complementary Assets or Resources Buying firms with assets that meet current needs to build
competitiveness
2. Friendly Acquisitions Facilitate Integration of Firms Friendly deals make integration go more smoothly
3. Effective Due-diligence Process Deliberate evaluation and negotiations are more likely to
lead to easy integration and building synergies
4. Financial Slack Provide enough additional financial resources so that
profitable projects would not be foregone
7 Considerations to Increase M&A Success
5. Low Debt Position Acquiring firm maintains financial flexibility when
incurring lower debt in acquisition
6. Innovation Continue to invest in R&D as part of the firm’s overall
strategy
7. Flexibility and Adaptability Executives who have experience at managing change and
with acquisitions are more flexible and adaptable to acquisitions
7 Considerations to Increase M&A Success
What if an M&A Fails? Restructuring Strategies
Strategy where a firm changes its set of businesses or financial structure
3 main types
1. Downsizing An intentional reduction in the number of a firm’s employees and/or operating units
Frequently used when excessive premium paid for acquired firm
2. Downscoping The divestiture, spin-off, or other means of eliminating businesses unrelated to the
firm’s core business
Example: American Standard Companies
3. Leveraged Buyouts Restructuring strategy where a party buys all of a firm’s assets in order to take the firm
private (private equity firms)
Example: Gibson Greeting Cards—3rd largest greeting card manufacturer in US—was part of RCA; 1982 RCA sold to The Wesray Corporation (investment group)
Restructuring and Outcomes