Competing for ADVANTAGE
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Chapter 9Acquisition and Restructuring Strategies
PART IIICREATING COMPETITIVE ADVANTAGE
The Strategic Management Process
Merger and Acquisition Strategies
Very popular strategies Especially cross-border acquisitions Offensive and defensive motives
Problematic High failure rates Complex strategic decisions Impacted by economic volatility Uncertain returns
Mergers, Acquisitions, and Takeovers – 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 or melding it with another division
Mergers, Acquisitions, and Takeovers – 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
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
Increase 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 or services
Increase market power by controlling more of the value chain
Related Acquisitions
Acquisition of a firm in a highly related industry
Increase market power by leveraging core competencies to gain a competitive advantage
Entry Barriers that Acquisitions Overcome
Economies of scale in established competitors
Differentiated competitor products
Enduring relationships and product loyalties between customers and 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 Profitability or adequate
returns on investments are not certain
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.
Reshape 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
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
Problems in Achieving Acquisition Success
Integration Challenges
Melding two disparate corporate cultures Working relationships Financial and control systems Uncertainty for acquired firm’s employees
Retaining crucial knowledge held by key personnel
Merging acquired capabilities 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 of any other companies.
Possible when the two firms' assets are complimentary in unique ways.
Yields a competitive advantage that is difficult to understand or imitate.
Transaction Costs Direct expenses
Legal fees Charges from investment bankers who
complete due diligence Indirect expenses
Managerial time to evaluate target firms and complete negotiations
Loss of key managers after an acquisition Additional costs
Managerial time in meetings Resources used to integrate processes
Due Diligence
Process through which a potential acquirer evaluates a target firm for acquisition
Associates the purchase price of an acquisition to an estimated, realistic achievable value
Large or Extraordinary Debt
Increases the likelihood of bankruptcy
Can lower the firm’s credit rating
Precludes needed investments in activities that contribute to long-term success (opportunity costs)
Too Much Diversification
Overwhelming information processing requirements
Overuse of financial controls to evaluate unit performance
Decline in internal innovation
Management Acquisition Activities
Searching for viable acquisition candidates
Completing effective due-diligence processes
Preparing and conducting negotiations
Managing integration processes after acquisition is completed
Firm Becomes Too Large
Key Terms Bureaucratic controls
Formalized supervisory and behavioral rules and policies designed to ensure decision and action consistency across different units of a firm
Attributes and Results of Successful Acquisitions
Restructuring
Key Terms Restructuring
Strategy through which a firm changes its set of businesses or 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)
Private equity firms Firms that facilitate or engage in taking public firms or business units of public firms private
Characteristics of Leveraged Buyouts
High debt Significant risk Related downscoping Managerial incentives
Restructuring and Outcomes
ETHICAL QUESTION
What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical
than takeovers? Why or why not?
ETHICAL QUESTIONOne 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 to this question differ by
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 QUESTIONWhat 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 QUESTION
What ethical issues are involved with conducting a robust due-diligence
process?
ETHICAL QUESTIONSome 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?