Strategic Management Ch08

8-1© 2006 by Nelson, a division of Thomson Canada Limited.

Chapter 8

Acquisition and Restructuring Strategies

Chapter Eight

© 2006 by Nelson, a division of Thomson Canada Limited.


The Strategic Management

Process

Chapter 8:Acquisition & Restructuring

Chapter 9:International

Strategy

Chapter 10:Cooperative

Strategy

Strategy Formulation

Chapter 11:Corporate

Governance

Ch. 12: Org. Structure & Controls

Chapter 13:Strategic

Leadership

Chapter 14:Org. Renewal & Innovation

Strategy Implementation

StrategicActions

Chapter 3:The External Environment

Strategic Competitiveness

Strategic Mission & Strategic Intent

Strategic Objectives & Inputs

Chapter 1: Strategic

ManagementStrategic

Competitiveness Ch. 2: Strat. Mgmt . &

Performance



Chapter 4:The Internal Environment

Chapter 5: Bus.-Level Strategy

Chapter 6:Competitive Dynamics

Chapter 7:Corp.-Level

Strategy



Acquisition and Restructuring StrategiesKnowledge Objectives:

1. Explain the popularity of acquisition strategies for firms competing in the global economy.

2. Discuss reasons firms use an acquisition strategy to achieve strategic competitiveness.

3. Describe seven problems that work against developing a competitive advantage using an acquisition strategy.

4. Name and describe attributes of effective acquisitions.

5. Define the restructuring strategy and distinguish among it’s common forms.

6. Explain the short-term and long-term outcomes of the different types of restructuring strategies.


Merger:

A transaction where two firms agree to integrate their operations on a relatively co-

equal basis.

Mergers and Acquisitions

*


Acquisition:

A strategy where one firm buys a controlling or 100% interest in another firm with the intent

of making the acquired firm a subsidiary within its portfolio.

Takeover:An acquisition where the target firm did not

solicit the bid of the acquiring firm.

Mergers and Acquisitions


Acquisition Types

The acquisition of a firm in a highly related industry.

Related Acquisition

Vertical AcquisitionA firm acquiring a supplier of distributor of one or more of it’s goods or services.

The acquisition of a company competing in the same industry in which the acquiring firm competes.

Horizontal Acquisition


Reasons for Acquisitions

Increasedmarket power

Overcomeentry barriers

Avoid cost of new product development

Increased speed to market

Learn and develop new capabilities

Reshape firm’s Competitive

Scope

Increased Diversification

Reduce riskfor developing new productsAcquisitions


Pharmaceutical firms access new products through acquisitions of other drug manufacturers

Alcan’s purchase of Pechiney (Ch. 1 opening case)


Best Buys purchase of Future Shop

Increased Market PowerAcquisition intended to reduce the competitive balance of the industry

Overcome Barriers to EntryAcquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive

Buying established businesses reduces risk of start-up ventures

Lower Cost & Risk of New Product Development



Toronto’s Onex Corporation

British Telcom’s Acquisition of Ireland’s East Telecom

U.S. Steel’s purchase of Marathon Oil

Increased Speed to MarketClosely related to Barriers to Entry, allows market entry in a more timely fashion

Increasing Diversification & Competitive ScopeFirms may use acquisitions to restrict dependence on a single or a few products or markets

Avoiding Excessive CompetitionFirms may acquire businesses in which competitive pressures are less intense than in their core business



The Jim Pattison Group of Companies

Angiotech: a Vancouver based research lab.

Learn & Develop New CapabilitiesAcquiring firms with new capabilities helps acquiring firm to learn new knowledge and remain agile.

Reshape the firm’s competitive scopeReducing a firm’s dependence on specific markets alters the firm’s competitive scope.


Problems with Acquisitions

Increasedmarket power

Overcomeentry barriers

Avoid cost of new product development

Increased speed to market

Learn and develop new capabilities

Reshape firm’s Competitive

Scope

Increased Diversification

Reduce riskfor developing new products

Integrationdifficulties

Inadequate evaluation of

target

Managers toofocused on acquisitions

Resulting firm is too large

Too muchdiversification

Large orextraordinary

debt

Inability toachieve synergy

Acquisitions


TransCanada’s acquisition of Nova Corp

Dynegy’s near purchase of Enron

TD Banks acquisition of Canada Trust

Problems with AcquisitionsIntegration Difficulties

Differing cultures may make integration of firms difficult.

Inadequate Evaluation of Target‘Winners Curse’ causes acquirer to overpay for firm.

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows.


Problems with Acquisitions

Vivendi’s purchase of Seagram Co. Ltd.

GE - prior to selling businesses and refocusing

Futurelink / the original LTV

Inability to Achieve SynergyJustifying acquisitions can increase estimate of expected benefits.

Overly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businesses.

Managers Overly Focused on AcquisitionsManagers lose track of core business by spending so much effort on acquisitions.

Too LargeLarge bureaucracy reduced innovation & flexibility.


Attributes of friendly AcquisitionsAttributes Results

Hi probability of synergy & competitive advantage by maintaining strengths

Faster & more effective integration; possibly lower premiumsFirms with strongest complementarities are acquired & overpayment is avoided

Acquired firm has resources that’re com-plementary to acquiring firm’s core bus.

Acquisition is friendly

Acquiring firm selects target & conducts negotiations carefully & deliberately

Financing (debt or equity) is easier and less costly to obtainLower finance cost & risk avoidance of trade-offs associated with hi debt

Acquiring firm has financial slack (cash or a favourable debt position)Merged firm maintains low to moderate debt instead of a higher debt position

Faster and more effective integration facilitates achievement of synergyMaintain long-term competitive advantage in markets

Has experience with change and is flexible and adaptableSustained and consistent emphasis on R&D and innovation


Reducing scope of operations.Selectively divesting or closing non-core businesses.

Leads to greater focus.

Restructuring Activities

Agilient Tech. cutting of its workforce by 15,000 jobs

Telus selling its Phone Book Business

Downscoping

DownsizingWholesale reduction of employees.

Leveraged Buyout (LBO)A party buys a firm’s entire assets in order to take the firm private.

Forsmann Little’s buyout of Dr. Pepper

Telus cutting of its workforce by 6,000 jobs

© 2006 by Nelson, a division of Thomson Canada Limited.

Lower Performance

Loss of Human Capital

Reduced Labour Costs

AlternativesShort-Term Outcomes

Long-Term Outcomes

Higher Performance

Reduced Debt Costs

Emphasis on Strategic Controls

Downscoping

Downsizing

LeveragedBuyout

Downscoping

Restructuring and Outcomes

Downsizing

Lower Performance

Reduced Labour Costs

Loss of Human Capital

Downscoping

Lower Performance

Higher Performance

Reduced Debt Costs


Higher Performance


Higher RiskHigh Debt Costs

Higher Performance



Higher Performance


LeveragedBuyout


Higher Performance



The Strategic Management

Process


Chapter 9:International

Strategy

Chapter 10:Cooperative

Strategy

Strategy Formulation

Chapter 11:Corporate

Governance

Ch. 12: Org. Structure & Controls

Chapter 13:Strategic

Leadership

Chapter 14:Org. Renewal & Innovation

Strategy Implementation

StrategicActions


Strategic Competitiveness

Strategic Mission & Strategic Intent

Strategic Objectives & Inputs

Chapter 1: Strategic

ManagementStrategic

Competitiveness Ch. 2: Strat. Mgmt . &

Performance



Chapter 4:The Internal Environment

Chapter 5: Bus.-Level Strategy

Chapter 6:Competitive Dynamics

Chapter 7:Corp.-Level

Strategy


Education

Strategic Management Ch08