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Chapter 9

Chapter 9. Acquisition & Restructuring Strategies. Mergers and Acquisitions. Merger : Strategy through which 2 Firms agree to Integrate Operations on a relatively Co-Equal Basis

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Chapter 9

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  1. Chapter 9 Acquisition & Restructuring Strategies

  2. Mergers and Acquisitions • Merger:Strategy through which 2 Firms agree to Integrate Operations on a relatively Co-Equal Basis • Acquisition:Strategy through which One firm Buys a Controlling Interest in another firm, with the intent of making the acquired firm a Subsidiary business within its own portfolio • Takeover:Special type of Acquisition Strategy; Target firm did Not Solicit acquiring firm’s Bid

  3. Learn & Develop New Capabilities Reshape Firm’s Competitive Scope Overcome Entry Barriers Increase Diversification Acquisitions Cost of New Product Development Increase Speed to Market Increase Market Power Lower Risk compared to Developing new Products Reasons for Making Acquisitions

  4. Reasons for Making Acquisitions: Increased Market Power Factors Increasing Market Power: • Firm is able to Sell its goods or services Above Competitive Levelsor • Costs of its primary or support activities are Below those of its Competitors • Usually derived from the Size of the firm and its Resources & Capabilities

  5. Reasons for Making Acquisitions:Increased Market Power Market Power is Increased by: • HorizontalAcquisitions • VerticalAcquisitions • RelatedAcquisitions

  6. Reasons for Making Acquisitions:Overcome Barriers to Entry • Barriers to Entry include: • Economies of Scalein established competitors • Differentiated Productsby competitors • Enduring Relationshipswith Customers that create product loyalties with competitors • Acquisition of an Established company: • More Effective than entering market as a competitor offering unfamiliar product to current buyers? • Provides new entrant withImmediate Market Access

  7. Reasons for Making Acquisitions:Cost of New Product Development & Speed to Market • Significant Investments of a firm’s Resources are required to: • Develop New Products Internally • Introduce New Products into the Marketplace • Acquisition of a Competitor may result in: • More Predictable Returns • Faster Market Entry • Rapid Access to New Capabilities

  8. Reasons for Making Acquisitions:Lower Risk versus Developing New Products • An Acquisition’sOutcomescan beEstimated more easily and accurately, compared to the outcomes of an internal product development process. • Therefore Managers may View Acquisitions asLower Risk.

  9. Reasons for Making Acquisitions:Increased Diversification • It may be Easier to Develop and Introduce New Products in Markets we currently serve • It may beDifficult to Develop New ProductsforMarketsin which a firmLacks Experience • Uncommon for a firm to Develop new products Internally to Diversify its product lines • Acquisitions are the Quickest, Easiest way to Diversify and Change business portfolio

  10. Reasons for Making Acquisitions:Reshaping the Firm’s Competitive Scope •Firms may use Acquisitions toReducetheirDependenceon one or more products or markets •Reducing a company’s Dependence on specific MarketsAlters the firm’s Competitive Scope

  11. Reasons for Making Acquisitions:Learning & Developing New Capabilities • Acquisitions mayGain Capabilitiesthat the firm does not possess • Acquisitions may be used to: • Acquire a SpecialTechnological Capability • Broaden a firm’sKnowledge Base • Reduce Inertia

  12. Resulting Firm is Too Large Inadequate Evaluation of Target Managers Overly Focused on Acquisitions Acquisitions Large or Extraordinary Debt Too Much Diversification Integration Difficulties Inability to Achieve Synergy Problems With Acquisitions

  13. Problems With AcquisitionsIntegration Difficulties • Integration Challenges include: • Blending 2 DifferentCorporate Cultures • Linking differentFinancial & Control Systems • Building Effective Working Relationships (particularly whenManagement StylesDiffer) • Resolving Problems regarding theStatusof the newly acquired firm’sExecutives • Loss of Key Personnelweakens the acquired firm’s capabilities and Reduces its Value

  14. Problems With AcquisitionsInadequate Evaluation of Target • Evaluation requires closelyExamining hundreds of Issues, including: • Financingfor the intended transaction • Cultural Differencesbetween the acquiring and target firms • Tax Consequencesof the transaction • Necessary Actions to successfully blend 2 workforces • Ineffective Due-Diligence Processmay: • Result in paying Excessive Premium for the target company

  15. Problems With AcquisitionsLarge or Extraordinary Debt • Firm may take onSignificant Debtto acquire another company • High Debt can: • Increase theLikelihood of Bankruptcy • Lead to a Downgrade in the firm’sCredit Rating • Preclude needed Investmentin activities that contribute to the firm’s Long-Term Success

  16. Problems With AcquisitionsInability to Achieve Synergy • Synergyexists when Assets are Worth More when Used in Conjunction with each other than when they are used separately. • Firms experienceTransaction Costswhen using Acquisition Strategies to create Synergy. • Firms tend toUnderestimate Indirect Costswhen Evaluating a potential Acquisition.

  17. Problems With AcquisitionsToo Much Diversification • Diversified firms must ProcessMore Informationof Greater Diversity • Scopecreated by Diversification may cause managers to Rely too much onFinancial, rather than strategic,Controlsto Evaluate business units’ Performances • Acquisitions may becomeSubstitutes for Innovation

  18. Problems With AcquisitionsManagers Overly Focused on Acquisitions • Managers in Target Firms may operate in a state of virtualSuspended Animationduring an acquisition. • Target’s Executives may beHesitant to make Decisions with Long-Term Consequencesuntil negotiations have been completed. • Acquisition Process can create aShort-Term Perspectiveand greaterAversion to Riskamong top-level executives in a target firm.

  19. Problems With AcquisitionsToo Large • Additional Costs may Exceed Benefitsof Economies of Scale & additional Market Power • Larger Size may lead to moreBureaucratic Controls • Formalized Controls can lead to Rigid & Standardized Managerial Behavior • Firm may becomeLess Innovative

  20. Attributes of Effective Acquisitions Attributes Results Buy firms with Assets to meet Current Needs to build Competitiveness Complementary Assets / Resources Friendly deals make Integration go more Smoothly Friendly Acquisitions Deliberate Evaluation & Negotiations are more likely to lead to Easy Integration and building Synergies Careful SelectionProcess Maintain Financial Slack Have additional Financial Resources so profitable projects are not foregone

  21. Attributes of Effective Acquisitions Attributes Results Low-to-ModerateDebt Merged firm Maintains Financial Flexibility Sustain Emphasis on Innovation Continue to Invest in R&D as part of the firm’s overall Strategy Has Experience at Managing Change & is Flexible and Adaptable Flexibility

  22. Restructuring Activities • Downsizing: • Wholesale Reduction of Employees • Downscoping(Opposite of Diversification): • Selectively Divesting or Closing Non-Core Businesses • Reducing Scope of Operations • Leads to Greater Focus • Leveraged Buyout(LBO): • Party Buys firm’s entire Assets in order to take the firm Private.

  23. Loss of Human Capital Downsizing Lower Performance Downscoping Leveraged Buyout Emphasis on Strategic Controls High Debt Costs Reduced Debt Costs Reduced Labor Costs Higher Performance Higher Risk Restructuring and Outcomes

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