Download CHAPTER 7 STRATEGIC ACQUISITION AND

CHAPTER 7
STRATEGIC
ACQUISITION AND
RESTRUCTURING
THE STRATEGIC MANAGEMENT
PROCESS
KNOWLEDGE OBJECTIVES
● Explain the popularity of merger and
acquisition strategies in firms competing in
the global economy.
● Discuss reasons why firms use an
acquisition strategy to achieve strategic
competitiveness.
● Describe seven problems that work against
achieving success when using an acquisition
strategy.
KNOWLEDGE OBJECTIVES
● Name and describe the attributes of
effective acquisitions.
● Define the restructuring strategy and
distinguish among its common forms.
● Explain the short- and long-term outcomes
of the different types of restructuring
strategies.
POPULARITY OF MERGER AND
ACQUISITION STRATEGIES
•
Source of firm growth and above-average
returns
POPULARITY OF MERGER AND
ACQUISITION STRATEGIES
•
Heavily influenced by external environment
• Tight credit markets
• Political changes in foreign countries’
orientation toward M&A
•
During the recent financial crisis, tightened
credit markets made it more difficult for firms
to complete “megadeals” (> $10 billion)
POPULARITY OF MERGER AND
ACQUISITION STRATEGIES
•
•
•
Cross-border acquisitions heighten during
currency imbalances, from strong currency
countries to weaker currency countries
Firms use M&A strategies to create value for
all stakeholders
M&A value creation applies equally to all
strategies (business-level, corporate-level,
international, and cooperative)
MERGERS, ACQUISITIONS, AND TAKEOVERS:
WHAT ARE THE DIFFERENCES?
MERGER
Two firms agree to integrate their operations on
a relatively co-equal basis
 There are few TRUE mergers because one
firm usually dominates in terms of market
share, size, or asset value
ACQUISITION
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
MERGERS, ACQUISITIONS, AND TAKEOVERS:
WHAT ARE THE DIFFERENCES?
TAKEOVER
Special type of acquisition strategy wherein
the target firm did not solicit the acquiring
firm's bid
HOSTILE TAKEOVER
Unfriendly takeover that is undesired by the
target firm
RATIONALE FOR STRATEGY
Pre-announcement returns of hostile
takeovers are largely anticipated and
associated with a significant increase in the
bidder’s and target’s share price
REASONS FOR ACQUISITIONS AND
PROBLEMS IN ACHIEVING SUCCESS
Reasons for
Acquisitions
and Problems
in Achieving
Success
REASONS FOR ACQUISITIONS
Increased Market Power
Market power is increased by:
●Horizontal acquisitions: other firms in the
same industry
McDonald’s acquisition of Boston Market
(successful?)
●Vertical acquisitions: suppliers or distributors
of the acquiring firm
Walt Disney Company’s acquisition of Fox Family
Worldwide
●Related acquisitions: firms in related
industries
REASONS FOR ACQUISITIONS
Increased Market Power
• Acquirer and acquired companies
compete in the same industry
Horizontal
Acquisitions
• Firm’s market power is increased by
exploiting:
 Cost-based synergies
 Revenue-based synergies
Similar characteristics:
• Strategy
• Managerial styles
• Resource allocation
patterns
• Previous alliance
management
experience
• Acquisitions with similar
characteristics result in higher
performance than those with
dissimilar characteristics
REASONS FOR ACQUISITIONS
Increased Market Power
Horizontal
Acquisitions
Vertical
Acquisitions
• Acquisition of a supplier
or distributor of one or
more of the firm’s goods
or services
 Increases a firm’s
market power by
controlling additional
parts of the value
chain
REASONS FOR ACQUISITIONS
Increased Market Power
Horizontal
Acquisitions
Vertical
Acquisitions
Related
Acquisitions
• Acquisition of a company in a highly
related industry
• Value creation takes place through
the synergy that is generated by
integrating resources and
capabilities
 Because of the difficulty in
implementing synergy, related
acquisitions are often difficult to
implement
PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
Integration
Difficulties
Inadequate
Target Evaluation
Too Large
Managers
Overly Focused on
Acquisitions
Too Much
Diversification
PROBLEMS WITH
ACQUISITIONS
Large or
Extraordinary Debt
Inability to
Achieve Synergy
PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
● Acquisition strategies are not problemfree, even when pursued for valuecreating reasons.
● Research suggests:
20% of all mergers and acquisitions
are successful
60% produce disappointing results
20% are clear failures, with
technology acquisitions reporting even
higher failure rates
PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
Too Much Diversification
Diversified firms must process more
information of greater diversity.
•
•
•
Increased operational scope created by
diversification may cause managers to rely
too much on financial rather than strategic
controls to evaluate business units’
performances
Strategic focus shifts to short-term
performance
Acquisitions may become substitutes for
innovation
PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
Too Much Diversification
Overdiversification
•
Related diversification requires more information
processing than does unrelated diversification
•
Due to the additional information processing, related
diversified firms become overdiversified with fewer
business units than do unrelated diversifiers
•
Overdiversification leads to a decline in performance,
after which business units are often divested
•
Even when a firm is not overdiversified, a high level of
diversification can have a negative effect on its longterm performance
EFFECTIVE ACQUISITIONS
Attributes of
Successful
Acquisitions
EFFECTIVE ACQUISITION STRATEGIES
Complementary
Assets/Resources
Buying firms with assets that meet
current needs to build competitiveness
Friendly
Acquisitions
Friendly deals make integration go
more smoothly
Due Diligence/Careful
Selection Process
Deliberate evaluation and negotiations
are more likely to lead to easy
integration and building synergies
Maintain Financial
Slack
Provide enough additional financial
resources so that profitable projects may
be capitalized upon rather than forgone
RESTRUCTURING
A strategy through which a firm changes its set of
businesses or financial structure
• Failure of an acquisition strategy often precedes
a restructuring strategy
• Restructuring may occur because of changes in
the external or internal environments
Restructuring strategies:
• Downsizing
• Downscoping
• Leveraged buyouts
RESTRUCTURING
DOWNSIZING
DOWNSCOPING
LEVERAGED BUYOUT
•Reduction in the number of a firm’s
employees and in the number of its
operating units, but it does not
change the essence of the business
•Refers to divestiture, spin-off, or
some other means of eliminating
businesses that are unrelated to a
firm’s core businesses
•A party buys all of the assets of a
business, financed largely with debt,
and takes the firm private
RESTRUCTURING
DOWNSIZING
DOWNSCOPING
• Tactical
• Short-term
• Cut labor costs
• Acquisition failed to
create anticipated value
• Paid too much for target
• Strategic
• Long-term
• Focus on core businesses
• More positive effect on
firm performance than
downsizing
RESTRUCTURING
Restructuring
and Outcomes