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©2004 by South-Western/Thomson Learning 1
Acquisition and Restructuring Acquisition and Restructuring StrategiesStrategies
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Chapter 8Chapter 8
2
Chapter 2Chapter 2Strategic LeadershipStrategic Leadership
Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization
Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics
Chapter 9Chapter 9International StrategyInternational Strategy
Chapter 1Chapter 1Introduction toIntroduction to
Strategic ManagementStrategic Management
Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment
Chapter 5Chapter 5Business-LevelBusiness-Level
StrategyStrategy
Chapter 8Chapter 8Acquisitions andAcquisitions and
Restructuring StrategiesRestructuring Strategies
Chapter 11Chapter 11Corporate GovernanceCorporate Governance
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy
Chapter 10Chapter 10Cooperative StrategyCooperative Strategy
Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship
StrategicAnalysis
StrategicThinking
CreatingCompetitiveAdvantage
MonitoringAnd CreatingEntrepreneurialOpportunities
The Strategic Management ProcessThe Strategic Management Process
Chapter 8Chapter 8Acquisition andAcquisition and
Restructuring StrategiesRestructuring Strategies
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Mergers, Acquisitions and Mergers, Acquisitions and TakeoversTakeovers Merger:Merger: a strategy through which two firms a strategy through which two firms
agree to integrate theiragree to integrate their operations on a operations on a relatively co-equal basisrelatively co-equal basis
Acquisition:Acquisition: a strategy through which one firm a strategy through which one firm buys a controlling interest in another firm with buys a controlling interest in another firm with the intent of making the acquired firm a the intent of making the acquired firm a subsidiary business within its own portfoliosubsidiary business within its own portfolio
Takeover:Takeover: a special type of an acquisition a special type of an acquisition strategy wherein the target firm did not solicit the strategy wherein the target firm did not solicit the acquiring firm’s bidacquiring firm’s bid
4
AcquisitionsAcquisitions
Reasons for Making AcquisitionsReasons for Making Acquisitions
IncreaseIncreasemarket powermarket power
OvercomeOvercomeentry barriersentry barriers
Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed
to marketto market
IncreaseIncreasediversificationdiversification
Reshape firm’sReshape firm’scompetitive scopecompetitive scope
Lower risk comparedLower risk comparedto developing newto developing new
productsproducts
Learn and developLearn and developnew capabilitiesnew capabilities
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services when a firm is able to sell its goods or services
above competitive levels orabove competitive levels or
– when the costs of its primary or support activities when the costs of its primary or support activities are below those of its competitorsare below those of its competitors
– usually is derived from the size of the firm and its usually is derived from the size of the firm and its resources and capabilities to compete resources and capabilities to compete
Market power is increased byMarket power is increased by– horizontal acquisitionshorizontal acquisitions
– vertical acquisitionsvertical acquisitions
– related acquisitionsrelated acquisitions
Increased Market PowerIncreased Market Power
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors
– differentiated products by competitorsdifferentiated products by competitors
– enduring relationships with customers that create enduring relationships with customers that create product loyalties with competitorsproduct loyalties with competitors
acquisition of an established company acquisition of an established company – may be more effective than entering the market as may be more effective than entering the market as
a competitor offering an unfamiliar good or a competitor offering an unfamiliar good or service that is unfamiliar to current buyersservice that is unfamiliar to current buyers
Cross-border acquisitionCross-border acquisition
Overcome Barriers to EntryOvercome Barriers to Entry
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Significant investments of a firm’s resources Significant investments of a firm’s resources are required toare required to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace
Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities
Cost of New Product Development and Cost of New Product Development and Increased Speed to MarketIncreased Speed to Market
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
An acquisition’s outcomes can be An acquisition’s outcomes can be estimated more easily and accurately estimated more easily and accurately compared to the outcomes of an internal compared to the outcomes of an internal product development processproduct development process
Therefore managers may view acquisitions Therefore managers may view acquisitions as lowering riskas lowering risk
Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
It may be easier to develop and introduce It may be easier to develop and introduce new products in markets currently served new products in markets currently served by the firmby the firm
It may be difficult to develop new products It may be difficult to develop new products for markets in which a firm lacks experiencefor markets in which a firm lacks experience– it is uncommon for a firm to develop new it is uncommon for a firm to develop new
products internally to diversify its product linesproducts internally to diversify its product lines– acquisitions are the quickest and easiest way to acquisitions are the quickest and easiest way to
diversify a firm and change its portfolio of diversify a firm and change its portfolio of businessesbusinesses
Increased DiversificationIncreased Diversification
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or dependence on one or more products or marketsmarkets
Reducing a company’s dependence on Reducing a company’s dependence on specific markets alters the firm’s specific markets alters the firm’s competitive scopecompetitive scope
Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Acquisitions may gain capabilities that the Acquisitions may gain capabilities that the firm does not possessfirm does not possess
Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base
– reduce inertiareduce inertia
Learning and Developing New CapabilitiesLearning and Developing New Capabilities
12
AcquisitionsAcquisitions
Problems With AcquisitionsProblems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties
InadequateInadequateevaluation of targetevaluation of target
Large orLarge orextraordinary debtextraordinary debt
Inability toInability toachieve synergyachieve synergy
Too muchToo muchdiversificationdiversification
Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions
Resulting firmResulting firmis too largeis too large
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Problems With AcquisitionsProblems With Acquisitions
Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships building effective working relationships
(particularly when management styles differ)(particularly when management styles differ)– resolving problems regarding the status of the resolving problems regarding the status of the
newly acquired firm’s executivesnewly acquired firm’s executives– loss of key personnel weakens the acquired loss of key personnel weakens the acquired
firm’s capabilities and reduces its valuefirm’s capabilities and reduces its value
Integration DifficultiesIntegration Difficulties
14
Problems With AcquisitionsProblems With Acquisitions
Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction
– differences in cultures between the acquiring and differences in cultures between the acquiring and target firmtarget firm
– tax consequences of the transactiontax consequences of the transaction
– actions that would be necessary to successfully actions that would be necessary to successfully meld the two workforcesmeld the two workforces
Ineffective due-diligence process mayIneffective due-diligence process may– result in paying excessive premium for the target result in paying excessive premium for the target
companycompany
Inadequate Evaluation of TargetInadequate Evaluation of Target
15
Problems With AcquisitionsProblems With Acquisitions
Firm may take on significant debt to Firm may take on significant debt to acquire a companyacquire a company
High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that preclude needed investment in activities that
contribute to the firm’s long-term successcontribute to the firm’s long-term success
Large or Extraordinary DebtLarge or Extraordinary Debt
16
Problems With AcquisitionsProblems With Acquisitions
Synergy exists when assets are worth Synergy exists when assets are worth more when used in conjunction with each more when used in conjunction with each other than when they are used separatelyother than when they are used separately
Firms experience transaction costs (e.g., Firms experience transaction costs (e.g., legal fees) when they use acquisition legal fees) when they use acquisition strategies to create synergystrategies to create synergy
Firms tend to underestimate indirect costs Firms tend to underestimate indirect costs of integration when evaluating a potential of integration when evaluating a potential acquisitionacquisition
Inability to Achieve SynergyInability to Achieve Synergy
17
Problems With AcquisitionsProblems With Acquisitions
Diversified firms must process more Diversified firms must process more information of greater diversity information of greater diversity
Scope created by diversification may Scope created by diversification may cause managers to rely too much on cause managers to rely too much on financial rather than strategic controls to financial rather than strategic controls to evaluate business units’ performancesevaluate business units’ performances
Acquisitions may become substitutes for Acquisitions may become substitutes for innovationinnovation
Too Much DiversificationToo Much Diversification
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Problems With AcquisitionsProblems With Acquisitions
Managers in target firms may operate in a Managers in target firms may operate in a state of virtual suspended animation during state of virtual suspended animation during an acquisitionan acquisition
Executives may become hesitant to make Executives may become hesitant to make decisions with long-term consequences decisions with long-term consequences until negotiations have been completeduntil negotiations have been completed
Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk perspective and a greater aversion to risk among top-level executives in a target firmamong top-level executives in a target firm
Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions
19
Problems With AcquisitionsProblems With Acquisitions
Additional costs may exceed the benefits Additional costs may exceed the benefits of the economies of scale and additional of the economies of scale and additional market powermarket power
Larger size may lead to more bureaucratic Larger size may lead to more bureaucratic controls controls
Formalized controls often lead to relatively Formalized controls often lead to relatively rigid and standardized managerial rigid and standardized managerial behaviorbehavior
Firm may produce less innovationFirm may produce less innovation
Too LargeToo Large
20
Attributes of Effective Attributes of Effective AcquisitionsAcquisitions
AttributesAttributes ResultsResults
Complementary Complementary Assets or ResourcesAssets or Resources
Buying firms with assets that meet current Buying firms with assets that meet current needs to build competitivenessneeds to build competitiveness
Friendly Friendly AcquisitionsAcquisitions
Friendly deals make integration go more Friendly deals make integration go more smoothlysmoothly
Careful Selection Careful Selection ProcessProcess
Deliberate evaluation and negotiations are Deliberate evaluation and negotiations are more likely to lead to easy integration and more likely to lead to easy integration and building synergiesbuilding synergies
Maintain Financial Maintain Financial SlackSlack
Provide enough additional financial Provide enough additional financial resources so that profitable projects would resources so that profitable projects would not be foregonenot be foregone
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Attributes of Effective Attributes of Effective AcquisitionsAcquisitions
AttributesAttributes ResultsResults
Low-to-Moderate Low-to-Moderate DebtDebt
Merged firm maintains financial flexibilityMerged firm maintains financial flexibility
FlexibilityFlexibility Has experience at managing change and is Has experience at managing change and is flexible and adaptableflexible and adaptable
Sustain Emphasis Sustain Emphasis on Innovation on Innovation
Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategyfirm’s overall strategy
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Restructuring ActivitiesRestructuring Activities DownsizingDownsizing
– Wholesale reduction of employeesWholesale reduction of employees
DownscopingDownscoping– Selectively divesting or closing non-core Selectively divesting or closing non-core
businessesbusinesses– Reducing scope of operationsReducing scope of operations– Leads to greater focusLeads to greater focus
Leveraged Buyout (LBO)Leveraged Buyout (LBO)– A party buys a firm’s entire assets in order to A party buys a firm’s entire assets in order to
take the firm private.take the firm private.
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LowerLowerperformanceperformance
HigherHigherperformanceperformance
Higher riskHigher risk
Loss ofLoss ofhuman capitalhuman capital
Restructuring and OutcomesRestructuring and Outcomes
Emphasis onEmphasis onstrategic controlsstrategic controls
High debt costsHigh debt costs
Reduced debtReduced debtcostscosts
Reduced laborReduced laborcostscosts
DownsizingDownsizing
DownscopingDownscoping
LeveragedLeveragedbuyoutbuyout
Alternatives Short-Term Outcomes Long-Term Outcomes