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

Chapter 8

Acquisition and Restructuring Strategies

Chapter Eight

8-2© 2006 by Nelson, a division of Thomson Canada Limited.

Chapter 5Bus. - Level

Strategy

Chapter 6Competitive

Dynamics

Chapter 9International

Strategy

Chapter 10CooperativeStrategies

Chapter 8Acquisitions &Restructuring

Chapter 11Corporate

Governance

Chapter 12Structure& Control

Chapter 13Strategic

Leadership

Chapter 14Entrepreneurship & Innovation

Str

ateg

icIn

pu

ts

Str

ateg

icA

ctio

ns

Str

ateg

ic O

utc

om

esChapter 4Internal

Environment

Chapter 3External

Environment Strat. Intent

Strat. Mission

The Strategic Management .

Process

Strategy Formulation Strategy Implementation

Strategic Competitiveness

Chapter 1

Above Average Returns

Chapter 2 Feedback

Strategic Competitiveness

Chapter 1

Chapter 7Corp. - Level

Strategy

Chapter 5Bus. - Level

Strategy

Chapter 6Competitive

Dynamics

Chapter 8Acquisitions &Restructuring

The Strategic Management Process

8-3© 2006 by Nelson, a division of Thomson Canada Limited.

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.

8-4© 2006 by Nelson, a division of Thomson Canada Limited.

Merger:

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

equal basis.

Mergers and Acquisitions

*

8-5© 2006 by Nelson, a division of Thomson Canada Limited.

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

8-6© 2006 by Nelson, a division of Thomson Canada Limited.

Horizontal Acquisition

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

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

Related AcquisitionThe acquisition of a firm in a highly related industry.

8-7© 2006 by Nelson, a division of Thomson Canada Limited.

Reasons for Acquisitions

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

Pharmaceutical firms access new products through acquisitions of other drug manufacturers

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

Reasons for Acquisitions

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

8-9© 2006 by Nelson, a division of Thomson Canada Limited.

Reasons for Acquisitions

Toronto’s Onex Corporation

British Telcom’s Acquisition of Ireland’s East Telecom

The Jim Pattison Group of Companies

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

Increasing Diversification and 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

8-10© 2006 by Nelson, a division of Thomson Canada Limited.

Reasons for Acquisitions

The Jim Pattison Group of Companies

Angiotech: a Vancouver based research lab.

Learn & Develop New CapabilitiesAcquiring firms with new capabilities helps the 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.

8-11© 2006 by Nelson, a division of Thomson Canada Limited.

Problems With Acquisitions

8-12© 2006 by Nelson, a division of Thomson Canada Limited.

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.

8-13© 2006 by Nelson, a division of Thomson Canada Limited.

Problems with Acquisitions

Vivendi’s purchase of Seagram Co. Ltd.

GE--prior to selling businesses and refocusing

Futurelink

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.

8-14© 2006 by Nelson, a division of Thomson Canada Limited.

Attributes of friendly Acquisitions

8-15© 2006 by Nelson, a division of Thomson Canada Limited.

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

Leads to greater focus.

Restructuring Activities

Agilient Technologies cutting of its workforce by 15,000 jobs

Telus cutting of its workforce by 6,000 jobs

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

8-16© 2006 by Nelson, a division of Thomson Canada Limited.

Downscoping

Downsizing

Lower Performance

Reduced Labour Costs

Loss of Human Capital

AlternativesShort-Term Outcomes

Long-Term Outcomes

Higher RiskHigh Debt Costs

LeveragedBuyout

Downsizing

Higher Performance

Reduced Debt Costs

Emphasis on Strategic Controls

Reduced Labour Costs

Loss of Human Capital

Lower Performance

Downscoping

Reduced Debt Costs

Restructuring and Outcomes

LeveragedBuyout