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Acquisitions and

RestructuringStrategies

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Mergers, Acquisitions, and Takeovers:

What are the Differences?• Merger – A transaction where two firms agree to integrate their

operations on a relatively coequal asis ecause they have

resources and capailities that together may create a stronger

competitive advantage

• Acquisition – A transaction where one firm uys another firm with the intent

of more effectively using a core competence y making theacquired firm a susidiary within its portfolio of usinesses

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Mergers, Acquisitions, and Takeovers:

What are the Differences?• Joint Venture

– A contractual agreement !oining together two or more parties

for the purpose of e"ecuting a particular usiness undertaking#

All parties agree to share in the profits and losses of the

enterprise

• Take Over – An acquisition where the target firm did not solicit the id of

the acquiring firm

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Integration

difficulties

Inadequateevaluation of target

Too muchdiversification

Large or extraordinary debt

Inability toachieve synergy

Managers overlyfocused on acquisitions

Too large

Increased

market power

Overcomeentry barriers

Lower riskcompared to developingnew products

Cost of newproduct development

Increased speedto market

Increaseddiversification

void excessivecompetition

Acquisitions

Reasons Problems

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Acquisitions: $ncreased Market %ower

• &actors increasing market power when: – There is the aility to sell goods or services aove

competitive levels#

–'osts of primary or support activities are elowthose of competitors#

– A firm(s si)e, resources and capailities gives it a

superior aility to compete#

• Acquisitions intended to increase market powerare su!ect to: – *egulatory review

– Analysis y financial markets

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Acquisitions: $ncreased Market %ower

+cont(d• Market power is increased y: – -ori)ontal acquisitions: other firms in the same

industry

– .ertical acquisitions: suppliers or distriutors of the

acquiring firm

– *elated acquisitions: firms in highly related

industries

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Market %ower Acquisitions

• cquisition of a company in the

same industry in which the

acquiring firm competes

increases a firm!s market power

• cquisitions with similar

characteristics result in higher

performance than those with

dissimilar characteristics"

HorizontalAcquisitions

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Market %ower Acquisitions +cont(d

• cquisition 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"


VerticalAcquisition

s

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Market %ower Acquisitions +cont(d

• cquisition of a company in a

highly related industry

#ecause of the difficulty in

implementing synergy$

related acquisitions are often

difficult to implement"


VerticalAcquisition

sRelatedAcquisition

s

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Acquisitions: /vercoming 0ntry

1arriers

• 0ntry 1arriers – &actors associated with the market or with the firms

operating in it that increase the e"pense and

difficulty faced y new ventures when trying to

enter that market• 0conomies of scale

• Differentiated products

• 'ross21order Acquisitions

– Acquisitions made etween companies with

headquarters in different countries

• Are often made to overcome entry arriers#

• 'an e difficult to negotiate and operate ecause of the

differences in foreign cultures#

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Acquisitions: 'ost of 3ew2%roduct

Development and $ncreased 4peed to

Market• $nternal development of new products is often

perceived as high2risk activity#

– Acquisitions allow a firm to gain access to new and

current products that are new to the firm#

– *eturns are more predictale ecause of the

acquired firms( e"perience with the products#

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Acquisitions: 5ower *isk 'ompared to

Developing 3ew %roducts

• An acquisition(s outcomes can e estimated

more easily and accurately than the outcomes

of an internal product development process#

– Managers may view acquisitions as lowering risk

associated with internal ventures and *6D

investments#

–

Acquisitions may discourage or suppress innovation#

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Acquisitions: $ncreased Diversification

• 7sing acquisitions to diversify a firm is the

quickest and easiest way to change its portfolio

of usinesses#

• 1oth related diversification and unrelated diversification strategies can e implemented

through acquisitions#

• The more related the acquired firm is to theacquiring firm, the greater is the proaility

that the acquisition will e successful#

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Acquisitions: *eshaping the &irm(s

'ompetitive 4cope

• An acquisition can:

– *educe the negative effect of an intense rivalry on a

firm(s financial performance#

– *educe a firm(s dependence on one or more products

or markets#

• *educing a company(s dependence on specific

markets alters the firm(s competitive scope#

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Acquisitions: 5earning and Developing

3ew 'apailities• An acquiring firm can gain capailities that the

firm does not currently possess:

– 4pecial technological capaility

– A roader knowledge ase

• &irms should acquire other firms with different

ut related and complementary capailities inorder to uild their own knowledge ase#

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%rolems in Achieving Acquisition

4uccess

Too large

Managers

overly focused on

acquisitionsExtraordinary debt

Inadequate

target evaluation

Too much

diversification

Inability to

achieve synergy

Integration

difficulties

Problems

with

Acquisitions

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4uccess: $ntegration Difficulties• $ntegration challenges include:

– Melding two disparate corporate cultures

– 5inking different financial and control systems

– 1uilding effective working relationships +particularly

when management styles differ

– *esolving prolems regarding the status of the newly

acquired firm(s e"ecutives – 5oss of key personnel weakens the acquired firm(s

capailities and reduces its value

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4uccess: $nadequate 0valuation of the

Target• Due Diligence – The process of evaluating a target firm for

acquisition

• $neffective due diligence may result in paying an e"cessivepremium for the target company#

• 0valuation requires e"amining:

– &inancing of the intended transaction

– Differences in culture etween the firms

– Ta" consequences of the transaction

– Actions necessary to meld the two workforces

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4uccess: 5arge or 0"traordinary Det• -igh det can:

– $ncrease the likelihood of ankruptcy

– 5ead to a downgrade of the firm(s credit rating

– %reclude investment in activities that contriute to

the firm(s long2term success such as:

• *esearch and development

• -uman resource training• Marketing

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4uccess: $naility to Achieve 4ynergy

• Synergy

– When assets are worth more when used in

con!unction with each other than when they areused separately#

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+cont(d• A firm develops competitive advantage through

an acquisition strategy only when a transaction

generates private synergy.

• Private synergy – When the comination and integration of the acquiring and

acquired firms( assets yields capailities and core

competencies that could not e developed y comining andintegrating either firm(s assets with another company#

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+cont(d• %ossile when firm(s assets are complimentary

in unique ways

– 7nique type of assets complimentarity is not possiley comining either company(s assets with another

firm(s assets#

• Advantage: $t is difficult for competitors to understand andimitate#

• Disadvantage: $t is also difficult to create#

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4uccess: Too Much Diversification• Diversified firms must process more information

of greater diversity#

– $ncreased operational scope created y

diversification may cause managers to rely too muchon financial +*/$ rather than strategic controls to

evaluate usiness units( performances#

– 4trategic focus shifts to short2term performance#

• *esult ? 4trategic competitiveness?

– Acquisitions may ecome sustitutes for innovation#

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4uccess: Managers /verly &ocused on

Acquisitions• Managers invest sustantial time and energy inacquisition strategies in:

– 4earching for viale acquisition candidates#

– 'ompleting effective due2diligence processes#

– %reparing for negotiations#

– Managing the integration process after the

acquisition is completed#

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4uccess: Managers /verly &ocused on

Acquisitions• Managers in target firms operate in a state ofvirtual suspended animation during an

acquisition#

– 0"ecutives may ecome hesitant to make decisionswith long2term consequences until negotiations have

een completed#

– The acquisition process can create a short2term

perspective and a greater aversion to risk amonge"ecutives in the target firm#

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4uccess: Too 5arge

• Additional costs of controls may e"ceed the

enefits of the economies of scale and

additional market power#

• 5arger si)e may lead to more ureaucraticcontrols#

• &ormali)ed controls often lead to relatively

rigid and standardi)ed managerial ehavior#• The firm may produce less innovation#

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Acquired firm has Assets / Resources

that are comlementary to the

acquiring firm!s core business

"uying firms with assets that meet current needs

to build cometitiveness#

Acquisitions is $riendly

$riendly deals ma%e integration go more smoothly#

$aster and more effective integration and ossiblylower remiums

Acquiring firm conducts due

diligence#

&areful 'election Process

(eliberate evaluation and negotiations are more

li%ely to lead to easy integration and building

synergies#

Acquiring firm has $inancial

'lac% )cash or a favorable debt

osition*

Provide enough additional financial resources

so that rofitable ro+ects would not be

foregone#

$inancing is easy and less costly to obtain

Attributes Results

Attriutes of 0ffective Acquisitions

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Attriutes of 0ffective Acquisitions

Attributes Results

Merged firm maintains ,ow-to-

Moderate

(ebt

Merged firm maintains financial flexibility

,ower financing cost. ,ower ris%

Acquiring firm manageschange well and is flexible and

adatable

$aster and more effective integrationfacilitates achievement of synergies

Acquiring firm has sustained

emhasis on Innovation/R( &ontinue to invest in R( as art of

the firm!s overall strategy

,ong term cometitive advantage

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*estructuring

• A strategy through which a firm changes its set

of usinesses or financial structure#

– &ailure of an acquisition strategy often precedes a

restructuring strategy# – *estructuring may occur ecause of changes in the

e"ternal or internal environments#

• *estructuring strategies:

– Downsi)ing

– Downscoping

– 5everaged uyouts

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Types of *estructuring: Downsi)ing

• A reduction in the numer of a firm(s

employees and sometimes in the numer of its

operating units#

– May or may not change the composition ofusinesses in the company(s portfolio#

• Typical reasons for downsi)ing:

– 0"pectation of improved profitaility from cost

reductions

– Desire or necessity for more efficient operations

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Types of *estructuring: Downscoping

• A divestiture, spin2off or other means of

eliminating usinesses unrelated to a firm(s

core usinesses#

• A set of actions that causes a firm tostrategically refocus on its core usinesses#

– May e accompanied y downsi)ing, ut not

eliminating key employees from its primary

usinesses# – 4maller firm can e more effectively managed y

the top management team#

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*estructuring: 5everaged 1uyouts

+51/

• The acquisition of another company using a significant

amount of orrowed money +onds or loans to meet

the cost of acquisition#

• /ften, the assets of the company eing acquired are

used as collateral for the loans in addition to the assets

of the acquiring company#

• The purpose of leveraged uyouts is to allow

companies to make large acquisitions without having to

commit a lot of capital#

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*estructuring: 5everaged 1uyouts

+51/

• $n an 51/, there is usually a ratio of 89 det to ;9

equity#

– 5everaged uyouts have had a notorious history, especially in

the ;8

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*estructuring and /utcomes

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@

Thank You

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Assignment - 2

Case Presentations

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Case Presentations

Group ames Cases

; M 'ultivating 'ore competency +'ase2;

AMD .s $ntel: 'ompetitive 'hallenge +'ase2B

1oeing: *edefining strategies to manage the competitivemarket +'ase C @

B Dell: &rom a low cost %' market to an innovativecompany +'ase 2

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Group ames CasesG -uawei: 'isco(s 'hinese 'hallenger +'ase 2 ;B

< Fet 1lue Airways: 'hallenges Ahead +'ase 2 ;E

8 5ufthansa: oing loal ut how to managecomple"ity+'ase2;

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• B

• @

• E

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• <

• 8

• ;9

• ;;

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Documents

Lecture - 7 Sm