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Hitt Chapter 7 – Hitt Chapter 7 – Acquisitions and Acquisitions and

Restructuring StrategiesRestructuring Strategies

MGNT428: Business Policy & StrategyMGNT428: Business Policy & StrategyDr. Tom Lachowicz, InstructorDr. Tom Lachowicz, Instructor

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Chapter Learning Objectives …Chapter Learning Objectives …

• To be able to:

– Explain the popularity of acquisition strategies in firms competing in the global economy.

– Discuss reasons firms use an acquisition strategy to achieve strategic competitiveness.

– Describe seven problems that work against developing a competitive advantage using an acquisition strategy.

– Name and describe 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.

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Figure 1.1Figure 1.1

Copyright © 2004 South-Western. All rights reserved.

The Strategic The Strategic Management Management

ProcessProcess

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Mergers, Acquisitions, and Takeovers: Mergers, Acquisitions, and Takeovers:

What are the Differences?What are the Differences?• Merger

– A strategy through which two firms agree to integrate their operations on a relatively co-equal basis

• Acquisition– A strategy through which one firm buys a controlling, or 100%

interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

• Takeover– A special type of acquisition when the target firm did not solicit

the acquiring firm’s bid for outright ownership

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Acquisitions: Acquisitions: Increased Market PowerIncreased Market Power

• Factors increasing market power– When there is the ability to sell goods or services

above competitive levels– When costs of primary or support activities are below

those of competitors– When a firm’s size, resources and capabilities gives it

a superior ability to compete

• Acquisitions intended to increase market power are subject to:– Regulatory review– Analysis by financial markets

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Acquisitions: Acquisitions: Increased Market Power (cont’d)Increased Market Power (cont’d)

• Market power is increased by:

– Horizontal acquisitions

– Vertical acquisitions

– Related acquisitions

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Market Power AcquisitionsMarket Power Acquisitions

• Acquisition of a company in the same industry in which the acquiring firm competes increases a firm’s market power by exploiting:

– Cost-based synergies

– Revenue-based synergies

• Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics

Horizontal Horizontal AcquisitionAcquisition

ss

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Market Power Acquisitions (cont’d)Market Power Acquisitions (cont’d)

• 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

Horizontal Horizontal AcquisitionAcquisition

ssVertical Vertical

AcquisitionAcquisitionss

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Market Power Acquisitions (cont’d)Market Power Acquisitions (cont’d)

• Acquisition of a company in a highly related industry

– Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement

Horizontal Horizontal AcquisitionAcquisition

ssVertical Vertical

AcquisitionAcquisitionss

Related Related AcquisitionAcquisition

ss

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Acquisitions: Acquisitions: Overcoming Entry BarriersOvercoming Entry Barriers

• Factors associated with the market or with the firms currently operating in it that increase the expense and difficulty faced by new ventures trying to enter that market

– Economies of scale

– Differentiated products

• Cross-Border Acquisitions

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Acquisitions: Cost of New-Product Acquisitions: Cost of New-Product Development and Development and

Increased Speed to MarketIncreased Speed to Market

• Internal development of new products is often perceived as high-risk activity– Acquisitions allow a firm to gain access to new and

current products that are new to the firm

– Returns are more predictable because of the acquired firms’ experience with the products

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Acquisitions: Lower Risk Compared to Acquisitions: Lower Risk Compared to Developing New ProductsDeveloping New Products

• An acquisition’s outcomes can be estimated more easily and accurately than the outcomes of an internal product development process

• Managers may view acquisitions as lowering risk

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Acquisitions: Increased Diversification Acquisitions: Increased Diversification

• Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses

• Both related diversification and unrelated diversification strategies can be implemented through acquisitions

• The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful

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Acquisitions: Reshaping the Firm’s Acquisitions: Reshaping the Firm’s Competitive ScopeCompetitive Scope

• An acquisition can:– Reduce the negative effect of an intense

rivalry on a firm’s financial performance– Reduce a firm’s dependence on one or more

products or markets

• Reducing a company’s dependence on specific markets alters the firm’s competitive scope

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Acquisitions: Learning and Developing Acquisitions: Learning and Developing New Capabilities New Capabilities

• An acquiring firm can gain capabilities that the firm does not currently possess:– Special technological capability– Broaden a firm’s knowledge base– Reduce inertia

• Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base

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Acquisitions

Reasons for Reasons for Acquisitions Acquisitions

and Problems and Problems in Achieving in Achieving

SuccessSuccess

Adapted from Figure 7.1Adapted from Figure 7.1

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Too much diversification

Managers overly focused on acquisitions

Too large

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Success: Integration DifficultiesIntegration Difficulties

• Integration challenges include:– Melding two disparate corporate cultures

– Linking different financial and control systems

– Building effective working relationships (particularly when management styles differ)

– Resolving problems regarding the status of the newly acquired firm’s executives

– Loss of key personnel weakens the acquired firm’s capabilities and reduces its value

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Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success: Inadequate Evaluation of the TargetInadequate Evaluation of the Target

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

• Ineffective due diligence may result in paying an excessive premium for the target company

• Evaluation requires examining:– Financing of the intended transaction– Differences in culture between the firms– Tax consequences of the transaction– Actions necessary to meld the two workforces

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success:Success: Large or Extraordinary DebtLarge or Extraordinary Debt

• High debt can:– Increase the likelihood of bankruptcy– Lead to a downgrade of the firm’s credit rating– Preclude investment in activities that contribute to the

firm’s long-term success such as:

• Research and development• Human resource training• Marketing

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success:Success: Inability to Achieve SynergyInability to Achieve Synergy

• Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately– Firms experience transaction costs when they use

acquisition strategies to create synergy

– Firms tend to underestimate indirect costs when evaluating a potential acquisition

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success:Success: Too Much DiversificationToo Much Diversification

• Diversified firms must process more information of greater diversity

• Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances

• Acquisitions may become substitutes for innovation

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success:Success: Managers Overly Focused on Managers Overly Focused on

AcquisitionsAcquisitions

• Managers invest substantial time and energy in acquisition strategies in:– Searching for viable acquisition candidates

– Completing effective due-diligence processes

– Preparing for negotiations

– Managing the integration process after the acquisition is completed

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Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success: Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions

• Managers in target firms operate in a state of virtual suspended animation during an acquisition– Executives may become hesitant to make

decisions with long-term consequences until negotiations have been completed

• The acquisition process can create a short-term perspective and a greater aversion to risk among executives in the target firm

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Success: Too LargeToo Large

• Additional costs of controls may exceed the benefits of the economies of scale and additional market power

• Larger size may lead to more bureaucratic controls

• Formalized controls often lead to relatively rigid and standardized managerial behavior

• Firm may produce less innovation

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Table 7.1Table 7.1

Attributes of Attributes of Successful Successful

AcquisitionsAcquisitions

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RestructuringRestructuring

• 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

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Types of Restructuring: DownsizingTypes of Restructuring: Downsizing

• A reduction in the number of a firm’s employees and sometimes in the number of its operating units– May or may not change the composition of

businesses in the company’s portfolio

• Typical reasons for downsizing:– Expectation of improved profitability from cost

reductions– Desire or necessity for more efficient operations

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Types of Restructuring: DownscopingTypes of Restructuring: Downscoping

• A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses

• A set of actions that causes a firm to strategically refocus on its core businesses– May be accompanied by downsizing, but not eliminating

key employees from its primary businesses– Firm can be more effectively managed by the top

management team

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Restructuring: Leveraged BuyoutsRestructuring: Leveraged Buyouts

• A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private– Significant amounts of debt are usually incurred to

finance the buyout

• Can correct for managerial mistakes– Managers making decisions that serve their own

interests rather than those of shareholders

• Can facilitate entrepreneurial efforts and strategic growth

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Restructuring and OutcomesRestructuring and Outcomes

Adapted from Figure 7.2Adapted from Figure 7.2