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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: $ncreased Market %ower
+cont(d• Market power is increased y: – -ori)ontal acquisitions: other firms in the same
industry
– .ertical acquisitions: suppliers or distriutors of the
acquiring firm
– *elated acquisitions: firms in highly related
industries
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Market %ower Acquisitions
• cquisition of a company in the
same industry in which the
acquiring firm competes
increases a firm!s market power
• cquisitions with similar
characteristics result in higher
performance than those with
dissimilar characteristics"
HorizontalAcquisitions
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Market %ower Acquisitions +cont(d
• cquisition of a supplier or
distributor of one or more of the
firm!s goods or services
Increases a firm!s market
power by controlling additional
parts of the value chain"
HorizontalAcquisitions
VerticalAcquisition
s
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Market %ower Acquisitions +cont(d
• cquisition of a company in a
highly related industry
#ecause of the difficulty in
implementing synergy$
related acquisitions are often
difficult to implement"
HorizontalAcquisitions
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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
4uccess: $naility to Achieve 4ynergy
+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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%rolems in Achieving Acquisition
4uccess: $naility to Achieve 4ynergy
+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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
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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%rolems in Achieving Acquisition
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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