Acquisition And Restructuring Strategies,S
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  • 1. Chapter 7 Acquisition and Restructuring Strategies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing
  • 2. Mergers and Acquisitions Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm
  • 3. Problems in Achieving Success Reasons for Acquisitions Integration difficulties Inadequate evaluation of target Too much diversification Large or extraordinary debt Inability to achieve synergy Managers overly focused on acquisitions Too large Increased market power Overcome entry barriers Lower risk compared to developing new products Cost of new product development Increased speed to market Increased diversification Avoid excessive competition Acquisitions
  • 4. Reasons for Acquisitions Example: Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group Example: Watson Pharmaceuticals’ acquisition of TheraTech Example: British Petroleum’s acquisition of U.S. Amoco Increased Market Power Acquisition intended to reduce the competitive balance of the industry Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive Buying established businesses reduces risk of start-up ventures Lower Cost and Risk of New Product Development
  • 5. Example: General Electric’s acquisition of NBC Example: Kraft Food’s acquisition of Boca Burger Example: CNET’s acquisition of mySimon Reasons for Acquisitions Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Diversification Quick way to move into businesses when firm currently lacks experience and depth in industry Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a single or a few products or markets
  • 6. Problems with Acquisitions Example: Marks and Spencer’s acquisition of Brooks Brothers Example: Intel’s acquisition of DEC’s semiconductor division Example: AgriBioTech’s acquisition of dozens of small seed firms Integration Difficulties Differing financial and control systems can make integration of firms difficult Inadequate Evaluation of Target “ Winners Curse” bid causes acquirer to overpay for firm Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows
  • 7. Example: Ford and Jaguar Example: Quaker Oats and Snapple Example: GE--prior to selling businesses and refocusing Problems with Acquisitions Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Managers Overly Focused on Acquisitions Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy Too Large Large bureaucracy reduces innovation and flexibility
  • 8. Attributes of Effective Acquisitions Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness + Friendly Acquisitions Friendly deals make integration go more smoothly + Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies + Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone +
  • 9. Attributes of Effective Acquisitions Low-to-Moderate Debt Merged firm maintains financial flexibility + Flexibility Has experience at managing change and is flexible and adaptable + Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy +
  • 10. Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs Restructuring Activities Example: Disney’s selling of Fairchild Publications Downsizing Wholesale reduction of employees Downscoping Reducing scope of operations Selectively divesting or closing non-core businesses Leads to greater focus
  • 11. Leveraged Buyout (LBO) A party buys a firm’s entire assets in order to take the firm private. Example: Forsmann Little’s buyout of Dr. Pepper Restructuring Activities
  • 12. Restructuring and Outcomes Downsizing Downscoping Leveraged Buyout Alternatives Short-Term Outcomes Long-Term Outcomes
  • 13. Downsizing Alternatives Short-Term Outcomes Long-Term Outcomes Restructuring and Outcomes Loss of Human Capital Lower Performance Reduced Labor Costs
  • 14. Downsizing Reduced Labor Costs Loss of Human Capital Lower Performance Alternatives Short-Term Outcomes Long-Term Outcomes Restructuring and Outcomes Higher Performance Reduced Debt Costs Emphasis on Strategic Controls Downscoping
  • 15. Downscoping Reduced Debt Costs Downsizing Reduced Labor Costs Loss of Human Capital Lower Performance Alternatives Short-Term Outcomes Long-Term Outcomes Restructuring and Outcomes High Debt Costs Emphasis on Strategic Controls Leveraged Buyout Higher Performance Higher Risk