Acquisition and Restructuring Strategies <ul><li>Knowledge Objectives: </li></ul><ul><li>Explain the popularity of acquisition strategies for firms competing in the global economy. </li></ul><ul><li>Discuss reasons firms use an acquisition strategy to achieve strategic competitiveness. </li></ul><ul><li>Describe seven problems that work against developing a competitive advantage using an acquisition strategy. </li></ul><ul><li>Name and describe attributes of effective acquisitions. </li></ul><ul><li>Define the restructuring strategy and distinguish among it’s common forms. </li></ul><ul><li>Explain the short-term and long-term outcomes of the different types of restructuring strategies. </li></ul>
Mergers and Acquisitions Merger: A transaction where two firms agree to integrate their operations on a relatively co-equal basis. *
Mergers and Acquisitions 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.
Horizontal Acquisition The acquisition of a company competing in the same industry in which the acquiring firm competes. Vertical Acquisition A firm acquiring a supplier of distributor of one or more of it’s goods or services. Related Acquisition The acquisition of a firm in a highly related industry.
Reasons for Acquisitions Pharmaceutical firms access new products through acquisitions of other drug manufacturers Alcan’s purchase of Pechiney (Ch. 1 opening case) Best Buys purchase of Future Shop 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 & Risk of New Product Development
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 Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Increasing Diversification and Competitive Scope Firms may use acquisitions to restrict dependence on a single or a few products or markets Avoiding Excessive Competition Firms may acquire businesses in which competitive pressures are less intense than in their core business
Reasons for Acquisitions The Jim Pattison Group of Companies Angiotech: a Vancouver based research lab. Reshape the firm’s competitive scope Reducing a firm’s dependence on specific markets alters the firm’s competitive scope. Learn & Develop New Capabilities Acquiring firms with new capabilities helps the acquiring firm to learn new knowledge and remain agile.
Problems with Acquisitions TransCanada’s acquisition of Nova Corp Dynegy’s near purchase of Enron TD Banks acquisition of Canada Trust Integration 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.
Problems with Acquisitions Vivendi’s purchase of Seagram Co. Ltd. GE--prior to selling businesses and refocusing Futurelink 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 lose track of core business by spending so much effort on acquisitions. Too Large Large bureaucracy reduced innovation & flexibility.
Restructuring Activities Reducing scope of operations. Selectively divesting or closing non-core businesses. Leads to greater focus. Agilient Technologies cutting of its workforce by 15,000 jobs Telus cutting of its workforce by 6,000 jobs Forsmann Little’s buyout of Dr. Pepper Downscoping Downsizing Wholesale reduction of employees. Leveraged Buyout (LBO) A party buys a firm’s entire assets in order to take the firm private.
Restructuring and Outcomes Downscoping Downsizing Lower Performance Reduced Labour Costs Loss of Human Capital Alternatives Short-Term Outcomes Long-Term Outcomes Higher Risk High Debt Costs Leveraged Buyout Downsizing Higher Performance Reduced Debt Costs Emphasis on Strategic Controls Reduced Labour Costs Loss of Human Capital Lower Performance Downscoping Reduced Debt Costs Leveraged Buyout