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.
Acquisition Types The acquisition of a firm in a highly related industry. Related Acquisition Vertical Acquisition A firm acquiring a supplier of distributor of one or more of it’s goods or services. The acquisition of a company competing in the same industry in which the acquiring firm competes. Horizontal Acquisition
Reasons for Acquisitions Increased market power Overcome entry barriers Avoid cost of new product development Increased speed to market Learn and develop new capabilities Reshape firm’s Competitive Scope Increased Diversification Reduce risk for developing new products Acquisitions
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 U.S. Steel’s purchase of Marathon Oil Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Increasing Diversification & 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. Learn & Develop New Capabilities Acquiring firms with new capabilities helps acquiring firm to learn new knowledge and remain agile. Reshape the firm’s competitive scope Reducing a firm’s dependence on specific markets alters the firm’s competitive scope.
Problems with Acquisitions Increased market power Overcome entry barriers Avoid cost of new product development Increased speed to market Learn and develop new capabilities Reshape firm’s Competitive Scope Increased Diversification Reduce risk for developing new products Integration difficulties Inadequate evaluation of target Managers too focused on acquisitions Resulting firm is too large Too much diversification Large or extraordinary debt Inability to achieve synergy Acquisitions
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 / the original LTV 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.
Attributes of friendly Acquisitions Attributes Results Hi probability of synergy & competitive advantage by maintaining strengths Faster & more effective integration; possibly lower premiums Firms with strongest complementarities are acquired & overpayment is avoided Acquired firm has resources that’re com-plementary to acquiring firm’s core bus. Acquisition is friendly Acquiring firm selects target & conducts negotiations carefully & deliberately Financing (debt or equity) is easier and less costly to obtain Lower finance cost & risk avoidance of trade-offs associated with hi debt Acquiring firm has financial slack (cash or a favourable debt position) Merged firm maintains low to moderate debt instead of a higher debt position Faster and more effective integration facilitates achievement of synergy Maintain long-term competitive advantage in markets Has experience with change and is flexible and adaptable Sustained and consistent emphasis on R&D and innovation
Restructuring Activities Reducing scope of operations. Selectively divesting or closing non-core businesses. Leads to greater focus. Agilient Tech. cutting of its workforce by 15,000 jobs Telus selling its Phone Book Business Forsmann Little’s buyout of Dr. Pepper Telus cutting of its workforce by 6,000 jobs 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 Lower Performance Loss of Human Capital Reduced Labour Costs Alternatives Short-Term Outcomes Long-Term Outcomes Higher Performance Reduced Debt Costs Emphasis on Strategic Controls Downscoping Downsizing Leveraged Buyout Downscoping Downsizing Lower Performance Reduced Labour Costs Loss of Human Capital Downscoping Lower Performance Higher Performance Reduced Debt Costs Emphasis on Strategic Controls Higher Performance Emphasis on Strategic Controls Higher Risk High Debt Costs Higher Performance Emphasis on Strategic Controls Higher Risk High Debt Costs Higher Performance Emphasis on Strategic Controls Leveraged Buyout Higher Risk High Debt Costs Higher Performance Emphasis on Strategic Controls