Corporate-level strategy involves selecting businesses and industries for a firm to compete in and determining how to manage the mix of businesses. It aims to create competitive advantages through activities like vertical integration, strategic alliances, and diversification. Vertical integration involves engaging in different stages of production, while strategic alliances refer to cooperative agreements between firms without full equity ownership. Diversification relates to entering new businesses and industries to achieve various strategic objectives.
BUS 499, Week 6 Acquisition and Restructuring StrategiesSlide #VannaSchrader3
BUS 499, Week 6: Acquisition and Restructuring Strategies
Slide #
Topic
Narration
1
Introduction
Welcome to Business Administration.
In this lesson we will discuss Acquisition and Restructuring Strategies.
Please go to the next slide.
2
Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
Please go to the next slide.
3
Supporting Topics
In order to achieve this objective, the following supporting topics will be covered:
The popularity of merger and acquisition strategies;
Reasons for acquisitions;
Problems in achieving acquisition success;
Effective acquisitions; and
Restructuring.
Please go to the next slide.
4
The Popularity of Merger and Acquisition Strategies
The acquisition strategy has been a popular strategy among U.S. firms for many years. Some believe that this strategy played a central role in an effective restructuring of U.S. business during the 1980s and 1990s and into the twenty-first century.
An acquisition strategy is sometimes used because of the uncertainty in the competitive landscape. A firm may make an acquisition to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment.
The strategic management process calls for an acquisition strategy to increase a firm’s strategic competitiveness as well as its returns to shareholders. Thus, an acquisition strategy should be used only when the acquiring firm will be able to increase its value through ownership of the acquired firm and the use of its assets.
Please go to the next slide.
5
Mergers, Acquisitions, and Takeovers
A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. Few true mergers actually occur, because one party is usually dominant in regard to market share or firm size.
An acquisition is a strategy through which one firm buys a controlling, or one hundred percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. In this case, the management of the acquired firm reports to the management of the acquiring firm. Although most mergers are friendly transactions, acquisitions can be friendly or unfriendly.
A takeover is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid. The number of unsolicited takeover bids increased in the economic downturn of 2001 to 2002, a common occurrence in economic recessions; because the poorly managed firms that are undervalued relative to their assets are more easily identified.
On a comparative basis, acquisitions are more common than mergers and takeovers.
Please go to the next slide.
6
Reasons for Acquisitions
There are a number of reasons firms decide to acquire another company. These are:
Increased market power;
Overcoming entry barriers;
Co ...
BUS 499, Week 6 Acquisition and Restructuring StrategiesSlide #.docxcurwenmichaela
BUS 499, Week 6: Acquisition and Restructuring Strategies
Slide #
Topic
Narration
1
Introduction
Welcome to Business Administration.
In this lesson we will discuss Acquisition and Restructuring Strategies.
Please go to the next slide.
2
Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
Please go to the next slide.
3
Supporting Topics
In order to achieve this objective, the following supporting topics will be covered:
The popularity of merger and acquisition strategies;
Reasons for acquisitions;
Problems in achieving acquisition success;
Effective acquisitions; and
Restructuring.
Please go to the next slide.
4
The Popularity of Merger and Acquisition Strategies
The acquisition strategy has been a popular strategy among U.S. firms for many years. Some believe that this strategy played a central role in an effective restructuring of U.S. business during the 1980s and 1990s and into the twenty-first century.
An acquisition strategy is sometimes used because of the uncertainty in the competitive landscape. A firm may make an acquisition to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment.
The strategic management process calls for an acquisition strategy to increase a firm’s strategic competitiveness as well as its returns to shareholders. Thus, an acquisition strategy should be used only when the acquiring firm will be able to increase its value through ownership of the acquired firm and the use of its assets.
Please go to the next slide.
5
Mergers, Acquisitions, and Takeovers
A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. Few true mergers actually occur, because one party is usually dominant in regard to market share or firm size.
An acquisition is a strategy through which one firm buys a controlling, or one hundred percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. In this case, the management of the acquired firm reports to the management of the acquiring firm. Although most mergers are friendly transactions, acquisitions can be friendly or unfriendly.
A takeover is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid. The number of unsolicited takeover bids increased in the economic downturn of 2001 to 2002, a common occurrence in economic recessions; because the poorly managed firms that are undervalued relative to their assets are more easily identified.
On a comparative basis, acquisitions are more common than mergers and takeovers.
Please go to the next slide.
6
Reasons for Acquisitions
There are a number of reasons firms decide to acquire another company. These are:
Increased market power;
Overcoming entry barriers;
Co.
BUS 499, Week 6 Acquisition and Restructuring StrategiesSlide #VannaSchrader3
BUS 499, Week 6: Acquisition and Restructuring Strategies
Slide #
Topic
Narration
1
Introduction
Welcome to Business Administration.
In this lesson we will discuss Acquisition and Restructuring Strategies.
Please go to the next slide.
2
Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
Please go to the next slide.
3
Supporting Topics
In order to achieve this objective, the following supporting topics will be covered:
The popularity of merger and acquisition strategies;
Reasons for acquisitions;
Problems in achieving acquisition success;
Effective acquisitions; and
Restructuring.
Please go to the next slide.
4
The Popularity of Merger and Acquisition Strategies
The acquisition strategy has been a popular strategy among U.S. firms for many years. Some believe that this strategy played a central role in an effective restructuring of U.S. business during the 1980s and 1990s and into the twenty-first century.
An acquisition strategy is sometimes used because of the uncertainty in the competitive landscape. A firm may make an acquisition to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment.
The strategic management process calls for an acquisition strategy to increase a firm’s strategic competitiveness as well as its returns to shareholders. Thus, an acquisition strategy should be used only when the acquiring firm will be able to increase its value through ownership of the acquired firm and the use of its assets.
Please go to the next slide.
5
Mergers, Acquisitions, and Takeovers
A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. Few true mergers actually occur, because one party is usually dominant in regard to market share or firm size.
An acquisition is a strategy through which one firm buys a controlling, or one hundred percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. In this case, the management of the acquired firm reports to the management of the acquiring firm. Although most mergers are friendly transactions, acquisitions can be friendly or unfriendly.
A takeover is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid. The number of unsolicited takeover bids increased in the economic downturn of 2001 to 2002, a common occurrence in economic recessions; because the poorly managed firms that are undervalued relative to their assets are more easily identified.
On a comparative basis, acquisitions are more common than mergers and takeovers.
Please go to the next slide.
6
Reasons for Acquisitions
There are a number of reasons firms decide to acquire another company. These are:
Increased market power;
Overcoming entry barriers;
Co ...
BUS 499, Week 6 Acquisition and Restructuring StrategiesSlide #.docxcurwenmichaela
BUS 499, Week 6: Acquisition and Restructuring Strategies
Slide #
Topic
Narration
1
Introduction
Welcome to Business Administration.
In this lesson we will discuss Acquisition and Restructuring Strategies.
Please go to the next slide.
2
Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
Please go to the next slide.
3
Supporting Topics
In order to achieve this objective, the following supporting topics will be covered:
The popularity of merger and acquisition strategies;
Reasons for acquisitions;
Problems in achieving acquisition success;
Effective acquisitions; and
Restructuring.
Please go to the next slide.
4
The Popularity of Merger and Acquisition Strategies
The acquisition strategy has been a popular strategy among U.S. firms for many years. Some believe that this strategy played a central role in an effective restructuring of U.S. business during the 1980s and 1990s and into the twenty-first century.
An acquisition strategy is sometimes used because of the uncertainty in the competitive landscape. A firm may make an acquisition to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment.
The strategic management process calls for an acquisition strategy to increase a firm’s strategic competitiveness as well as its returns to shareholders. Thus, an acquisition strategy should be used only when the acquiring firm will be able to increase its value through ownership of the acquired firm and the use of its assets.
Please go to the next slide.
5
Mergers, Acquisitions, and Takeovers
A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. Few true mergers actually occur, because one party is usually dominant in regard to market share or firm size.
An acquisition is a strategy through which one firm buys a controlling, or one hundred percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. In this case, the management of the acquired firm reports to the management of the acquiring firm. Although most mergers are friendly transactions, acquisitions can be friendly or unfriendly.
A takeover is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid. The number of unsolicited takeover bids increased in the economic downturn of 2001 to 2002, a common occurrence in economic recessions; because the poorly managed firms that are undervalued relative to their assets are more easily identified.
On a comparative basis, acquisitions are more common than mergers and takeovers.
Please go to the next slide.
6
Reasons for Acquisitions
There are a number of reasons firms decide to acquire another company. These are:
Increased market power;
Overcoming entry barriers;
Co.
1LO1Understand when and how diversifying into multipl.docxfelicidaddinwoodie
1
LO1 Understand when and how diversifying into multiple businesses can enhance shareholder value.
LO2 Gain an understanding of how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage.
LO3 Become aware of the merits and risks of corporate strategies keyed to unrelated diversification.
LO4 Gain command of the analytical tools for evaluating a company’s diversification strategy.
LO5 Understand a diversified company’s four main corporate strategy options for solidifying its diversification strategy and improving company performance.
8-‹#›
2
Crafting a Diversified Company’s
Overall Corporate Strategy
Picking new industries to enter and deciding
on the means of entry
Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage
Establishing investment priorities and steering corporate resources into the most attractive business units
Initiating actions to boost the combined performance of the corporation’s collection
of businesses
8-‹#›
3
Strategic Options for
Diversified Corporations
Broadly restructuring the business
lineup with multiple divestitures
and/or acquisitions
Sticking with the existing business
lineup and pursuing opportunities presented by these businesses
Retrenching to a narrower scope of diversification by divesting poorly performing businesses
Broadening the scope of diversification
by entering additional industries
Strategic Options
8-‹#›
When Business Diversification
Becomes a Consideration
Diversification is called for when:
There are diminishing growth prospects in the present business
An expansion opportunity exists in an industry whose technologies and products complement the present business
Existing competencies and capabilities can be leveraged by expanding into an industry that requires similar resource strengths
Costs can be reduced by diversifying into closely related businesses
A powerful brand name can be transferred to the products of other businesses
8-‹#›
5
Building Shareholder Value:
The Ultimate Justification for
Business Diversification
Industry attractiveness test
Better-off
test
Tests for building shareholder value through diversification
Cost-of-entry
test
8-‹#›
6
Building Shareholder Value:
The Ultimate Justification for
Business Diversification
Diversification may result in building shareholder value if it passes three tests:
Industry Attractiveness Test—the target industry presents good long-term profit opportunities.
Cost of Entry Test—the cost to enter the target industry does not erode its long-term profit potential.
Better-Off Test—the firm’s businesses will perform better together than as stand-alone firms, producing
a synergistic 1+1=3 effect on shareholder value.
8-‹#›
7
Approaches to Diversifying
the Business Lineup
Diversification by acquisition of an existing business
Using joint ventures to achieve diversification
Options for entering new in ...
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1LO1Understand when and how diversifying into multipl.docxfelicidaddinwoodie
1
LO1 Understand when and how diversifying into multiple businesses can enhance shareholder value.
LO2 Gain an understanding of how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage.
LO3 Become aware of the merits and risks of corporate strategies keyed to unrelated diversification.
LO4 Gain command of the analytical tools for evaluating a company’s diversification strategy.
LO5 Understand a diversified company’s four main corporate strategy options for solidifying its diversification strategy and improving company performance.
8-‹#›
2
Crafting a Diversified Company’s
Overall Corporate Strategy
Picking new industries to enter and deciding
on the means of entry
Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage
Establishing investment priorities and steering corporate resources into the most attractive business units
Initiating actions to boost the combined performance of the corporation’s collection
of businesses
8-‹#›
3
Strategic Options for
Diversified Corporations
Broadly restructuring the business
lineup with multiple divestitures
and/or acquisitions
Sticking with the existing business
lineup and pursuing opportunities presented by these businesses
Retrenching to a narrower scope of diversification by divesting poorly performing businesses
Broadening the scope of diversification
by entering additional industries
Strategic Options
8-‹#›
When Business Diversification
Becomes a Consideration
Diversification is called for when:
There are diminishing growth prospects in the present business
An expansion opportunity exists in an industry whose technologies and products complement the present business
Existing competencies and capabilities can be leveraged by expanding into an industry that requires similar resource strengths
Costs can be reduced by diversifying into closely related businesses
A powerful brand name can be transferred to the products of other businesses
8-‹#›
5
Building Shareholder Value:
The Ultimate Justification for
Business Diversification
Industry attractiveness test
Better-off
test
Tests for building shareholder value through diversification
Cost-of-entry
test
8-‹#›
6
Building Shareholder Value:
The Ultimate Justification for
Business Diversification
Diversification may result in building shareholder value if it passes three tests:
Industry Attractiveness Test—the target industry presents good long-term profit opportunities.
Cost of Entry Test—the cost to enter the target industry does not erode its long-term profit potential.
Better-Off Test—the firm’s businesses will perform better together than as stand-alone firms, producing
a synergistic 1+1=3 effect on shareholder value.
8-‹#›
7
Approaches to Diversifying
the Business Lineup
Diversification by acquisition of an existing business
Using joint ventures to achieve diversification
Options for entering new in ...
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2. Corporate Level Strategy
A corporate-level strategy is an
action taken to gain a competitive
advantage through the selection and
management of a mix of businesses
competing in several industries or
product markets.
What businesses should the firm be in?
How should the corporate office manage
its group of businesses?
3. Corporate Level Strategy
Vertical Integration
Strategic Alliances
Diversification (corporate portfolio
management)
To add value, a corporate strategy should enable a company,
or one of its business units, to perform one or more of the
value creation functions at a lower cost, or in a way which
supports a differentiation advantage. Corporate strategy
is the way a company creates value through the
configuration and coordination of multi-market activities.
4. Vertical Integration
Defining Vertical Integration
The number of stages in a product’s or service’s
value chain that a particular firm engages in
defines that firm’s level of vertical integration.
• Forward integration: When Coca-Cola began buying
its previously franchised independent bottlers.
• Backward integration: When Home Box Office
began producing its own movies for screening on the
HBO Cable Channel.
5.
6. Vertical Scope of the Firm 20
Voigt, Fall, 1998
(1) In determining whether activities should be internal or external:
Summary: Creating Value in Vertical
Activities
(2) In coordinating these activities along the value chain:
External
Customer
Internal Activities
External
Supplier
Be Better Than Competitors
7. Vertical Integration
Why vertically integrate?
Market Power
entry barriers
down stream price maintenance
up stream power over price
Efficiency
specialized assets & the holdup problem
protecting product quality
improved scheduling
8. Transactions Costs and the
Scope of the Firm
Transactions Costs and the
Scope of the Firm
Which is more efficient : several specialist firms linked by markets,
or the combination of these specialist firms under common
ownership.
VERTICAL PRODUCT GEOGRAPHICAL
AREAS
SINGLE V1 P1 P2 P3 A1 A2 A3
FIRM V2
V3
SEVERAL V1 P1 P2 P3 A1 A2 A3
SPECIALIZED V2
FIRMS V3
Common Issue--- What are TRANSACTION COSTS of markets
compared with administrative costs of the firm?
9. Vertical Integration
In order to avoid confusion on the vertical
coordination problem it is important for the manager
to separate two distinct issues:
Issue #1: What is the objective for vertical
coordination? Or put differently, what
efficiencies, risk sharing, or market power
advantages are being sought?
Issue #2: What organizational form (e.g.,
vertical contracts, equity joint ventures, mergers
& acquisitions) best achieves the desired
objective(s)?
10. Managerial Eco. - Rutgers University 6-13
Optimal Input Procurement
Substantial
specialized
investments
relative to
contracting costs?
Spot Exchange
No
Complex contracting
environment relative to
costs of integration?
Yes
Vertical
Integration
Yes
Contract
No
11. Types of strategic alliance
Strategic alliances
Non-equity alliance
Cooperation between firms
is managed directly through
contracts without cross-
equity holding or an
independent firm being
created
Joint Venture
Cooperating firms form an
independent firm in which
they invest. Profits from this
independent firm compensate
partners for this investment
Equity alliance
Cooperative contracts are
supplemented by equity
investments by one partner in the
other partner. Sometimes these
investments are reciprocated
15. Motivations For Diversification
Value Enhancing Motives:
Economies of Scope (shared activities to
reduce costs)
Transferring Core Competencies (Leveraging)
Brand-name that is exportable (e.g., Haagen-
Dazs to chocolate candy)
R&D and new product development
Utilizing excess capacity (e.g., in distribution)
16. Motivations For Diversification
Value Enhancing Motives:
Developing New Competencies (Stretching)
Efficient Management
Financial Motives
internal capital allocation & restructuring
risk reduction
tax advantages
Increase market power
multi-point competition
17. Other Motivations For Diversification:
Motivations that “Devaluate”:
Growth maximization
managerial capitalism/agency problem
protect against “unemployment risk”
maximize management compensation
Motivations that are “Value neutral”:
Diversification motivated by poor performance in
current businesses.
18. Diversification
Issue #1: There may be no value to
stockholders in diversification moves since
stockholders are free to diversify by holding a
portfolio of stocks.
Issue #2: When there is a reduction in
managerial (employment) risk, then there is
upside and downside effects for stockholders.
19. Diversification
On the upside, managers will be more willing
to learn firm-specific skills that will improve
the productivity and long-run success of the
company (to the benefit of stockholders).
On the downside, top-level managers may
have the incentive to diversify to a point that
is detrimental to stockholders.
20. Diversification
No one has shown that investors
pay a premium for diversified firms
-- in fact, discounts are common.
A classic example is Kaiser Industries
that was dissolved as a holding
company because its diversification
apparently subtracted from its value.
21. Diversification
No one has shown that investors pay a
premium for diversified firms -- in fact,
discounts are common.
Kaiser Industries main assets: (1) Kaiser Steel;
(2) Kaiser Aluminum; and (3) Kaiser Cement.
These were independent companies and the stock
of each were publicly traded. Kaiser industries
was selling at a discount which vanished when
Kaiser industries revealed its plan to sell its
holdings.
26. Mergers and Acquisitions
Increasing use of mergers &
acquisitions
1980s: 55,000 M&As: total value $1.3 trillion
1998: total value $2.5 trillion
1999: total value $3.4 trillion
IN UNITED STATES:
1998: total value $1.6 trillion
1999: total value $1.75 trillion
27. Mergers and Acquisitions
A merger is a strategy through
which two firms agree to integrate
their operations on a relatively co-
equal basis because they have
resources and capabilities that
together may create a stronger
competitive advantage.
28.
29. Mergers and Acquisitions
An acquisition is a strategy
through which one firm buys a
controlling or 100 percent interest
in another firm with the intent of
using a core competence more
effectively by making the acquired
firm a subsidiary business within its
portfolio.
30. Mergers and Acquisitions
A takeover is a type of an
acquisition strategy wherein the
target firm did not solicit the
acquiring firm’s bid.
31. Ch7-3
Problems in
Achieving Success
Problems in
Problems in
Achieving Success
Achieving Success
Integration
Integration
difficulties
difficulties
Inadequate
Inadequate
evaluation of target
evaluation of target
Too much
Too much
diversification
diversification
Large or
Large or
extraordinary debt
extraordinary debt
Inability to
Inability to
achieve synergy
achieve synergy
Managers overly
Managers overly
focused on acquisitions
focused on acquisitions
Too large
Too large
Increased
Increased
market power
market power
Overcome
Overcome
entry barriers
entry barriers
Lower risk
Lower risk
compared to developing
compared to developing
new products
new products
Cost of new
Cost of new
product development
product development
Increased speed
Increased speed
to market
to market
Increased
Increased
diversification
diversification
Avoid excessive
Avoid excessive
competition
competition
Acquisitions
Acquisitions
Reasons for
Reasons for
Acquisitions
Acquisitions
32. Mergers and Acquisitions
Reasons for Acquisitions
Increased Market Power
• e.g., BP Amoco attempt to acquire Arco
Overcome Entry Barriers
• e.g., entry into international markets
Lower Cost of New Product Development
• e.g., pharmaceutical companies frequently use
acquisitions to gain access to new products
33. Mergers and Acquisitions
Reasons for Acquisitions
Increased Speed to Market
• e.g., BMW’s acquisition of Rover
Diversification
• e.g., Seagram’s acquisition of Universal Studios
Avoiding Excess Competition
• e.g., General Electric’s acquisition of NBC
34. Mergers and Acquisitions
Problems with Acquisitions
Integration Difficulties
• e.g., Pillsbury and Burger King
Inadequate Evaluation of Target
• e.g., Bridgestone acquisition of Firestone
Large or Extraordinary Debt
• e.g., Campeau’s acquisition of Federated
Stores
35. Mergers and Acquisitions
Problems with Acquisitions
Inability to Achieve Synergy
•e.g., AT&T and NCR
Overly Diversified
•e.g, GE -- prior to refocusing
Overly Focused on Acquisitions
•e.g., Conglomerates of 1960s
36.
37.
38. Sustainable Competitive Advantage
Trying to gain sustainable competitive
advantage via mergers and acquisitions puts
us right up against the “efficient market”
wall.
If an industry is generally known to be highly
profitable, there will be many firms bidding on
the assets already in the market. Generally the
discounted value of future cash flows will be
impounded in the price that the acquirer pays.
Thus, the acquirer is expected to make only a
competitive rate of return on investment.
39. Sustainable Competitive Advantage
And the situation may actually be
worse, given the phenomenon of
the winner’s curse.
The most optimistic bidder usually
over-estimates the true value of the
firm.
40. Sustainable Competitive Advantage
Under what scenarios can the bidder do well?
(1) Luck;
(2) Asymmetric information
– This eliminates the competitive bidding premise implicit in
the “efficient market hypothesis”
(3) Specific-synergies between the bidder and
the target.
– Once again this eliminates the competitive bidding premise
of the efficient market hypothesis.
41. Restructuring Activities
Downsizing
Wholesale reduction of employees
• e.g., General Motors cuts 74,000 workers and closes 21
plants
Downscoping
Selectively divesting non-core businesses
• e.g., Break-up of AT&T into three businesses in 1995
42. Restructuring Activities -- LBOs
Purchase involving mostly borrowed funds
Generally occurs in mature industries where
R&D is not central to value creation
High debt load commits cash flows to repay
debt, creating discipline for managers
Increases concentration of ownership
Focuses attention of management on
shareholder value