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Acquisitions
What is an acquisition? Where one business acquires a controlling interest in another business
Examples (1) December 2005 Buyer – ITV plc | price - £175million http://www.telegraph.co.uk/finance/2927757/ITV-buys-Frien...
Examples (2) March 2004 Buyer – WM Morrisons| price - £3bn http://news.bbc.co.uk/1/hi/business/3542291.stm   January 2007 ...
Why might acquisitions be preferred? <ul><li>Existing products are in the later stages of their life cycles </li></ul><ul>...
Advantages of acquisitions <ul><li>Quick access to resources & skills the business needs </li></ul><ul><li>Overcomes barri...
Drawbacks of acquisitions <ul><li>High cost involved </li></ul><ul><li>Problems of valuation </li></ul><ul><li>Clash of cu...
Possible reasons for acquisitions (1) <ul><li>Increase market share </li></ul><ul><li>Acquire new skills </li></ul><ul><li...
Possible reasons for acquisitions (2) <ul><li>Overcome barriers to entry to target markets </li></ul><ul><li>Defend itself...
Two directions of integration (1) Forward Backwards Horizontal Vertical
Two directions of integration (2) Direction Explanation Forward + vertical Acquiring a business further up in the supply c...
Example (1) &quot;This is a once in a lifetime opportunity to combine two of the most respected and well-known companies i...
Example (2) Broadcaster BSkyB acquired television set-top box maker Amstrad for about £125m. Sky said that the deal meant ...
What is “Synergy”? The whole is greater than the sum of the individual parts
Two kinds of “synergy” Eliminate duplicated functions & services Better deals from suppliers Higher productivity & efficie...
But acquisitions usually fail It is widely accepted that over 50-70% of takeovers destroy shareholder value
Why acquisitions fail <ul><li>Price paid for acquisition was too high (over-estimate of synergies) </li></ul><ul><li>Lack ...
Acquisitions and change <ul><li>An acquisition poses significant challenges for management </li></ul><ul><li>Employees </l...
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Introduction to Acquisitions

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A brief overview of the concept of a business acquisition - why they are done and how they go wrong.

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Introduction to Acquisitions

  1. 1. Acquisitions
  2. 2. What is an acquisition? Where one business acquires a controlling interest in another business
  3. 3. Examples (1) December 2005 Buyer – ITV plc | price - £175million http://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.html December 206 Buyer – First Choice | price - £120million http://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.html
  4. 4. Examples (2) March 2004 Buyer – WM Morrisons| price - £3bn http://news.bbc.co.uk/1/hi/business/3542291.stm January 2007 Buyer – Tata| price - £5.8bn http://news.bbc.co.uk/1/hi/business/6315823.stm
  5. 5. Why might acquisitions be preferred? <ul><li>Existing products are in the later stages of their life cycles </li></ul><ul><li>Business lacks knowledge or resources to develop organically </li></ul><ul><li>Speed of growth is a high priority </li></ul><ul><li>Competitors enjoy significant advantages that are hard to overcome </li></ul>
  6. 6. Advantages of acquisitions <ul><li>Quick access to resources & skills the business needs </li></ul><ul><li>Overcomes barriers to entry </li></ul><ul><li>Helps spread risk (wider range of products and greater geographical spread) </li></ul><ul><li>Revenue growth opportunities (synergy) </li></ul><ul><li>Cost saving opportunities (synergy) </li></ul><ul><li>Reduces competition </li></ul><ul><li>May enable economies of scale </li></ul>
  7. 7. Drawbacks of acquisitions <ul><li>High cost involved </li></ul><ul><li>Problems of valuation </li></ul><ul><li>Clash of cultures </li></ul><ul><li>Upset customers </li></ul><ul><li>Problems of integration (change management) </li></ul><ul><li>Resistance from employees </li></ul><ul><li>Non-existent synergy </li></ul><ul><li>Incompatibility of management styles, structures and culture </li></ul><ul><li>Questionable motives </li></ul><ul><li>High failure rate </li></ul><ul><li>Diseconomies of scale </li></ul>
  8. 8. Possible reasons for acquisitions (1) <ul><li>Increase market share </li></ul><ul><li>Acquire new skills </li></ul><ul><li>Access economies of scale </li></ul><ul><li>Secure better distribution </li></ul><ul><li>Acquire intangible assets (brands, patents, trade marks) </li></ul><ul><li>Spread risks by diversifying </li></ul>
  9. 9. Possible reasons for acquisitions (2) <ul><li>Overcome barriers to entry to target markets </li></ul><ul><li>Defend itself against a takeover threat </li></ul><ul><li>Enter new segments of existing market </li></ul><ul><li>To eliminate competition </li></ul>
  10. 10. Two directions of integration (1) Forward Backwards Horizontal Vertical
  11. 11. Two directions of integration (2) Direction Explanation Forward + vertical Acquiring a business further up in the supply chain – e.g. manufacturer buys a distributor Backward + vertical Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler Horizontal Acquiring a business at the same stage of the supply chain – e.g. a manufacturer buys a competitor Conglomerate Where the acquisition has no clear connection to the business buying it
  12. 12. Example (1) &quot;This is a once in a lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry&quot;, CEO Adidas = Horizontal integration
  13. 13. Example (2) Broadcaster BSkyB acquired television set-top box maker Amstrad for about £125m. Sky said that the deal meant they could now save money, design their products in-house and be more innovative. = Backward vertical integration
  14. 14. What is “Synergy”? The whole is greater than the sum of the individual parts
  15. 15. Two kinds of “synergy” Eliminate duplicated functions & services Better deals from suppliers Higher productivity & efficiency from shared assets Cost Savings Cross-selling to customers of both businesses Access to new distribution Brand extensions New geographic markets opened up Revenues
  16. 16. But acquisitions usually fail It is widely accepted that over 50-70% of takeovers destroy shareholder value
  17. 17. Why acquisitions fail <ul><li>Price paid for acquisition was too high (over-estimate of synergies) </li></ul><ul><li>Lack of decisive change management in the early stages </li></ul><ul><li>The takeover was mishandled </li></ul><ul><li>Cultural incompatibility </li></ul><ul><li>Poor communication </li></ul><ul><li>Loss of key personnel & customers post acquisition </li></ul><ul><li>The creation of a lumbering giant that is soon outpaced by smaller rivals </li></ul>
  18. 18. Acquisitions and change <ul><li>An acquisition poses significant challenges for management </li></ul><ul><li>Employees </li></ul><ul><ul><li>E.g. Uncertainty about acquirer intentions & strategy (cost savings, rationalisation) </li></ul></ul><ul><li>Customers </li></ul><ul><ul><li>E.g. continued relationship; impact on quality </li></ul></ul><ul><li>Management (of acquired business) </li></ul><ul><ul><li>E.g. duplicated roles, new hierarchy </li></ul></ul>
  19. 19. Keep up-to-date with business stories, resources, quizzes and worksheets for your business course. Click the logo!

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