MGNT428 Ch07 Acquisitions & Restructuring Strategies - Lachowicz

8/3/2019 MGNT428 Ch07 Acquisitions & Restructuring Strategies - Lachowicz

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Hitt Chapter 7Hitt Chapter 7

Acquisitions andAcquisitions and

Restructuring StrategiesRestructuring Strategies

MGNT428: Business Policy & StrategyMGNT428: Business Policy & Strategy

Dr. Tom Lachowicz, InstructorDr. Tom Lachowicz, Instructor


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Chapter Learning Objectives Chapter Learning Objectives

To be able to:

Explain the popularity of

acquisition strategies in

firms competing in the

global economy.

Discuss reasons firms use

an acquisition strategy to

achieve strategic

competitiveness.

Describe seven problems

that work against

developing a competitive

advantage using an

acquisition strategy.

Name and describe

attributes of effective

acquisitions.

Define the restructuring

strategy and distinguishamong its common forms.

Explain the short- and long-

term outcomes of the

different types of

restructuring strategies.


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Figure 1.1Figure 1.1

Copyright 2004 South-Western. All rights reserved.

The StrategicThe Strategic

ManagementManagement

ProcessProcess


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Mergers, Acquisitions, and Takeovers:Mergers, Acquisitions, and Takeovers:

What are the Differences?What are the Differences?

Merger A strategy through which two firms agree to integrate their

operations on a relatively co-equal basis Acquisition

A strategy through which one firm buys a controlling, or 100%

interest in another firm with the intent of making the acquired firm

a subsidiary business within its portfolio

Takeover A special type of acquisition when the target firm did not solicit

the acquiring firms bid for outright ownership


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Acquisitions:Acquisitions:

Increased Market PowerIncreased Market Power

Factors increasing market power When there is the ability to sell goods or services

above competitive levels

When costs of primary or support activities are belowthose of competitors

When a firms size, resources and capabilities gives ita superior ability to compete

Acquisitions intended to increase marketpower are subject to: Regulatory review

Analysis by financial markets


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Increased Market Power (contd)Increased Market Power (contd)

Market power is increased by:

Horizontal acquisitions Vertical acquisitions

Related acquisitions


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Market Power AcquisitionsMarket Power Acquisitions

Acquisition of a company in the

same industry in which the

acquiring firm competes

increases a firms market power

by exploiting:

Cost-based synergies

Revenue-based synergies

Acquisitions with similar

characteristics result in higher

performance than those with

dissimilar characteristics

HorizontalHorizontalAcquisitionsAcquisitions


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Market Power Acquisitions (contd)Market Power Acquisitions (contd)

Acquisition of a supplier or

distributor of one or more of

the firms goods or services

Increases a firms marketpower by controlling

additional parts of the

value chain


VerticalVerticalAcquisitionsAcquisitions


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Market Power Acquisitions (contd)Market Power Acquisitions (contd)

Acquisition of a company

in a highly related industry

Because of the difficulty in

implementing synergy,related acquisitions are often

difficult to implement


VerticalVerticalAcquisitionsAcquisitions

RelatedRelatedAcquisitionsAcquisitions


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Overcoming Entry BarriersOvercoming Entry Barriers

Factors associated with the market or with

the firms currently operating in it that

increase the expense and difficulty faced

by new ventures trying to enter that market

Economies of scale

Differentiated products

Cross-Border Acquisitions


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Acquisitions: Cost of NewAcquisitions: Cost of New--ProductProduct

Development andDevelopment andIncreased Speed to MarketIncreased Speed to Market

Internal development of new products is

often perceived as high-risk activity

Acquisitions allow a firm to gain access to new and

current products that are new to the firm

Returns are more predictable because of the acquiredfirms experience with the products


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Acquisitions: Lower Risk Compared toAcquisitions: Lower Risk Compared to

Developing New ProductsDeveloping New Products

An acquisitions outcomes can be

estimated more easily and accurately than

the outcomes of an internal product

development process

Managers may view acquisitions as

lowering risk


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Acquisitions: Increased DiversificationAcquisitions: Increased Diversification

Using acquisitions to diversify a firm is the

quickest and easiest way to change its portfolio

of businesses

Both related diversification and unrelated

diversification strategies can be implemented

through acquisitions

The more related the acquired firm is to theacquiring firm, the greater is the probability that

the acquisition will be successful


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Acquisitions: Reshaping the FirmsAcquisitions: Reshaping the Firms

Competitive ScopeCompetitive Scope

An acquisition can:

Reduce the negative effect of an intense

rivalry on a firms financial performance

Reduce a firms dependence on one or more

products or markets

Reducing a companys dependence onspecific markets alters the firms

competitive scope


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Acquisitions: Learning and DevelopingAcquisitions: Learning and Developing

New CapabilitiesNew Capabilities

An acquiring firm can gain capabilities that

the firm does not currently possess: Special technological capability

Broaden a firms knowledge base

Reduce inertia

Firms should acquire other firms with

different but related and complementarycapabilities in order to build their own

knowledge base


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Acquisitions

Reasons forReasons for

AcquisitionsAcquisitions

and Problemsand Problemsin Achievingin Achieving

SuccessSuccess

Adapted from Figure 7.1Adapted from Figure 7.1

Integration

difficulties

Inadequate

evaluation of targetLarge or

extraordinary debt

Inability to

achieve synergy

Too much

diversification

Managers overly

focused on

acquisitions

Too large


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Problems in Achieving AcquisitionProblems in Achieving Acquisition

Success:Success: Integration DifficultiesIntegration Difficulties

Integration challenges include:

Melding two disparate corporate cultures

Linking different financial and control systems

Building effective working relationships (particularly

when management styles differ)

Resolving problems regarding the status of the newlyacquired firms executives

Loss of key personnel weakens the acquired firms

capabilities and reduces its value


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Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:

Inadequate Evaluation of the TargetInadequate Evaluation of the Target

Due Diligence The process of evaluating a target firm for acquisition

Ineffective due diligence may result in paying an excessivepremium for the target company

Evaluation requires examining: Financing of the intended transaction

Differences in culture between the firms

Tax consequences of the transaction

Actions necessary to meld the two workforces


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Success:Success: Large or Extraordinary DebtLarge or Extraordinary Debt

High debt can: Increase the likelihood of bankruptcy

Lead to a downgrade of the firms credit rating

Preclude investment in activities that contribute to the

firms long-term success such as:

Research and development

Human resource training

Marketing


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Success:Success: Inability to Achieve SynergyInability to Achieve Synergy

Synergy exists when assets are worth

more when used in conjunction with each

other than when they are used separately

Firms experience transaction costs when they use

acquisition strategies to create synergy

Firms tend to underestimate indirect costs whenevaluating a potential acquisition


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Success:Success: Too Much DiversificationToo Much Diversification

Diversified firms must process more information

of greater diversity

Scope created by diversification may cause

managers to rely too much on financial rather

than strategic controls to evaluate business

units performances

Acquisitions may become substitutes for

innovation


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Success:Success: Managers Overly Focused onManagers Overly Focused on


Managers invest substantial time and

energy in acquisition strategies in:

Searching for viable acquisition candidates

Completing effective due-diligence processes

Preparing for negotiations

Managing the integration process after the acquisition

is completed


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Problems in Achieving Acquisition Success:Problems in Achieving Acquisition Success:

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions

Managers in target firms operate in a state of

virtual suspended animation during an

acquisition Executives may become hesitant to make

decisions with long-term consequences until

negotiations have been completed

The acquisition process can create a short-term

perspective and a greater aversion to risk

among executives in the target firm


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Success:Success: Too LargeToo Large

Additional costs of controls may exceed the

benefits of the economies of scale and

additional market power

Larger size may lead to more bureaucratic

controls

Formalized controls often lead to relatively rigidand standardized managerial behavior

Firm may produce less innovation


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Table 7.1Table 7.1

Attributes ofAttributes of

SuccessfulSuccessful



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RestructuringRestructuring

A strategy through which a firm changes

its set of businesses or financial structure Failure of an acquisition strategy often precedes a

restructuring strategy

Restructuring may occur because of changes in the

external or internal environments

Restructuring strategies: Downsizing

Downscoping

Leveraged buyouts


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Types of Restructuring: DownsizingTypes of Restructuring: Downsizing

A reduction in the number of a firms

employees and sometimes in the number

of its operating units

May or may not change the composition of

businesses in the companys portfolio

Typical reasons for downsizing:

Expectation of improved profitability from costreductions

Desire or necessity for more efficient

operations


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Types of Restructuring: DownscopingTypes of Restructuring: Downscoping

A divestiture, spin-off or other means of

eliminating businesses unrelated to a

firms core businesses

A set of actions that causes a firm to

strategically refocus on its core

businesses May be accompanied by downsizing, but not

eliminating key employees from its primary

businesses

Firm can be more effectively managed by the top

management team


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Restructuring: Leveraged BuyoutsRestructuring: Leveraged Buyouts

A restructuring strategy whereby a partybuys all of a firms assets in order to takethe firm private

Significant amounts of debt are usually incurred tofinance the buyout

Can correct for managerial mistakes Managers making decisions that serve their own

interests rather than those of shareholders Can facilitate entrepreneurial efforts and

strategic growth


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Restructuring and OutcomesRestructuring and Outcomes

Adapted from Figure 7.2Adapted from Figure 7.2

MGNT428 Ch07 Acquisitions & Restructuring Strategies - Lachowicz

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