Hitt Chapter 7

Acquisitions and
Restructuring Strategies

MGNT428: Business Policy & Strategy

Dr. Tom Lachowicz, Instructor

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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 distinguish
among its common forms.
Explain the short- and long-
term outcomes of the
different types of
restructuring strategies.
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 The Strategic
Management
Process

Figure 1.1

Copyright 2004 South-Western. All rights reserved.

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Mergers, Acquisitions, and Takeovers:
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:
Increased 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 below
those of competitors
When a firms size, resources and capabilities gives it a
superior ability to compete
Acquisitions intended to increase market
power are subject to:
Regulatory review
Analysis by financial markets

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 Acquisitions:
Increased Market Power (contd)

Market power is increased by:

Horizontal acquisitions
Vertical acquisitions
Related acquisitions

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 Market Power Acquisitions
Horizontal
Acquisition Acquisition of a company in the
s 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

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 Market Power Acquisitions (contd)
Horizontal
Acquisition Acquisition of a supplier or
s distributor of one or more of
Vertical
Acquisition the firms goods or services
s
Increases a firms market
power by controlling
additional parts of the
value chain

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 Market Power Acquisitions (contd)
Horizontal
Acquisition Acquisition of a company in
s a highly related industry
Vertical
Acquisition Because of the difficulty in
s implementing synergy,
Related related acquisitions are often
Acquisition difficult to implement
s

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 Acquisitions:
Overcoming 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 New-Product
Development and
Increased 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 acquired
firms experience with the products

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Acquisitions: Lower Risk Compared to
Developing 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 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 the
acquiring firm, the greater is the probability that
the acquisition will be successful

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 Acquisitions: Reshaping the Firms
Competitive 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 on
specific markets alters the firms
competitive scope
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Acquisitions: Learning and Developing
New 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 complementary
capabilities in order to build their own
knowledge base
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 Reasons for Adapted from Figure 7.1

Acquisitions Too large

and Problems
in Achieving
Success
Managers overly
focused on
Acquisitions acquisitions

Integration Too much

difficulties diversification

Inadequate Large or Inability to

evaluation of target extraordinary debt achieve synergy

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 Problems in Achieving Acquisition
Success: Integration 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 newly
acquired firms executives
Loss of key personnel weakens the acquired firms
capabilities and reduces its value

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 Problems in Achieving Acquisition Success:
Inadequate Evaluation of the Target

Due Diligence
The process of evaluating a target firm for acquisition
Ineffective due diligence may result in paying an excessive
premium 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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 Problems in Achieving Acquisition
Success: Large 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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 Problems in Achieving Acquisition
Success: Inability 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 when
evaluating a potential acquisition

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 Problems in Achieving Acquisition
Success: Too 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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 Problems in Achieving Acquisition
Success: Managers Overly Focused on
Acquisitions
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:
Managers 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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 Problems in Achieving Acquisition
Success: Too 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 rigid
and standardized managerial behavior
Firm may produce less innovation
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Attributes of
Successful
Acquisitions

Table 7.1
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 Restructuring

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: 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 cost
reductions
Desire or necessity for more efficient operations

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 Types 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 Buyouts

A restructuring strategy whereby a party

buys all of a firms assets in order to take
the firm private
Significant amounts of debt are usually incurred to
finance 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 Outcomes

Adapted from Figure 7.2

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