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 longterm outcomes of the different types of restructuring strategies.

The Strategic Management Process

Figure 1.1 3
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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

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

Market Power Acquisitions

Horizontal 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
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Market Power Acquisitions (contd)

Horizontal Acquisitions Vertical Acquisitions

Acquisition of a supplier or distributor of one or more of the firms goods or services Increases a firms market power by controlling additional parts of the value chain

Market Power Acquisitions (contd)

Horizontal Acquisitions Vertical Acquisitions Related Acquisitions

Acquisition of a company in a highly related industry

Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement

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 NewDevelopment 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 Acquisitions and Problems in Achieving Success

Adapted from Figure 7.1

Too large

Acquisitions

Managers overly focused on acquisitions

Integration difficulties

Too much diversification

Inadequate evaluation of target

Large or extraordinary debt

Inability to 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 25

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 30