CHAPTER 7

Acquisitions and Restructuring

Strategies
Knowledge Objectives
Studying this chapter should provide you with the
strategic management knowledge needed 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.

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Knowledge Objectives (contd)
Studying this chapter should provide you with the
strategic management knowledge needed to:
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
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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 government scrutiny
Analysis by financial markets close examination by
financial analyst : need to understand political/legal
segment of general environment

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

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

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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
Facing entry barriers created by
Economies of scale
Differentiated products
a new entrant may find the acquisition of an established company to
be more effective than entering into the market
as a competitor offering good or services that is unfamiliar
Cross-Border Acquisitions
Acquisitions made between companies with headquarters in different
countries. These acquisitions made to overcome entry barriers.
Exp: Daimler-Benz (GERMAN) acquisition of Chrysler Corporation
(U.S) 711
Acquisitions: Cost of New-Product
Development and Increased Speed to
Market
Developing new products internally and successfully
into the mrkt often require significant investment of a
firms resources.
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

713
 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
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the acquisition will be successful
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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Problems in Adapted from Figure 7.1
Achieving
Success Too large

through
Acquisition
Managers overly
focused on
Acquisitions acquisitions

Integration
difficulties Too much
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. Transaction
cost may be direct or indirect.
Direct cost include legal fees and charges by investment
bank who complete due diligence for the acquiring firm.
Firms tend to underestimate indirect cost such as
managerial time to evaluate target firms in a potential
acquisition 721
 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 such as return on
investment (ROI) causes individual business unit
managers to focus on short-term outcomes at the expense
of long-term

Acquisitions may become substitutes for innovation722

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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