Chapter 7
Acquisition and Restructuring Strategies
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2000 South-Western College Publishing
Chapter 3
Internal
Environment
Chapter 2
External
Environment
The Strategic
Management
Process
Strategic Intent
Strategic Mission
Strategic
Competitiveness
Above Average
Returns
Feedback
Strategy Formulation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 7
Acquisitions &
Restructuring
Strategy Implementation
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 12
Strategic
Leadership
Chapter 13
Entrepreneurship
& Innovation
Strategic
Inputs
Strategic
Actions
Strategic
Outcomes
Mergers and Acquisitions
Merger
A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage
Acquisition
A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses
Takeover
An acquisition where the target firm did not solicit the bid of the acquiring firm
Problems in
Achieving Success
Integration
difficulties
Inadequate
evaluation of target
Too much
diversification
Large or
extraordinary debt
Inability to
achieve synergy
Managers overly
focused on acquisitions
Too large
Increased
market power
Overcome
entry barriers
Lower risk
compared to developing new products
Cost of new
product development
Increased speed
to market
Increased
diversification
Avoid excessive
competition
Acquisitions
Reasons for
Acquisitions
Reasons for Acquisitions
Example: Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group
Example: Watson Pharmaceuticals’ acquisition of TheraTech
Example: British Petroleum’s acquisition of . Amoco
Increased Market Power
Acquisition intended to reduce the competitive balance of the industry
Overcome Barriers to Entry
Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive
Buying established businesses reduces risk of start-up ventures
Lower Cost and Risk of New Product Development
Example: General Electric’s acquisition of NBC
Example: Kraft Food’s acquisition of Boca Burger
Example: CNET’s acquisition of mySimon
Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more timely fashion
Diversification
Quick way to move into businesses when firm currently lacks experience and depth in industry
Reshaping Competitive Scope
Firms may use acquisitions to restrict its dependence on a single or a few products or markets
Problems with Acquisitions
Example: Marks and Spencer’s acquisition of Brooks Brothers
Example: Intel’s acquisition of DEC’s semiconductor division
Example: AgriBioTech’s acquisition of dozens of small seed firms
Integration Difficulties
Differing financial and control systems can make integration of firms difficult
Inadequate Evaluation of Target
“Winners Curse” bid causes acquirer to overpay for firm
Large or Extraordinary Debt
Costly debt can create onerous burden on cash outflows
Example: Ford and Jaguar
Example: Quaker Oats and Snapple
Example: GE--prior to selling businesses and refocusing
Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits
Problems with Acquisitions
Overly Diversified
Acquirer doesn’t have expertise required to manage unrelated businesses
Managers Overly Focused on Acquisitions
Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy
Too Large
Large bureaucracy reduces innovation and flexibility
Attributes of Effective Acquisitions
Complementary Assets or Resources
Buying firms with assets that meet current needs to build competitiveness
+
Friendly Acquisitions
Friendly deals make integration go more smoothly
+
Careful Selection Process
Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies
+
Maintain Financial Slack
Provide enough additional financial resources so that profitable projects would not be foregone
+
Attributes of Effective Acquisitions
Low-to-Moderate Debt
Merged firm maintains financial flexibility
+
Flexibility
Has experience at managing change and is flexible and adaptable
+
Emphasize Innovation
Continue to invest in R&D as part of the firm’s overall strategy
+
Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs
Restructuring Activities
Example: Disney’s selling of Fairchild Publications
Downsizing
Wholesale reduction of employees
Downscoping
Reducing scope of operations
Selectively divesting or closing non-core businesses
Leads to greater focus
Leveraged Buyout (LBO)
A party buys a firm’s entire assets in order to take the firm private.
Example: Forsmann Little’s buyout of Dr. Pepper
Restructuring Activities
Downsizing
Downscoping
Leveraged
Buyout
Alternatives
Short-Term Outcomes
Long-Term Outcomes
Restructuring and Outcomes
Loss of
Human Capital
Lower Performance
Downsizing
Reduced Labor Costs
Alternatives
Short-Term Outcomes
Long-Term Outcomes
Restructuring and Outcomes
Higher Performance
Reduced Debt Costs
Emphasis on Strategic Controls
Downscoping
Downsizing
Reduced Labor Costs
Loss of
Human Capital
Lower Performance
Alternatives
Short-Term Outcomes
Long-Term Outcomes
Restructuring and Outcomes
High Debt Costs
Emphasis on Strategic Controls
Downscoping
Leveraged
Buyout
Reduced Debt Costs
Higher Performance
Higher Risk
Downsizing
Reduced Labor Costs
Loss of
Human Capital
Lower Performance
Alternatives
Short-Term Outcomes
Long-Term Outcomes
Restructuring and Outcomes
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