1 Chapter 9 Acquisition and Restructuring Strategies PART III CREATING COMPETITIVE ADVANTAGE.
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Transcript of 1 Chapter 9 Acquisition and Restructuring Strategies PART III CREATING COMPETITIVE ADVANTAGE.
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Competing for ADVANTAGE
1
Chapter 9Acquisition and Restructuring Strategies
PART IIICREATING COMPETITIVE ADVANTAGE
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The Strategic Management Process
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Merger and Acquisition Strategies
Very popular strategies Especially cross-border acquisitions Offensive and defensive motives
Problematic High failure rates Complex strategic decisions Impacted by economic volatility Uncertain returns
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Mergers, Acquisitions, and Takeovers – The Differences
Key Terms
Merger
Strategy through which two firms agree to integrate their operations on a relatively co-equal basis
Acquisition
Strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio or melding it with another division
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Mergers, Acquisitions, and Takeovers – The Differences
Key Terms
Takeover
Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
Hostile takeover
Unfriendly takeover strategy that is unexpected and undesired by the target firm
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Reasons for Acquisitions
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Sources of Market Power
Size of the firm Resources and
capabilities to compete in the market
Share of the market
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Types of Acquisitions to Increase Market Power
Horizontal Acquisitions
Vertical Acquisitions
Related Acquisitions
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Horizontal Acquisitions
Acquisition of a company competing in the same industry
Increase market power by exploiting cost-based and revenue-based synergies
Character similarities between the firms lead to smoother integration and higher performance
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Vertical Acquisitions
Acquisition of a supplier or distributor of one or more products or services
Increase market power by controlling more of the value chain
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Related Acquisitions
Acquisition of a firm in a highly related industry
Increase market power by leveraging core competencies to gain a competitive advantage
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Entry Barriers that Acquisitions Overcome
Economies of scale in established competitors
Differentiated competitor products
Enduring relationships and product loyalties between customers and competitors
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Cross-Border Acquisitions
Acquisitions made between companies with headquarters in different countries
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New Product Development
Significant investments of a firm’s resources are required to: develop new products
internally
introduce new products into the marketplace
Profitability or adequate returns on investments are not certain
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Increase Speed to Market
Acquisitions are used for rapid market entry critical to
successful competition in the highly uncertain and complex global environment faced by
firms today.
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Reshape the Firm’s Competitive Scope
Acquisitions quickly and easily: Change a firm's portfolio of
businesses
Establish new lines of products in markets where the firm lacks experience
Alter the scope of a firm’s activities
Create strategic flexibility
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Learn and Develop New Capabilities
Acquisitions are used to: Gain capabilities that the firm
does not possess
Broaden the firm’s knowledge base
Reduce inertia
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Problems in Achieving Acquisition Success
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Integration Challenges
Melding two disparate corporate cultures Working relationships
Financial and control systems
Uncertainty for acquired firm’s employees
Retaining crucial knowledge held by key personnel
Merging acquired capabilities into internal processes and procedures
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Private Synergy
Occurs when the combination and integration of acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating the assets of any other companies.
Possible when the two firms' assets are complimentary in unique ways.
Yields a competitive advantage that is difficult to understand or imitate.
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Transaction Costs
Direct expenses Legal fees
Charges from investment bankers who complete due diligence
Indirect expenses Managerial time to evaluate target firms
and complete negotiations
Loss of key managers after an acquisition
Additional costs Managerial time in meetings
Resources used to integrate processes
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Due Diligence
Process through which a potential acquirer evaluates a target firm for acquisition
Associates the purchase price of an acquisition to an estimated, realistic achievable value
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Large or Extraordinary Debt
Increases the likelihood of bankruptcy
Can lower the firm’s credit rating
Precludes needed investments in activities that contribute to long-term success (opportunity costs)
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Too Much Diversification
Overwhelming information processing requirements
Overuse of financial controls to evaluate unit performance
Decline in internal innovation
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Management Acquisition Activities
Searching for viable acquisition candidates
Completing effective due-diligence processes
Preparing and conducting negotiations
Managing integration processes after acquisition is completed
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Firm Becomes Too Large
Key Terms
Bureaucratic controls
Formalized supervisory and behavioral rules and policies designed to ensure decision and action consistency across different units of a firm
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Attributes and Results of Successful Acquisitions
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Restructuring
Key Terms
Restructuring
Strategy through which a firm changes its set of businesses or financial structure
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Restructuring –Three Strategies
Downsizing
Downscoping
Leveraged Buyouts
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Downsizing
Key Terms
Downsizing
Strategy that involves a reduction in the number of a firm's employees (and sometimes in the number of operating units) that may or may not change the composition of businesses in the company's portfolio
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Downscoping
Key Terms
Downscoping
Strategy of eliminating businesses that are unrelated to a firm's core businesses through divesture, spin-off, or some other means
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Leveraged Buyouts
Key Terms
Leveraged buyouts (LBOs)
Restructuring strategy whereby a party buys all of a firm's assets in order to take the firm private (or no longer trade the firm's shares publicly)
Private equity firms
Firms that facilitate or engage in taking public firms or business units of public firms private
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Characteristics of Leveraged Buyouts
High debt Significant risk Related downscoping Managerial incentives
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Restructuring and Outcomes
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ETHICAL QUESTION
What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical
than takeovers? Why or why not?
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ETHICAL QUESTION
One of the outcomes associated with market power is that the firm is able to
sell its good or service above competitive levels. Is it ethical for firms to pursue
market power? Does your answer to this question differ
by the industry in which the firm competes? For example, are the ethics of pursuing market power different for firms producing and selling medical equipment
compared with those producing and selling sports clothing?
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ETHICAL QUESTION
What ethical considerations are associated with downsizing decisions?
If you were part of a corporate downsizing, would you feel that your
firm had acted unethically? If you believe that downsizing has an
unethical component to it, what should firms do to avoid using this
technique?
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ETHICAL QUESTION
What ethical issues are involved with conducting a robust due-diligence
process?
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ETHICAL QUESTION
Some evidence suggests that there is a direct relationship between a firm’s size and the level of compensation its top executives receive. If this is so,
what inducement does this relationship provide to top-level
managers? What can be done to influence this relationship so that it serves shareholders’ best interests?