Aquisition and Restructuring
Transcript of Aquisition and Restructuring
Ch7-1
Chapter 7Chapter 7
Acquisition and Restructuring Strategies
Acquisition and Restructuring Strategies
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
©2000 South-Western College Publishing©2000 South-Western College Publishing
Ch7-2
Mergers and AcquisitionsMergers and AcquisitionsMergers and AcquisitionsMergers and Acquisitions
MergerMergerA transaction where two firms agree to integrate their A transaction where two firms agree to integrate their operations on a relatively coequal basis because they operations on a relatively coequal basis because they have resources and capabilities that together may have resources and capabilities that together may create a stronger competitive advantagecreate a stronger competitive advantage
AcquisitionAcquisitionA transaction where one firm buys another firm A transaction where one firm buys another firm with the intent of more effectively using a core with the intent of more effectively using a core competence by making the acquired firm a competence by making the acquired firm a subsidiary within its portfolio of businessessubsidiary within its portfolio of businesses
TakeoverTakeoverAn acquisition where the target firm did not solicit An acquisition where the target firm did not solicit the bid of the acquiring firmthe bid of the acquiring firm
Ch7-3
Problems inProblems inAchieving SuccessAchieving Success
Problems inProblems inAchieving SuccessAchieving Success
IntegrationIntegrationdifficultiesdifficulties
Inadequate Inadequate evaluation of targetevaluation of target
Too muchToo muchdiversificationdiversification
Large orLarge orextraordinary debtextraordinary debt
Inability toInability toachieve synergyachieve synergy
Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions
Too largeToo large
IncreasedIncreasedmarket powermarket power
OvercomeOvercomeentry barriersentry barriers
Lower riskLower riskcompared to developing compared to developing
new productsnew products
Cost of newCost of newproduct developmentproduct development
Increased speedIncreased speedto marketto market
IncreasedIncreaseddiversificationdiversification
Avoid excessiveAvoid excessivecompetitioncompetition
AcquisitionsAcquisitions
Reasons forReasons forAcquisitions Acquisitions
Ch7-4
Reasons for AcquisitionsReasons for AcquisitionsReasons for AcquisitionsReasons for Acquisitions
Example:Example: Belgian-Dutch Fortis’ acquisition of American Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance GroupBanker’s Insurance Group
Example:Example: Watson Pharmaceuticals’ acquisition of TheraTechWatson Pharmaceuticals’ acquisition of TheraTech
Example: Example: British Petroleum’s acquisition of U.S. AmocoBritish Petroleum’s acquisition of U.S. Amoco
Increased Market PowerIncreased Market PowerAcquisition intended to reduce the competitive balance of Acquisition intended to reduce the competitive balance of the industrythe industry
Overcome Barriers to EntryOvercome Barriers to EntryAcquisitions overcome costly barriers to entry which may make Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive“start-ups” economically unattractive
Buying established businesses reduces risk of start-up Buying established businesses reduces risk of start-up venturesventures
Lower Cost and Risk of New Product DevelopmentLower Cost and Risk of New Product Development
Ch7-5Example:Example: General Electric’s acquisition of NBCGeneral Electric’s acquisition of NBC
Example:Example: Kraft Food’s acquisition of Boca BurgerKraft Food’s acquisition of Boca Burger
Example:Example: CNET’s acquisition of mySimonCNET’s acquisition of mySimon
Reasons for AcquisitionsReasons for AcquisitionsReasons for AcquisitionsReasons for Acquisitions
Increased Speed to MarketIncreased Speed to MarketClosely related to Barriers to Entry, allows market entry Closely related to Barriers to Entry, allows market entry in a more timely fashionin a more timely fashion
DiversificationDiversification
Quick way to move into businesses when firm currently lacks Quick way to move into businesses when firm currently lacks experience and depth in industryexperience and depth in industry
Reshaping Competitive ScopeReshaping Competitive ScopeReshaping Competitive ScopeReshaping Competitive ScopeFirms may use acquisitions to restrict its dependence on a Firms may use acquisitions to restrict its dependence on a single or a few products or marketssingle or a few products or markets
Ch7-6
Problems with AcquisitionsProblems with Acquisitions
Example:Example: Marks and Spencer’s acquisition of Brooks BrothersMarks and Spencer’s acquisition of Brooks Brothers
Example:Example: Intel’s acquisition of DEC’s semiconductor divisionIntel’s acquisition of DEC’s semiconductor division
Example:Example: AgriBioTech’s acquisition of dozens of small seed AgriBioTech’s acquisition of dozens of small seed firmsfirms
Integration DifficultiesIntegration DifficultiesDiffering financial and control systems can make integration Differing financial and control systems can make integration of firms difficultof firms difficult
Inadequate Evaluation of TargetInadequate Evaluation of Target““Winners Curse” bid causes acquirer to overpay for firmWinners Curse” bid causes acquirer to overpay for firm
Large or Extraordinary DebtLarge or Extraordinary DebtLarge or Extraordinary DebtLarge or Extraordinary Debt
Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows
Ch7-7
Example:Example: Ford and JaguarFord and Jaguar
Example:Example: Quaker Oats and SnappleQuaker Oats and Snapple
Example:Example: GE--prior to selling businesses and refocusingGE--prior to selling businesses and refocusing
Inability to Achieve SynergyInability to Achieve SynergyJustifying acquisitions can increase estimate of Justifying acquisitions can increase estimate of expected benefitsexpected benefits
Problems with AcquisitionsProblems with Acquisitions
Overly DiversifiedOverly DiversifiedAcquirer doesn’t have expertise required to manage Acquirer doesn’t have expertise required to manage unrelated businessesunrelated businesses
Managers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers may fail to objectively assess the value of Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategyoutcomes achieved through the firm’s acquisition strategy
Too LargeToo LargeLarge bureaucracy reduces innovation and flexibilityLarge bureaucracy reduces innovation and flexibility
Ch7-8
Attributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective Acquisitions
Complementary Assets or ResourcesComplementary Assets or ResourcesBuying firms with assets that meet current Buying firms with assets that meet current needs to build competitivenessneeds to build competitiveness
++
Friendly AcquisitionsFriendly AcquisitionsFriendly AcquisitionsFriendly AcquisitionsFriendly deals make integration go more smoothlyFriendly deals make integration go more smoothly
++
Careful Selection ProcessCareful Selection ProcessCareful Selection ProcessCareful Selection ProcessDeliberate evaluation and negotiations is more likely Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergiesto lead to easy integration and building synergies
++
Maintain Financial SlackMaintain Financial SlackMaintain Financial SlackMaintain Financial SlackProvide enough additional financial resources so Provide enough additional financial resources so that profitable projects would not be foregonethat profitable projects would not be foregone
++
Ch7-9
Attributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective AcquisitionsAttributes of Effective Acquisitions
Low-to-Moderate DebtLow-to-Moderate DebtLow-to-Moderate DebtLow-to-Moderate DebtMerged firm maintains financial flexibilityMerged firm maintains financial flexibility
++
FlexibilityFlexibilityFlexibilityFlexibilityHas experience at managing change and is Has experience at managing change and is flexible and adaptableflexible and adaptable
++
Emphasize Innovation Emphasize Innovation Emphasize Innovation Emphasize Innovation Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategyfirm’s overall strategy
++
Ch7-10
Example:Example: Procter & Gamble’s cutting of its Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobsworldwide workforce by 15,000 jobs
Restructuring ActivitiesRestructuring ActivitiesRestructuring ActivitiesRestructuring Activities
Example:Example: Disney’s selling of Fairchild PublicationsDisney’s selling of Fairchild Publications
DownsizingDownsizingWholesale reduction of employeesWholesale reduction of employees
DownscopingDownscopingDownscopingDownscoping
Reducing scope of operationsReducing scope of operations
Selectively divesting or closing non-core businessesSelectively divesting or closing non-core businesses
Leads to greater focusLeads to greater focus
Ch7-11
Leveraged Buyout (LBO)Leveraged Buyout (LBO)A party buys a firm’s entire assets in order to take the A party buys a firm’s entire assets in order to take the firm private. firm private.
Example:Example: Forsmann Little’s buyout of Dr. PepperForsmann Little’s buyout of Dr. Pepper
Restructuring ActivitiesRestructuring ActivitiesRestructuring ActivitiesRestructuring Activities
Ch7-12
DownsizingDownsizingDownsizingDownsizing
DownscopingDownscopingDownscopingDownscoping
LeveragedLeveragedBuyoutBuyout
LeveragedLeveragedBuyoutBuyout
AlternativesAlternatives Short-Term Short-Term OutcomesOutcomes
Long-Term Long-Term OutcomesOutcomes
Restructuring and OutcomesRestructuring and Outcomes
Ch7-13
Loss of Loss of Human CapitalHuman Capital
Lower Lower PerformancePerformance
Lower Lower PerformancePerformance
DownsizingDownsizingDownsizingDownsizing
Reduced Reduced Labor CostsLabor Costs
Reduced Reduced Labor CostsLabor Costs
AlternativesAlternatives Short-Term Short-Term OutcomesOutcomes
Long-Term Long-Term OutcomesOutcomes
Restructuring and OutcomesRestructuring and Outcomes
Ch7-14
Higher Higher PerformancePerformance
Higher Higher PerformancePerformance
Reduced Reduced Debt CostsDebt CostsReduced Reduced
Debt CostsDebt Costs
Emphasis on Emphasis on Strategic ControlsStrategic Controls
Emphasis on Emphasis on Strategic ControlsStrategic Controls
DownscopingDownscopingDownscopingDownscoping
Downsizing
Reduced Labor Costs
Loss of Human Capital
Lower Performance
AlternativesAlternatives Short-Term Short-Term OutcomesOutcomes
Long-Term Long-Term OutcomesOutcomes
Restructuring and OutcomesRestructuring and Outcomes
High Debt High Debt CostsCosts
High Debt High Debt CostsCosts
Emphasis on Emphasis on Strategic ControlsStrategic Controls
Emphasis on Emphasis on Strategic ControlsStrategic Controls
Downscoping
LeveragedLeveragedBuyoutBuyout
LeveragedLeveragedBuyoutBuyout
Reduced Debt Costs
Higher Higher PerformancePerformance
Higher Higher PerformancePerformance
Higher RiskHigher RiskHigher RiskHigher Risk
Downsizing
Reduced Labor Costs
Loss of Human Capital
Lower Performance
AlternativesAlternatives Short-Term Short-Term OutcomesOutcomes
Long-Term Long-Term OutcomesOutcomes
Restructuring and OutcomesRestructuring and Outcomes