Aquisition & Merger

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PowerPoint Presentation by Charlie PowerPoint Presentation by Charlie Cook Cook The University of West Alabama The University of West Alabama Strategic Management Strategic Management Competitiveness and Globalization: Competitiveness and Globalization: Concepts and Cases Concepts and Cases Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Seventh edition STRATEGIC ACTIONS: STRATEGY FORMULATION © 2007 Thomson/South-Western. 2007 Thomson/South-Western. All rights reserved. All rights reserved. CHAPTER 7 CHAPTER 7 Acquisition and Mergers Acquisition and Mergers Management of Strategy Management of Strategy Concepts and Cases Concepts and Cases

Transcript of Aquisition & Merger

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PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGICACTIONS:STRATEGYFORMULATION

STRATEGICACTIONS:STRATEGYFORMULATION

©© 2007 Thomson/South-Western. 2007 Thomson/South-Western.All rights reserved.All rights reserved.

CHAPTER 7CHAPTER 7

Acquisition and MergersAcquisition and Mergers

Management of StrategyManagement of StrategyConcepts and CasesConcepts and Cases

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KKNOWLEDGENOWLEDGE O OBJECTIVESBJECTIVES

1.1. Explain the popularity of acquisition strategies in firms competing in Explain the popularity of acquisition strategies in firms competing in the global economy.the global economy.

2.2. Discuss reasons why firms use an acquisition strategy to achieve Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness.strategic competitiveness.

3.3. Describe seven problems that work against developing a Describe seven problems that work against developing a competitive advantage using an acquisition strategy.competitive advantage using an acquisition strategy.

4.4. Name and describe attributes of effective acquisitions.Name and describe attributes of effective acquisitions.

5.5. Define the restructuring strategy and distinguish among its Define the restructuring strategy and distinguish among its common forms.common forms.

6.6. Explain the short- and long-term outcomes of the different types of Explain the short- and long-term outcomes of the different types of restructuring strategies.restructuring strategies.

Studying this chapter should provide you with the strategic management knowledge needed to:

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Mergers, Acquisitions, and Takeovers: Mergers, Acquisitions, and Takeovers: What are the Differences?What are the Differences?• MergerMerger

Two firms agree to integrate their operations on a Two firms agree to integrate their operations on a relatively co-equal basis.relatively co-equal basis.

• AcquisitionAcquisition One firm buys a controlling, or 100% interest in another One firm buys a controlling, or 100% interest in another

firm with the intent of making the acquired firm a firm with the intent of making the acquired firm a subsidiary business within its portfolio.subsidiary business within its portfolio.

• TakeoverTakeover A special type of acquisition when the target firm did A special type of acquisition when the target firm did

not solicit the acquiring firmnot solicit the acquiring firm’’s bid for outright s bid for outright ownership.ownership.

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FIGUREFIGURE 7.17.1

Reasons for Reasons for Acquisitions and Acquisitions and Problems in Problems in Achieving Achieving SuccessSuccess

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Reasons for AcquisitionsReasons for Acquisitions

Learning andLearning anddevelopingdeveloping

new capabilitiesnew capabilities

Reshaping firmReshaping firm’’sscompetitive scopecompetitive scope

IncreasedIncreaseddiversificationdiversification Lower risk thanLower risk than

developing newdeveloping newproductsproducts

Cost of newCost of newproduct product

developmentdevelopment

OvercomingOvercomingentry barriersentry barriers

Increase speedIncrease speedto marketto market

IncreasedIncreasedmarket powermarket power

Making anMaking anAcquisitionAcquisition

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Acquisitions: Increased Market PowerAcquisitions: Increased Market Power

• Factors increasing market power when:Factors increasing market power when: There is the ability to sell goods or services above There is the ability to sell goods or services above

competitive levels.competitive levels. Costs of primary or support activities are below those Costs of primary or support activities are below those

of competitors.of competitors. A firmA firm’’s size, resources and capabilities gives it a s size, resources and capabilities gives it a

superior ability to compete.superior ability to compete.

• Acquisitions intended to increase market power Acquisitions intended to increase market power are subject to:are subject to: Regulatory reviewRegulatory review Analysis by financial marketsAnalysis by financial markets

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Acquisitions: Increased Market Power Acquisitions: Increased Market Power (cont(cont’’d)d)

• Market power is increased by:Market power is increased by:

Horizontal acquisitions:Horizontal acquisitions: other firms in the same other firms in the same industryindustry

Vertical acquisitions:Vertical acquisitions: suppliers or distributors of the suppliers or distributors of the acquiring firm acquiring firm

Related acquisitions:Related acquisitions: firms in related industries firms in related industries

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Market Power AcquisitionsMarket Power Acquisitions

• Acquisition of a company in the Acquisition of a company in the same industry in which the same industry in which the acquiring firm competes acquiring firm competes increases a firmincreases a firm’’s market power s market power by exploiting:by exploiting:

Cost-based synergiesCost-based synergies

Revenue-based synergiesRevenue-based synergies

• Acquisitions with similar Acquisitions with similar characteristics result in higher characteristics result in higher performance than those with performance than those with dissimilar characteristics.dissimilar characteristics.

Horizontal Horizontal AcquisitionAcquisition

ss

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Market Power Acquisitions (contMarket Power Acquisitions (cont’’d)d)

• Acquisition of a supplier or Acquisition of a supplier or distributor of one or more of the distributor of one or more of the firmfirm’’s goods or servicess goods or services

Increases a firmIncreases a firm’’s market s market power by controlling additional power by controlling additional parts of the value chain.parts of the value chain.

Horizontal Horizontal AcquisitionAcquisition

ssVertical Vertical

AcquisitionAcquisitionss

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Market Power Acquisitions (contMarket Power Acquisitions (cont’’d)d)

• Acquisition of a company in a Acquisition of a company in a highly related industryhighly related industry

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

Horizontal Horizontal AcquisitionAcquisition

ssVertical Vertical

AcquisitionAcquisitionss

Related Related AcquisitionAcquisition

ss

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Acquisitions: Overcoming Entry BarriersAcquisitions: Overcoming Entry Barriers

• Entry BarriersEntry Barriers Factors associated with the market or with the firms Factors associated with the market or with the firms

operating in it that increase the expense and difficulty operating in it that increase the expense and difficulty faced by new ventures trying to enter that marketfaced by new ventures trying to enter that market

• Economies of scaleEconomies of scale

• Differentiated productsDifferentiated products

• Cross-Border AcquisitionsCross-Border Acquisitions Acquisitions made between companies with Acquisitions made between companies with

headquarters in different countriesheadquarters in different countries• Are often made to overcome entry barriers.Are often made to overcome entry barriers.• Can be difficult to negotiate and operate because of the

differences in foreign cultures.

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Acquisitions: Cost of New-Product Acquisitions: Cost of New-Product Development and Increased Speed to Development and Increased Speed to MarketMarket• Internal development of new products is often Internal development of new products is often

perceived as high-risk activity.perceived as high-risk activity.

Acquisitions allow a firm to gain access to new and Acquisitions allow a firm to gain access to new and current products that are new to the firm.current products that are new to the firm.

Returns are more predictable because of the acquired Returns are more predictable because of the acquired firmsfirms’’ experience with the products. experience with the products.

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Acquisitions: Lower Risk Compared to Acquisitions: Lower Risk Compared to Developing New ProductsDeveloping New Products

• An acquisitionAn acquisition’’s outcomes can be estimated s outcomes can be estimated more easily and accurately than the outcomes of more easily and accurately than the outcomes of an internal product development process.an internal product development process.

Managers may view acquisitions as lowering risk Managers may view acquisitions as lowering risk associated with internal ventures and R&D associated with internal ventures and R&D investments.investments.

Acquisitions may discourage or suppress innovation.Acquisitions may discourage or suppress innovation.

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Acquisitions: Increased DiversificationAcquisitions: Increased Diversification

• Using acquisitions to diversify a firm is the Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio quickest and easiest way to change its portfolio of businesses.of businesses.

• Both Both relatedrelated diversification and diversification and unrelatedunrelated diversification strategies can be implemented diversification strategies can be implemented through acquisitions.through acquisitions.

• The The more relatedmore related the acquired firm is to the the acquired firm is to the acquiring firm, acquiring firm, the greaterthe greater is the probability that is the probability that the acquisition will be successful.the acquisition will be successful.

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Acquisitions: Reshaping the FirmAcquisitions: Reshaping the Firm’’s s Competitive ScopeCompetitive Scope

• An acquisition can:An acquisition can:

Reduce the negative effect of an intense rivalry on a Reduce the negative effect of an intense rivalry on a firmfirm’’s financial performance.s financial performance.

Reduce a firmReduce a firm’’s dependence on one or more s dependence on one or more products or markets.products or markets.

• Reducing a companyReducing a company’’s dependence on specific s dependence on specific markets alters the firmmarkets alters the firm’’s competitive scope.s competitive scope.

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Acquisitions: Learning and Developing Acquisitions: Learning and Developing New CapabilitiesNew Capabilities• An acquiring firm can gain capabilities that the An acquiring firm can gain capabilities that the

firm does not currently possess:firm does not currently possess:

Special technological capabilitySpecial technological capability

A broader knowledge baseA broader knowledge base

Reduced inertiaReduced inertia

• Firms should acquire other firms with different Firms should acquire other firms with different but related and complementary capabilities in but related and complementary capabilities in order to build their own knowledge base.order to build their own knowledge base.

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Problems in Achieving Acquisition Problems in Achieving Acquisition SuccessSuccess

Too largeToo large

Managers Managers overly focused onoverly focused on

acquisitionsacquisitionsExtraordinary debtExtraordinary debt

InadequateInadequatetarget evaluationtarget evaluation

Too muchToo muchdiversificationdiversification

Inability toInability toachieve synergyachieve synergy

IntegrationIntegrationdifficultiesdifficulties

ProblemsProblemswithwith

AcquisitionsAcquisitions

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Integration DifficultiesSuccess: Integration Difficulties• Integration challenges include:Integration challenges include:

Melding two disparate corporate culturesMelding two disparate corporate cultures

Linking different financial and control systemsLinking different financial and control systems

Building effective working relationships (particularly Building effective working relationships (particularly when management styles differ)when management styles differ)

Resolving problems regarding the status of the newly Resolving problems regarding the status of the newly acquired firmacquired firm’’s executivess executives

Loss of key personnel weakens the acquired firmLoss of key personnel weakens the acquired firm’’s s capabilities and reduces its valuecapabilities and reduces its value

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Inadequate Evaluation of the Success: Inadequate Evaluation of the TargetTarget• Due DiligenceDue Diligence

The process of evaluating a target firm for acquisitionThe process of evaluating a target firm for acquisition• Ineffective due diligence may result in paying an excessive Ineffective due diligence may result in paying an excessive

premium for the target company.premium for the target company.

• Evaluation requires examining:Evaluation requires examining: Financing of the intended transactionFinancing of the intended transaction

Differences in culture between the firmsDifferences in culture between the firms

Tax consequences of the transactionTax consequences of the transaction

Actions necessary to meld the two workforcesActions necessary to meld the two workforces

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Large or Extraordinary DebtSuccess: Large or Extraordinary Debt• High debt (e.g., junk bonds) can:High debt (e.g., junk bonds) can:

Increase the likelihood of bankruptcyIncrease the likelihood of bankruptcy

Lead to a downgrade of the firmLead to a downgrade of the firm’’s credit ratings credit rating

Preclude investment in activities that contribute to the Preclude investment in activities that contribute to the firmfirm’’s long-term success such as:s long-term success such as:

• Research and developmentResearch and development

• Human resource trainingHuman resource training

• MarketingMarketing

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Inability to Achieve SynergySuccess: Inability to Achieve Synergy

• SynergySynergy

When assets are worth more when used in When assets are worth more when used in conjunction with each other than when they are used conjunction with each other than when they are used separately.separately.

• Firms experience transaction costs when they use Firms experience transaction costs when they use acquisition strategies to create synergy.acquisition strategies to create synergy.

• Firms tend to underestimate indirect costs when Firms tend to underestimate indirect costs when evaluating a potential acquisition.evaluating a potential acquisition.

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Inability to Achieve Synergy Success: Inability to Achieve Synergy (cont(cont’’d)d)• Private synergyPrivate synergy

When the combination and integration of the acquiring When the combination and integration of the acquiring and acquired firmsand acquired firms’’ assets yields capabilities and core assets yields capabilities and core competencies that could not be developed by competencies that could not be developed by combining and integrating either firmcombining and integrating either firm’’s assets with s assets with another company.another company.

• Advantage: It is difficult for competitors to Advantage: It is difficult for competitors to understand and imitate.understand and imitate.

• Disadvantage: It is also difficult to create.Disadvantage: It is also difficult to create.

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Too Much DiversificationSuccess: Too Much Diversification• Diversified firms must process more information Diversified firms must process more information

of greater diversity.of greater diversity. Increased operational scope created by diversification Increased operational scope created by diversification

may cause managers to rely too much on financial may cause managers to rely too much on financial rather than strategic controls to evaluate business rather than strategic controls to evaluate business unitsunits’’ performances. performances.

Strategic focus shifts to short-term performance.Strategic focus shifts to short-term performance.

Acquisitions may become substitutes for innovation.Acquisitions may become substitutes for innovation.

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Managers Overly Focused on Success: Managers Overly Focused on AcquisitionsAcquisitions• Managers invest substantial time and energy in Managers invest substantial time and energy in

acquisition strategies in:acquisition strategies in:

Searching for viable acquisition candidates.Searching for viable acquisition candidates.

Completing effective due-diligence processes.Completing effective due-diligence processes.

Preparing for negotiations.Preparing for negotiations.

Managing the integration process after the acquisition Managing the integration process after the acquisition is completed.is completed.

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Managers Overly Focused on Success: Managers Overly Focused on AcquisitionsAcquisitions• Managers in target firms operate in a state of Managers in target firms operate in a state of

virtual suspended animation during an virtual suspended animation during an acquisition.acquisition. Executives may become hesitant to make decisions Executives may become hesitant to make decisions

with long-term consequences until negotiations have with long-term consequences until negotiations have been completed.been completed.

The acquisition process can create a short-term The acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among executives in the target firm.executives in the target firm.

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Problems in Achieving Acquisition Problems in Achieving Acquisition Success: Too LargeSuccess: Too Large

• Additional costs of controls may exceed the Additional costs of controls may exceed the benefits of the economies of scale and additional benefits of the economies of scale and additional market power.market power.

• Larger size may lead to more bureaucratic Larger size may lead to more bureaucratic controls.controls.

• Formalized controls often lead to relatively rigid Formalized controls often lead to relatively rigid and standardized managerial behavior.and standardized managerial behavior.

• The firm may produce less innovation.The firm may produce less innovation.

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TABLETABLE 7.17.1 Attributes of Successful AcquisitionsAttributes of Successful Acquisitions

Attributes1. Acquired firm has assets or resources that are complementary to the acquiring firm’s

core business2. Acquisition is friendly3. Acquiring firm conducts effective due diligence to select target firms and evaluate the

target firm’s health (financial, cultural, and human resources)4. Acquiring firm has financial slack (cash or a favorable debt position) 5. Merged firm maintains low to moderate debt position6. Acquiring firm has sustained and consistent emphasis on R&D and innovation7. Acquiring firm manages change well and is flexible and adaptable

Results1. High probability of synergy and competitive advantage by maintaining strengths2. Faster and more effective integration and possibly lower premiums3. Firms with strongest complementarities are acquired and overpayment is avoided4. Financing (debt or equity) is easier and less costly to obtain5. Lower financing cost, lower risk (e.g., of bankruptcy), and avoidance of trade-offs that

are associated with high debt6. Maintain long-term competitive advantage in markets7. Faster and more effective integration facilitates achievement of synergy

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Effective Acquisition StrategiesEffective Acquisition Strategies

Complementary Complementary Assets /ResourcesAssets /Resources

Buying firms with assets that meet Buying firms with assets that meet current needs to build competitiveness.current needs to build competitiveness.

FriendlyFriendlyAcquisitionsAcquisitions

Friendly deals make integration go more Friendly deals make integration go more smoothly.smoothly.

Careful Selection Careful Selection ProcessProcess

Deliberate evaluation and negotiations Deliberate evaluation and negotiations are more likely to lead to easy are more likely to lead to easy integration and building synergies.integration and building synergies.

Maintain Financial Maintain Financial SlackSlack

Provide enough additional financial Provide enough additional financial resources so that profitable projects resources so that profitable projects would not be foregone.would not be foregone.

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Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

AttributesAttributes ResultsResults

Low-to-ModerateLow-to-Moderate DebtDebt

Merged firm maintains Merged firm maintains financial flexibilityfinancial flexibility

FlexibilityFlexibility Has experience at Has experience at managing change and is managing change and is flexible and adaptableflexible and adaptable

SustainSustainEmphasisEmphasis

onon InnovationInnovation

Continue to invest in R&D Continue to invest in R&D as part of the firmas part of the firm’’s overall s overall strategystrategy

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RestructuringRestructuring

• A strategy through which a firm changes its set A strategy through which a firm changes its set of businesses or financial structure.of businesses or financial structure. Failure of an acquisition strategy often precedes a Failure of an acquisition strategy often precedes a

restructuring strategy.restructuring strategy.

Restructuring may occur because of changes in the Restructuring may occur because of changes in the external or internal environments.external or internal environments.

• Restructuring strategies:Restructuring strategies: DownsizingDownsizing

DownscopingDownscoping

Leveraged buyoutsLeveraged buyouts

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Types of Restructuring: DownsizingTypes of Restructuring: Downsizing

• A reduction in the number of a firmA reduction in the number of a firm’’s employees s employees and sometimes in the number of its operating and sometimes in the number of its operating units.units. May or may not change the composition of May or may not change the composition of

businesses in the companybusinesses in the company’’s portfolio.s portfolio.

• Typical reasons for downsizing:Typical reasons for downsizing: Expectation of improved profitability from cost Expectation of improved profitability from cost

reductionsreductions

Desire or necessity for more efficient operationsDesire or necessity for more efficient operations

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Types of Restructuring: DownscopingTypes of Restructuring: Downscoping

• A divestiture, spin-off or other means of A divestiture, spin-off or other means of eliminating businesses unrelated to a firmeliminating businesses unrelated to a firm’’s core s core businesses.businesses.

• A set of actions that causes a firm to strategically A set of actions that causes a firm to strategically refocus on its core businesses.refocus on its core businesses. May be accompanied by downsizing, but not May be accompanied by downsizing, but not

eliminating key employees from its primary eliminating key employees from its primary businesses.businesses.

Smaller firm can be more effectively managed by the Smaller firm can be more effectively managed by the top management team.top management team.

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Restructuring: Leveraged Buyouts Restructuring: Leveraged Buyouts (LBO)(LBO)• A restructuring strategy whereby a party buys all A restructuring strategy whereby a party buys all

of a firmof a firm’’s assets in order to take the firm private.s assets in order to take the firm private. Significant amounts of debt may be incurred to Significant amounts of debt may be incurred to

finance the buyout.finance the buyout.

Immediate sale of non-core assets to pare down debt.Immediate sale of non-core assets to pare down debt.

• Can correct for managerial mistakesCan correct for managerial mistakes Managers making decisions that serve their own Managers making decisions that serve their own

interests rather than those of shareholders.interests rather than those of shareholders.

• Can facilitate entrepreneurial efforts and Can facilitate entrepreneurial efforts and strategic growth.strategic growth.

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FIGUREFIGURE 7.27.2 Restructuring and OutcomesRestructuring and Outcomes