Copyright © 2009 South-Western, a part of Cengage LearningAll rights reserved.

Power Point Presentation by Dr. Leslie A. KorbGeorgian Court University

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Understanding Business Strategy

Concepts & Cases

Part 3: StrategyChapter 7: Acquiring and Integrating Businesses

Chapter 7: Acquiring and Integrating Businesses

An acquisition is a transaction in which a firm buys a controlling interest in another firm with the intention of either making it a subsidiary business or combining it with its current business or businesses

A takeover is a specialized type of acquisition in which the target firm does not solicit the acquiring firm’s offer

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Chapter 7: Acquiring and Integrating Businesses

A merger is a transaction in which firms agree to combine their operations on a relatively equal basis

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Reasons for Acquisitions

Reduce Costs Gain Market Power Increase Growth Learn to Build Capabilities Manage Risk and Other Financial Objectives

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Reduce Costs

Using horizontal acquisitions to reduce costs Gain scale economies through horizontal

acquisitions Increases in productivity Reduce the competition Using vertical acquisitions to increase scale

and to gain market power

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Gain Market Power

Use horizontal and vertical acquisitions to gain market power

Reduce overcapacity by eliminating duplicate operations

Problems: firms can pay too much for an acquisition

Making an acquisition pay off may result in more drastic action – selling off productive assets

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Increase Growth

If the acquiring firm is the first or one of the first to make such acquisitions in the industry - an advantage in market power and position

Tata Motors is an example.

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Learn to Build Capabilities

Target companies often have unique employee skills, organizational technologies, or superior knowledge that are available to the acquiring firm only through acquisitions

Pooling the companies’ combined resources and capabilities may enable development of new “centers of excellence” for specialized products in new markets

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Manage Risk & Other Financial Objectives

Some firms choose to use acquisitions to diversify their operations, thereby reducing their dependence on performance in an intensely competitive market

At times, firms also make acquisitions to gain access to tax advantages or to reduce business or financial risk

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Screening, Selecting & Negotiating

Research suggests that financial acquirers (such as Kohlberg Kravis Roberts [KKR]) experience higher valuations in their acquisitions than do corporate acquisitions Public versus Private firms and adequate

information Screening enables the acquiring party to

identify the acquisition opportunities that exist while at the same time determining the appropriate price

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Screening, Selecting & Negotiating

Key issues requiring careful analysis should be identified early in the negotiating process Due Diligence

Analyzing competitors Evaluating the target firm’s value Understanding the synergies that may be created

between the target and acquiring firms Determining top price decisions and walk away

terms

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Integration Success

More likely when an integration team, including employees from the acquiring firm and the acquired firm, is formed and charged with full responsibility to integrate the two companies to create value

Opportunities for increased growth as learning occurs

Leverage the capabilities of both firms to create value

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Pitfalls and Prevention

Because combined firms often lose target firm managers through turnover, it is important to retain key executives and other valuable human capital, especially if the acquiring firm wants to gain new skills from the acquired firm Anchoring and overconfidence Excessive debt Overdiversification Managers overly involved in the process

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Acquisition Failure & Restructuring

Sometimes acquisitions fail Divestiture 1981: Sears and Dean Witter Reynolds Leveraged Buyouts (LBOs) – merger repair

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