acquisition and restructuring strategies

Chapter 3 Internal Environment Chapter 2 External Management Process The Strategic Management Process Strategic Intent Strategic Mission Strategic Competitiveness Above Average Returns F

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

Management

Process

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

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 U.S 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

Restructuring and Outcomes

Loss of Human Capital

Lower Performance

Downsizing

Reduced Labor Costs

Restructuring and Outcomes

Higher Performance

Reduced Debt Costs

Emphasis on Strategic Controls

Downscoping

Downsizing

Reduced Labor Costs

Loss of Human Capital

Lower Performance

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

Restructuring and Outcomes