ACQUISITIONS AND

RESTRUCTURING

Mergers, Acquisitions, and Takeovers:

What are the Differences?

Merger
A strategy through which two firms agree to integrate their operations
on a relatively co-equal basis

Acquisition
A strategy through which one firm buys a controlling, or 100% interest
in another firm with the intent of making the acquired firm a subsidiary
business within its portfolio

Takeover
A special type of acquisition when the target firm did not solicit the
acquiring firms bid for outright ownership
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Reasons for
Acquisitions
and Problems
in Achieving
Success

Cost new product

development/increased
speed to market

Increased
diversification
Acquisitions

Increased
market
power

Overcomin
g entry
barriers

Avoiding excessive
competition

Lower risk
compared to
developing new
products

Learning and
developing new
capabilities
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Acquisitions: Increased Market Power

Factors

increasing market power

When there is the ability to sell goods or
services above competitive levels
When costs of primary or support activities
are below those of competitors
When a firms size, resources and
capabilities gives it a superior ability to
compete

Acquisitions

intended to increase market

power are subject to:
Regulatory review
Analysis by financial markets
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Acquisitions: Increased Market Power

(contd)
Market power is increased by:
Horizontal acquisitions
Vertical acquisitions
Related acquisitions

Market Power Acquisitions

Horizontal
Acquisition
s

Acquisition of a company in the

same industry in which the acquiring
firm competes increases a firms
market power by exploiting:
Cost-based synergies
Revenue-based synergies

Acquisitions with similar

characteristics result in higher
performance than those with
dissimilar characteristics
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Market Power Acquisitions (contd)

Horizontal
Acquisitions
Vertical
Acquisitions

Acquisition of a supplier or
distributor of one or more of the
firms goods or services
Increases a firms market power

by controlling additional parts of

the value chain

Market Power Acquisitions (contd)

Horizontal
Acquisitions
Vertical
Acquisitions
Related
Acquisition
s

Acquisition of a company in a
highly related industry
Because of the difficulty in

implementing synergy, related

acquisitions are often difficult
to implement

Acquisitions: Overcoming Entry

Barriers

Factors associated with the market or with the firms currently

operating in it that increase the expense and difficulty faced by
new ventures trying to enter that market
Economies of scale
Differentiated products

Cross-Border Acquisitions

Acquisitions: Cost of New-Product

Development and Increased Speed to Market

Internal development of new products is often perceived as

high-risk activity
Acquisitions allow a firm to gain access to new and current

products that are new to the firm

Returns are more predictable because of the acquired firms

experience with the products

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Acquisitions: Lower Risk Compared to

Developing New Products

An acquisitions outcomes can be estimated more easily and

accurately than the outcomes of an internal product
development process

Managers may view acquisitions as lowering risk

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Acquisitions: Increased
Diversification

Using acquisitions to diversify a firm is the quickest

and easiest way to change its portfolio of
businesses

Both related diversification and unrelated

diversification strategies can be implemented
through acquisitions

The more related the acquired firm is to the

acquiring firm, the greater is the probability that the
acquisition will be successful

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Acquisitions: Reshaping the Firms

Competitive Scope

An acquisition can:
Reduce the negative effect of an intense rivalry on a firms
financial performance
Reduce a firms dependence on one or more products or
markets

Reducing a companys dependence on specific markets alters

the firms competitive scope

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Acquisitions: Learning and Developing

New Capabilities

An acquiring firm can gain capabilities that the firm does

not currently possess:
Special technological capability
Broaden a firms knowledge base
Reduce inertia

Firms should acquire other firms with different but

related and complementary capabilities in order to build
their own knowledge base
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Reasons for
Acquisitions
and Problems
in Achieving
Success

Too large

Acquisitions

Too much
diversification

Integration
difficulties

Inadequate
evaluation of
target

Managers overly
focused on
acquisitions

Large or
extraordinary debt

Inability to
achieve synergy
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Problems in Achieving Acquisition

Success: Integration Difficulties

Integration challenges include:

Melding two disparate corporate cultures
Linking different financial and control systems
Building effective working relationships

(particularly when management styles differ)

Resolving problems regarding the status of the

newly acquired firms executives

Loss of key personnel weakens the acquired firms

capabilities and reduces its value

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Problems in Achieving Acquisition Success: Inadequate

Evaluation of the Target
Due

Diligence

The

process of evaluating a target firm for acquisition

Ineffective

due diligence may result in paying an excessive

premium for the target company

Evaluation

requires examining:

Financing

of the intended transaction

Differences in culture between the firms
Tax consequences of the transaction
Actions necessary to meld the two workforces
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Problems in Achieving Acquisition Success: Large or

Extraordinary Debt

High debt can:

Increase the likelihood of bankruptcy
Lead to a downgrade of the firms credit rating
Preclude investment in activities that contribute
to the firms long-term success such as:
Research and development
Human resource training
Marketing

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Problems in Achieving Acquisition Success: Inability to

Achieve Synergy
Synergy

exists when assets are worth

more when used in conjunction with
each other than when they are used
separately
Firms

experience transaction costs when

they use acquisition strategies to create
synergy

Firms

tend to underestimate indirect costs

when evaluating a potential acquisition
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Problems in Achieving Acquisition Success: Too Much

Diversification

Diversified firms must process more

information of greater diversity

Scope created by diversification may cause

managers to rely too much on financial rather
than strategic controls to evaluate business
units performances

Acquisitions may become substitutes for

innovation

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Problems in Achieving Acquisition Success: Managers

Overly Focused on Acquisitions
Managers

invest substantial time and

energy in acquisition strategies in:
Searching

for viable acquisition candidates

Completing
Preparing

effective due-diligence processes

for negotiations

Managing

the integration process after the

acquisition is completed
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Problems in Achieving Acquisition Success: Managers

Overly Focused on Acquisitions

Managers in target firms operate in a state of

virtual suspended animation during an
acquisition
Executives may become hesitant to make
decisions with long-term consequences until
negotiations have been completed
The acquisition process can create a short-term
perspective and a greater aversion to risk among
executives in the target firm
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Problems in Achieving Acquisition Success: Too Large

Larger size may lead to more bureaucratic

controls

Formalized controls often lead to relatively

rigid and standardized managerial behavior

Firm may produce less innovation

Additional costs of controls may exceed the

benefits of the economies of scale and
additional market power
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Attributes of
Successful
Acquisitions

Table 7.1

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Restructuring

A strategy through which a firm changes its set of

businesses or financial structure
Failure of an acquisition strategy often precedes a
restructuring strategy
Restructuring may occur because of changes in
the external or internal environments
Restructuring strategies:
Downsizing
Downscoping
Leveraged buyouts
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Types of Restructuring: Downsizing

A reduction

in the number of a firms

employees and sometimes in the number
of its operating units
May

or may not change the composition of

businesses in the companys portfolio

Typical

reasons for downsizing:

Expectation

of improved profitability from

cost reductions
Desire or necessity for more efficient
operations
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Types of Restructuring: Downscoping

A divestiture, spin-off or other means of

eliminating businesses unrelated to a firms
core businesses
A set of actions that causes a firm to
strategically refocus on its core businesses
May be accompanied by downsizing, but
not eliminating key employees from its
primary businesses
Firm can be more effectively managed by
the top management team
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Restructuring: Leveraged Buyouts

A restructuring strategy whereby a party

buys all of a firms assets in order to take
the firm private
Significant amounts of debt are usually
incurred to finance the buyout
Can correct for managerial mistakes
Managers making decisions that serve
their own interests rather than those of
shareholders
Can facilitate entrepreneurial efforts and
strategic growth
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Restructuring and Outcomes

Adapted from Figure 7.2

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