BUSINESS POLICY AND STRATEGIC MANAGEMENT

ASSIGNMENT ON

"ACQUISITION AND RESTRUCTURING STRATEGY"

Submitted to:

Prof. Dr. Antony Cruz

MBA IV SEM Sandra Mallisa Shruthi C N Rajani K P Shilpa N Pallavi

Q.1 What is Acquistion? An Acquistion is a strategy through which one firm buys a controlling or 100% interest in another firm with the intent of making the acquired firm a subsidary business within its portfolio.

Q.2 What is Restucturing? Restructuring is a strategy through which a firm changes its set of businesses or its financial structure. Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs.

Q.3 What are the attributes of effective acquisitions? Complementary assets or resources

Friendly acquisitions facilitate integration of firms Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.) Financial slack Low debt position o High debt can : Increase the likelihood of bankruptcy Lead to a downgrade in the firms credit rating Preclude needed investment in activities that contribute to the firms long-term success

Innovation Flexibility and adaptability

Q.4 What are the different acquisition strategies?

Adjacent industry strategy: An acquirer may see an opportunity to use one of its competitive strengths to buy into an adjacent industry. This approach may work if the competitive strength gives the company a major advantage in the adjacent industry.

Diversification strategy: A company may elect to diversify away from its core business in order to offset the risks inherent in its own industry. These risks usually translate into highly variable cash flows which can make it difficult to remain in business when a bout of negative cash flows happen to coincide with a period of tight credit where loans are difficult to obtain. For example, a business environment may fluctuate strongly with changes in the overall economy, so a company buys into a business having more stable sales.

Full service strategy: An acquirer may have a relatively limited line of products or services, and wants to reposition itself to be a full-service provider. This calls for the pursuit of other businesses that can fill in the holes in the acquirers full-service strategy.

Geographic growth strategy: A business may have gradually built up an excellent business within a certain geographic area, and wants to roll out its concept into a new region. This can be a real problem if the companys product line requires local support in the form of regional warehouses, field service operations, and/or local sales representatives. Such product lines can take a long time to roll out, since the business must create this infrastructure as it expands. The geographical growth strategy can be used to accelerate growth by finding another business that has the geographic support characteristics that the company needs, such as a regional distributor, and rolling out the product line through the acquired business.

Industry roll-up strategy: Some companies attempt an industry roll-up strategy, where they buy up a number of smaller businesses with small market share to achieve a consolidated business with significant market share. While attractive in theory, this is not that easy a strategy to pursue. In order to create any value, the

acquirer needs to consolidate the administration, product lines, and branding of the various acquirees, which can be quite a chore.

Low-cost strategy: In many industries, there is one company that has rapidly built market share through the unwavering pursuit of the low-cost strategy. This approach involves offering a baseline or mid-range product that sells in large volumes, and for which the company can use best production practices to drive down the cost of manufacturing. It then uses its low-cost position to keep prices low, thereby preventing other competitors from challenging its primary position in the market. This type of business needs to first attain the appropriate sales volume to achieve the lowest-cost position, which may call for a number of acquisitions. Under this strategy, the acquirer is looking for businesses that already have significant market share, and products that can be easily adapted to its low-cost production strategy.

Market window strategy: A company may see a window of opportunity opening up in the market for a particular product or service. It may evaluate its own ability to launch a product within the time during which the window will be open, and conclude that it is not capable of doing so. If so, its best option is to acquire another company that is already positioned to take advantage of the window with the correct products, distribution channels, facilities, and so forth.

Product supplementation strategy: An acquirer may want to supplement its product line with the similar products of another company. This is particularly useful when there is a hole in the acquirers product line that it can immediately fill by making an acquisition.

Sales growth strategy: One of the most likely reasons why a business acquires is to achieve greater growth than it could manufacture through internal, or organic, growth. It is very difficult for a business to grow at more than a modest pace through organic growth, because it must overcome a variety of obstacles, such as bottlenecks, hiring the right people, entering new markets, opening up new distribution channels, and so forth. Conversely, it can massively accelerate its rate of growth with an acquisition.

Synergy strategy: One of the more successful acquisition strategies is to examine

other businesses to see if there are costs that can be stripped out or revenue advantages to be gained by combining the companies. Ideally, the result should be greater profitability than the two companies would normally have achieved if they had continued to operate as separate entities. This strategy is usually focused on similar businesses in the same market, where the acquirer has considerable knowledge of how businesses are operated.

Vertical integration strategy: A company may want to have complete control over every aspect of its supply chain, all the way through to sales to the final customer. This control may involve buying the key suppliers of those components that the company needs for its products, as well as the distributors of those products and the retail locations in which they are sold.

Q.5 What are the types of restructuring strategies? Downsizing This restructuring strategy is about reducing the manpower to keep employee costs under control. Take the case of auto-giant General Motors, which in 1991 decided to shut down 21 plants and lay off 74,000 employees to counter its losses. Another example is that of IBM, which had never laid off staff ever since its incorporation, but had to layoff 85,000 employees to stay in business. This type of restructuring is tough to manage and is mostly adopted to overcome adverse situations. Downsizing is not always a result of business losses; it may be needed even in cases of takeovers, acquisitions and mergers, where duplicity of the staff propels this form of organizational restructuring.whether you are acquiring a business or some other business is acquiring your business, restructuring will be needed post acquisition. The business being acquired undergoes major restructuring to get in-line with the organizational setup of the acquiring business. When AT&T acquired BellSouth, BellSouth was restructured to fit into the organizational setup of AT&T. And it wasnt just BellSouth that was restructured, as

AT&T too saw some restructuring to accommodate BellSouth. Altogether, AT&T had to cut down 10,000 employees over a period of three years, following acquisition of BellSouth. Also, when two businesses decide to merge together, organizational restructuring is a must to unite the two distinct organizations into one organization. When Glaxo Wellcome and SmithKline Beecham merged together to form Glaxo SmithKline in 1999, both the companies had to undergo major restructuring, and there was some major downsizing before as well as after the new company was formed. Starbust This restructuring strategy involves breaking a company into smaller independent business units for increasing flexibility and productivity. This may be done either to dissect the business into manageable chunks or when the business wants to diversify and foray into unrelated areas. One of the latest examples of this strategy is Pfizers decision to spin off four non-pharmaceutical firms this year. Starbursting may also be used for expansion of the existing business such as when a business decides to spin off subsidiaries to handle business in different geographic areas. Verticilazation This is the latest in restructuring trends, wherein an organization restructures itself to offer tailored products and services to cater to the requirements of a specific industry. In 2002, HCL verticalized its operations to meet the specific demands of five different industries: retail, media and telecom, manufacturing, finance and life sciences. This type of restructuring opens up avenues for specialization. De-layering De-layering involves breaking down the classical pyramid setup into a flat organization. The main objective of this type of restructuring is to thin out the top

layer of unproductive and highly paid white collar staff. General Electric has reduced the number of management levels from ten to four in some of its work facilities in order to improve overall productivity. Hewlett Packard, on the other hand, has de-layered to promote innovation, build customer intimacy and increase consumer satisfaction. The major advantage of de-layering is that the decision making process becomes shorter and more effective. Business Process Reengineering This type of restructuring is carried out for making operational improvements. It begins with identifying how things are being done currently and then it moves on to re-engineering the tasks to improve productivity. Business process re-engineering usually results in changing roles. While at times BPR may lead to layoffs, it can also create new employment opportunities. When Ford Motor was trying to reduce its cost, it found that the process at its accounts payable department needed to be re-engineered. The reengineering helped in simplifying the controls and maintaining the financial information more accurately, that too after laying off 75 percent of the staff from the accounts payable department. Outsourcing Todays businesses prefer to outsource some of their processes to other firms. There are two ways outsourcing benefits a business; first, it helps in reducing costs and second, it allows the business to concentrate on its core business and leave the remaining tasks to outsourcing firms. Whenever a business plans to outsource one of its processes, it will cause some major restructuring and reshuffling within the company. Downsizing is common when a business outsources its processes. For instance, Nokia plans to layoff 4000 of its employees by the year end 2012, as it will be outsourcing the production of its

Symbian operating system. Virtualization Virtualization is the last on our list of restructuring strategies. This strategy involves pushing employees outside the office to places where they are more needed like at the clients site. It also involves upgrading to technology, which allows unmanned virtual offices to be set up. For example, the ATMs offered by banks are their virtual units.

Q.6 What are the reasons for acquisition strategy? Companies follow acquisition strategies for a variety of reasons, including: Increased Market Power

A primary reason for acquisitions is that they enable companies to gain greater market power. While a number of companies may feel that they have an internal core competence, they may be unable to exploit their resources and capabilities because of a lack of size. A company may be able to gain the size necessary to exploit its core competence by becoming larger in terms of the size of its market share. And, an increase in market share enables the company to increase its market power. Because of this, acquisitions to meet a market power objective generally involve buying a supplier, a competitor, a distributor, or a business in a highly related industry. Horizontal Acquisitions

Buying a competitor or a business in a highly related industry--which increases the company's market power--provides the company with the size it needs to exploit its core competence and gain a competitive advantage in its primary market. When a competitor in the same industry is acquired, a company has engaged in a horizontal acquisition. Vertical Acquisitions

A vertical acquisition has occurred when a company acquires a supplier or distributor, which is positioned either backward or forward in the company's cost/activity/value chain. Related Acquisitions

When a target company in a highly related industry is acquired, the company has made a related acquisition. Recent evidence indicates that horizontal acquisition of companies with similar characteristics--strategy, managerial styles, and resource allocation patterns--results in higher performance because generally it is difficult to successfully integrate the merged companies. Companies that are able to gain greater market share or that gain core resources that can be used to gain a competitive advantage have more market power that can be used against competitors. Acquisitions in the pharmaceutical industry provide a good example of companies pursuing market power objectives. While some of these mergers--such as the Merck acquisition of Medco--represent vertical acquisitions to ensure distribution of product lines, others have been either related or horizontal acquisitions to enable the acquiring companies to take advantage of regulatory changes that are challenging the power of pharmaceutical companies. As a trade-off, it is likely that pharmaceutical companies are likely to divert funds from R&D into making and managing acquisitions. Overcoming of Entry Barriers

As discussed earlier, barriers to entry represent factors associated with the market and/or companies operating in the market that make it more expensive and difficult for new companies to enter the market. For example, it may be difficult to enter a market dominated by large, established competitors. As noted earlier, such markets may require: a) Investments in large-scale manufacturing facilities that enable the company to achieve economies of scale so that it can offer competitive prices b) Significant expenditures in advertising and promotion to overcome any brand loyalty enjoyed by existing products c) Establishing or breaking into existing distribution channels so that goods are

convenient to customers When barriers to entry are present, the company's best choice may be to acquire a company already having a presence in the industry or market. In fact, the higher the barriers to entry into an attractive market or industry, the more likely it is that companies interested in entering will follow acquisition strategies. While the acquisition cost might be high (depending on such factors as attractiveness of the business or market, competing acquisitions, or the cost of integrating operations), the acquiring company achieves immediate market access, gains a brand that has access to existing distribution channels, and may already have some degree of brand loyalty. Entry barriers companies face when trying to enter international markets are often great. Commonly, acquisitions are used to overcome entry barriers in international markets. It is important to compete successfully in these markets since five of the emerging markets (China, India, Brazil, Mexico, and Indonesia) are among the 12 largest economies in the world with a combined purchasing power that is already one-half that of the Group of Seven industrial nations (United States, Japan, Britain, France, Germany, Canada, and Italy). Cross-Border Acquisitions

Cross border-acquisitions and cross-border alliances are alternatives companies consider while pursuing strategic competitiveness. Compared to a cross-border alliance, a company has more control over its international operations through a cross-border acquisition. Acquisitions also represent a viable strategy for companies that wish to enter international markets because acquisitions may be the fastest way to enter new markets, provides more control over foreign operations than do strategic alliances with a foreign partner, enable the acquiring company to make changes in the acquired company's operations and provides the acquirer with access to the resources and capabilities of the acquired company Cost of New-Product Development

Acquisitions also may represent an attractive alternative to developing new products internally because of the cost and time required starting a new venture and achieving a positive return. Internal development of new products is often perceived by managers to be costly and to represent high-risk investments of company resources. While sometimes costly, it may be in the company's best interest to acquire an existing business because the acquired company has a track record with an established sales volume and a customer base, yielding predictable returns and the acquiring company gains immediate market access In addition to representing attractive prices, large pharmaceutical companies have used acquisitions to supplement products in the pipeline with projects from undervalued biotechnology companies; thus, this is one way to appropriate new products. Increased Speed to Market

Companies also can implement an acquisition strategy to rapidly gain market entry, establish relative market power over a competitor, and achieve a new product advantage. Acquisitions also enable companies to enter foreign markets more rapidly as it is less costly from a time perspective to acquire companies with established operations and supplier and/or customer relationships in a foreign market than to develop them. Lower Risk Compared to Developing New Products

Internal product development processes can be risky, in that entering a market and earning an acceptable return on investment requires significant resources and time. All the same, acquisition outcomes can be estimated easily and accurately (as compared to the outcomes of an internal product development process), causing managers to view acquisitions as carrying lowering risk. Because acquisitions recently have become such a common means of avoiding risky internal ventures, they even could become a substitute for innovation enabling companies to avoid the risk of internal ventures and overcome constraints on internal resources and capabilities.

Although they often enable companies to offset the risk of internal ventures and of developing new products, acquisitions are not without risks of their own. Acquisition-related risks will be discussed later in this chapter. Increased Diversification

Acquisitions are a common strategy that companies can use to diversify. This may be because it should be easier for companies to develop new products and/or new ventures within their current markets because of market-related knowledge, so companies that desire to enter new markets may find that current product-market knowledge and skills are not transferable to the new target market. Thus, internal ventures and new product development for new markets are not common means of diversification. Acquisitions also may have gained in popularity as a related or horizontal diversification strategy enabling rapid moves into related markets (or to expand market power) and as an unrelated diversification strategy. Also, acquisitions are the most frequently used means for companies to diversify their operations into international markets. However, companies must be careful when making acquisitions to diversify their product lines because horizontal and related acquisitions tend to contribute more to strategic competitiveness, and thus they are more successful than diversifying acquisitions. Reshaping the company's Competitive Scope

To reduce intense rivalry's negative effect on financial performance, a company may use acquisitions as a way to restrict its dependence on a single or a few products or markets. Reducing dependence on single products or markets results in a different competitive scope for a company.

Q.7 What are the reasons for restructuring strategy? There are several reasons you may have to reorganize the operations and other structures of

the organization. Restructuring a company can improve efficiency, keep technology up to date, or implement strategic or governance changes made by, or mandated to, company owners. Changed Nature of Business

In todays business environment, the only constant is change. Companies that refuse to change with the times face the risk of their product line becoming obsolete. Because of this, businesses experiment with new products, explore new markets, and reach out to new groups of customers on a continuous basis. Businesses seek to diversify into new areas to increase sales, optimize their capacity, and conversely shed off divisions that do not add much value, to concentrate on core competencies instead. All such initiatives require restructuring. For instance, expansion to an overseas market may require changes in the staff profile to better connect with the international market, and changes in work policies and routines to ensure compliance with export regulations. Starting a new product line may require changes in the system of work, hiring new experts familiar in the business line and placing them in positions of authority, and other interventions. Hiving off unprofitable or unneeded business lines may require changes to retain specific components of such divisions that the main business may wish to retain. Downsizing

One common reason for restructuring a company is to downsize the workforce. The changing nature of economy may force the business to adopt new strategies or alter their product mix, making staff redundant. Similarly, cutthroat competition and pressure on margins from competitors who adopt a low price strategy may force the company to adopt lean techniques, just in time inventory, and other measures to cut input costs and achieve process efficiency. In such situations, the organization will need to redo job descriptions, rework its team, group, and communication structures and reporting relationships to ensure that the remaining workforce does the job well. Very often, downsizing-induced restructuring leads

to a flatter organizational structure, and broader job descriptions and duties. New Work Methods

Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory based work. Newer methods of work, especially outsourcing, telecommuting, and flex time require new systems, policies, and structures in place, besides a change in culture, and such requirements may trigger organizational restructuring. The presence of telecommuting employees, temporary employees, and outsourcing work may require a drastic overhaul of performance management parameters, compensation and benefits administration, and other vital systems. The newer work methods may, for instance, require placing emphasis on the results rather than the methods, flexible reporting relationships, and a strong communication policy. New Management Methods

Traditional management science recommends highly centralized operations, and the top management adopting a command and control style. The new behavioral approach to management considers human resources a key driver of strategic advantage, and focuses on empowering the workforce and providing considerate leeway to line managers in conducting day-to-day operations. The top management intervenes only to set strategy and ensure compliance; strategic business units receive autonomy in functioning. Traditional management structures were bureaucratic and hierarchical. Of late, management experts see wisdom in flatter organizations with wider roles and responsibilities for each member of the team. Job flexibility, enlargement and enrichment are key features of such new structures, but successful implementation requires changes in the communication and reporting structures of the organization. While new organizations can start with such new paradigms, old organizations have to restructure themselves to keep up with these best practices to remain competitive. Quality Management

Competitive pressures force most companies to have a serious look at the quality of their products and services, and adopt quality interventions such as Six Sigma and Total Quality Management. Implementing new quality standards may require changes in the organization. Most of the new quality applications strive to imbibe quality in the actual work process rather than maintain a separate quality control department to accept or reject output based on quality specifications. In many cases, an organizational level audit precedes quality interventions, and such audits highlight inefficiencies in the organizational structure that may impede quality in the first place. For instance, reducing waste may require eliminating certain processes, and thereby reallocation of personnel undertaking such activities.

Technology

Innovations in technology, work processes, materials and other factors that influence the business, may require restructuring to keep up with the times. For instance, enterprise resource planning that links all systems and procedures of an organizational by leveraging the power of information technology may initially require a complete overhaul of the systems and procedures first. Such technology-centric change may be part of a business process engineering exercise that involves redesigning the business processes to maximize potential and value added, while minimizing everything else. Failure to do so may result in the company systems and procedures turning obsolete and discordant with the times.

Mergers and Acquisitions

In todays corporate world, where survival of the fittest is the maxim, mergers and acquisitions are commonplace and any merger or acquisition invariably heralds a restructuring exercise. The reasons for such restructuring accompanying mergers and acquisitions are many. Some of the common reasons are:
o

Reconciling the systems and procedures of the merged organizations to ensure that

the new entity has consistency of approach.

o

Eliminating duplication of work or systems, such as two human resource or finance departments.

Incorporating the preferences of the new owners, and more.

Joint ventures may also require formation of matrix teams, special task forces, or a new subsidiary.

Finance Related Issues

Very often, small and medium scale businesses have informal structures and reporting relationships, and an ad-hoc style of decision-making. When such companies grow and want to raise fresh funds, venture capitalists and regulations might demand a more professional set up, with formal written-down structures and policies. A listed company may undertake a restructuring exercise to improve its efficiency and unlock hidden value, and thereby show more profits to attract fresh investors. Bankruptcy may force the business to shed excess flab such as workforce, land, or other resources, sell some business lines to raise cash, and become lean and mean, to attract bail-outs or some other rescue package. Companies may try to restructure out of court to avoid the high costs of a formal bankruptcy.

Buy Outs

At times, the restructuring exercise may be the result of the whims and fancies of the owners. For instance, the company may have a new owner who wants to stamp his or her personal authority and style onto the business. Restructuring allows the new owner to:
o o o

Reshuffle key personnel and provide power to trusted lieutenants. Start with a clean state and thereby exert greater control. Preempt any inefficiencies that caused the previous owner to sell-out, and more.

With or without ownership change acting as a trigger, company owners may appoint a management consultant to review the company and suggest macro-level changes, as a

routine exercise.

Statutory and Legal Compliance

At times, restructuring may be a forced exercise, to conform to some legal or statutory requirements. For instance, the government may mandate financial and healthcare institutions that deal with sensitive personal data to monitor their computer networks. A new bill may require that private computer networks adopt the same security measures that government networks adopt, to gain immunity from liability lawsuits in the eventuality of cyber attacks. Any organizational restructuring is basically a change initiative. Success depends on managing resistance to change by convincing the remaining workforce of the need for change and the possible benefits, an effective communication system to lend clarity to the change process, and effective leadership.

Q.8 What are the problems in achieving acquisition success?

1. Integration difficulties 2. Inadequate evaluation of target 3. Large or extraordinary debt Junk bonds: financing option whereby risky acquisitions are financed with money

(debt) that provides a large potential return to lenders (bondholders) 4. Inability to achieve synergy Synergy: Value created by units exceeds value of units working independently

o Achieved when the two firms' assets are complementary in unique ways o Yields a difficult-to-understand or imitate competitive advantage Private synergy: Occurs when the combination and integration of acquiring and

acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating the assets with any other company 5. 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 performance of business units Acquisitions may become substitutes for innovation 6. Managers overly focused on acquisitions Necessary activities with an acquisition strategy o Search for viable acquisition candidates o Complete effective due-diligence processes o Prepare for negotiations Managing the integration process after the acquisition o Diverts attention from matters necessary for long-term competitive success (I.e., identifying other activities, interacting with important external stakeholders, or fixing fundamental internal problems) o A short-term perspective and greater risk aversion can result for target firm's managers 7. Too large Bureaucratic controls Formalized supervisory and behavioral rules and policies designed to ensure consistency of decisions and actions across different units of a firm formalized controls decrease flexibility Additional costs may exceed the benefits of the economies of scale and additional market power

 Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and standardized managerial behavior Firm may produce less innovation