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Merger and Acquisition Strategies

Most corporations are very familiar with merger and acquisition strategies. For example,
the latter half of the twentieth century found major companies using these strategies to
grow and to deal with the competitive challenges in their domestic markets as well as
those emerging from global competitors. Today, smaller firms also use merger and
acquisition strategies to grow in their existing markets and to enter new markets.
The Popularity of Merger and Acquisition Strategies
Merger and acquisition strategies have been popular among U.S. firms for many years.
Some believe that these strategies played a central role in the restructuring of U.S.
businesses
during the 1980s and 1990s and that they continue generating these types of benefits
in the twenty-first century. firms use merger and acquisition strategies to improve their
ability
to create more value for all stakeholders including shareholders.

Mergers, Acquisitions, and Takeovers: What Are


the Differences
A merger is a strategy through which two firms agree to integrate their operations
on a relatively coequal basis.
An acquisition is a strategy through which one firm buys a controlling, or 100
percent, interest in another firm with the intent of making the acquired firm a
subsidiary business within its portfolio. After completing the transaction, the
management of the acquired firm reports to the management of the acquiring
firm. A takeover is a special type of acquisition wherein the
target firm does not solicit the acquiring firms bid; thus, takeovers are unfriendly
acquisitions.

Reasons for acquisition


Increased Market Power
Achieving greater market power is a primary reason for acquisitions. Market
power usually is derived from the size of the firm and its resources and
capabilities to compete in the market place. Most acquisitions that are designed
to achieve greater market power entail buying a competitor, a supplier, a
distributor, or a business in a highly related industry to allow the exercise of a
core competence and to gain competitive advantage in the acquiring firms
primary market.
Horizontal Acquisition is the acquisition of a company competing in the
same industry as the acquiring firm
Vertical Acquisition is firm acquiring a supplier or distributor of one or
more
of its goods or services.
Related Acquisition is Acquiring a firm in a highly related industry
Overcoming Entry Barriers
Barriers to entry are factors associated with a market or with the firms currently
operating in it that increase the expense and difficulty new firms encounter when
trying to enter that particular market. Facing the entry barriers that economies of
scale and differentiated products create, a new entrant may find acquiring an
established company to be more effective than entering the market as a
competitor offering a product that is unfamiliar to current buyers. In fact, the
higher the barriers to market entry, the greater the probability that a firm will
acquire an existing firm to overcome them.

Cross border acquisition is Acquisitions made between companies with


headquarters in different countries
Cost of New Product Development and Increased Speed to Market
Developing new products internally and successfully introducing them into the
marketplace often requires significant investment of a firms resources, including
time, making it difficult to quickly earn a profitable return. Acquisitions are
another means a firm can use to gain access to new products and to current
products that are new to the firm.
Lower Risk Compared to Developing New Products
Because the outcomes of an acquisition can be estimated more easily and
accurately than the outcomes of an internal product development process,
managers may view acquisitions as being less risky. Firms should exercise caution
when using acquisitions to reduce their risks relative to the risks the firm incurs
when developing new products internally.
Increased Diversification
Acquisitions are also used to diversify firms. Based on experience and the insights
resulting from it, firms typically find it easier to develop and introduce new
products in markets they are currently serving
Reshaping the Firms Competitive Scope
the intensity of competitive rivalry is an industry characteristic that affects the
firms profitability. To reduce the negative effect of an intense rivalry on their
financial performance, firms may use acquisitions to lessen their dependence on
one or more products or markets. Reducing a companys dependence on specific
markets shapes the firms competitive scope.
Learning and Developing New Capabilities
Firms sometimes complete acquisitions to gain access to capabilities they lack.
For example, acquisitions may be used to acquire a special technological
capability.

Problem in Achieving Acquisition


Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy

Synergy is Value created by units exceeds value of units working


independently
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
Too much diversification
Managers overly focused on acquisitions
Too large
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

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
Restructuring

Restructuring is firm changes set of businesses or financial structure.


Downsizing: Reduction in number of firms employees (and possibly number of
operating units) that may or may not change the composition of businesses in
the company's portfolio
Downscoping: Eliminating businesses unrelated to firms core businesses through
divesture, spin-off, or some other means
Leveraged buyouts (LBOs)

One party buys all of a firm's assets in order to take the firm
private (or no longer trade the firm's shares publicly)
Private equity firm: Firm that facilitates or engages in taking a
public firm private
Why LBOs?
Protection against a capricious financial market
Allows owners to focus on developing innovations/bring them to
market
A form of firm rebirth to facilitate entrepreneurial efforts