Seminar 7: Acquisition

Contents:
1. To understand the motives and types of
acquisitions
2. To understand the various stages that make up a
typical acquisition process
3. To identify potential issues and remedies that
might occur during the acquisition process
4. To identify and understand why successful
acquisitions have certain attributes

MERGERS, ACQUISITIONS, AND

TAKEOVERS: WHAT ARE THE
DIFFERENCES?

MERGER

Two firms agree to integrate their operations on a relatively

co-equal basis

There are few TRUE mergers because one firm usually

dominates in terms of market share, size, or asset value

ACQUISITION

One firm buys a controlling, 100 percent interest in another

firm with the intent of making the acquired firm a subsidiary
business within its portfolio
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MERGERS, ACQUISITIONS, AND

TAKEOVERS: WHAT ARE THE
DIFFERENCES?

TAKEOVER

Special type of acquisition strategy wherein the target firm

did not solicit the acquiring firm's bid

HOSTILE TAKEOVER

Unfriendly takeover that is undesired by the target firm

RATIONALE FOR STRATEGY

Pre-announcement returns of hostile takeovers are largely

anticipated and associated with a significant increase in the
bidders and targets share price
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Choice Of Entry Mode Is Influenced By The Level of Resources

Committed By The Firm

Commitment of Resources

High
Wholly Owned
Subsidiary
Characteristics
- Internal growth
Advantages
- Full control
- Potential for
maximal returns
Disadvantages
- Slow
- High costs and risks
associated to being
new to the country

Acquisition
Characteristics
- Buying over another
firm to gain entry
Advantages
-Quick access to new
market
- Greater control
Disadvantages
-Costly
- Integration is
complex and uncertain
-Non-realization of
synergy

Strategic Alliance

Low

Licensing

Characteristics
- Partnership with
another firm to
combine expertise

Characteristics
- Another firm
purchases the right to
manufacture and sell

Advantages
-Gain access to
resources / expertise
- Shared risk

Advantages
-Low cost & risk

Disadvantages
- Collaboration issues
- Incompatible
partners (conflict)

Disadvantages
- little control
- Limited potential
returns
- Risk of foreign firm
exploiting knowledge

Exporting
Characteristics
-Does not require
establishing
operations in host
country
Advantages
- Easy to do, fast
Disadvantages
-High cost of
transportation
- little control
- middle man
required

An Understanding of the Foreign Market, Together with a Firms Resources and

Capabilities Drives Entry Mode Choice

Acquisitions Provide Avenues To Accomplish Organizational

Goals (I)
Situation

Goals

Internal Issues

Action

Organization seeks
international
diversification

To overcome liability of
foreignness & other
entry barriers

Organization has
no content
expertise

Acquire established firm

in host country with
content knowledge (E.g.
Singtel acquiring Optus)

Organization requires
new types of
innovation and product
development

To develop new
products and
introduce them quickly
and successfully into
the market

Organization has
limited know-how
or have met with
road-blocks

Acquire a firm with

specific core knowledge
or competencies (E.g.
HP acquiring Indigo)

Organization seeks to
diversify/control its
revenue stream for
various reasons (e.g.
seasonality,
geography, industry)

To remove fluctuations
in revenue streams,
develop new revenue
streams and manage
risk / achieve control

Not directly
applicable

Acquire a firm that

provides new revenue
streams, strengthen
current revenue streams
(e.g. Prudential acquiring
Bache and Company)

Acquisitions Can be Used to Attain Specific Organizational Goals

Acquisitions Provide Avenues To Accomplish Organizational

Goals (II)
Reasons for Acquisition

Enhance
Market Power

Develop
Competencies /
Capabilities

Improve
Competitive
Position

Reshaping
Competitive
Scope /
Restructuring *
Acquisitions are often done for
broad strategic reasons

Types of Acquisition

Vertical
Integration
Horizontal
Integration

Outcomes / Mechanisms
for Success
Increased
control
Enhanced
Bargaining
Power

Related
Acquisition
Unrelated
Acquisition

The type of acquisition follows the

reasons for the acquisition

Improved
Economies
of Scale
Cost /
Revenue
Synergies

Improved
Competencies
Ability to
Refocus

Various mechanisms influence the

success of an acquisition

Acquisitions Can be Used to Achieve Broad Organizational Goals

Acquisition - Reasons
Growth:
1. Increase size of the Pie
Innovation
International (outside current coverage)
2. Increase Market Share
Market power ValueNet (or Value System) integration
Synergistic scope and/or scale benefits
Risk:
1. Baskets Portfolio Management, Asset Utilization
2. Environmental Uncertainties
Resource Dependency
Competitive dynamics
Direction:
1. Vision, Mission, Strategic Intent SWOT
2. Industry or Regulatory changes Entry barriers

A Typical Acquisition Process Consists Of Several Key Stages

Identifying an
organizational
goal

Identifying
strategic
options

At this stage, specific or broad

organizational goals are identified.
E.g. The firm needs to enter into a foreign
market, like China

Choosing the
best option
(Acquisition
in this
chapter)
Pros and cons of
each option are
considered

E.g. The firm needs to secure scarce

resources such as raw materials

Specific
mechanisms to
accomplish goals
are identified

E.g. The firm wants to obtain greater

economies of scale in order to enhance
competitiveness

Potential issues
and problems are
identified

Organizational goals and options are

normally carried out together

Due
diligence

Due diligence
can include:
- Understanding
the fit between
companies
- Proper valuation
of the target firm
- Any useful
knowledge prior
to the acquisition
(e.g. a previous
alliance, contact)

The
Acquisition

Integration

The Acquisition and Integration

process normally occurs over a
period of time.
The acquisition is typically
completed when control is
effectively ceded over to the
acquirer (deal terms are agreed
upon)
The Integration process is a
complex process which
integrates various aspects of the
two firms according to a master
plan of sorts. (Some companies
might choose not to integrate
systems, routines, etc)

The Acquisition Process is an Extended Process which Entails Planning, as

well as, Implementation Elements

Acquisitions Should Be Evaluated Carefully To Avoid Potential

Issues (I)
Reason For Acquisition
Overcome entry barriers

Reduce cost of new

product development and
increase speed to market
Lower risk compared to
developing new products

Increased diversification /
control revenue streams

Potential Problems In
Achieving Success
Inadequate evaluation of
target
Integration difficulties
Coordination issues
Large or extraordinary debt
Potentially costly
Integration difficulties
Inability to achieve synergy
Integration difficulties
Inadequate evaluation of
target
Too much diversification
Inability to achieve synergy
Coordination issues

Potential Preventive Actions

Understanding differences across
countries / industries
Develop effective organization structure
Thorough cost / benefit analysis
Understanding what and how to
integrate the firms
Understand own strengths /
weaknesses
Understanding what and how to
integrate the firms
Understand own competitive scope /
focus
Identify sources of potential synergy
and understand how to achieve them
Develop effective organization structure

Understanding the Requirements of a Successful Acquisition Will Enable the

Firm to Take Steps to Address Potential Problems
* Sourced and adapted from Figure 7.1 of the Ireland / Hoskission / Hitt Textbook The Management of Strategy, Concepts, Eighth Edition

Acquisitions Should Be Evaluated Carefully To Avoid Potential

Issues (II)
Reason For Acquisition

Potential Problems In
Achieving Success

Potential Preventive Actions

Increase market power

Integration difficulties
Potentially costly
Inability to achieve synergy

Careful selection / evaluation of target firm

Understanding what and how to integrate
the firms

Reshaping the firms

competitive scope

Maintaining congruent strategy

Too much focus on acquisitions
Integration difficulties
Inability to achieve synergy

Understanding the systematic steps

required to achieve the firms strategy
Careful selection / evaluation of target
firm(s) for portfolio development

Learning and developing new

capabilities

Inadequate evaluation of target

Integration difficulties
Inability to achieve synergy

Understanding the new capabilities

acquired and how to leverage them
Careful selection / evaluation of target firm

Understanding the Requirements of a Successful Acquisition Will Enable the

Firm to Take Steps to Address Potential Problems
* Sourced and adapted from Table 7.1 of the Ireland / Hoskission / Hitt Textbook The Management of Strategy, Concepts, Eighth Edition

Successful Acquisitions Tend To Have Certain Characteristics

Attributes

Results

Acquired firm has assets or resources that are

complementary to the acquiring firms core
business
Acquisition is friendly

High probability of synergy and competitive

advantage by maintaining strengths

Acquiring firm conducts effective due

diligence to select target firms and evaluate
the target firms health
Acquiring firm has financial slack
Merged firm maintains low to moderate debt
position

Faster and more effective integration and

possibly lower premiums
Firms with strongest complementarities are
acquired and overpayment is avoided
Financing is easier and less costly to obtain

Acquiring firm has sustained emphasis on

R&D and innovation

Lower financing cost, lower risk, and

avoidance of trade-offs associated with higher
debt
Maintain long term competitive advantage of
markets

Acquiring firm manages change well and is

flexible and adaptable

Faster and more effective integration

facilitates achievement of synergy

Understanding Acquisition Goals and Requirements Can Help Organizations

Determine Key Characteristics / Attributes Desired
* Taken from Figure 7.2 of the Ireland / Hoskission / Hitt Textbook The Management of Strategy, Concepts, Eighth Edition

Acquisition - Issues
Operational:
1. Cultural
2. Coordination
Need for Global Integration
Organizational Structure
Financial:
1. Overvalued
2. Large debt
Informational:
1. Synergistic failure
Limited scope or scale benefits
2. Poor due diligence
Decision based on insufficient information
Poor understanding of capabilities (e.g., tacit
knowledge)