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
Acquisition
s and
Problems
in
Achieving
Success

Adapted from Figure 7.1

Increased
diversification
Acquisitions

Increased
market power

Overcoming
entry barriers

Cost new product

development/increased
speed to market

Avoiding excessive
competition

Lower risk
compared to
developing new
products

Learning and
developing new
capabilities
72

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
73

Acquisitions: Increased Market Power

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

74

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
75

Market Power Acquisitions (contd)

Horizontal
Acquisition
s
Vertical
Acquisition
s

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

76

Market Power Acquisitions (contd)

Horizontal
Acquisition
s
Vertical
Acquisition
s
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

77

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

78

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

79

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

710

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
711

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

712

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
713

Reasons
for
Acquisition
s and
Problems
in
Achieving
Success

Adapted from Figure 7.1

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
714

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
715

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
716

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

717

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

718

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
719

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 effective due-diligence processes
Preparing for negotiations
Managing the integration process after the
acquisition is completed

720

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 shortterm perspective and a greater aversion to
risk among executives in the target firm
721

Problems in Achieving Acquisition

Success: Too Large
Additional costs of controls 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
722

Attributes
of
Successful
Acquisition
s

Table 7.1
723

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
724

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

725

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
726

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

727

Restructuring and Outcomes

Adapted from Figure 7.2

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