Acquisition and Restructuring

Strategies
 Mergers and Acquisitions
Merger
A transaction where two firms agree to integrate their
operations on a relatively coequal basis because they
have resources and capabilities that together may
create a stronger competitive advantage
Acquisition
A transaction where one firm buys another firm
with the intent of more effectively using a core
competence by making the acquired firm a
subsidiary within its portfolio of businesses
Takeover
An acquisition where the target firm did not solicit
the bid of the acquiring firm
Reasons for Problems in
Acquisitions Achieving Success
Increased Integration
market power difficulties

Overcome Inadequate
entry barriers evaluation of target

Cost of new Large or

product development extraordinary debt

Increased speed Inability to

to market Acquisitions achieve synergy

Lower risk Too much

compared to developing diversification
new products

Increased Managers overly

diversification focused on acquisitions

Avoid excessive
competition Too large
 Reasons for Acquisitions
Increased Market Power
Acquisition intended to reduce the competitive balance of
the industry
Example: British Petroleum’s acquisition of U.S. Amoco

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make
“start-ups” economically unattractive
Example: Belgian-Dutch Fortis’ acquisition of American
Banker’s Insurance Group
Lower Cost and Risk of New Product Development
Buying established businesses reduces risk of start-up
ventures
Example: Watson Pharmaceuticals’ acquisition of TheraTech
 Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market entry
in a more timely fashion
Example: Kraft Food’s acquisition of Boca Burger
Diversification
Quick way to move into businesses when firm currently lacks
experience and depth in industry
Example: CNET’s acquisition of mySimon

Reshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a
single or a few products or markets
Example: General Electric’s acquisition of NBC
 Problems with Acquisitions
Integration Difficulties
Differing financial and control systems can make integration
of firms difficult
Example: Intel’s acquisition of DEC’s semiconductor division

Inadequate Evaluation of Target

“Winners Curse” bid causes acquirer to overpay for firm
Example: Marks and Spencer’s acquisition of Brooks Brothers

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows
Example: AgriBioTech’s acquisition of dozens of small seed
firms
 Problems with Acquisitions
Inability to Achieve Synergy
Justifying acquisitions can increase estimate of
expected benefits
Example: Quaker Oats and Snapple
Overly Diversified
Acquirer doesn’t have expertise required to manage
unrelated businesses
Example: GE--prior to selling businesses and refocusing
Managers Overly Focused on Acquisitions
Managers may fail to objectively assess the value of
outcomes achieved through the firm’s acquisition strategy
Example: Ford and Jaguar
Too Large
Large bureaucracy reduces innovation and flexibility
 Attributes of Effective Acquisitions

+ Complementary Assets or Resources

Buying firms with assets that meet current
needs to build competitiveness

+ Friendly Acquisitions
Friendly deals make integration go more smoothly

+ Careful Selection Process

Deliberate evaluation and negotiations is more likely
to lead to easy integration and building synergies

+ Maintain Financial Slack

Provide enough additional financial resources so
that profitable projects would not be foregone
 Attributes of Effective Acquisitions

+ Low-to-Moderate Debt
Merged firm maintains financial flexibility

+ Flexibility
Has experience at managing change and is
flexible and adaptable

+ Emphasize Innovation
Continue to invest in R&D as part of the
firm’s overall strategy
 Restructuring Activities
Downsizing
Wholesale reduction of employees
Example: Procter & Gamble’s cutting of its
worldwide workforce by 15,000 jobs

Downscoping
Selectively divesting or closing non-core businesses
Reducing scope of operations
Leads to greater focus
Example: Disney’s selling of Fairchild Publications
 Restructuring Activities
Leveraged Buyout (LBO)
A party buys a firm’s entire assets in order to take the
firm private.
Example: Forsmann Little’s buyout of Dr. Pepper
 Restructuring and Outcomes
Short-Term Long-Term
Alternatives
Outcomes Outcomes

Downsizing

Downscoping

Leveraged
Buyout
 Restructuring and Outcomes
Short-Term Long-Term
Alternatives
Outcomes Outcomes
Reduced Loss of
Labor Costs Human Capital
Downsizing

Lower
Performance
 Restructuring and Outcomes
Short-Term Long-Term
Alternatives
Outcomes Outcomes
Reduced Loss of
Labor Costs Human Capital
Downsizing

Reduced Lower
Debt Costs Performance
Downscoping

Emphasis on Higher
Strategic Controls Performance
 Restructuring and Outcomes
Short-Term Long-Term
Alternatives
Outcomes Outcomes
Reduced Loss of
Labor Costs Human Capital
Downsizing

Reduced Lower
Debt Costs Performance
Downscoping

Emphasis on Higher
Strategic Controls Performance
Leveraged
Buyout
High Debt
Higher Risk
Costs