MERGER AND ACQUISITION STRATEGY STRATEGIC MANAGEMENT MERGER AND ACQUISITION STRATEGY

MERGER AND ACQUISITION STRATEGY Mergers, Acquisitions, and Takeovers 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.

MERGER AND ACQUISITION STRATEGY A takeover is a special type of acquisition wherein the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions. Research evidence shows “… that hostile acquirers deliver significantly higher shareholder value than friendly acquirers” for the acquiring firm.

MERGER AND ACQUISITION STRATEGY Reasons for Acquisitions Increased Market Power Overcoming Entry Barriers Cost of New Product Development and Increased Speed to Market Lower Risk Compared to Developing New Products Increased Diversification Acquisitions are also used to diversify Reshaping the Firm’s Competitive Scope Learning and Developing New Capabilities

MERGER AND ACQUISITION STRATEGY Problems in Achieving Acquisition Success Integration Difficulties Inadequate Evaluation of Target Large or Extraordinary Debt Managers Overly Focused on Acquisitions Too Large Inability to Achieve Synergy Too Much Diversification

MERGER AND ACQUISITION STRATEGY Integration Difficulties “Managerial practice and academic writings show that, the post-acquisition integration phase is probably the single most important determinant of shareholder value creation (and equally of value destruction) in mergers and acquisitions. Integration is complex and involves a large number of activities, which if overlooked can lead to significant difficulties.

MERGER AND ACQUISITION STRATEGY Inadequate Evaluation of Target The failure to complete an effective due-diligence process may easily result in the acquiring firm paying an excessive premium for the target company. Research shows that in times of high or increasing stock prices due diligence is relaxed; firms often overpay during these periods and long-run performance of the newly formed firm suffers. Research also shows that without due diligence, “the purchase price is driven by the pricing of other ‘comparable’ acquisitions rather than by a rigorous assessment.

MERGER AND ACQUISITION STRATEGY Large or Extraordinary Debt Acquisitions may arise in high debt, which can have several negative effects on the firm. For example, because high debt increases the likelihood of bankruptcy, it can lead to a downgrade in the firm’s credit rating by agencies such as Moody’s and Standard & Poor’s.

MERGER AND ACQUISITION STRATEGY Managers Overly Focused on Acquisitions Activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success, such as identifying and taking advantage of other opportunities and interacting with important external stakeholders. Both theory and research suggest that managers can become overly involved in the process of making acquisitions.

MERGER AND ACQUISITION STRATEGY Too Large Most acquisitions create a larger firm, which should help increase its economies of scale. These economies can then lead to more efficient operations—for example, two sales organizations can be integrated using fewer sales representatives because such sales personnel can sell the products of both firms (particularly if the products of the acquiring and target firms are highly related). Many firms seek increases in size because of the potential economies of scale and enhanced market power

MERGER AND ACQUISITION STRATEGY Inability to Achieve Synergy A firm develops a competitive advantage through an acquisition strategy only when a transaction generates private synergy. Private synergy is created when combining and integrating the acquiring and acquired firms’ assets yield capabilities and core Competencies. Private synergy is possible when firms’ assets are complementary in unique ways; that is, the unique type of asset complementarity is not possible by combining either company’s assets with another firm’s. Private synergy is difficult to create.

MERGER AND ACQUISITION STRATEGY Too Much Diversification The level at which over diversification occurs varies across companies because each firm has different capabilities to manage diversification. Over diversification leads to a decline in performance, after which business units are often divested.

MERGER AND ACQUISITION STRATEGY Effective Acquisitions Acquisition strategies do not always lead to above average returns for the acquiring firm’s shareholders. Some companies are able to create value when using an acquisition strategy. The probability of success increases when the firm’s actions are consistent with the “attributes of successful acquisitions.

MERGER AND ACQUISITION STRATEGY - Successful Acquisitions Effective Acquisitions

MERGER AND ACQUISITION STRATEGY Restructuring Restructuring is a strategy through which a firm changes its set of businesses or its financial structure. Restructuring is a global, divesting businesses from company portfolios and downsizing accounted for a large percentage of firms’ restructuring strategies. Firms focus on a fewer number of products and markets following restructuring.

MERGER AND ACQUISITION STRATEGY Downsizing Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units. Downsizing is often a part of acquisitions that fail to create the value anticipated when the transaction was completed. Downsizing is often used when the acquiring firm paid too high of a premium to acquire the target firm. Reducing the number of employees and/or the firm’s scope in terms of products produced and markets served occurs in firms to enhance the value being created.

MERGER AND ACQUISITION STRATEGY Downscoping Downscoping refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses. Downscoping causes firms to refocus on their core business. Managerial effectiveness increases because the firm has become less diversified, allowing the top management team to better understand and manage the remaining businesses.

MERGER AND ACQUISITION STRATEGY Leveraged Buyouts A leveraged buyout (LBO) is a restructuring strategy whereby a party (typically a private equity firm) buys all of a firm’s assets in order to take the firm private. Leveraged buyouts were used as a restructuring strategy to correct for managerial mistakes or because the firm’s managers were making decisions that primarily served their own interests rather than those of shareholders. Some firms use buyouts to build firm resources and expand rather than simply restructure distressed assets.

MERGER AND ACQUISITION STRATEGY – RESTRUCTURING OUTCOMES

MERGER AND ACQUISITION STRATEGY End