1. 1 Management of Technical Organizations (EMSE 6001) George Washington University School of Engineering and Applied Science Chapter 7 – Strategic Acquisition and Restructuring Dr. Basel Ali Spring 1, 2019

2. 2 Strategic Acquisition and Restructuring

3. 3  Source of firm growth and above-average returns  Mergers o 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 o 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  Takeovers o Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid o Hostile Takeover - Unfriendly takeover that is undesired by the target firm o Poison pill, greenmail

4. 4 Reasons for Acquisitions Increased Market Power  A firm is able to sell its goods or services above competitive levels  Cost of its primary or support activities are lower than those of its competitors.  Three types of acquisitions can be used by firms to increase their market power: 1.Horizontal Acquisition – The acquisition of a company in the same industry 2.Vertical Acquisition – The acquisition of a supplier or a distributer. 3.Related Acquisition – Acquiring a firm in a highly related industry

5. 5 Reasons for Acquisitions Overcoming Entry Barrier  Acquisition provide immediate access to market to overcome barriers such as economies of scale and customer loyalty  Especially attractive for firms seeking to enter international market  Cross-Border Acquisitions  Made between companies with headquarters in different countries.  Most of the deals are horizontal to increase market power.  Factors: currency exchange rate and government policies.

6. 6 Reasons for Acquisitions Cost of New Product Development and Increased Speed to Market  Internal product development requires investment of resources such as money and time.  Acquisition provides a mean to gain access to new products, more predictable returns and a faster market entry. Lower Risk Compared to Developing New Products  Internal product development could be a high risk activity  The outcome of acquisition can be estimated more easily.  Caution – acquisition may become a substitute for innovation

7. 7 Reasons for Acquisitions Increased Diversification  Difficult for firms to develop products that differ from their current line for new markets  In general, the more related the acquired firm, the greater is the probability the acquisition will be successful (horizontal and related acquisition) Reshaping the Firm’s Competitive Scope  Firms use acquisition to lessen dependence on one or more products or markets, thus reducing effect of rivalry. Learning and Developing New Capabilities  Gain access to capabilities a firm lacks.  Works better when a firm acquire companies with different but related and complementary capabilities.

8. 8 Problems in Achieving Acquisition Success Integration Difficulties  Different corporate cultures  Linking different financial and control systems  Different management styles Example: UPS acquired Mail Box Etc.  Mail Box Etc. franchisees cant deal with other shipping companies  UPS often built company owned stores close by franchisee outlets.  UPS focus on wholesale pickup, Mail Box Etc. focus on retail traffic.

9. 9 Problems in Achieving Acquisition Success Inadequate Evaluation of Target Due diligence is a process through which a firm evaluates a target firm for acquisition.  Usually carried out by banks, accountants, lawyers.  Items evaluated include:  Financing  Differences in culture  Tax consequences of transaction  Ability to effectively integrate the target  Failure to complete an effective due diligence process may results in paying an excessive premium.

10. 10 Problems in Achieving Acquisition Success Large or Extraordinary Debt Junk bonds – financial option through which risky acquisitions are financed with money that provides a large potential return to lenders  Unsecured  High interest rate  Acquiring a company with debt create additional debt load which increases price tag

11. 11 Problems in Achieving Acquisition Success Inability to Achieve Synergy Synergy exists when the value created by units working together exceeds the value those units could create working independently. Private Synergy is created when integrating the acquiring and acquired firms’ assets yield capabilities and core competencies that could not be developed by combining either firm’s assets with another firm.  Possible when assets are complementary in unique ways  Difficult for competitors to understand and imitate  Difficult to create

12. 12 Problems in Achieving Acquisition Success Too Much Diversification  Firms use diversification to gain strategic competitiveness  At some point, firms become over-diversified  Depending on resources and capabilities  Related diversification requires more information processing than unrelated diversification.  Over-diversification can have a negative effect on long-term performance, thus leading to divestment.

13. 13 Problems in Achieving Acquisition Success Managers Overly Focused on Acquisitions  Managers are involved with: 1.Searching for viable acquisition candidate 2.Completing effective due diligence process 3.Preparing for negotiations 4.Managing the integration process  Overseeing acquisition activities can divert managerial attention from other important matters. Too Large  Size increases the complexity of the management challenge  Creates diseconomy of scope – not enough economic benefit to outweigh the costs of managing a more complex organization.  Adds Bureaucratic Controls

14. 14 Problems in Achieving Acquisition Success Firms have successful acquisition when they: 1.Select the right target 2.Avoid paying too high a premium 3.Effectively integrate the operations of the acquiring and target firms.

15. 15 Effective Acquisitions A pattern of actions improves the probability of having a successful acquisition: 1.Complementary assets/resources Buying firms with assets that meet current needs to build competitiveness and create synergy. 2.Friendly acquisitions Friendly deals make integration go more smoothly 3.Due Diligence/careful selecting process Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies 4.Maintain financial slack Provide enough additional financial resources so that profitable projects may be capitalized upon rather than forgone

16. 16 Effective Acquisitions 5.Low-to-moderate debt Merged firm maintains financial flexibility 6.Sustained emphasis on innovation Continue to invest in R&D as part of the firm’s overall strategy 7.Flexibility and adaptability Has experience at managing change and is flexible and can adapt their capabilities to new environment.

17. 17 Effective Acquisitions

18. 18 Restructuring  Restructuring is a strategy through which a firm changes its set of business or its financial structure. Failure of an acquisition strategy often precedes a restructuring strategy Restructuring may occur because of changes in the external or internal environments  Three types of restructuring: Downsizing, Downscoping, Leveraged Buyouts

19. 19 Restructuring Downsizing - A reduction in the number of a firm’s employees and sometimes operating units. –May or may not change the composition of businesses in the company’s portfolio –Typical reasons for downsizing Expectation of improved profitability from labor cost reductions Desire or necessity for more efficient operations − Downsizing is: Tactical Short-term Cut labor costs Could cause the lose of key personnel

20. 20 Restructuring Downscoping – eliminating businesses that are unrelated to a firm’s core business. − A set of actions that causes a firm to strategically refocus on its core businesses and reduce the diversity of its business portfolio − May be accompanied by downsizing, but must avoid eliminating key employees Smaller firm can be more effectively managed by the top management team − Downscoping is: Strategic Long-term Focus on core businesses More positive effect on firm performance than downsizing

21. 21 Restructuring Leveraged Buyouts – A party buys all of the assets of a business, financed largely with debt, and takes the firm private  Private equity firm: firm that facilitates or engages in taking a public firm private  Significant amounts of debt may be incurred to finance the buyout  Immediate sale of non-core assets to pare down debt Why?  Can correct for managerial mistakes. Managers making decisions that serve their own interests rather than those of shareholders  Protection against a unpredictable financial market  Allows owners to focus on developing innovations and bringing them to market  A form of firm rebirth to facilitate entrepreneurial efforts

22. 22 Restructuring Three types of Leveraged Buyouts (LBOs) 1.Management buyouts (MBOs) – Managers acquire part of the company 2.Employee buyouts (EBOs) – Employees buy majority stake in their company 3.Whole-firm buyouts  MBOs, more so than EBOs and whole-firm buyouts, lead to downscoping, increased strategic focus, and improved performance

23. 23 Restructuring Outcomes

24. 24 Competitive Rivalry and Dynamics Now you should be able to Explain the popularity of merger and acquisition strategies in firms competing in the global economy. Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness. Describe seven problems that work against achieving success when using an acquisition strategy. Name and describe the attributes of effective acquisitions. Define the restructuring strategy and distinguish among its common forms. Explain the short- and long-term outcomes of the different types of restructuring strategies.