1. Chapter 7 – Acquisitions & Restructuring Strategies

2. Mergers, Acquisitions, & Takeovers
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 firm’s bid for outright ownership

3. Mergers, Acquisitions, & Takeovers
Friendly acquisition
The management of the target firm wants the firm to be acquired
Unfriendly acquisition (hostile takeover)
The management of the target firm does not want the firm to be acquired (direct negotiations with the firm’s owners; tender offer; bear hug)

4. Regional M&A Activity in 2006
Europe
$1.43 trillion
(+38%)
North America
$1.73 trillion
(+39%)
Asia-Pacific
$343 billion
(+49%)
Japan
$103.2 billion
(-36%)
Middle East
and Africa
$65 billion
(+111%)
Latin America
and the Caribbean
$127 billion
(+295%)
World-wide
$3.80 trillion
(+38%)
Announced deals; percentage change compared to 2005
Source: Thomson Financial.

5. 7 Reasons for Acquisitions
Cost new product development/increased speed to market
Lower risk
compared to developing
new products
Increased market power
Acquisitions
Avoiding excessive competition
Horizontal
Cost-based synergies
Revenue-based synergies
Vertical
Control over value chain
Related
Reduce rivalry
Reduce dependence on
one market or product
Overcoming entry barriers
Learning and developing new capabilities
Increased diversification
Economies of scale
Differentiated products
Cross-border acquisitions
New capabilities
Broaden knowledge base
Reduce inertia

6. 7 Problems in Acquisitions
Too large
7 Problems in Acquisitions
Managers overly focused on acquisitions
Acquisitions
Too much diversification
Inadequate evaluation of target
Inability to achieve synergy
Integration difficulties
Large or extraordinary debt

7. Inadequate Evaluation of 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

8. Example – Culture Clash
Grants seats based on seniority
Discounted flight privileges employees
Grants seats based on a first-come, first-served basis
More traditional uniforms
Uniforms
More casual uniforms
Offers Coca Cola and Miller beer
In-flight beverages
Serves Pepsi and Bud Light beer
Unions want to protect the seniority standings of their members
Seniority rankings
Workers are concerned about being ranked as less senior than US Airways staffers
Source: The Wall Street Journal, March 7, 2006, B2.

9. Integration Difficulties
Integration challenges include:
Linking different financial and control systems
Melding two disparate corporate cultures
Building effective working relationships (particularly when management styles differ)
Resolving problems regarding the status of the newly acquired firm’s executives
Loss of key personnel weakens the acquired firm’s capabilities and reduces its value

10. Large or Extraordinary Debt
High debt can:
Increase the likelihood of bankruptcy
Lead to a downgrade of the firm’s credit rating
Preclude investment in activities that contribute to the firm’s long-term success such as:
Research and development
Human resource training
Marketing

11. 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

12. 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

13. 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

14. Managers Overly Focused on Acquisitions – cont’d
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 short-term perspective and a greater risk aversion among executives in the target firm

15. 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

16. Attributes of Successful Acquisitions

17. 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

18. Restructuring and Outcomes

19. Downsizing
A reduction in the number of a firm’s employees and sometimes in the number of its 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 cost reductions
Desire or necessity for more efficient operations

20. Downscoping
A divestiture, spin-off, or other means of eliminating businesses unrelated to a firm’s 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

21. Leveraged Buyouts (LBOs)
A restructuring strategy whereby a party buys all of a firm’s 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