1. Acquisition and Restructuring Strategies
Chapter 7
Acquisition and Restructuring Strategies
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2000 South-Western College Publishing 1

2. The Strategic Management Process Strategy Formulation
Chapter 2
The Strategic
Management
Process
External
Strategic
Inputs
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Formulation
Strategy Implementation
Chapter 4
Chapter 5
Chapter 6
Chapter 10
Chapter 11
Business-Level
Competitive
Corporate-Level
Corporate
Structure
Strategy
Dynamics
Strategy
Governance
& Control
Strategic
Actions
Chapter 7
Chapter 8
Chapter 9
Chapter 12
Chapter 13
Acquisitions &
International
Cooperative
Strategic
Entrepreneurship
& Innovation
Restructuring
Strategy
Strategies
Leadership
Strategic
Outcomes
Strategic
Competitiveness
Above Average
Feedback
Returns 2

3. Mergers and Acquisitions
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 3

4. Reasons for Acquisitions Problems in Achieving Success
Increased
market power
Overcome
entry barriers
Lower risk
compared to developing new products
Cost of new
product development
Increased speed
to market
diversification
Avoid excessive
competition
Integration
difficulties
Inadequate
evaluation of target
Too much
diversification
Large or
extraordinary debt
Inability to
achieve synergy
Managers overly
focused on acquisitions
Too large
Acquisitions 31

5. 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
Buying established businesses reduces risk of start-up ventures
Lower Cost and Risk of New Product Development
Example: Watson Pharmaceuticals’ acquisition of TheraTech 11

6. 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 17

7. 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 23

8. 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 30

9. 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 + 34

10. 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 + 37

11. Restructuring Activities
Downsizing
Wholesale reduction of employees
Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs
Downscoping
Reducing scope of operations
Selectively divesting or closing non-core businesses
Leads to greater focus
Example: Disney’s selling of Fairchild Publications 41

12. 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 48

13. Restructuring and Outcomes
Alternatives
Short-Term Outcomes
Long-Term Outcomes
Downsizing
Downscoping
Leveraged
Buyout 50

14. Restructuring and Outcomes
Short-Term Outcomes
Long-Term Outcomes
Alternatives
Reduced Labor Costs
Loss of
Human Capital
Lower Performance
Downsizing 53

15. Restructuring and Outcomes
Short-Term Outcomes
Long-Term Outcomes
Alternatives
Loss of
Human Capital
Reduced Labor Costs
Downsizing
Reduced Debt Costs
Emphasis on Strategic Controls
Lower Performance
Downscoping
Higher Performance 56

16. Restructuring and Outcomes
Short-Term Outcomes
Long-Term Outcomes
Alternatives
Loss of
Human Capital
Reduced Labor Costs
Downsizing
Reduced Debt Costs
Lower Performance
Downscoping
High Debt Costs
Emphasis on Strategic Controls
Higher Performance
Higher Risk
Leveraged
Buyout 59