chapter 7 acquisition and restructuring strategies diane m. sullivan, ph.d. 2011 sections modified...

Chapter 7

Acquisition and Restructuring Strategies

Diane M. Sullivan, Ph.D. 2011

Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 CengageSections modified from Gentner (2009)

The Strategic Management Process

Insert figure 1.1 graphic Firms determine the

mechanism(s) for implementing corporate-level strategies

3 possible mechanisms:

1) Mergers

2) Acquisitions

3) Restructuring

Goals:

1) Diversifying

2) Achieving growth

3) Meeting competitive challenges

Mergers & Acquisitions: Key Definitions

Merger Strategy where firms integrate their operations on a coequal basis

Example : 1997 Guinness merged with Grand Metropolitan, to form Diageo, plc, the world’s largest spirits company

Takeover

A special type of acquisition strategy where the acquired firm does not

solicit the acquiring firm’s bid Example: Guinness took over Arthur Bell to pursue Spirits

Acquisition (our main focus today) Strategy where one firm buys a controlling (or 100%) interest in another

firm and makes the acquired firm a subsidiary

Acquisitions are more common than mergers or takeovers

Acquisition: Examples Example Horizontal Acquisition

2004: Oracle acquired PeopleSoft to facilitate growth by acquiring a rival; gained access to customers, sales force, and software applications

Example Vertical Acquisition 2007: CVS Corp. acquired a PBM customer,

Caremark RX, Inc.

Buyer Target

Competitors

OraclePeople-

Soft

Forward Integration (firm buys customer)

Buyer

CVS

Target

Care-mark

The Triple Sevens of Acquisitions 7 reasons firms pursue acquisitions 7 problems with acquisitions 7 ways to increase likelihood of success

7 Reasons Firms Pursue Acquisition Strategies

1. Increased Market Power

2. Overcoming Entry Barriers

3. Cost of new product development and increased speed to market

4. Lower risk compared to developing new products

5. Increased diversification

6. Reshaping firm’s competitive advantage

7. Learning and developing new capabilities


1. Increased Market Power (main reason) Sources of market power include

Size of the firm, resources and capabilities to compete in the market, share of the market

These are achieved through:1. Horizontal Acquisitions

Acquirer and acquired companies compete in the same industry Example: McDonald’s acquisition of Boston Market in 2000

2. Vertical Acquisitions Firm acquires a supplier or distributor of one or more of its goods or

services; leads to additional controls over parts of the value chain Example: Google’s purchase of DoubleClick in 2007

3. Related Acquisitions Firm acquires another company in a highly related industry Example: Chapter 6 – P&G and Gillette

2. Overcoming Barriers to Entry

Acquiring established firms may help overcome Economies of scale enjoyed by competitors

Differentiated products by competitors

Competitors that enjoy customer loyalties

Acquisitions may be more effective than entering the market as a new competitor with an unfamiliar good

Acquisitions can provide a new entrant with immediate market access


3. Cost of New Product Development & Increased Speed to Market Significant investments are required to

Develop new products internally

Introduce new products into the marketplace

Acquisition of a competitor may result in Lower costs relative to developing internally

Faster market entry

Rapid access to new capabilities

Often benefits firms in knowledge-intensive industries (e.g., pharmaceuticals)


4. Lower Risk Compared to Developing New Products Outcomes more easily and accurately estimated compared to

internal product development process

Therefore acquisitions viewed as lowering risk More predictable returns and lower risk

5. Increased Diversification If lack experience, acquisitions easiest way to gain expertise

Faster to diversify and change a firm’s portfolio

Example: Conglomerates (e.g., Jarden Corporation)


6. Reshaping a Firm’s Competitive Scope To lessen dependence on a particular market Example 1: GE reducing dependence on electronics market by making

acquisitions in financial services Example 2: Microsoft trying to reduce dependence on software, to enter

search engine and web content markets

7. Learning and Developing New Capabilities Acquisitions help gain capabilities firm does not possess Acquisitions may be used to

Acquire a special technological capability (e.g., IBM moving into software) Broaden a firm’s knowledge base

Reduce inertia


Headline: March 29, 2011

Most M&As Fail to add value!

20% successful; 60% produce disappointing results; 20% clear

failures

7 Problems in Achieving Acquisition Success

1. Integration difficulties

2. Inadequate evaluation of target

3. Large or extraordinary debt

4. Inability to achieve synergy

5. Too much diversification

6. Managers overly focused on acquisitions

7. Too large

1. Integration Difficulties Melding two companies can be difficult

Corporate culture clashes Different financial and control systems Status of newly acquired executives

Example: UPS and Mailboxes, Inc.

2. Inadequate Evaluation of Target A lack of due diligence may result in paying a premium Especially problematic when firms are performing well Investment banks can help in obtaining effective valuation

Must assess both business model and financial value

Enter the dot com boom! Example: 1999 Yahoo! acquired Geocities.com for

$3.57 billion and it never turned a profit!


3. Large or Extraordinary Debt When firm’s take on high levels of debt to acquire a firm

Increases the likelihood of bankruptcy Leads to a downgrade in the firm’s credit rating Precludes investments that may contribute to long-term success

4. Inability to Achieve Synergy Synergy exists when assets are worth more when used

together versus when used separately Firms also incur “transaction costs” to create synergy that

when estimated inaccurately can lead to problems If unable to achieve expected synergy, acquisitions can fail

Example: PepsiCo, Inc.


5. Too much Diversification Managers absorptive capacities can lessen their abilities

manage highly diversified firms Diversification is often substituted for innovation

6. Managers Overly Focused on Acquisitions Focusing too much on acquisitions at the expense of

managing the firm’s day-to-day activities

7. Too Large Large companies require more standardized management

Bureaucratic controls This can lessen innovative capacities and reduce firm performance


How Can Firms Increase Likelihood of Success?

7 considerations to increase M&A success1. Complementary assets or resources

2. Friendly acquisitions facilitate integration of firms

3. Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.)

4. Financial slack

5. Low debt position

6. Innovation

7. Flexibility and adaptability

1. Complementary Assets or Resources Buying firms with assets that meet current needs to build

competitiveness

2. Friendly Acquisitions Facilitate Integration of Firms Friendly deals make integration go more smoothly

3. Effective Due-diligence Process Deliberate evaluation and negotiations are more likely to

lead to easy integration and building synergies

4. Financial Slack Provide enough additional financial resources so that

profitable projects would not be foregone

7 Considerations to Increase M&A Success

5. Low Debt Position Acquiring firm maintains financial flexibility when

incurring lower debt in acquisition

6. Innovation Continue to invest in R&D as part of the firm’s overall

strategy

7. Flexibility and Adaptability Executives who have experience at managing change and

with acquisitions are more flexible and adaptable to acquisitions

7 Considerations to Increase M&A Success

What if an M&A Fails? Restructuring Strategies

Strategy where a firm changes its set of businesses or financial structure

3 main types

1. Downsizing An intentional reduction in the number of a firm’s employees and/or operating units

Frequently used when excessive premium paid for acquired firm

2. Downscoping The divestiture, spin-off, or other means of eliminating businesses unrelated to the

firm’s core business

Example: American Standard Companies

3. Leveraged Buyouts Restructuring strategy where a party buys all of a firm’s assets in order to take the firm

private (private equity firms)

Example: Gibson Greeting Cards—3rd largest greeting card manufacturer in US—was part of RCA; 1982 RCA sold to The Wesray Corporation (investment group)

Restructuring and Outcomes

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