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bus499_w6.pptBusiness Administration
BUS 499
Acquisition and Restructuring Strategies
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2009). BUS499: Strategic management: Competitiveness and globalization, concepts and cases: 2009 custom edition (8th ed.). Mason, OH: South-Western Cengage Learning.
Welcome to Senior Seminar in Business Administration.
In this lesson we will discuss Acquisition and Restructuring Strategies.
Please go to the next slide.
Objectives
- Upon completion of this lesson, you will be able to:
- Identify various levels and types of strategy in a firm
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
Please go to the next slide.
Supporting Topics
- The popularity of merger and acquisition strategies
- Reasons for acquisitions
- Problems in achieving acquisition success
- Effective acquisitions
- Restructuring
In order to achieve this objective, the following supporting topics will be covered:
The popularity of merger and acquisition strategies;
Reasons for acquisitions;
Problems in achieving acquisition success;
Effective acquisitions; and
Restructuring.
Please go to the next slide.
The Popularity of Merger and Acquisition Strategies
- Uncertainty in the competitive landscape
- Strategic management process
The acquisition strategy has been a popular strategy among U.S. firms for many years. Some believe that this strategy played a central role in an effective restructuring of U.S. business during the 1980s and 1990s and into the twenty-first century.
An acquisition strategy is sometimes used because of the uncertainty in the competitive landscape. A firm may make an acquisition to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment.
The strategic management process calls for an acquisition strategy to increase a firm’s strategic competitiveness as well as its returns to shareholders. Thus, an acquisition strategy should be used only when the acquiring firm will be able to increase its value through ownership of the acquired firm and the use of its assets.
Please go to the next slide.
Mergers, Acquisitions, and Takeovers
- Merger
- Acquisition
- Takeover
A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. Few true mergers actually occur, because one party is usually dominant in regard to market share or firm size.
An acquisition is a strategy through which one firm buys a controlling, or one hundred percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. In this case, the management of the acquired firm reports to the management of the acquiring firm. Although most mergers are friendly transactions, acquisitions can be friendly or unfriendly.
A takeover is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid. The number of unsolicited takeover bids increased in the economic downturn of 2001 to 2002, a common occurrence in economic recessions, because the poorly managed firms that are undervalued relative to their assets are more easily identified.
On a comparative basis, acquisitions are more common than mergers and takeovers.
Please go to the next slide.
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
- Reshaping the firm’s competitive scope
- Learning and developing new capabilities
*
Reasons for Acquisitions, continued
- Greater market power
- Horizontal acquisitions
- Vertical acquisitions
- Related acquisitions
- Overcoming entry barriers
- Cross-border acquisitions
A primary reason for acquisitions is to achieve greater market power. To increase their market power, firms often use horizontal, vertical, and related acquisitions.
The acquisition of a company competing in the same industry as the acquiring firm is referred to as a horizontal acquisition. Horizontal acquisitions increase a firm’s market power by exploiting cost-based and revenue-based synergies. Research suggests that horizontal acquisitions result in higher performance when the firms have similar characteristics.
A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services. A firm becomes vertically integrated through this type of acquisition in that it controls additional parts of the value chain.
The acquisition of a firm in a highly related industry is referred to as a related acquisition.
Acquisitions are a commonly used method to overcome barriers to enter international markets.
Acquisitions made between companies with headquarters in different countries are called cross-border acquisitions. These acquisitions are often made to overcome entry barriers.
Please go to the next slide.
Reasons for Acquisitions, continued
- Cost of new product development and increased speed to market
- Lower risk compared to developing new products
- Increased diversification
*
Reasons for Acquisitions, continued
- Reshaping the firm’s competitive scope
- Learning and developing new capabilities
*
Check Your Understanding
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Problems in Achieving Success
- Integration difficulties
- Inadequate evaluation to target
- Large or extraordinary debt
- Inability to achieve synergy
- Too much diversification
- Mangers overly focused on acquisitions
- Too large
*
Effective Acquisitions
| Attributes |
| Acquired firm has assets or resources |
| Acquisition is friendly |
| Acquiring firm conducts effective due diligence |
| Acquiring firm has financial slack. |
| Merged firm maintains low to moderate debt position |
| Acquiring firm has emphasis on R&D and innovation |
| Acquiring firm manages change well and is flexible and adaptable. |
The intensity of competitive rivalry is an industry characteristic that affects the firm’s profitability. To reduce the negative effect of an intense rivalry on their financial performance, firms may use acquisitions to lessen their dependence on one or more products or markets. Reducing a company’s dependence on specific markets alters the firm’s competitive scope.
Please go to the next slide.
Restructuring
- Downsizing
- Downscoping
- Leveraged buyouts
- Restructuring outcomes
Defined formally, restructuring is a strategy through which a firm changes its set of businesses or its financial structure. From the 1970s into the 2000s divesting businesses from company portfolios and downsizing accounted for a large percentage of firms’ restructuring strategies. Restructuring is a global phenomenon. Three restructuring strategies are used: downsizing, downscoping, and leveraged buyouts.
Once thought to be an indicator of organizational decline, downsizing is now recognized as a legitimate restructuring strategy. Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units, but it may or may not change the composition of businesses in the company’s portfolio.
Downscoping has a more positive effect on firm performance than downsizing does. Downscoping refers to divesture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses. Commonly, downscoping is described as a set of actions that causes a firm to strategically refocus on its core businesses.
Traditionally, 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. A leveraged buyout, or LBO, is a restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private.
Downsizing does not commonly lead to higher firm performance. Still, in free-market-based societies at large, downsizing has generated an incentive for individuals who have been laid off to start their own business. An unintentional outcome of downsizing is that laid-off employees often start new businesses in order to live through the disruption of their lives. Downsizing also tends to result in a loss of human capital in the long term.
Please go to the next slide.
Summary
- Mergers, acquisitions, and takeovers
- Reasons for acquisitions
- Problems in achieving acquisition success
- Effective acquisitions
- Restructuring
We have reached the end of this lesson. Let’s take a look at what we have covered.
First, we discussed 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 one hundred percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. In this case, the management of the acquired firm reports to the management of the acquiring firm. A takeover is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid.
Next, we went over types of acquisitions. These include horizontal, vertical, related, and cross-border acquisitions.
We then discussed competitive scope. To reduce the negative effect of an intense rivalry on their financial performance, firms may use acquisitions to lessen their dependence on one or more products or markets. Reducing a company’s dependence on specific markets alters the firm’s competitive scope.
Then, we went over capabilities. Some acquisitions are made to gain capabilities that the firm does not possess. For example, acquisitions may be used to acquire a special technological capability.
Next, we talked about downsizing. Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units, but it may or may not change the composition of businesses in the company’s portfolio.
Then, we discussed downscoping. Downscoping refers to divesture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses.
We concluded the lesson with a discussion on restructuring outcomes. Downsizing does not commonly lead to higher firm performance. Still, in free-market-based societies at large, downsizing has generated an incentive for individuals who have been laid off to start their own business.
This completes this lesson.
