Topic Analysis Due Tonight Central times / One page

Chapter Review

Summary

· Mergers and acquisitions as a strategy are popular for companies based in countries throughout the world. Through this strategy, firms seek to create value and outperform rivals. Globalization and deregulation of multiple industries in many of the world’s economies are two of the reasons for this popularity among both large and small firms.

· Firms use acquisition strategies to

· increase market power

· overcome entry barriers to new markets or regions

· avoid the costs of developing new products and increase the speed of new market entries

· reduce the risk of entering a new business

· become more diversified

· reshape their competitive scope by developing a different portfolio of businesses

· enhance their learning as the foundation for developing new capabilities

· Among the problems associated with using an acquisition strategy are

· the difficulty of effectively integrating the firms involved

· incorrectly evaluating the target firm’s value

· creating debt loads that preclude adequate long-term investments (e.g., R&D)

· overestimating the potential for synergy

· creating a firm that is too diversified

· creating an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing the acquisition

· developing a combined firm that is too large, necessitating extensive use of bureaucratic, rather than strategic, controls

· Effective acquisitions have the following characteristics:

· the acquiring and target firms have complementary resources that are the foundation for developing new capabilities

· the acquisition is friendly, thereby facilitating integration of the firm’s resources

· the target firm is selected and purchased on the basis of completing a thorough due-diligence process

· the acquiring and target firms have considerable slack in the form of cash or debt capacity

· the newly formed firm maintains a low or moderate level of debt by selling off portions of the acquired firm or some of the acquiring firm’s poorly performing units

· the acquiring and acquired firms have experience in terms of adapting to change

· R&D and innovation are emphasized in the new firm

· Restructuring is used to improve a firm’s performance by correcting for problems created by ineffective management. Restructuring by downsizing involves reducing the number of employees and hierarchical levels in the firm. Although it can lead to short-term cost reductions, the reductions may be realized at the expense of long-term success because of the loss of valuable human resources (and knowledge) and overall corporate reputation.

· The goal of restructuring through downscoping is to reduce the firm’s level of diversification. Often, the firm divests unrelated businesses to achieve this goal. Eliminating unrelated businesses makes it easier for the firm and its top-level managers to refocus on the core businesses.

· Through a leveraged buyout (an LBO), a firm is purchased so that it can become a private entity. LBOs usually are financed largely through debt, although limited partners (institutional investors) are becoming more prominent. General partners have a variety of strategies, and some emphasize equity versus debt when minority partners have a longer time horizon. Management buyouts (MBOs), employee buyouts (EBOs), and whole-firm LBOs are the three types of LBOs. Because they provide clear managerial incentives, MBOs have been the most successful of the three. Often, the intent of a buyout is to improve efficiency and performance to the point where the firm can be sold successfully within five to eight years.

· Commonly, restructuring’s primary goal is gaining or reestablishing effective strategic control of the firm. Of the three restructuring strategies, downscoping is aligned most closely with establishing and using strategic controls and usually improves performance more on a comparative basis.