PUJA

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KNOWLEDGE OBJECTIVES

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KNOWLEDGE OBJECTIVES

©2013 Cengage Learning.  All Rights Reserved.  May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE DIFFERENCES?

MERGER

Two firms agree to integrate their operations on a relatively co-equal basis

 There are few TRUE mergers because one firm usually dominates in terms of market share, size, or asset value

ACQUISITION

One firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

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MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE DIFFERENCES?

TAKEOVER

Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid

HOSTILE TAKEOVER

Unfriendly takeover that is undesired by the target firm

RATIONALE FOR STRATEGY

Pre-announcement returns of hostile takeovers are largely anticipated and associated with a significant increase in the bidder’s and target’s share price

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REASONS FOR ACQUISITIONS

Increased Market Power

Market Leadership results from Market Power

Factors increasing market power:

● The ability to sell goods or services above competitive levels

● Costs of primary or support activities are below those of competitors

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

● Purchase of a competitor, a supplier, a distributor, or a business in a highly related industry

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REASONS FOR ACQUISITIONS

Increased Market Power

Market power is increased by:

●Horizontal acquisitions: other firms in the same industry

McDonald’s acquisition of Boston Market (successful?)

●Vertical acquisitions: suppliers or distributors of the acquiring firm

Walt Disney Company’s acquisition of Fox Family Worldwide

●Related acquisitions: firms in related industries

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REASONS FOR ACQUISITIONS

Increased Market Power

Horizontal Acquisitions

Acquirer and acquired companies compete in the same industry

Firm’s market power is increased by exploiting:

Cost-based synergies

Revenue-based synergies

Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics

Similar characteristics:

Strategy

Managerial styles

Resource allocation patterns

Previous alliance management experience

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REASONS FOR ACQUISITIONS

Increased Market Power

Horizontal Acquisitions

Vertical Acquisitions

Acquisition of a supplier or distributor of one or more of the firm’s goods or services

Increases a firm’s market power by controlling additional parts of the value chain

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REASONS FOR ACQUISITIONS

Increased Market Power

Horizontal Acquisitions

Vertical Acquisitions

Related Acquisitions

Acquisition of a company in a highly related industry

Value creation takes place through the synergy that is generated by integrating resources and capabilities

Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement

©2013 Cengage Learning.  All Rights Reserved.  May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

REASONS FOR ACQUISITIONS

Overcoming Entry Barriers

Entry Barriers

Factors associated with the market or with the firms operating in it that increase the expense and difficulty faced by new ventures trying to enter that market

Economies of scale

Differentiated products

Cross-Border Acquisitions

Acquisitions made between companies with headquarters in different countries

Are often made to overcome entry barriers

Can be difficult to negotiate and operate because of the differences in foreign cultures

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REASONS FOR ACQUISITIONS

Cost of New Product Development and Increased Speed to Market

Internal development of new products is often perceived as high-risk activity.

Acquisitions allow a firm to gain access to new and current products that are new to the firm.

Compared with internal product development, acquisitions:

Are less costly

Have faster market penetration

Have more predictable returns due to the acquired firms’ experience with the products

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REASONS FOR ACQUISITIONS

Lower Risk Compared to Developing New Products

Outcomes for an acquisition can be more easily and accurately estimated than the outcomes of an internal product development process.

Acquisition strategies are a common means of avoiding risky internal ventures and risky R&D investments.

Acquisitions may become a substitute for innovation, and thus should always be strategic rather than defensive in nature.

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REASONS FOR ACQUISITIONS

Learning and Developing New Capabilities

An acquiring firm can gain capabilities that the firm does not currently possess:

Special technological capability

A broader knowledge base

Reduced inertia

Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base

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PROBLEMS WITH

ACQUISITIONS

Integration

Difficulties

Inadequate

Target Evaluation

Large or

Extraordinary Debt

Inability to

Achieve Synergy

Too Much

Diversification

Managers Overly Focused on

Acquisitions

Too Large

PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

● Acquisition strategies are not problem-free, even when pursued for value-creating reasons.

● Research suggests:

20% of all mergers and acquisitions are successful

60% produce disappointing results

20% are clear failures, with technology acquisitions reporting even higher failure rates

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

Greater acquisition success accrues to firms able to:

1. select the “right” target

2. avoid paying too high a premium (by doing appropriate due diligence)

3. integrate the operations of the acquiring and target firm effectively

4. retain the target firm’s human capital, as illustrated by Facebook’s approach described in the opening case

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

Integration Difficulties

Integration challenges include:

Melding two disparate corporate cultures

Linking different financial and control systems

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 weakening the acquired firm’s capabilities and reducing its value

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

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:

The financing of the intended transaction

The differences in culture between the firms

The tax consequences of the transaction

Actions necessary to meld the two workforces

BOTH the accuracy of the financial position and accounting standards used AND the quality of the strategic fit and the ability of the acquiring firm to effectively integrate the target

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

Large or Extraordinary Debt

Junk bonds: Financing option whereby risky acquisitions are financed with money (debt) that provides a large potential return to lenders (bondholders)

High debt (e.g., junk bonds) 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

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

Inability to Achieve Synergy

Synergy: when assets are worth more when used in conjunction with each other than when they are used separately

Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources (e.g., human capital and knowledge) across the businesses in the merged firm.

Firms experience transaction costs when they use acquisition strategies to create synergy

Firms tend to underestimate indirect costs when evaluating a potential acquisition

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PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

Too Much Diversification

Diversified firms must process more information of greater diversity.

Increased operational scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances

Strategic focus shifts to short-term performance

Acquisitions may become substitutes for innovation

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EFFECTIVE ACQUISITION STRATEGIES

Complementary Assets/Resources

Buying firms with assets that meet current needs to build competitiveness

Friendly Acquisitions

Friendly deals make integration go more smoothly

Due Diligence/Careful Selection Process

Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies

Maintain Financial Slack

Provide enough additional financial resources so that profitable projects may be capitalized upon rather than forgone

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EFFECTIVE ACQUISITION STRATEGIES

Attributes

Results

Low-to-Moderate Debt

Merged firm maintains financial flexibility

Flexibility

Has experience at managing change and is flexible and adaptable

Sustained Emphasis on Innovation

Continue to invest in R&D as part of the firm’s overall strategy

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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

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RESTRUCTURING

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RESTRUCTURING

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RESTRUCTURING

FIGURE 7.2

Restructuring and Outcomes