Chapter 8

Acquisition and Restructuring

Strategies

Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland

©2004 by South-Western/Thomson Learning 1

The Strategic Management Process
Chapter 1
Strategic Chapter 2
Introduction to
Thinking Strategic Leadership
Strategic Management

Chapter 3 Chapter 4
Strategic Strategic Intent
The External The Internal
Analysis Environment Organization
Strategic Mission

Chapter 5 Chapter 6
Chapter 7
Business-Level Competitive Rivalry and
Creating Strategy Competitive Dynamics
Corporate-Level Strategy
Competitive
Advantage Chapter 8
Chapter 9 Chapter 10
Acquisitions
Acquisition and
and
International Strategy Cooperative Strategy
Restructuring Strategies

Monitoring
And Creating Chapter 11 Chapter 12
Entrepreneurial Corporate Governance Strategic Entrepreneurship
2
Opportunities
Discussion Questions
Click
Here 1. What is the difference between a
merger and an acquisition? To what
does restructuring refer?
Why do firms pursue mergers and
Click
Here 2.
acquisitions?
Click
Here 3. What are the problems associated with
mergers and acquisitions?

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Here More discussion questions 3
Discussion Questions (cont.)
Click
Here
4. If mergers and acquisitions are normally a
break-even strategy for the acquiring firm,
why is there so much M&A activity? What
are the attributes of effective acquisitions?
5. What are the advantages and
Click disadvantages of downsizing? Why has
Here
downscoping often led to increases in
value?
6. When should a leveraged buyout be
Click
pursued?
Here

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Discussion Question 1

What is the difference between a

merger and an acquisition? To what
does restructuring refer?

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Mergers, Acquisitions and
Takeovers
 Merger: a strategy through which two firms
agree to integrate their operations on a
relatively co-equal basis
 Acquisition: a strategy through which one firm
buys a controlling interest in another firm with
the intent of making the acquired firm a
subsidiary business within its own portfolio
 Takeover: a special type of an acquisition
strategy wherein the target firm did not solicit the
acquiring firm’s bid
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Discussion Question 2

Why do firms pursue mergers and

acquisitions?

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Reasons for Making Acquisitions
Learn and develop
new capabilities
Increase Reshape firm’s
market power competitive scope

Overcome Acquisitions Increase

entry barriers diversification

Cost of new Lower risk compared

product development to developing new
Increase speed products
to market
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Reasons for Making Acquisitions:
Increased Market Power
 Factors increasing market power
– when a firm is able to sell its goods or services above
competitive levels or
– when the costs of its primary or support activities are
below those of its competitors
– usually is derived from the size of the firm and its
resources and capabilities to compete
 Market power is increased by
– horizontal acquisitions
– vertical acquisitions
– related acquisitions
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Reasons for Making Acquisitions:
Overcome Barriers to Entry
 Barriers to entry include
– economies of scale in established competitors
– differentiated products by competitors
– enduring relationships with customers that create
product loyalties with competitors
 acquisition of an established company
– may be more effective than entering the market as a
competitor offering an unfamiliar good or service
that is unfamiliar to current buyers
 Cross-border acquisition
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Reasons for Making Acquisitions:
Cost of New Product Development and
Increased Speed to Market
 Significant investments of a firm’s resources
are required to
– develop new products internally
– introduce new products into the marketplace
 Acquisition of a competitor may result in
– lower risk compared to developing new products
– increased diversification
– reshaping the firm’s competitive scope
– learning and developing new capabilities
– faster market entry
– rapid access to new capabilities
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Reasons for Making Acquisitions:
Lower Risk Compared to Developing
New Products
 An acquisition’s outcomes can be
estimated more easily and accurately
compared to the outcomes of an internal
product development process
 Therefore managers may view acquisitions
as lowering risk

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Reasons for Making Acquisitions:
Increased Diversification
 It may be easier to develop and introduce
new products in markets currently served
by the firm
 It may be difficult to develop new products
for markets in which a firm lacks experience
– it is uncommon for a firm to develop new
products internally to diversify its product lines
– acquisitions are the quickest and easiest way to
diversify a firm and change its portfolio of
businesses
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Reasons for Making Acquisitions:
Reshaping the Firms’ Competitive Scope
 Firms may use acquisitions to reduce their
dependence on one or more products or
markets
 Reducing a company’s dependence on
specific markets alters the firm’s
competitive scope

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Reasons for Making Acquisitions:
Learning and Developing New Capabilities
 Acquisitions may gain capabilities that the
firm does not possess
 Acquisitions may be used to
– acquire a special technological capability
– broaden a firm’s knowledge base
– reduce inertia

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Discussion Question 3

What are the problems associated

with mergers and acquisitions?

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Problems With Acquisitions
Integration Resulting firm
difficulties is too large

Inadequate Acquisitions Managers overly

evaluation of target focused on acquisitions

Large or Too much

extraordinary debt diversification

Inability to
achieve synergy
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Problems With Acquisitions
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 weakens the acquired
firm’s capabilities and reduces its value

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Problems With Acquisitions
Inadequate Evaluation of Target
 Evaluation requires that hundreds of issues be
closely examined, including
– financing for the intended transaction
– differences in cultures between the acquiring and
target firm
– tax consequences of the transaction
– actions that would be necessary to successfully meld
the two workforces
 Ineffective due-diligence process may
– result in paying excessive premium for the target
company

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Problems With Acquisitions
Large or Extraordinary Debt
 Firm may take on significant debt to
acquire a company
 High debt can
– increase the likelihood of bankruptcy
– lead to a downgrade in the firm’s credit rating
– preclude needed investment in activities that
contribute to the firm’s long-term success

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Problems With Acquisitions
Inability to Achieve Synergy
 Synergy exists when assets are worth
more when used in conjunction with each
other than when they are used separately
 Firms experience transaction costs (e.g.,
legal fees) when they use acquisition
strategies to create synergy
 Firms tend to underestimate indirect costs
of integration when evaluating a potential
acquisition
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Problems With Acquisitions
Too Much Diversification
 Diversified firms must process more
information of greater diversity
 Scope created by diversification may
cause managers to rely too much on
financial rather than strategic controls to
evaluate business units’ performances
 Acquisitions may become substitutes for
innovation

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Problems With Acquisitions
Managers Overly Focused on Acquisitions
 Managers in target firms may operate in a
state of virtual suspended animation during
an acquisition
 Executives may become hesitant to make
decisions with long-term consequences
until negotiations have been completed
 Acquisition process can create a short-term
perspective and a greater aversion to risk
among top-level executives in a target firm

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Problems With Acquisitions
Too Large
 Additional costs may exceed the benefits
of the economies of scale and additional
market power
 Larger size may lead to more bureaucratic
controls
 Formalized controls often lead to relatively
rigid and standardized managerial
behavior
 Firm may produce less innovation
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Here Return to Discussion Questions 24
Discussion Question 4

If mergers and acquisitions are

normally a break-even strategy for
the acquiring firm, why is there so
much M&A activity? What are the
attributes of effective acquisitions?

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 Attributes of Effective
Acquisitions
Attributes Results
Complementary Buying firms with assets that meet current
Assets or Resources needs to build competitiveness
Friendly Friendly deals make integration go more
Acquisitions smoothly
Careful Selection Deliberate evaluation and negotiations are
Process more likely to lead to easy integration and
building synergies
Maintain Financial Provide enough additional financial
Slack resources so that profitable projects would
not be foregone 26
 Attributes of Effective
Acquisitions
Attributes Results
Low-to-Moderate Merged firm maintains financial flexibility
Debt

Sustain Emphasis Continue to invest in R&D as part of the

on Innovation firm’s overall strategy

Flexibility Has experience at managing change and is

flexible and adaptable

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Discussion Question 5

What are the advantages and

disadvantages of downsizing? Why
has downscoping often led to
increases in value?

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Restructuring Activities
 Downsizing
– Wholesale reduction of employees
 Downscoping
– Selectively divesting or closing non-core
businesses
– Reducing scope of operations
– Leads to greater focus
 Leveraged Buyout (LBO)
– A party buys a firm’s entire assets in order to
take the firm private.
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 Click
Here Return to Discussion Questions

Restructuring and Outcomes

Alternatives Short-Term Outcomes Long-Term Outcomes

Reduced labor Loss of

costs human capital
Downsizing

Reduced debt Lower

costs performance
Downscoping

Emphasis on Higher
Leveraged strategic controls performance
buyout
High debt costs Higher risk
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Discussion Question 6

When should a leveraged buyout

be pursued?

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