Chapter 7 Acquisition and Restructuring Strategies

Chapter 7Acquisition and Restructuring StrategiesMichael A. HittR. Duane IrelandRobert E. Hoskisson©2000 South-Western College PublishingChapter 3InternalEnvironmentChapter 2ExternalEnvironmentThe StrategicManagementProcessStrategic IntentStrategic MissionStrategicCompetitivenessAbove AverageReturnsFeedbackStrategy FormulationChapter 4Business-LevelStrategyChapter 5CompetitiveDynamicsChapter 6Corporate-LevelStrategyChapter 8InternationalStrategyChapter 9CooperativeStrategiesChapter 7Acquisitions &RestructuringStrategy ImplementationChapter 10CorporateGovernanceChapter 11Structure& ControlChapter 12StrategicLeadershipChapter 13Entrepreneurship & InnovationStrategicInputsStrategicActionsStrategic OutcomesMergers and AcquisitionsMergerA transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantageAcquisitionA transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businessesTakeoverAn acquisition where the target firm did not solicit the bid of the acquiring firmProblems inAchieving SuccessIntegrationdifficultiesInadequate evaluation of targetToo muchdiversificationLarge orextraordinary debtInability toachieve synergyManagers overlyfocused on acquisitionsToo largeIncreasedmarket powerOvercomeentry barriersLower riskcompared to developing new productsCost of newproduct developmentIncreased speedto marketIncreaseddiversificationAvoid excessivecompetitionAcquisitionsReasons forAcquisitions Reasons for AcquisitionsExample: Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance GroupExample: Watson Pharmaceuticals’ acquisition of TheraTechExample: British Petroleum’s acquisition of U.S. AmocoIncreased Market PowerAcquisition intended to reduce the competitive balance of the industryOvercome Barriers to EntryAcquisitions overcome costly barriers to entry which may make “start-ups” economically unattractiveBuying established businesses reduces risk of start-up venturesLower Cost and Risk of New Product DevelopmentExample: General Electric’s acquisition of NBCExample: Kraft Food’s acquisition of Boca BurgerExample: CNET’s acquisition of mySimonReasons for AcquisitionsIncreased Speed to MarketClosely related to Barriers to Entry, allows market entry in a more timely fashionDiversificationQuick way to move into businesses when firm currently lacks experience and depth in industryReshaping Competitive ScopeFirms may use acquisitions to restrict its dependence on a single or a few products or marketsProblems with AcquisitionsExample: Marks and Spencer’s acquisition of Brooks BrothersExample: Intel’s acquisition of DEC’s semiconductor divisionExample: AgriBioTech’s acquisition of dozens of small seed firmsIntegration DifficultiesDiffering financial and control systems can make integration of firms difficultInadequate Evaluation of Target“Winners Curse” bid causes acquirer to overpay for firmLarge or Extraordinary DebtCostly debt can create onerous burden on cash outflowsExample: Ford and JaguarExample: Quaker Oats and SnappleExample: GE--prior to selling businesses and refocusingInability to Achieve SynergyJustifying acquisitions can increase estimate of expected benefitsProblems with AcquisitionsOverly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businessesManagers Overly Focused on AcquisitionsManagers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategyToo LargeLarge bureaucracy reduces innovation and flexibilityAttributes of Effective AcquisitionsComplementary Assets or ResourcesBuying firms with assets that meet current needs to build competitiveness+Friendly AcquisitionsFriendly deals make integration go more smoothly+Careful Selection ProcessDeliberate evaluation and negotiations is more likely to lead to easy integration and building synergies+Maintain Financial SlackProvide enough additional financial resources so that profitable projects would not be foregone+Attributes of Effective AcquisitionsLow-to-Moderate DebtMerged firm maintains financial flexibility+FlexibilityHas experience at managing change and is flexible and adaptable+Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy+Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobsRestructuring ActivitiesExample: Disney’s selling of Fairchild PublicationsDownsizingWholesale reduction of employeesDownscopingReducing scope of operationsSelectively divesting or closing non-core businessesLeads to greater focusLeveraged Buyout (LBO)A party buys a firm’s entire assets in order to take the firm private. Example: Forsmann Little’s buyout of Dr. PepperRestructuring ActivitiesDownsizingDownscopingLeveragedBuyoutAlternativesShort-Term OutcomesLong-Term OutcomesRestructuring and OutcomesLoss of Human CapitalLower PerformanceDownsizingReduced Labor CostsAlternativesShort-Term OutcomesLong-Term OutcomesRestructuring and OutcomesHigher PerformanceReduced Debt CostsEmphasis on Strategic ControlsDownscopingDownsizingReduced Labor CostsLoss of Human CapitalLower PerformanceAlternativesShort-Term OutcomesLong-Term OutcomesRestructuring and OutcomesHigh Debt CostsEmphasis on Strategic ControlsDownscopingLeveragedBuyoutReduced Debt CostsHigher PerformanceHigher RiskDownsizingReduced Labor CostsLoss of Human CapitalLower PerformanceAlternativesShort-Term OutcomesLong-Term OutcomesRestructuring and Outcomes