logging in or signing up Acquisition and Restructuring Strategies 391989 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 1275 Category: Education License: All Rights Reserved Like it (1) Dislike it (0) Added: September 09, 2010 This Presentation is Public Favorites: 2 Presentation Description No description available. Comments Posting comment... By: ggeita (20 month(s) ago) Nice Presentation! Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Chapter 7 : Copyright © 2004 South-WesternAll rights reserved. Chapter 7 Acquisitions and Restructuring Strategies Knowledge Objectives : Copyright © 2004 South-Western. All rights reserved. 7–2 Knowledge Objectives Studying this chapter should provide you with the strategic management knowledge needed to: Explain the popularity of acquisition strategies in firms competing in the global economy. Discuss reasons firms use an acquisition strategy to achieve strategic competitiveness. Describe seven problems that work against developing a competitive advantage using an acquisition strategy. Name and describe attributes of effective acquisitions. Define the restructuring strategy and distinguish among its common forms. Knowledge Objectives (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–3 Knowledge Objectives (cont’d) Studying this chapter should provide you with the strategic management knowledge needed to: Explain the short- and long-term outcomes of the different types of restructuring strategies. The Strategic Management Process : Copyright © 2004 South-Western. All rights reserved. 7–4 Figure 1.1 Copyright © 2004 South-Western. All rights reserved. The Strategic Management Process Mergers, Acquisitions, and Takeovers: What are the Differences? : Copyright © 2004 South-Western. All rights reserved. 7–5 Mergers, Acquisitions, and Takeovers: What are the Differences? 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, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio Takeover A special type of acquisition when the target firm did not solicit the acquiring firm’s bid for outright ownership Reasons for Acquisitions and Problems in Achieving Success : Copyright © 2004 South-Western. All rights reserved. 7–6 Reasons for Acquisitions and Problems in Achieving Success Adapted from Figure 7.1 Acquisitions: Increased Market Power : Copyright © 2004 South-Western. All rights reserved. 7–7 Acquisitions: Increased Market Power Factors increasing market power When there is the ability to sell goods or services above competitive levels When costs of primary or support activities are below those of competitors When a firm’s size, resources and capabilities gives it a superior ability to compete Acquisitions intended to increase market power are subject to: Regulatory review Analysis by financial markets Acquisitions: Increased Market Power (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–8 Acquisitions: Increased Market Power (cont’d) Market power is increased by: Horizontal acquisitions Vertical acquisitions Related acquisitions Market Power Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–9 Market Power Acquisitions Acquisition of a company in the same industry in which the acquiring firm competes increases a firm’s market power by exploiting: Cost-based synergies Revenue-based synergies Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics Market Power Acquisitions (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–10 Market Power Acquisitions (cont’d) 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 Market Power Acquisitions (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–11 Market Power Acquisitions (cont’d) Acquisition of a company in a highly related industry Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement Acquisitions: Overcoming Entry Barriers : Copyright © 2004 South-Western. All rights reserved. 7–12 Acquisitions: Overcoming Entry Barriers Factors associated with the market or with the firms currently 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: Cost of New-Product Development and Increased Speed to Market : Copyright © 2004 South-Western. All rights reserved. 7–13 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 Returns are more predictable because of the acquired firms’ experience with the products Acquisitions: Lower Risk Compared to Developing New Products : Copyright © 2004 South-Western. All rights reserved. 7–14 Acquisitions: Lower Risk Compared to Developing New Products An acquisition’s outcomes can be estimated more easily and accurately than the outcomes of an internal product development process Managers may view acquisitions as lowering risk Acquisitions: Increased Diversification : Copyright © 2004 South-Western. All rights reserved. 7–15 Acquisitions: Increased Diversification Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses Both related diversification and unrelated diversification strategies can be implemented through acquisitions The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful Acquisitions: Reshaping the Firm’s Competitive Scope : Copyright © 2004 South-Western. All rights reserved. 7–16 Acquisitions: Reshaping the Firm’s Competitive Scope An acquisition can: Reduce the negative effect of an intense rivalry on a firm’s financial performance Reduce a firm’s dependence on one or more products or markets Reducing a company’s dependence on specific markets alters the firm’s competitive scope Acquisitions: Learning and Developing New Capabilities : Copyright © 2004 South-Western. All rights reserved. 7–17 Acquisitions: Learning and Developing New Capabilities An acquiring firm can gain capabilities that the firm does not currently possess: Special technological capability Broaden a firm’s knowledge base Reduce inertia Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base Reasons for Acquisitions and Problems in Achieving Success : Copyright © 2004 South-Western. All rights reserved. 7–18 Reasons for Acquisitions and Problems in Achieving Success Adapted from Figure 7.1 Problems in Achieving Acquisition Success: Integration Difficulties : Copyright © 2004 South-Western. All rights reserved. 7–19 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 weakens the acquired firm’s capabilities and reduces its value Problems in Achieving Acquisition Success: Inadequate Evaluation of the Target : Copyright © 2004 South-Western. All rights reserved. 7–20 Problems in Achieving Acquisition Success: Inadequate Evaluation of the 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: Financing of the intended transaction Differences in culture between the firms Tax consequences of the transaction Actions necessary to meld the two workforces Problems in Achieving Acquisition Success: Large or Extraordinary Debt : Copyright © 2004 South-Western. All rights reserved. 7–21 Problems in Achieving Acquisition Success: Large or Extraordinary Debt High debt 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 Problems in Achieving Acquisition Success: Inability to Achieve Synergy : Copyright © 2004 South-Western. All rights reserved. 7–22 Problems in Achieving Acquisition Success: 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 when they use acquisition strategies to create synergy Firms tend to underestimate indirect costs when evaluating a potential acquisition Problems in Achieving Acquisition Success: Too Much Diversification : Copyright © 2004 South-Western. All rights reserved. 7–23 Problems in Achieving Acquisition Success: 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 Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–24 Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions Managers invest substantial time and energy in acquisition strategies in: Searching for viable acquisition candidates Completing effective due-diligence processes Preparing for negotiations Managing the integration process after the acquisition is completed Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–25 Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions Managers in target firms 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 The acquisition process can create a short-term perspective and a greater aversion to risk among executives in the target firm Problems in Achieving Acquisition Success: Too Large : Copyright © 2004 South-Western. All rights reserved. 7–26 Problems in Achieving Acquisition Success: Too Large Additional costs of controls 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 Attributes of Successful Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–27 Table 7.1 Attributes of Successful Acquisitions Restructuring : Copyright © 2004 South-Western. All rights reserved. 7–28 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 Types of Restructuring: Downsizing : Copyright © 2004 South-Western. All rights reserved. 7–29 Types of Restructuring: Downsizing A reduction in the number of a firm’s employees and sometimes in the number of its operating units May or may not change the composition of businesses in the company’s portfolio Typical reasons for downsizing: Expectation of improved profitability from cost reductions Desire or necessity for more efficient operations Types of Restructuring: Downscoping : Copyright © 2004 South-Western. All rights reserved. 7–30 Types of Restructuring: Downscoping A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses A set of actions that causes a firm to strategically refocus on its core businesses May be accompanied by downsizing, but not eliminating key employees from its primary businesses Firm can be more effectively managed by the top management team Restructuring: Leveraged Buyouts : Copyright © 2004 South-Western. All rights reserved. 7–31 Restructuring: Leveraged Buyouts A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private Significant amounts of debt are usually incurred to finance the buyout Can correct for managerial mistakes Managers making decisions that serve their own interests rather than those of shareholders Can facilitate entrepreneurial efforts and strategic growth Restructuring and Outcomes : Copyright © 2004 South-Western. All rights reserved. 7–32 Restructuring and Outcomes Adapted from Figure 7.2 You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
Acquisition and Restructuring Strategies 391989 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 1275 Category: Education License: All Rights Reserved Like it (1) Dislike it (0) Added: September 09, 2010 This Presentation is Public Favorites: 2 Presentation Description No description available. Comments Posting comment... By: ggeita (20 month(s) ago) Nice Presentation! Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Chapter 7 : Copyright © 2004 South-WesternAll rights reserved. Chapter 7 Acquisitions and Restructuring Strategies Knowledge Objectives : Copyright © 2004 South-Western. All rights reserved. 7–2 Knowledge Objectives Studying this chapter should provide you with the strategic management knowledge needed to: Explain the popularity of acquisition strategies in firms competing in the global economy. Discuss reasons firms use an acquisition strategy to achieve strategic competitiveness. Describe seven problems that work against developing a competitive advantage using an acquisition strategy. Name and describe attributes of effective acquisitions. Define the restructuring strategy and distinguish among its common forms. Knowledge Objectives (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–3 Knowledge Objectives (cont’d) Studying this chapter should provide you with the strategic management knowledge needed to: Explain the short- and long-term outcomes of the different types of restructuring strategies. The Strategic Management Process : Copyright © 2004 South-Western. All rights reserved. 7–4 Figure 1.1 Copyright © 2004 South-Western. All rights reserved. The Strategic Management Process Mergers, Acquisitions, and Takeovers: What are the Differences? : Copyright © 2004 South-Western. All rights reserved. 7–5 Mergers, Acquisitions, and Takeovers: What are the Differences? 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, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio Takeover A special type of acquisition when the target firm did not solicit the acquiring firm’s bid for outright ownership Reasons for Acquisitions and Problems in Achieving Success : Copyright © 2004 South-Western. All rights reserved. 7–6 Reasons for Acquisitions and Problems in Achieving Success Adapted from Figure 7.1 Acquisitions: Increased Market Power : Copyright © 2004 South-Western. All rights reserved. 7–7 Acquisitions: Increased Market Power Factors increasing market power When there is the ability to sell goods or services above competitive levels When costs of primary or support activities are below those of competitors When a firm’s size, resources and capabilities gives it a superior ability to compete Acquisitions intended to increase market power are subject to: Regulatory review Analysis by financial markets Acquisitions: Increased Market Power (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–8 Acquisitions: Increased Market Power (cont’d) Market power is increased by: Horizontal acquisitions Vertical acquisitions Related acquisitions Market Power Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–9 Market Power Acquisitions Acquisition of a company in the same industry in which the acquiring firm competes increases a firm’s market power by exploiting: Cost-based synergies Revenue-based synergies Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics Market Power Acquisitions (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–10 Market Power Acquisitions (cont’d) 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 Market Power Acquisitions (cont’d) : Copyright © 2004 South-Western. All rights reserved. 7–11 Market Power Acquisitions (cont’d) Acquisition of a company in a highly related industry Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement Acquisitions: Overcoming Entry Barriers : Copyright © 2004 South-Western. All rights reserved. 7–12 Acquisitions: Overcoming Entry Barriers Factors associated with the market or with the firms currently 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: Cost of New-Product Development and Increased Speed to Market : Copyright © 2004 South-Western. All rights reserved. 7–13 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 Returns are more predictable because of the acquired firms’ experience with the products Acquisitions: Lower Risk Compared to Developing New Products : Copyright © 2004 South-Western. All rights reserved. 7–14 Acquisitions: Lower Risk Compared to Developing New Products An acquisition’s outcomes can be estimated more easily and accurately than the outcomes of an internal product development process Managers may view acquisitions as lowering risk Acquisitions: Increased Diversification : Copyright © 2004 South-Western. All rights reserved. 7–15 Acquisitions: Increased Diversification Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses Both related diversification and unrelated diversification strategies can be implemented through acquisitions The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful Acquisitions: Reshaping the Firm’s Competitive Scope : Copyright © 2004 South-Western. All rights reserved. 7–16 Acquisitions: Reshaping the Firm’s Competitive Scope An acquisition can: Reduce the negative effect of an intense rivalry on a firm’s financial performance Reduce a firm’s dependence on one or more products or markets Reducing a company’s dependence on specific markets alters the firm’s competitive scope Acquisitions: Learning and Developing New Capabilities : Copyright © 2004 South-Western. All rights reserved. 7–17 Acquisitions: Learning and Developing New Capabilities An acquiring firm can gain capabilities that the firm does not currently possess: Special technological capability Broaden a firm’s knowledge base Reduce inertia Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base Reasons for Acquisitions and Problems in Achieving Success : Copyright © 2004 South-Western. All rights reserved. 7–18 Reasons for Acquisitions and Problems in Achieving Success Adapted from Figure 7.1 Problems in Achieving Acquisition Success: Integration Difficulties : Copyright © 2004 South-Western. All rights reserved. 7–19 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 weakens the acquired firm’s capabilities and reduces its value Problems in Achieving Acquisition Success: Inadequate Evaluation of the Target : Copyright © 2004 South-Western. All rights reserved. 7–20 Problems in Achieving Acquisition Success: Inadequate Evaluation of the 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: Financing of the intended transaction Differences in culture between the firms Tax consequences of the transaction Actions necessary to meld the two workforces Problems in Achieving Acquisition Success: Large or Extraordinary Debt : Copyright © 2004 South-Western. All rights reserved. 7–21 Problems in Achieving Acquisition Success: Large or Extraordinary Debt High debt 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 Problems in Achieving Acquisition Success: Inability to Achieve Synergy : Copyright © 2004 South-Western. All rights reserved. 7–22 Problems in Achieving Acquisition Success: 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 when they use acquisition strategies to create synergy Firms tend to underestimate indirect costs when evaluating a potential acquisition Problems in Achieving Acquisition Success: Too Much Diversification : Copyright © 2004 South-Western. All rights reserved. 7–23 Problems in Achieving Acquisition Success: 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 Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–24 Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions Managers invest substantial time and energy in acquisition strategies in: Searching for viable acquisition candidates Completing effective due-diligence processes Preparing for negotiations Managing the integration process after the acquisition is completed Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–25 Problems in Achieving Acquisition Success: Managers Overly Focused on Acquisitions Managers in target firms 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 The acquisition process can create a short-term perspective and a greater aversion to risk among executives in the target firm Problems in Achieving Acquisition Success: Too Large : Copyright © 2004 South-Western. All rights reserved. 7–26 Problems in Achieving Acquisition Success: Too Large Additional costs of controls 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 Attributes of Successful Acquisitions : Copyright © 2004 South-Western. All rights reserved. 7–27 Table 7.1 Attributes of Successful Acquisitions Restructuring : Copyright © 2004 South-Western. All rights reserved. 7–28 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 Types of Restructuring: Downsizing : Copyright © 2004 South-Western. All rights reserved. 7–29 Types of Restructuring: Downsizing A reduction in the number of a firm’s employees and sometimes in the number of its operating units May or may not change the composition of businesses in the company’s portfolio Typical reasons for downsizing: Expectation of improved profitability from cost reductions Desire or necessity for more efficient operations Types of Restructuring: Downscoping : Copyright © 2004 South-Western. All rights reserved. 7–30 Types of Restructuring: Downscoping A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses A set of actions that causes a firm to strategically refocus on its core businesses May be accompanied by downsizing, but not eliminating key employees from its primary businesses Firm can be more effectively managed by the top management team Restructuring: Leveraged Buyouts : Copyright © 2004 South-Western. All rights reserved. 7–31 Restructuring: Leveraged Buyouts A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private Significant amounts of debt are usually incurred to finance the buyout Can correct for managerial mistakes Managers making decisions that serve their own interests rather than those of shareholders Can facilitate entrepreneurial efforts and strategic growth Restructuring and Outcomes : Copyright © 2004 South-Western. All rights reserved. 7–32 Restructuring and Outcomes Adapted from Figure 7.2