Acquisition

1
Chapter 7

• Acquisition
• and
• restructuring
• strategies

2
Mode of entry means by which firms enter new
lines of business

• 3 primary modes of entry -
• 1.
• 2.
• 3.

3
Start-up as a mode of entry -

• Typically the least common method - WHY?
• Disadvantages of this mode of entry?
• Any advantages of this mode of entry?

4
Joint venture/strategic alliance as modes of
entry -

• Increasingly common as a mode of entry
• Advantages
• Disadvantages

5
Acquisition as a mode of entry -

• The most common entry method,
• with numerous major varieties
• horizontal acquisition
• vertical acquisition
• related acquisition
• unrelated acquisition
• acquisition vs. merger vs. takeover

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Acquisitions as a mode of entry

• Main advantages
• Main disadvantages

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Reasons for acquisition
Adapted from Figure 7.1
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Acquisitions Overcoming entry barriers

• ENTRY BARRIERS increase the expense and
  difficulty faced by new ventures trying to enter
  that market, such as
• . . .
• . . .
• . . .
• Examples ?
• Cross-Border Acquisitions -

9
Acquisitions New product and/or new capability
development - lower cost, lower risk, faster

• Internal development of new products and/or
  skills is costly and time-consuming
• Trial and error method is problematic
• The resulting new products may flop!
• Acquisitions enable access to new products,
  processes, technologies, key people/ideas . .
• Outcomes are more predictable because of the
  acquired firms experience

10
Danger in new product development via
acquisition?

• Suggestions for firms using acquisition for new
  product development?

11
Acquisitions Increased market power

• Efforts to reduce/minimize/eliminate competition
• Use of horizontal, vertical, or related
  acquisitions
• Often related to firm size
• Can firm price above competitive levels? Or are
  costs below industry averages?
• Acquisitions intended to increase market power
  are subject to regulatory scrutiny as well as
  evaluation by financial markets

12
Acquisitions Increased diversification

• A relatively quick way to change a firms
  portfolio of businesses
• Both related diversification and unrelated
  diversification strategies can be implemented
  through acquisitions
• Higher probability of success occur with
  __________________ acquisitions

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Strategic dilemma Can/should an organization
re-invent itself through acquisition?

• Examples ?
• Likely outcomes ?
• Key underlying issue ?

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Acquisition track record -who benefits most?
Stockholders of the acquiring
firm?Stockholders of the acquired firm?Others?

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Miscellaneous recent research findings . . .

• Non-acquirers are more likely to outperform the
  market than active acquirers
• Some large proficient acquirers do many
  successful deals more typically, companies do
  few but very unsuccessful deals
• Best success potential is with small- or
  mid-sized deals that fill gaps in related product
  lines or aid in globalization

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Miscellaneous recent research findings . . .

• Business redefinition via acquisition or merger
  is generally unsuccessful
• Larger CEO egos are associated with larger
  acquisition premiums!
• In general, firms are getting better at
  acquisitions, but most still destroy shareholder
  wealth

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Problems in achieving success
Adapted from Figure 7.1
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Problems in achieving acquisition success
integration difficulties

• Integration challenges include
• . . .
• . . .
• . . .
• . . .

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Problems in achieving acquisition success
inadequate evaluation

• What information should you evaluate about the
  firm targeted for acquisition?
• ?
• ?
• ?
• ?
• Inadequate due diligence may result in paying
  too much or buying a junker

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Problems in achieving acquisition success large
debt

• Problematic effects of high debt
• ?
• ?
• ?
• ?

21
Problems in achieving acquisition success
elusive synergy

• Synergy exists when assets are worth more when
  used together than when they are used separately
• Easier to contemplate than to capture!

22
Problems in achieving acquisition success too
much diversification

• Firms move beyond their competencies
• Are acquisitions a crutch for poor performance
  or lack of innovation?
• Diversified firms must process more information
  of greater diversity - how much can HQ execs
  comprehend/understand?
• Diversification may cause managers to rely too
  much on financial rather than strategic controls
  to evaluate division performance

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Two basic types of organizational controls

• Financial Controls

• Strategic Controls

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Problems in achieving acquisition success too
large

• Additional costs of controls and coordination may
  exceed benefits of scale economies and
  additional market power
• Frequent organizational culture impacts of large
  diverse organizations ?

25
Problems in achieving acquisition success
acquisition fixation

• Managers in target firms suspend initiatives
• Managers in acquirers invest substantial time and
  energy in acquisition strategies
• Searching for/courting acquisition candidates
• Conducting due-diligence processes
• Managing post-acquisition integration process
• The urge to merge addiction fun . . .
• excitement, power, prestige, intrigue . . .

26
Northwestern Corporation

• Core business utilities (70 years in SD) -
• electric and natural gas
• Mid-1990s, stock price 30-40/share
• Then high flying diversification strategy
• Entertainment, propane, telecommunications, data
  services, heating, plumbing, A/C, . . .
• 2002-2003
• Internal consolidation, dividend suspension,
  divestitures, deferred interest and tax payments,
  2.2 billion in debt, stock price .82/share,
  bankruptcy filing with 9418 creditors!

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Attributes of successful acquisitions

• Complementary assets relatedness in
  strategically important ways
• Use of pre-selection criteria
• Friendly acquisition
• Careful negotiation
• Financial slack moderate debt
• Continuing innovation in acquiring firm
• Firms are adaptable to change
• Conscientious people management

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3 Tests for successful diversification,suggeste
d by Michael Porter

• 1. The Attractiveness Test -
• 2. The Cost-of-Entry Test -
• 3. The Better-Off Test -

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More corporate strategy advice from Michael
Porter . . .

• First, fully develop the core business
• Then, use the 3 tests to move beyond core
  business, with careful negotiation
• Avoid unrelated businesses - COMPETENCE IS
  NECESSARY!
• Seek realistic sources of synergy that impact
  competitive advantage
• Practice timely outplacement of divisions
• Pay shareholder dividends!

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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
• 3 main restructuring approaches
• 1.
• 2.
• 3.

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Restructuring

• Downsizing
• searching the value chain for efficiencies
• reducing the workforce
• outcomes are often disappointing - WHY?

• Downscoping
• eliminating an entire business unit, or
  divestiture
• can sell off, spin off, or liquidate
• facilitate refocusing on core competencies
• helps reduce debt
• generally produces better results than downsizing

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LBOs . . .

• the assets of the firm are puchased, largely
• financed by debt, and the firm is taken private
• Advantages? Disadvantages?

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Restructuring and outcomes
Adapted from Figure 7.2
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Current trends in corporate-level strategy

• _________ diversification more downscoping
• Increased reliance on core competencies
• - more single/dominant businesses
• - more related diversifiers, working with
• activity sharing and skill transfer
• Strategic alliance is often used instead of
  vertical integration
• Internationalization reduces the need for broad
  diversification