Acquisition and Restructuring
Strategies
Chapter Eight
Chapter 8
© 2006 by Nelson, a division of Thomson Canada Limited.
8-1
Mergers and Acquisitions
Merger:
A transaction where two firms agree to
integrate their operations on a relatively coequal basis.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Mergers and Acquisitions
Acquisition:
A strategy where one firm buys a controlling
or 100% interest in another firm with the intent
of making the acquired firm a subsidiary
within its portfolio.
Takeover:
An acquisition where the target firm did not
solicit the bid of the acquiring firm.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Horizontal Acquisition
The acquisition of a company competing in the
same industry in which the acquiring firm
competes.
Vertical Acquisition
A firm acquiring a supplier of distributor of one
or more of it’s goods or services.
Related Acquisition
The acquisition of a firm in a highly related
industry.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Reasons for Acquisitions
Increased Market Power
Acquisition intended to reduce the competitive balance
of the industry
Overcome Barriers to Entry
Acquisitions overcome costly barriers to entry which may
make “start-ups” economically unattractive
Lower Cost & Risk of New Product Development
Buying established businesses reduces risk of startup ventures
© 2006 by Nelson, a division of Thomson Canada Limited.
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Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market
entry in a more timely fashion
Increasing Diversification and Competitive Scope
Firms may use acquisitions to restrict dependence on a
single or a few products or markets
Avoiding Excessive Competition
Firms may acquire businesses in which competitive
pressures are less intense than in their core business
© 2006 by Nelson, a division of Thomson Canada Limited.
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Reasons for Acquisitions
Learn & Develop New Capabilities
Acquiring firms with new capabilities helps the
acquiring firm to learn new knowledge and remain
agile.
Reshape the firm’s competitive scope
Reducing a firm’s dependence on specific markets alters
the firm’s competitive scope.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Problems with Acquisitions
Integration Difficulties
Differing cultures may make integration of firms
difficult.
Inadequate Evaluation of Target
‘Winners Curse’ causes acquirer to overpay for firm.
Large or Extraordinary Debt
Costly debt can create onerous burden on cash outflows.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Problems with Acquisitions
Inability to Achieve Synergy
Justifying acquisitions can increase estimate
of expected benefits.
Overly Diversified
Acquirer doesn’t have expertise required to manage
unrelated businesses.
Managers Overly Focused on Acquisitions
Managers lose track of core business by spending so
much effort on acquisitions.
Too Large
Large bureaucracy reduced innovation & flexibility.
© 2006 by Nelson, a division of Thomson Canada Limited.
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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.
© 2006 by Nelson, a division of Thomson Canada Limited.
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