Chapter 7
Acquisition and Restructuring Strategies
Diane M. Sullivan, Ph.D. 2013
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Sections modified from Gentner (2009)
The Strategic Management Process



Firms determine the
mechanism(s) for
implementing corporatelevel strategies
3 possible mechanisms:
1)
Mergers
2)
Acquisitions
3)
Restructuring
Goals:
1)
Diversifying
2)
Achieving growth
3)
Meeting competitive
challenges
Insert figure 1.1 graphic
Mergers & Acquisitions: Key Definitions



Merger

Strategy where firms integrate their operations on a coequal basis

Example : 1997 Guinness merged with Grand Metropolitan, to form
Diageo, plc, the world’s largest spirits company
Takeover

A special type of acquisition strategy where the acquired firm does not
solicit the acquiring firm’s bid

Example: Guinness took over Arthur Bell to pursue Spirits
Acquisition (our main focus today)

Strategy where one firm buys a controlling (or 100%) interest in another
firm and makes the acquired firm a subsidiary

Acquisitions are more common than mergers or takeovers
Acquisition: Examples

Example Horizontal Acquisition

2004: Oracle acquired PeopleSoft to facilitate growth by acquiring a
rival; gained access to customers, sales force, and software applications

2012: Disney acquired LucasFilm to gain access to highly branded
entertainment
Competitors
Buyer
Target
Oracle
PeopleSoft
Target

Example Vertical Acquisition

2007: CVS Corp. acquired a PBM customer,
Caremark RX, Inc.
Caremark
Buyer
CVS
Vertical
Integration
(firm buys
customer or
supplier)
Disney’s Acquisition of LucasFilm
The Triple Sevens of Acquisitions
7 reasons firms pursue acquisitions
 7 problems with acquisitions
 7 ways to increase likelihood of success

7 Reasons Firms Pursue Acquisition Strategies
1.
Increased Market Power
2.
Overcoming Entry Barriers
3.
Cost of new product development and increased speed to
market
4.
Lower risk compared to developing new products
5.
Increased diversification
6.
Reshaping firm’s competitive advantage
7.
Learning and developing new capabilities
7 Reasons Firms Pursue Acquisition Strategies
1. Increased Market Power (main reason)

Sources of market power include
Size of the firm, resources and capabilities to compete in the
market, share of the market
 These are achieved through:

1. Horizontal Acquisitions



Acquirer and acquired companies compete in the same industry
Example: McDonald’s acquisition of Boston Market in 2000
Example: Priceline’s purchase of Kayak in 2012
2. Vertical Acquisitions


Firm acquires a supplier or distributor of one or more of its goods or
services; leads to additional controls over parts of the value chain
Example: Google’s purchase of DoubleClick in 2007
3. Related Acquisitions


Firm acquires another company in a highly related industry
Example: Chapter 6 – P&G and Gillette
7 Reasons Firms Pursue Acquisition Strategies
2. Overcoming Barriers to Entry


Acquiring established firms may help overcome

Economies of scale enjoyed by competitors

Differentiated products by competitors

Competitors that enjoy customer loyalties
Acquisitions may be more effective than entering the
market as a new competitor with an unfamiliar good

Acquisitions can provide a new entrant with immediate market access
7 Reasons Firms Pursue Acquisition Strategies
3. Cost of New Product Development & Increased
Speed to Market



Significant investments are required to

Develop new products internally

Introduce new products into the marketplace
Acquisition of a competitor may result in

Lower costs relative to developing internally

Faster market entry

Rapid access to new capabilities
Often benefits firms in knowledge-intensive industries (e.g.,
pharmaceuticals)
7 Reasons Firms Pursue Acquisition Strategies
4. Lower Risk Compared to Developing New Products

Outcomes more easily and accurately estimated compared to
internal product development process

Therefore acquisitions viewed as lowering risk

More predictable returns and lower risk
5. Increased Diversification

If lack experience, acquisitions easiest way to gain expertise

Faster to diversify and change a firm’s portfolio

Example: Conglomerates (e.g., Jarden Corporation)
7 Reasons Firms Pursue Acquisition Strategies
6. Reshaping a Firm’s Competitive Scope

To lessen dependence on a particular market

Example 1: GE reducing dependence on electronics market by making
acquisitions in financial services

Example 2: Microsoft trying to reduce dependence on software, to enter
search engine and web content markets
7. Learning and Developing New Capabilities

Acquisitions help gain capabilities firm does not possess

Acquisitions may be used to

Acquire a special technological capability (e.g., IBM moving into software)

Broaden a firm’s knowledge base

Reduce inertia
Headline: March 25, 2013
Most M&As Fail to add value!
20% successful; 60% produce disappointing
results; 20% clear failures
7 Problems in Achieving Acquisition Success
1.
2.
3.
4.
5.
6.
7.
Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Too much diversification
Managers overly focused on acquisitions
Too large
7 Problems in Achieving Acquisition Success
1. Integration Difficulties


Melding two companies can be difficult

Corporate culture clashes

Different financial and control systems

Status of newly acquired executives
Example: UPS and Mailboxes, Inc.
2. Inadequate Evaluation of Target

A lack of due diligence may result in paying a premium

Especially problematic when firms are performing well

Investment banks can help in obtaining effective valuation


Must assess both business model and financial value
Enter the dot com boom!

Example: 1999 Yahoo! acquired Geocities.com for
$3.57 billion and it never turned a profit!
7 Problems in Achieving Acquisition Success
3. Large or Extraordinary Debt

When firm’s take on high levels of debt to acquire a firm

Increases the likelihood of bankruptcy

Leads to a downgrade in the firm’s credit rating

Precludes investments that may contribute to long-term success
4. Inability to Achieve Synergy

Synergy exists when assets are worth more when used
together versus when used separately

Firms also incur “transaction costs” to create synergy that
when estimated inaccurately can lead to problems

If unable to achieve expected synergy, acquisitions can fail

Example: PepsiCo, Inc.
7 Problems in Achieving Acquisition Success
5. Too much Diversification

Managers absorptive capacities can lessen their abilities
manage highly diversified firms

Diversification is often substituted for innovation
6. Managers Overly Focused on Acquisitions

Focusing too much on acquisitions at the expense of
managing the firm’s day-to-day activities
7. Too Large

Large companies require more standardized management

Bureaucratic controls

This can lessen innovative capacities and reduce firm performance
How Can Firms Increase Likelihood of Success?

7 considerations to increase M&A success
1.
2.
3.
4.
5.
6.
7.
Complementary assets or resources
Friendly acquisitions facilitate integration of firms
Effective due-diligence process (assessment of target firm
by acquirer, such as books, culture, etc.)
Financial slack
Low debt position
Innovation
Flexibility and adaptability
7 Considerations to Increase M&A Success
1. Complementary Assets or Resources

Buying firms with assets that meet current needs to build
competitiveness
2. Friendly Acquisitions Facilitate Integration of Firms

Friendly deals make integration go more smoothly
3. Effective Due-diligence Process

Deliberate evaluation and negotiations are more likely to
lead to easy integration and building synergies
4. Financial Slack

Provide enough additional financial resources so that
profitable projects would not be foregone
7 Considerations to Increase M&A Success
5. Low Debt Position

Acquiring firm maintains financial flexibility when
incurring lower debt in acquisition
6. Innovation

Continue to invest in R&D as part of the firm’s overall
strategy
7. Flexibility and Adaptability

Executives who have experience at managing change and
with acquisitions are more flexible and adaptable to
acquisitions
What if an M&A Fails?

Restructuring Strategies


Strategy where a firm changes its set of businesses or financial structure
3 main types
1.
2.
3.
Downsizing

An intentional reduction in the number of a firm’s employees and/or operating units

Frequently used when excessive premium paid for acquired firm
Downscoping

The divestiture, spin-off, or other means of eliminating businesses unrelated to the
firm’s core business

Example: American Standard Companies
Leveraged Buyouts

Restructuring strategy where a party buys all of a firm’s assets in order to take the firm
private (private equity firms)

Example: Gibson Greeting Cards—3rd largest greeting card manufacturer in US—was
part of RCA; 1982 RCA sold to The Wesray Corporation (investment group)
Restructuring and Outcomes