Mergers and Acquisitions
Merger
A 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 advantage
Acquisition
A 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 businesses
Takeover
An acquisition where the target firm did not solicit
the bid of the acquiring firm
Ch7-1
Problems in
Achieving Success
Reasons for
Acquisitions
Increased
market power
Integration
difficulties
Overcome
entry barriers
Inadequate
evaluation of target
Cost of new
product development
Large or
extraordinary debt
Increased speed
to market
Acquisitions
Inability to
achieve synergy
Lower risk
compared to developing
new products
Too much
diversification
Increased
diversification
Managers overly
focused on acquisitions
Avoid excessive
competition
Too large
Ch7-2
Reasons for Acquisitions
Increased Market Power
Acquisition intended to reduce the competitive balance of
the industry
Example: British Petroleum’s acquisition of U.S. Amoco
Overcome Barriers to Entry
Acquisitions overcome costly barriers to entry which may make
“start-ups” economically unattractive
Example: Belgian-Dutch Fortis’ acquisition of American
Banker’s Insurance Group
Lower Cost and Risk of New Product Development
Buying established businesses reduces risk of start-up
ventures
Example: Watson Pharmaceuticals’ acquisition of TheraTech
Ch7-3
Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market entry
in a more timely fashion
Example: Kraft Food’s acquisition of Boca Burger
Diversification
Quick way to move into businesses when firm currently lacks
experience and depth in industry
Example: CNET’s acquisition of mySimon
Reshaping Competitive Scope
Firms may use acquisitions to restrict its dependence on a
single or a few products or markets
Example: General Electric’s acquisition of NBC
Ch7-4
Problems with Acquisitions
Integration Difficulties
Differing financial and control systems can make integration
of firms difficult
Example: Intel’s acquisition of DEC’s semiconductor division
Inadequate Evaluation of Target
“Winners Curse” bid causes acquirer to overpay for firm
Example: Marks and Spencer’s acquisition of Brooks Brothers
Large or Extraordinary Debt
Costly debt can create onerous burden on cash outflows
Example: AgriBioTech’s acquisition of dozens of small seed
firms
Ch7-5
Problems with Acquisitions
Inability to Achieve Synergy
Justifying acquisitions can increase estimate of
expected benefits
Example: Quaker Oats and Snapple
Overly Diversified
Acquirer doesn’t have expertise required to manage
unrelated businesses
Example: GE--prior to selling businesses and refocusing
Managers Overly Focused on Acquisitions
Managers may fail to objectively assess the value of
outcomes achieved through the firm’s acquisition strategy
Example: Ford and Jaguar
Too Large
Large bureaucracy reduces innovation and flexibility
Ch7-6
Attributes of Effective Acquisitions
+ Complementary Assets or Resources
Buying firms with assets that meet current
needs to build competitiveness
+ Friendly Acquisitions
Friendly deals make integration go more smoothly
+ Careful Selection Process
Deliberate evaluation and negotiations is more likely
to lead to easy integration and building synergies
+ Maintain Financial Slack
Provide enough additional financial resources so
that profitable projects would not be foregone
Ch7-7
Attributes of Effective Acquisitions
+
Low-to-Moderate Debt
Merged firm maintains financial flexibility
+
Flexibility
Has 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
Ch7-8
Restructuring and Outcomes
Alternatives
Downsizing
Short-Term
Outcomes
Long-Term
Outcomes
Reduced
Labor Costs
Loss of
Human Capital
Reduced
Debt Costs
Lower
Performance
Emphasis on
Strategic Controls
Higher
Performance
High Debt
Costs
Higher Risk
Downscoping
Leveraged
Buyout