PART III
CREATING COMPETITIVE ADVANTAGE
Chapter 9
Acquisition and Restructuring Strategies
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Very popular strategies
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Especially cross-border acquisitions
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Offensive and defensive motives
Problematic

High failure rates
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Complex strategic decisions
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Impacted by economic volatility
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Uncertain returns
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Key Terms
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Merger
Strategy through which two firms agree to
integrate their operations on a relatively coequal basis
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Acquisition
Strategy through which one firm buys a
controlling, 100 percent interest in another
firm with the intent of making the acquired
firm a subsidiary business within its portfolio
or melding it with another division
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Key Terms

Takeover
Special type of acquisition strategy
wherein the target firm did not solicit
the acquiring firm's bid
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Hostile takeover
Unfriendly takeover strategy that is
unexpected and undesired by the
target firm
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Size of the firm
Resources and capabilities
to compete in the market
Share of the market
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Horizontal Acquisitions

Vertical Acquisitions
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Related Acquisitions

Acquisition of a company
competing in the same industry
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Increase market power by
exploiting cost-based and
revenue-based synergies
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Character similarities between the
firms lead to smoother integration
and higher performance
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Acquisition of a supplier or
distributor of one or more
products or services
Increase market power by
controlling more of the value
chain


Acquisition of a firm in a highly
related industry
Increase market power by
leveraging core competencies to
gain a competitive advantage
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Economies of scale in established
competitors
Differentiated competitor products
Enduring relationships and product
loyalties between customers and
competitors

Acquisitions made between
companies with headquarters in
different countries


Significant investments of a
firm’s resources are required to:

develop new products internally

introduce new products into the
marketplace
Profitability or adequate returns
on investments are not certain
Acquisitions are used for rapid
market entry critical to successful
competition in the highly uncertain
and complex global environment
faced by firms today.
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Acquisitions quickly and easily:

Change a firm's portfolio of businesses

Establish new lines of products in
markets where the firm lacks
experience

Alter the scope of a firm’s activities

Create strategic flexibility

Acquisitions are used to:

Gain capabilities that the firm does
not possess

Broaden the firm’s knowledge base

Reduce inertia
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Melding two disparate corporate cultures

Working relationships

Financial and control systems
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Uncertainty for acquired firm’s employees
Retaining crucial knowledge held by key
personnel
Merging acquired capabilities into internal
processes and procedures
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Occurs when the combination and integration
of acquiring and acquired firms' assets yields
capabilities and core competencies that could
not be developed by combining and
integrating the assets of any other companies.
Possible when the two firms' assets are
complimentary in unique ways.
Yields a competitive advantage that is difficult
to understand or imitate.
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Direct expenses
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Legal fees

Charges from investment bankers who
complete due diligence
Indirect expenses

Managerial time to evaluate target firms and
complete negotiations
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Loss of key managers after an acquisition
Additional costs

Managerial time in meetings
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Resources used to integrate processes
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Process through which a potential
acquirer evaluates a target firm for
acquisition
Associates the purchase price of an
acquisition to an estimated, realistic
achievable value
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Increases the likelihood of
bankruptcy
Can lower the firm’s credit rating
Precludes needed investments in
activities that contribute to longterm success (opportunity costs)
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Overwhelming information
processing requirements
Overuse of financial controls to
evaluate unit performance
Decline in internal innovation
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Searching for viable acquisition
candidates
Completing effective due-diligence
processes
Preparing and conducting negotiations
Managing integration processes after
acquisition is completed
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Key Terms

Bureaucratic controls
Formalized supervisory and behavioral
rules and policies designed to ensure
decision and action consistency across
different units of a firm
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Key Terms
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Restructuring
Strategy through which a firm
changes its set of businesses or
financial structure
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Downsizing
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Downscoping
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Leveraged Buyouts
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Key Terms

Downsizing
Strategy that involves a reduction in the
number of a firm's employees (and sometimes
in the number of operating units) that may or
may not change the composition of businesses
in the company's portfolio

Key Terms

Downscoping
Strategy of eliminating businesses
that are unrelated to a firm's core
businesses through divesture, spinoff, or some other means

Key Terms

Leveraged buyouts (LBOs)
Restructuring strategy whereby a party buys all
of a firm's assets in order to take the firm private
(or no longer trade the firm's shares publicly)

Private equity firms
Firms that facilitate or engage in taking public
firms or business units of public firms private
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High debt
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Significant risk
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Related downscoping
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Managerial incentives
What are the ethical issues associated
with takeovers, if any? Are mergers
more or less ethical than takeovers? Why
or why not?
One of the outcomes associated with market
power is that the firm is able to sell its good or
service above competitive levels. Is it ethical
for firms to pursue market power?
Does your answer to this question differ by
the industry in which the firm competes? For
example, are the ethics of pursuing market
power different for firms producing and
selling medical equipment compared with
those producing and selling sports clothing?
What ethical considerations are associated
with downsizing decisions? If you were
part of a corporate downsizing, would you
feel that your firm had acted unethically?
If you believe that downsizing has an
unethical component to it, what should
firms do to avoid using this technique?
What ethical issues are involved with
conducting a robust due-diligence
process?
Some evidence suggests that there is a
direct relationship between a firm’s size
and the level of compensation its top
executives receive. If this is so, what
inducement does this relationship provide
to top-level managers? What can be done
to influence this relationship so that it
serves shareholders’ best interests?