Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 9 – Acquisition and Restructuring Strategy
The Strategic Management Process
Insert Figure 1.6
Mergers, Acquisitions, and Takeovers:
What Are the Differences?
 Key Terms

Merger - strategy through which two
firms agree to integrate their operations
on a relatively co-equal basis.

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.
Mergers, Acquisitions, and Takeovers
What Are the Differences?
–
 Key Terms

Takeover – special type of acquisition
strategy wherein the target firm did not
solicit the acquiring firm's bid

Hostile Takeover – unfriendly takeover
strategy that is unexpected and
undesired by the target firm
Reasons for Acquisitions
Insert Figure 9.1
Sources of Market Power
 Size of the firm
 Resources and capabilities
to compete in the market
 Share of the market
Types of Acquisitions to
Increase Market Power
 Horizontal Acquisitions
 Vertical Acquisitions
 Related Acquisitions
Horizontal Acquisitions

Acquisition of a company competing in
the same industry

The increase of market power by
exploiting cost-based and revenuebased synergies

Character similarities between the firms
lead to smoother integration and higher
performance
Vertical Acquisitions
 Acquisition of a supplier or distributor of
one or more products
 Increase of market power by controlling
more of the value chain
Related Acquisitions
 Acquisition of a firm in a highly related
industry
 Increase of market power by leveraging
core competencies to gain a competitive
advantage
Entry Barriers that Acquisitions Overcome
 Economies of scale in established
competitors
 Differentiated products by competitors
 Enduring relationships with customers that
create product loyalties with competitors
Cross-Border Acquisitions
 Acquisitions made between
companies with headquarters in
different countries
New Product Development
 Significant investments of a firm’s
resources are required to:

Develop new products internally

Introduce new products into the
marketplace
Acquisition of a Competitor –
Outcomes
 Lower risk compared to developing new
products
 Increased diversification
 Reshaping the firm’s competitive scope
 Learning and developing new capabilities
 Faster market entry
 Rapid access to new capabilities
Increase Speed to Market
 Acquisitions are used for rapid
market entry critical to successful
competition in the highly uncertain
and complex global environment
faced by firms today
Reshaping the Firm’s Competitive Scope
 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
Reshaping the Firm’s Competitive Scope
 Acquisitions are often used:

In reaction to reduced profitability in a
competitive environment of intense
rivalry

To reduce overdependence on a single
product or market
Learn and Develop New Capabilities
 Acquisitions are used to:

Gain capabilities that the firm does
not possess

Broaden the firm’s knowledge base

Reduce inertia
Reasons for Acquisitions
Insert Figure 9.1
Integration Challenges
 Integration involves a large number of activities
 Two disparate corporate cultures must be melded
 Effective working relationships must be built
 Different financial and control systems must be linked
 The status of the acquired firms employees and
executives must be determined
 Turnover of key personnel must be minimized to retain
crucial knowledge
 Acquired capabilities must be merged into internal
processes and procedures
Private Synergy
 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 with any other company
 Is possible when the two firms' assets are
complimentary in unique ways
 Yields a competitive advantage that is difficult
to understand or imitate
Transaction Costs
 Transaction costs – direct and indirect
expenses incurred when firms use acquisition
strategies to create synergy
 These costs must be added to the purchase
price of an acquisition to adequately evaluate
its potential value
 Firms tend to underestimate these costs,
which negatively impacts anticipated revenue
projections and expected cost-based
synergies
Transaction Costs
 Direct costs include legal fees and charges
from investment bankers who complete due
diligence for the acquiring firm
 Indirect costs include managerial time to
evaluate target firms and complete
negotiations, as well as the loss of key
managers after an acquisition
 Additional costs include the actual time and
resources used for integration processes
Due Diligence
 Due diligence – process through which a
potential acquirer evaluates a target firm for
acquisition
 Failure to complete an effective due-diligence
process may easily result in the acquiring firm
paying an excessive premium for the target
company
Due Diligence
 Evaluation requires that hundreds of issues
be closely examined, including:

Financing for the intended transaction

Differences in cultures between the acquiring
firm and target firm

Tax consequences of the transaction

Actions that would be necessary to
successfully meld the two workforces
Large or Extraordinary Debt
 High debt can:

Increase the likelihood of bankruptcy

Lead to a downgrade in the firm’s credit
rating

Preclude needed investment in activities
that contribute to the firm’s long-term
success
Too Much Diversification
 Diversified firms must process more
information of greater diversity
 Scope created by diversification may
cause managers to rely too much on
financial rather than strategic controls to
evaluate performance of business units
 Acquisitions may become substitutes for
innovation
Managers Too Focused on Acquisitions
 Activities managers undertake when
executing an acquisition strategy:

Searching for viable acquisition
candidates

Completing effective due-diligence
processes

Preparing for negotiations

Managing the integration process after
the acquisition is completed
Managers Too Focused on Acquisitions
 Managerial attention can be diverted from
other matters necessary for long-term
competitive success (such as identifying
other activities, interacting with important
external stakeholders, or fixing
fundamental internal problems)
 A short-term perspective and greater risk
aversion can result for target firm's
managers
Firms Become Too Large
 Key Terms

Bureaucratic Controls – formalized
supervisory and behavioral rules and
policies designed to ensure that
decisions and actions across different
units of a firm are consistent
Firms Become Too Large
 Additional costs may exceed the benefits of
the economies of scale and additional market
power
 Larger size may lead to more bureaucratic
controls
 Formalized controls often lead to relatively
rigid and standardized managerial behavior
 Firm may produce less innovation
Effective Acquisitions
Insert Table 9.1
Restructuring
 Key Terms

Restructuring – strategy through
which a firm changes its set of
businesses or its financial structure
Restructuring – Three Strategies
 Downsizing
 Downscoping
 Leveraged Buyouts
Downsizing
 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
Downscoping
 Key Terms

Downscoping – strategy of
eliminating businesses that are
unrelated to a firm's core
businesses through divesture,
spin-off, or some other means
Leveraged Buyouts
 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)
Leveraged Buyouts
 Management buyouts
 Employee buyouts
 Whole-firm buyouts
Outcomes from Restructuring
Insert Figure 9.2
Ethical Questions
What are the ethical issues associated with
takeovers, if any? Are mergers more or less
ethical than takeovers? Why or why not?
Ethical Questions
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 differ based on 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?
Ethical Questions
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?
Ethical Questions
What ethical issues are involved with
conducting a robust due-diligence process?
Ethical Questions
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?