Understanding Business Strategy Concepts & Cases Part 3: Strategy Chapter 7: Acquiring and Integrating Businesses

Chapter 7: Acquiring and Integrating Businesses An acquisition is a transaction in which a firm buys a controlling interest in another firm with the intention of either making it a subsidiary business or combining it with its current business or businesses A takeover is a specialized type of acquisition in which the target firm does not solicit the acquiring firm’s offer

Chapter 7: Acquiring and Integrating Businesses A merger is a transaction in which firms agree to combine their operations on a relatively equal basis

Reasons for Acquisitions Reduce Costs Gain Market Power Increase Growth Learn to Build Capabilities Manage Risk and Other Financial Objectives

Reduce Costs Using horizontal acquisitions to reduce costs Gain scale economies through horizontal acquisitions Increases in productivity Reduce the competition Using vertical acquisitions to increase scale and to gain market power

Gain Market Power Use horizontal and vertical acquisitions to gain market power Reduce overcapacity by eliminating duplicate operations Problems: firms can pay too much for an acquisition Making an acquisition pay off may result in more drastic action – selling off productive assets

Increase Growth If the acquiring firm is the first or one of the first to make such acquisitions in the industry - an advantage in market power and position Tata Motors is an example.

Learn to Build Capabilities Target companies often have unique employee skills, organizational technologies, or superior knowledge that are available to the acquiring firm only through acquisitions Pooling the companies’ combined resources and capabilities may enable development of new “centers of excellence” for specialized products in new markets

Manage Risk & Other Financial Objectives Some firms choose to use acquisitions to diversify their operations, thereby reducing their dependence on performance in an intensely competitive market At times, firms also make acquisitions to gain access to tax advantages or to reduce business or financial risk

Screening, Selecting & Negotiating Research suggests that financial acquirers (such as Kohlberg Kravis Roberts [KKR]) experience higher valuations in their acquisitions than do corporate acquisitions Public versus Private firms and adequate information Screening enables the acquiring party to identify the acquisition opportunities that exist while at the same time determining the appropriate price

Screening, Selecting & Negotiating Key issues requiring careful analysis should be identified early in the negotiating process Due Diligence Analyzing competitors Evaluating the target firm’s value Understanding the synergies that may be created between the target and acquiring firms Determining top price decisions and walk away terms

Integration Success More likely when an integration team, including employees from the acquiring firm and the acquired firm, is formed and charged with full responsibility to integrate the two companies to create value Opportunities for increased growth as learning occurs Leverage the capabilities of both firms to create value

Pitfalls and Prevention Because combined firms often lose target firm managers through turnover, it is important to retain key executives and other valuable human capital, especially if the acquiring firm wants to gain new skills from the acquired firm Anchoring and overconfidence Excessive debt Overdiversification Managers overly involved in the process

Acquisition Failure & Restructuring Sometimes acquisitions fail Divestiture 1981: Sears and Dean Witter Reynolds Leveraged Buyouts (LBOs) – merger repair