Mergers and Acquisitions Merger: a strategy through which two firms agree to integrate their operations on a relatively co-equal basis Acquisition: a strategy through which one firm buys a controlling interest in another firm with the intent of making the acquired firm a subsidiary business within its own portfolio Takeover: a special type of an acquisition strategy wherein the target firm did not solicit the acquiring firm’s bid

Reasons for Making Acquisitions Learn and develop new capabilities Increase market power Reshape firm’s competitive scope Acquisitions Overcome entry barriers Increase diversification Cost of new product development Lower risk compared to developing new products Increase speed to market

Problems With Acquisitions Integration difficulties Resulting firm is too large Acquisitions Inadequate evaluation of target Managers overly focused on acquisitions Large or extraordinary debt Too much diversification Inability to achieve synergy

Attributes of Effective Acquisitions Results 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 are 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

Attributes of Effective Acquisitions Results Low-to-Moderate Debt Merged firm maintains financial flexibility Sustain Emphasis on Innovation Continue to invest in R&D as part of the firm’s overall strategy Flexibility Has experience at managing change and is flexible and adaptable

Restructuring Activities Downsizing Wholesale reduction of employees Downscoping Selectively divesting or closing non-core businesses Reducing scope of operations Leads to greater focus Leveraged Buyout (LBO) A party buys a firm’s entire assets in order to take the firm private.