8-1© 2006 by Nelson, a division of Thomson Canada Limited. Chapter 8 Acquisition and Restructuring Strategies Chapter Eight

8-2© 2006 by Nelson, a division of Thomson Canada Limited. Merger: A transaction where two firms agree to integrate their operations on a relatively co- equal basis. Mergers and Acquisitions *

8-3© 2006 by Nelson, a division of Thomson Canada Limited. Acquisition: A strategy where one firm buys a controlling or 100% interest in another firm with the intent of making the acquired firm a subsidiary within its portfolio. Takeover: An acquisition where the target firm did not solicit the bid of the acquiring firm. Mergers and Acquisitions

8-4© 2006 by Nelson, a division of Thomson Canada Limited. Horizontal Acquisition The acquisition of a company competing in the same industry in which the acquiring firm competes. Vertical Acquisition A firm acquiring a supplier of distributor of one or more of it’s goods or services. Related Acquisition The acquisition of a firm in a highly related industry.

8-5© 2006 by Nelson, a division of Thomson Canada Limited. Reasons for Acquisitions Increased Market Power Acquisition intended to reduce the competitive balance of the industry Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive Buying established businesses reduces risk of start- up ventures Lower Cost & Risk of New Product Development

8-6© 2006 by Nelson, a division of Thomson Canada Limited. Reasons for Acquisitions Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Increasing Diversification and Competitive Scope Firms may use acquisitions to restrict dependence on a single or a few products or markets Avoiding Excessive Competition Firms may acquire businesses in which competitive pressures are less intense than in their core business

8-7© 2006 by Nelson, a division of Thomson Canada Limited. Reasons for Acquisitions Learn & Develop New Capabilities Acquiring firms with new capabilities helps the acquiring firm to learn new knowledge and remain agile. Reshape the firm’s competitive scope Reducing a firm’s dependence on specific markets alters the firm’s competitive scope.

8-8© 2006 by Nelson, a division of Thomson Canada Limited. Problems with Acquisitions Integration Difficulties Differing cultures may make integration of firms difficult. Inadequate Evaluation of Target ‘Winners Curse’ causes acquirer to overpay for firm. Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows.

8-9© 2006 by Nelson, a division of Thomson Canada Limited. Problems with Acquisitions Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits. Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses. Managers Overly Focused on Acquisitions Managers lose track of core business by spending so much effort on acquisitions. Too Large Large bureaucracy reduced innovation & flexibility.

8-10© 2006 by Nelson, a division of Thomson Canada Limited. Reducing scope of operations. Selectively divesting or closing non-core businesses. Leads to greater focus. Restructuring Activities Downscoping Downsizing Wholesale reduction of employees. Leveraged Buyout (LBO) A party buys a firm’s entire assets in order to take the firm private.