1. Acquisition and Restructuring Strategies
Chapter 7

2. Merger, Acquisition and Take over
Merger – It’s a strategy through which two firms agree to integrate their operations on a relatively coequal basis
Acquisition – It’s a strategy through which on firm buys a controlling or 100% , interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio
Takeover – It is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid

3. Reasons of Acquisition
Increased market power – when firm is able to sell its products above competitive levels or when the costs of its primary or support activities are lower than those of its competitors
To increase market power, firms often use horizontal, vertical and related acquisitions

4. Horizontal Acquisition
The acquisition of a company competing in the same industry as the acquiring firm is referred to as a horizontal acquisition
Horizontal acquisition increase a firm’s market power by exploiting cost based and revenue based synergies
Horizontal acquisition results in higher performance when the firms have similar characteristics

5. Vertical acquisition
A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services

6. Related Acquisition
The acquisition of a firm in a highly related industry is referred as related acquisition

7. Overcoming entry barriers
Barriers to entry are factors associated with the market or with the firms currently operating in it which increase the expense and difficulty faced by new ventures trying to enter that particular market
Facing entry barriers created by economies of scale and differentiated products, a new entrant may find acquiring an established company to be more effective than entering the market as a competitor offering good s or services that is unfamiliar to the current market

8. Cross border acquisitions to reduce entry barrier problem
Acquisition made between companies with headquarters in different countries are called cross border acquisitions
These acquisitions are often used to overcome entry barriers

9. Cost of new product development and increased speed to the market
Developing new products internally and successfully introducing them into the market place often requires significant investment and carries a lot of risk also
Acquisition are another means a firm can use to gain access to new products and to current products that are new to the firm

10. Lower risk compared to developing new products
Because the outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process, managers may view acquisition as lowering risk

11. Increased diversification
Firms may use acquisition for diversification
Firms might find it difficult to develop a new product for a new market and in a case of unrelated diversification the firm would go for acquisition

12. Reshaping the competitive scope
Intense rivalry and competition can affect a firm’s profitability and so to reduce the negative affect of rivalry on profitability a firm may go for acquisition to lessen its dependence on one or more products or markets
Reducing a firm’s dependence on a specific market alters the firm’s competitive scope

13. Learning and Developing new capabilities
Some acquisitions are done in order to gain capabilities a firm does not possess
Acquisition may be used to acquire a special technological capability

14. Problems in achieving acquisition success
Integration problems – arises due to different corporate culture, linking financial and control system, building effective working relationships, resolving problems regarding status of the newly acquired firm’s executive
Inadequate evaluation of target – The potential acquirer evaluates the target firm through a process called Due diligence in which hundreds of items are examined like financing for internal transaction, differences in culture, tax consequences of the transaction, actions needed to meld the two workforces
Due diligence is performed by investment bankers/accountants/management consultants etc at times this can be done by an internal team
If the due diligence is not done properly it may result in acquiring firm paying an excessive premium for the target company
Research shows that in times of high stock prices due diligence is relaxed and so the purchase price is driven by other factors rather than rigorous assessment of where, when and how management can drive real performance gains

15. Problems in achieving acquisition success
Large or extraordinary debt – debt was supposed to discipline managers but has negative consequences like likelihood of bankrupcy, downgrading by rating agencies, elimination/postponement of investments and R&D
Inability to generate synergy – it is achieved by efficiencies derived from economies of scale and economies of scope and by sharing resources
Private synergy is created when the combination and integration of the acquiring and acquired firms assets yield capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company and this can happen if the firms’ assets are complementary in unique ways

16. Problems in achieving acquisition success
Too much diversification
Managers overly focused on acquisition
Too large size of the firm post acquisition

17. Effective acquisition
It happens when
The resources of target firm are complementary to acquired firm’s assets giving rise to unique capabilities and core competencies
Friendly acquisition work better than hostile acquisition
Proper due diligence processes like deliberate and caref8ul selection of target firms and an evaluation of the relative health of those firms (financial health, cultural fit and value of human resources
Keeping low or medium size of debt
An emphasis of innovation
Having flexibility and adaptability