1. Chapter 7 Acquisition and Restructuring Strategies
Diane M. Sullivan, Ph.D. 2015
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Sections modified from Gentner (2009)

2. The Strategic Management Process
Firms determine the mechanism(s) for implementing corporate-level strategies
3 possible mechanisms:
Mergers
Acquisitions
Restructuring
Goals:
Diversifying
Achieving growth
Meeting competitive challenges
Insert figure 1.1 graphic

3. Mergers & Acquisitions: Key Definitions
Strategy where firms integrate their operations on a coequal basis
Example : Guinness merged with Grand Metropolitan, to form Diageo, plc, the world’s largest spirits company
Takeover
A special type of acquisition strategy where the acquired firm does not solicit the acquiring firm’s bid
Example: Guinness took over Arthur Bell to pursue Spirits
Acquisition (our main focus today)
Strategy where one firm buys a controlling (or 100%) interest in another firm and makes the acquired firm a subsidiary
Acquisitions are more common than mergers or takeovers

4. Acquisition: Examples
Example Horizontal Acquisition
2004: Oracle acquired PeopleSoft to facilitate growth by acquiring a rival; gained access to customers, sales force, and software applications
2012: Disney acquired LucasFilm to gain access to highly branded entertainment
Example Vertical Acquisition
2007: CVS Corp. acquired a PBM customer, Caremark RX, Inc.
Buyer
Target
Competitors
Oracle
People-Soft
Vertical Integration (firm buys customer or supplier)
Buyer
CVS
Target
Care-mark 4

5. Disney’s Acquisition of LucasFilm

6. The Triple Sevens of Acquisitions
7 reasons firms pursue acquisitions
7 problems with acquisitions
7 ways to increase likelihood of success

7. 7 Reasons Firms Pursue Acquisition Strategies
Increased Market Power
Overcoming Entry Barriers
Cost of new product development and increased speed to market
Lower risk compared to developing new products
Increased diversification
Reshaping firm’s competitive advantage
Learning and developing new capabilities

8. 7 Reasons Firms Pursue Acquisition Strategies
1. Increased Market Power (main reason)
Sources of market power include
Size of the firm, resources and capabilities to compete in the market, share of the market
These factors are achieved through:
Horizontal Acquisitions
Acquirer and acquired companies compete in the same industry
Example: McDonald’s acquisition of Boston Market in 2000
Example: Priceline’s purchase of Kayak in 2012
Vertical Acquisitions
Firm acquires a supplier or distributor of one or more of its goods or services; leads to additional controls over parts of the value chain
Example: Google’s purchase of DoubleClick in 2007
Related Acquisitions
Firm acquires another company in a highly related industry
Example: Chapter 6 – P&G and Gillette

9. 7 Reasons Firms Pursue Acquisition Strategies
2. Overcoming Barriers to Entry
Acquiring established firms may help overcome
Economies of scale enjoyed by competitors
Differentiated products by competitors
Competitors that enjoy customer loyalties
Acquisitions may be more effective than entering the market as a new competitor with an unfamiliar good
Acquisitions can provide a new entrant with immediate market access

10. 7 Reasons Firms Pursue Acquisition Strategies
3. Cost of New Product Development & Increased Speed to Market
Significant investments are required to
Develop new products internally
Introduce new products into the marketplace
Acquisition of a competitor may result in
Lower costs relative to developing internally
Faster market entry
Rapid access to new capabilities
Often benefits firms in knowledge-intensive industries (e.g., pharmaceuticals)

11. 7 Reasons Firms Pursue Acquisition Strategies
4. Lower Risk Compared to Developing New Products
Outcomes more easily and accurately estimated compared to internal product development process
Therefore acquisitions viewed as lowering risk
More predictable returns and lower risk
5. Increased Diversification
If lack experience, acquisitions easiest way to gain expertise
Faster to diversify and change a firm’s portfolio
Example: Conglomerates (e.g., Jarden Corporation)

12. 7 Reasons Firms Pursue Acquisition Strategies
6. Reshaping a Firm’s Competitive Scope
To lessen dependence on a particular market
Example 1: GE reducing dependence on electronics market by making acquisitions in financial services
Example 2: Microsoft trying to reduce dependence on software, to enter search engine and web content markets
7. Learning and Developing New Capabilities
Acquisitions help gain capabilities firm does not possess
Acquisitions may be used to
Acquire a special technological capability (e.g., IBM moving into software)
Broaden a firm’s knowledge base
Reduce inertia

13. Most M&As Fail to add value!
Headline: March 23, 2015
Most M&As Fail to add value!
20% successful; 60% produce disappointing results; 20% clear failures

14. 7 Problems in Achieving Acquisition Success
Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Too much diversification
Managers overly focused on acquisitions
Too large

15. 7 Problems in Achieving Acquisition Success
1. Integration Difficulties
Melding two companies can be difficult
Corporate culture clashes
Different financial and control systems
Status of newly acquired executives
Example: UPS and Mailboxes, Inc.
2. Inadequate Evaluation of Target
A lack of due diligence may result in paying a premium
Especially problematic when firms are performing well
Investment banks can help in obtaining effective valuation
Must assess both business model and financial value
Enter the dot com boom!
Example: Yahoo! acquired Geocities.com for $3.57 billion and it never turned a profit!

16. 7 Problems in Achieving Acquisition Success
3. Large or Extraordinary Debt
When firm’s take on high levels of debt to acquire a firm
Increases the likelihood of bankruptcy
Leads to a downgrade in the firm’s credit rating
Precludes investments that may contribute to long-term success
4. Inability to Achieve Synergy
Synergy exists when assets are worth more when used together versus when used separately
Firms also incur “transaction costs” to create synergy that when estimated inaccurately can lead to problems
If unable to achieve expected synergy, acquisitions can fail
Example: PepsiCo, Inc.

17. 7 Problems in Achieving Acquisition Success
5. Too much Diversification
Managers absorptive capacities can lessen their abilities manage highly diversified firms
Diversification is often substituted for innovation
6. Managers Overly Focused on Acquisitions
Focusing too much on acquisitions at the expense of managing the firm’s day-to-day activities
7. Too Large
Large companies require more standardized management
Bureaucratic controls
This can lessen innovative capacities and reduce firm performance

18. How Can Firms Increase Likelihood of Success?
7 considerations to increase M&A success
Complementary assets or resources
Friendly acquisitions facilitate integration of firms
Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.)
Financial slack
Low debt position
Innovation
Flexibility and adaptability

19. 7 Considerations to Increase M&A Success
1. Complementary Assets or Resources
Buying firms with assets that meet current needs to build competitiveness
2. Friendly Acquisitions Facilitate Integration of Firms
Friendly deals make integration go more smoothly
3. Effective Due-diligence Process
Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies
4. Financial Slack
Provide enough additional financial resources so that profitable projects would not be foregone

20. 7 Considerations to Increase M&A Success
5. Low Debt Position
Acquiring firm maintains financial flexibility when incurring lower debt in acquisition
6. Innovation
Continue to invest in R&D as part of the firm’s overall strategy
7. Flexibility and Adaptability
Executives who have experience at managing change and with acquisitions are more flexible and adaptable to acquisitions

21. What if an M&A Fails? Restructuring Strategies
Strategy where a firm changes its set of businesses or financial structure
3 main types
Downsizing
An intentional reduction in the number of a firm’s employees and/or operating units
Frequently used when excessive premium paid for acquired firm
Downscoping
The divestiture, spin-off, or other means of eliminating businesses unrelated to the firm’s core business
Example: American Standard Companies
Leveraged Buyouts
Restructuring strategy where a party buys all of a firm’s assets in order to take the firm private (private equity firms)
Example: Gibson Greeting Cards—3rd largest greeting card manufacturer in US—was part of RCA; 1982 RCA sold to The Wesray Corporation (investment group)

22. Restructuring and Outcomes