Student Version

CHAPTER 7

STRATEGIC
ACTIONS:
STRATEGY
FORMULATION

PowerPoint Presentation by Charlie Cook

The University of West Alabama
2007 Thomson/South-Western.
All rights reserved.

Acquisition and
Restructuring
Strategies
Strategic
Management

Seventh edition

Competitiveness and Globalization:

Concepts
Cases
Michael A. Hitt and
R. Duane
Ireland Robert E. Hoskisson

Mergers, Acquisitions, and Takeovers:

What are the Differences?
Merger
Two firms agree to integrate their operations on a
relatively co-equal basis.

Acquisition
One 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
A special type of acquisition when the target firm did not
solicit the acquiring firms bid for outright ownership.
2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Increased Market Power

Factors increasing market power when:
There is the ability to sell goods or services above
competitive levels.
Costs of primary or support activities are below those
of competitors.
A firms size, resources and capabilities gives it a
superior ability to compete.

Acquisitions intended to increase market power

are subject to:
Regulatory review
Analysis by financial markets
2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Increased Market Power

(contd)
Market power is increased by:
Horizontal acquisitions: other firms in the same
industry
Vertical acquisitions: suppliers or distributors of the
acquiring firm
Related acquisitions: firms in related industries

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Acquisitions: Overcoming Entry Barriers

Entry Barriers
Factors associated with the market or with the firms
operating in it that increase the expense and difficulty
faced by new ventures trying to enter that market
Economies of scale
Differentiated products

Cross-Border Acquisitions
Acquisitions made between companies with
headquarters in different countries
Are often made to overcome entry barriers.
Can be difficult to negotiate and operate because of the
differences in foreign cultures.
2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Cost of New-Product

Development and Increased Speed to
Market
Internal development of new products is often
perceived as high-risk activity.
Acquisitions allow a firm to gain access to new and
current products that are new to the firm.
Returns are more predictable because of the acquired
firms experience with the products.

2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Lower Risk Compared to

Developing New Products
An acquisitions outcomes can be estimated
more easily and accurately than the outcomes of
an internal product development process.
Managers may view acquisitions as lowering risk
associated with internal ventures and R&D
investments.
Acquisitions may discourage or suppress innovation.

2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Increased Diversification

Using acquisitions to diversify a firm is the
quickest and easiest way to change its portfolio
of businesses.
Both related diversification and unrelated
diversification strategies can be implemented
through acquisitions.
The more related the acquired firm is to the
acquiring firm, the greater is the probability that
the acquisition will be successful.
2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Reshaping the Firms

Competitive Scope
An acquisition can:
Reduce the negative effect of an intense rivalry on a
firms financial performance.
Reduce a firms dependence on one or more products
or markets.

Reducing a companys dependence on specific

markets alters the firms competitive scope.

2007 Thomson/South-Western. All rights reserved.

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Acquisitions: Learning and Developing

New Capabilities
An acquiring firm can gain capabilities that the
firm does not currently possess:
Special technological capability
A broader knowledge base
Reduced inertia

Firms should acquire other firms with different

but related and complementary capabilities in
order to build their own knowledge base.
2007 Thomson/South-Western. All rights reserved.

710

Problems in Achieving Acquisition

Success: Integration Difficulties
Integration challenges include:
Melding two disparate corporate cultures
Linking different financial and control systems
Building effective working relationships (particularly
when management styles differ)
Resolving problems regarding the status of the newly
acquired firms executives
Loss of key personnel weakens the acquired firms
capabilities and reduces its value
2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Inadequate Evaluation of the
Target
Due Diligence
The process of evaluating a target firm for acquisition
Ineffective due diligence may result in paying an excessive
premium for the target company.

Evaluation requires examining:

Financing of the intended transaction
Differences in culture between the firms
Tax consequences of the transaction
Actions necessary to meld the two workforces
2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Large or Extraordinary Debt
High debt (e.g., junk bonds) can:
Increase the likelihood of bankruptcy
Lead to a downgrade of the firms credit rating
Preclude investment in activities that contribute to the
firms long-term success such as:
Research and development
Human resource training
Marketing

2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Inability to Achieve Synergy
Synergy
When assets are worth more when used in
conjunction with each other than when they are used
separately.
Firms experience transaction costs when they use
acquisition strategies to create synergy.
Firms tend to underestimate indirect costs when
evaluating a potential acquisition.

2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Inability to Achieve Synergy
(contd)
Private synergy
When the combination and integration of the acquiring
and acquired firms assets yields capabilities and core
competencies that could not be developed by
combining and integrating either firms assets with
another company.
Advantage: It is difficult for competitors to
understand and imitate.
Disadvantage: It is also difficult to create.

2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Too Much Diversification
Diversified firms must process more information
of greater diversity.
Increased operational scope created by diversification
may cause managers to rely too much on financial
rather than strategic controls to evaluate business
units performances.
Strategic focus shifts to short-term performance.
Acquisitions may become substitutes for innovation.

2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Managers Overly Focused on
Acquisitions
Managers invest substantial time and energy in
acquisition strategies in:
Searching for viable acquisition candidates.
Completing effective due-diligence processes.
Preparing for negotiations.
Managing the integration process after the acquisition
is completed.

2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Managers Overly Focused on
Acquisitions
Managers in target firms operate in a state of
virtual suspended animation during an
acquisition.
Executives may become hesitant to make decisions
with long-term consequences until negotiations have
been completed.
The acquisition process can create a short-term
perspective and a greater aversion to risk among
executives in the target firm.

2007 Thomson/South-Western. All rights reserved.

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Problems in Achieving Acquisition

Success: Too Large
Additional costs of controls may exceed the
benefits of the economies of scale and additional
market power.
Larger size may lead to more bureaucratic
controls.
Formalized controls often lead to relatively rigid
and standardized managerial behavior.
The firm may produce less innovation.

2007 Thomson/South-Western. All rights reserved.

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Restructuring
A strategy through which a firm changes its set
of businesses or financial structure.
Failure of an acquisition strategy often precedes a
restructuring strategy.
Restructuring may occur because of changes in the
external or internal environments.

Restructuring strategies:
Downsizing
Downscoping
Leveraged buyouts
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