Acquisitions and

Restructuring
Strategies

PowerPoint slides by:

R. Dennis
Middlemist
Colorado State
University
Mergers, Acquisitions, and Takeovers:
What are the Differences?
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, 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

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Reasons Adapted from Figure 7.1
for Cost new product
development/increased
Acquisition speed to market
s and
Problems
in Increased
Achieving diversification
Acquisitions
Success

Increased Avoiding excessive

market power competition

Lower risk
compared to Learning and
Overcoming
developing new developing new
entry barriers
products capabilities

Copyright 2004 South-Western. All rights reserved. 73

Market Power Acquisitions
Horizontal
Acquisition Acquisition of a company in the
s same industry in which the
acquiring firm competes
increases a firms market power
by exploiting:
Cost-based synergies
Revenue-based synergies
Acquisitions with similar
characteristics result in higher
performance than those with
dissimilar characteristics

Copyright 2004 South-Western. All rights reserved. 74

Market Power Acquisitions (contd)
Horizontal
Acquisition Acquisition of a supplier or
s distributor of one or more of
Vertical the firms goods or services
Acquisition
s Increases a firms market
power by controlling
additional parts of the value
chain

Copyright 2004 South-Western. All rights reserved. 75

Market Power Acquisitions (contd)
Horizontal
Acquisition Acquisition of a company in a
s highly related industry
Vertical Because of the difficulty in
Acquisition
s implementing synergy,
Related related acquisitions are
Acquisition often difficult to implement
s

Copyright 2004 South-Western. All rights reserved. 76

 Reasons Adapted from Figure 7.1
for
Too large
Acquisition
s and
Problems
in Managers overly
Achieving focused on
Acquisitions acquisitions
Success

Integration Too much

difficulties diversification

Inadequate Large or Inability to

evaluation of target extraordinary debt achieve synergy

Copyright 2004 South-Western. All rights reserved. 77

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

Copyright 2004 South-Western. All rights reserved. 78

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

Copyright 2004 South-Western. All rights reserved. 79

Problems in Achieving Acquisition
Success: Large or Extraordinary Debt
High debt 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

Copyright 2004 South-Western. All rights reserved. 710

Problems in Achieving Acquisition
Success: Inability to Achieve Synergy
Synergy exists 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

Copyright 2004 South-Western. All rights reserved. 711

Problems in Achieving Acquisition
Success: Too Much Diversification
Diversified firms must process more
information of greater diversity
Scope created by diversification may cause
managers to rely too much on financial
rather than strategic controls to evaluate
business units performances
Acquisitions may become substitutes for
innovation

Copyright 2004 South-Western. All rights reserved. 712

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

Copyright 2004 South-Western. All rights reserved. 713

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

Copyright 2004 South-Western. All rights reserved. 714

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
Firm may produce less innovation
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 Attributes
of
Successful
Acquisition
s

Table 7.1
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Restructuring and Outcomes

Adapted from Figure 7.2

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