Competing for - PowerPoint Presentation

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Competing for Advantage

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Chapter 9Acquisition and Restructuring Strategies

PART III

CREATING COMPETITIVE ADVANTAGESlide2

The Strategic Management ProcessSlide3

Merger and Acquisition StrategiesVery popular strategiesEspecially cross-border acquisitionsOffensive and defensive motives ProblematicHigh failure rates

Complex strategic decisionsImpacted by economic volatility Uncertain returns Slide4

Mergers, Acquisitions, and Takeovers – The DifferencesKey TermsMerger Strategy through which two firms agree to integrate their operations on a relatively co-equal basis

Acquisition Strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its

portfolio or melding it with another divisionSlide5

Mergers, Acquisitions, and Takeovers – The DifferencesKey TermsTakeover Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bidHostile takeover

Unfriendly takeover strategy that is unexpected and undesired by the target firmSlide6
Reasons for Acquisitions Slide7

Sources of Market PowerSize of the firmResources and capabilities to compete in the marketShare of the marketSlide8

Types of Acquisitions to Increase Market PowerHorizontal Acquisitions Vertical AcquisitionsRelated AcquisitionsSlide9

Horizontal Acquisitions Acquisition of a company competing in the same industryIncrease market power by exploiting cost-based and revenue-based synergiesCharacter similarities between the firms lead to smoother integration and higher performanceSlide10

Vertical AcquisitionsAcquisition of a supplier or distributor of one or more products or servicesIncrease market power by controlling more of the value chainSlide11

Related AcquisitionsAcquisition of a firm in a highly related industryIncrease market power by leveraging core competencies to gain a competitive advantageSlide12

Entry Barriers that

Acquisitions Overcome

Economies of scale in established competitorsDifferentiated competitor products Enduring relationships and product loyalties between customers and competitorsSlide13

Cross-Border AcquisitionsAcquisitions made between companies with headquarters in different countriesSlide14

New Product DevelopmentSignificant investments of a firm’s resources are required to:develop new products internallyintroduce new products into the marketplaceProfitability or adequate returns on investments are not certainSlide15

Increase Speed to MarketAcquisitions are used for rapid market entry critical to successful competition in the highly uncertain and complex global environment faced by firms today. Slide16

Reshape the Firm’s Competitive ScopeAcquisitions quickly and easily:Change a firm's portfolio of businessesEstablish new lines of products in markets where the firm lacks experience

Alter the scope of a firm’s activitiesCreate strategic flexibilitySlide17

Learn and Develop New CapabilitiesAcquisitions are used to:Gain capabilities that the firm does not possessBroaden the firm’s knowledge base

Reduce inertiaSlide18

Problems in Achieving Acquisition SuccessSlide19
Integration Challenges

Melding two disparate corporate culturesWorking relationshipsFinancial and control systemsUncertainty for acquired firm’s employees Retaining crucial knowledge held by key personnel

Merging acquired capabilities into internal processes and proceduresSlide20
Private Synergy

Occurs when the combination and integration of acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating the assets of any other companies.Possible when the two firms' assets are complimentary in unique ways.Yields a competitive advantage that is difficult to understand or imitate.Slide21

Transaction CostsDirect expensesLegal fees Charges from investment bankers who complete due diligenceIndirect expenses

Managerial time to evaluate target firms and complete negotiations

Loss of key managers after an acquisitionAdditional costs Managerial time in meetingsResources used to integrate processesSlide22

Due DiligenceProcess through which a potential acquirer evaluates a target firm for acquisitionAssociates the purchase price of an acquisition to an estimated, realistic achievable valueSlide23
Large or Extraordinary Debt

Increases the likelihood of bankruptcyCan lower the firm’s credit ratingPrecludes needed investments

in activities that contribute to long-term success (opportunity costs)Slide24
Too Much Diversification

Overwhelming information processing requirementsOveruse of financial controls to evaluate unit performanceDecline in internal innovation Slide25

Management Acquisition ActivitiesSearching for viable acquisition candidatesCompleting effective due-diligence processes

Preparing and conducting negotiationsManaging integration processes

after acquisition is completedSlide26

Firm Becomes Too LargeKey TermsBureaucratic controls Formalized supervisory and behavioral rules and policies designed to ensure decision and action consistency across different units of a

firmSlide27

Attributes and Results of Successful Acquisitions Slide28

RestructuringKey TermsRestructuring Strategy through which a firm changes its set of businesses or financial structureSlide29

Restructuring –Three StrategiesDownsizingDownscopingLeveraged Buyouts Slide30

DownsizingKey TermsDownsizing Strategy that involves a reduction in the number of a firm's employees (and sometimes in the number of operating units) that may or may not change the composition of businesses in the company's portfolioSlide31

DownscopingKey TermsDownscoping Strategy of eliminating businesses that are unrelated to a firm's core businesses through divesture, spin-off, or some other meansSlide32

Leveraged BuyoutsKey TermsLeveraged buyouts (LBOs) Restructuring strategy whereby a party buys all of a firm's assets in order to take the firm private (or no

longer trade the firm's shares publicly)Private equity firms

Firms that facilitate or engage in taking public firms or business units of public firms privateSlide33

Characteristics of Leveraged BuyoutsHigh debtSignificant riskRelated downscopingManagerial incentivesSlide34

Restructuring and OutcomesSlide35

Ethical Question What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical than takeovers? Why or why not?Slide36

Ethical Question One of the outcomes associated with market power is that the firm is able to sell its good or service above competitive levels. Is it ethical for firms to pursue market power? Does your answer to this question differ by the industry in which the firm competes?

For example, are the ethics of pursuing market power different for firms producing and selling medical equipment compared with those producing and selling sports clothing?Slide37

Ethical Question What ethical considerations are associated with downsizing decisions? If you were part of a corporate downsizing, would you feel that your firm had acted unethically? If you believe that downsizing has an unethical component to it, what should firms do to avoid using this technique?Slide38

Ethical Question What ethical issues are involved with conducting a robust due-diligence process?Slide39

Ethical Question Some evidence suggests that there is a direct relationship between a firm’s size and the level of compensation its top executives receive. If this is so, what inducement does this relationship provide to top-level managers? What can be done to influence this relationship so that it serves shareholders’ best interests?