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Competing for Advantage. Chapter 9 Acquisition and Restructuring Strategies. PART III CREATING COMPETITIVE ADVANTAGE. The Strategic Management Process. Merger and Acquisition Strategies. Very popular strategies Especially cross-border acquisitions Offensive and defensive motives
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Competing for Advantage Chapter 9 Acquisition and Restructuring Strategies PART III CREATING COMPETITIVE ADVANTAGE
Merger and Acquisition Strategies • Very popular strategies • Especially cross-border acquisitions • Offensive and defensive motives • Problematic • High failure rates • Complex strategic decisions • Impacted by economic volatility • Uncertain returns
Mergers, Acquisitions, and Takeovers – The Differences • Key Terms • Merger 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 division
Mergers, Acquisitions, and Takeovers – The Differences • Key Terms • Takeover Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid • Hostile takeover Unfriendly takeover strategy that is unexpected and undesired by the target firm
Sources of Market Power • Size of the firm • Resources and capabilities to compete in the market • Share of the market
Types of Acquisitions to Increase Market Power • Horizontal Acquisitions • Vertical Acquisitions • Related Acquisitions
Horizontal Acquisitions • Acquisition of a company competing in the same industry • Increase market power by exploiting cost-based and revenue-based synergies • Character similarities between the firms lead to smoother integration and higher performance
Vertical Acquisitions • Acquisition of a supplier or distributor of one or more products or services • Increase market power by controlling more of the value chain
Related Acquisitions • Acquisition of a firm in a highly related industry • Increase market power by leveraging core competencies to gain a competitive advantage
Entry Barriers that Acquisitions Overcome • Economies of scale in established competitors • Differentiated competitor products • Enduring relationships and product loyalties between customers and competitors
Cross-Border Acquisitions • Acquisitions made between companies with headquarters in different countries
New Product Development • Significant investments of a firm’s resources are required to: • develop new products internally • introduce new products into the marketplace • Profitability or adequate returns on investments are not certain
Increase Speed to Market Acquisitions are used for rapid market entry critical to successful competition in the highly uncertain and complex global environment faced by firms today.
Reshape the Firm’s Competitive Scope • Acquisitions quickly and easily: • Change a firm's portfolio of businesses • Establish new lines of products in markets where the firm lacks experience • Alter the scope of a firm’s activities • Create strategic flexibility
Learn and Develop New Capabilities • Acquisitions are used to: • Gain capabilities that the firm does not possess • Broaden the firm’s knowledge base • Reduce inertia
Integration Challenges • Melding two disparate corporate cultures • Working relationships • Financial and control systems • Uncertainty for acquired firm’s employees • Retaining crucial knowledge held by key personnel • Merging acquired capabilities into internal processes and procedures
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.
Transaction Costs • Direct expenses • Legal fees • Charges from investment bankers who complete due diligence • Indirect expenses • Managerial time to evaluate target firms and complete negotiations • Loss of key managers after an acquisition • Additional costs • Managerial time in meetings • Resources used to integrate processes
Due Diligence • Process through which a potential acquirer evaluates a target firm for acquisition • Associates the purchase price of an acquisition to an estimated, realistic achievable value
Large or Extraordinary Debt • Increases the likelihood of bankruptcy • Can lower the firm’s credit rating • Precludes needed investments in activities that contribute to long-term success (opportunity costs)
Too Much Diversification • Overwhelming information processing requirements • Overuse of financial controls to evaluate unit performance • Decline in internal innovation
Management Acquisition Activities • Searching for viable acquisition candidates • Completing effective due-diligence processes • Preparing and conducting negotiations • Managing integration processes after acquisition is completed
Firm Becomes Too Large • Key Terms • Bureaucratic controls Formalized supervisory and behavioral rules and policies designed to ensure decision and action consistency across different units of a firm
Restructuring • Key Terms • Restructuring Strategy through which a firm changes its set of businesses or financial structure
Restructuring –Three Strategies • Downsizing • Downscoping • Leveraged Buyouts
Downsizing • Key Terms • Downsizing 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 portfolio
Downscoping • Key Terms • Downscoping Strategy of eliminating businesses that are unrelated to a firm's core businesses through divesture, spin-off, or some other means
Leveraged Buyouts • Key Terms • Leveraged 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 private
Characteristics of Leveraged Buyouts • High debt • Significant risk • Related downscoping • Managerial incentives
Ethical Question What are the ethical issues associated with takeovers, if any? Are mergers more or less ethical than takeovers? Why or why not?
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?
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?
Ethical Question What ethical issues are involved with conducting a robust due-diligence process?
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?