HI6006

Competitive Strategy

Lecture 7: Acquisitions and Structure

The Strategic Management Process
KNOWLEDGE OBJECTIVES

Discuss reasons why firms use an

acquisition strategy to achieve strategic
competitiveness.

Describe seven problems that work

against achieving success when using an
acquisition strategy.
KNOWLEDGE OBJECTIVES

Name and describe the attributes of

effective acquisitions.

Define the restructuring strategy and

distinguish among its common forms.

Explain the short- and long-term outcomes of

the different types of restructuring strategies.
 Merger and Acquisition Success Factors

M&A value creation is challenging.

 Shareholders of acquired firms often earn above-
average returns from acquisitions.
 However, shareholders of acquiring firms earn
returns that are close to zero.
– In two-thirds of all acquisitions, the acquiring
firm’s stock price fell immediately after the
intended transaction was announced.
– This negative response reflects investors’
skepticism about projected synergies being
captured.
 Merger vs Acquisition

• Merger: Two firms agree to integrate their

operations on a relatively co-equal basis.
– There are few true mergers because one
firm usually dominates in terms of market
share, size or asset value.

• Acquisition: One firm buys a controlling

interest in another firm with the intent of
making the acquired firm a subsidiary business
within its portfolio.
 Take-Over style Acquisition

• A takeover is a special type of acquisition

strategy wherein the target firm does not solicit
the acquiring firm’s bid.

• A hostile takeover is an unfriendly takeover

that is undesired by the target firm.
– Rationale for strategy: Pre-announcement
returns of hostile takeovers are largely
anticipated and associated with a significant
increase in the bidder’s and target’s share price.
Pro’s and Con’s of Acquisitions
 Acquisitions aimed at increasing market influence

• Factors that increase market influence include:

– Market share

– More efficient supply chain than competitors

– Increased size of the firm, strength of resources and

organizational capabilities allow the combined
company to compete more strongly in the market

– Usually entails the purchase of a competitor, or a

supplier, or a distributor, or a similar business in a
related industry.
RELATED, HORIZONTAL OR VERTICAL ACQUISITIONS

Market power is increased by:

• horizontal acquisitions – acquisitions of other
firms in the same industry
• vertical acquisitions – acquisitions of suppliers
or distributors of the acquiring firm
• related acquisitions – acquisitions of firms in
related industries

Activity: Consider examples of recent

acquisitions in each of the above categories
 Acquisitions for 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.
 Entering a new market by means of an Acquisition

• To Overcome Barriers to Entry, i.e. 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. Barriers include:
– Legal aspects
– An already well-established customer-base and strong
brand loyalty

Cross-border acquisitions
– made between companies with headquarters in different
countries
– made to overcome entry barriers
– can be difficult to negotiate and operate because of the
differences in foreign cultures.
 Using an Acquisition Strategy instead of Innovating from within

• an acquisition can be more effective (quicker and

already market-ready) than internal product
development processes

• Acquisition strategies are a common means of

negating internal (expensive) investments in R&D

• Acquisitions could become a substitute for

innovation but all firms should strive to foster an
innovation capability, not becoming totally reliant
on acquisitions and ignoring internal innovation.
ADOPTING NEW KNOWLEDGE AND TECHNOLOGY
THROUGH ACQUISITIONS

• An acquiring firm can gain organizational

capabilities that it does not currently possess,
such as:
• special technological capability
• a broader knowledge base.

• When looking to acquire another firm, look for

capabilities that can complement those we
already have
 Practical Issues in Acquisitions

Integration
difficulties
Inadequate
Too large
target evaluation

ISSUES WITH
Managers ACQUISITIONS
overly focused on Large or
acquisitions extraordinary debt

Too much Inability to

diversification achieve synergy
 :
INTEGRATION CHALLENGES

Integration challenges (as in the UPS case) 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 firm’s executives
• loss of key personnel weakening the acquired
firm’s capabilities and reducing its value.
 INADEQUATE EVALUATION OF TARGET

Due Diligence – Evaluating the target firm:

• Analyse the differences in culture between the firms
and consider actions that will be necessary to
combine the two workforces (including magement
integration)
• the accuracy of the financial position, accounting
practices used, and tax implications
• the quality of the strategic fit and the ability of the
acquiring firm to effectively integrate the target
• How will the intended investment be financed
 Achieving SYNERGY

• Financial Synergy occurs when assets are worth

more when used in conjunction with each other than
when they are used separately.

• Operational Synergy is created by the efficiencies

derived from economies of scale by combining
resources (e.g. human capital and knowledge) in the
merged firm.

• Market Synergies are created through economies of

scope

Activity: Consider the above three forms of Synergy

– think of current practical examples
 TOO MUCH DIVERSIFICATION

Over-diversification

• Diversification requires more information processing

• Over-diversification can leads to a decline in

performance, (then acquired business units will be divested)

• Management of diversified corporations is more complex

(and the complexity increases with the un-relatedness of
the entities)
 DANGER OF A CORPORATION BECOMING TOO LARGE

• Additional costs and complexity of management

may exceed the benefits of the economies of scale and
additional market power, creating diseconomies of scope.
• Large size may necessitate bureaucratic control
systems.
– Formal rules and policies will need to be introduced to
ensure consistency of decisions and actions.
– Formalised controls often lead to relatively rigid
compliance and reward standardised managerial
behaviour.
– Firms may become less innovative.
Successful Acquisitions
 RESTRUCTURING
• Restructuring is an attempt to streamline the
organization’s communication and reporting
relationships between people
– If an acquisition fails it often leads to an
internal restructure.
– Restructuring may occur because of
changes in the external or internal
environments.
• Restructuring strategies include:
• downsizing
• downscoping
• leveraged buyouts.
 Types of RESTRUCTURING

• Reducing the number of a firm’s

employees and in the number of its
DOWNSIZING operating units, but it does not change
the essence of the business

• divesting, spin-off or some other means

of eliminating businesses that are
DOWNSCOPING unrelated to a firm’s core businesses

• When all of the assets of a business are

LEVERAGED sold, and the transaction is financed
mostly with debt
BUYOUT
Outcomes of Restructuring
 Introduction to Case Analysis

 Read the Case – looking to identify (highlight)

key strategic issues
 Decide which Strategy Model or theoretical
concepts are relevant to this case
 Use the model as your ‘template’ to summarise
the key issues identified in the case
 Form a picture of how this company (case)
applies the strategy model or theoretical
concepts
 Evaluate how well the company (case) has
applied Strategy Theory
 Tutorial Activity in small groups

Examine the Cisco mini-case (p193)

What has been the rationale for Cisco’s acquisitions?

From the case, can you identify any organisational capabilities

that Cisco has been able to develop through these experiences?

How will these organisational capabilities translate to core

competencies that give Cisco a sustainable competitive
advantage in their industry?
 Case Study

Analyse the Supermarket Case (Case 3, p436) to

determine which of the Merger and Acquisition
strategies might apply in this industry.

If you were appointed as a consultant to Coles,

would you advise them to expand through
acquisitions. If so, why and how?