Acquisition and Restructuring Strategies Chapter Eight

Chapter 8

2006 by Nelson, a division of Thomson Canada Limited.

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Strategic Inputs

The Strategic Management Process

Chapter 3 External Environment Chapter 4 Internal Environment

Strat. Intent Strat. Mission

The

Strategic Management Process

Strategic Actions

Strategy Formulation
Chapter 5 Bus. - Level Strategy Chapter 6 Chapter 7 Competitive Corp. - Level Dynamics Strategy Chapter 10 Cooperative Strategies

Strategy Implementation
Chapter 11 Chapter 12 Corporate Structure Governance & Control

Chapter 9 Chapter 8 Acquisitions & International Strategy Restructuring

Chapter 13 Chapter 14 StrategicEntrepreneurship Leadership Innovation &

Strategic Outcomes

Chapter 2 Above Average Returns

Chapter 1 Strategic Competitiveness

Feedback

2006 by Nelson, a division of Thomson Canada Limited.

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Acquisition and Restructuring Strategies

Knowledge Objectives: 1. Explain the popularity of acquisition strategies for firms competing in the global economy. 2. 3. 4. 5. 6. Discuss reasons firms use an acquisition strategy to achieve strategic competitiveness. Describe seven problems that work against developing a competitive advantage using an acquisition strategy. Name and describe attributes of effective acquisitions. Define the restructuring strategy and distinguish among its common forms. Explain the short-term and long-term outcomes of the different types of restructuring strategies.
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Mergers and Acquisitions Merger:

A transaction where two firms agree to integrate their operations on a relatively coequal basis.

2006 by Nelson, a division of Thomson Canada Limited.

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Mergers and Acquisitions Acquisition:

A strategy where one firm buys a controlling or 100% interest in another firm with the intent of making the acquired firm a subsidiary within its portfolio.

Takeover:
An acquisition where the target firm did not solicit the bid of the acquiring firm.
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Horizontal Acquisition
The acquisition of a company competing in the same industry in which the acquiring firm competes.

Vertical Acquisition
A firm acquiring a supplier of distributor of one or more of its goods or services.

Related Acquisition
The acquisition of a firm in a highly related industry.

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Reasons for Acquisitions

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Reasons for Acquisitions

Increased Market Power
Acquisition intended to reduce the competitive balance of the industry Alcans purchase of Pechiney (Ch. 1 opening case)

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive Best Buys purchase of Future Shop

Lower Cost & Risk of New Product Development

Buying established businesses reduces risk of startup ventures Pharmaceutical firms access new products through acquisitions of other drug manufacturers
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Reasons for Acquisitions

Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more timely fashion British Telcoms Acquisition of Irelands East Telecom

Increasing Diversification and Competitive Scope

Firms may use acquisitions to restrict dependence on a single or a few products or markets Torontos Onex Corporation

Avoiding Excessive Competition

Firms may acquire businesses in which competitive pressures are less intense than in their core business The Jim Pattison Group of Companies
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Reasons for Acquisitions

Learn & Develop New Capabilities
Acquiring firms with new capabilities helps the acquiring firm to learn new knowledge and remain agile. Angiotech: a Vancouver based research lab.

Reshape the firms competitive scope

Reducing a firms dependence on specific markets alters the firms competitive scope. The Jim Pattison Group of Companies

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Problems With Acquisitions

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Problems with Acquisitions

Integration Difficulties
Differing cultures may make integration of firms difficult. TD Banks acquisition of Canada Trust

Inadequate Evaluation of Target

Winners Curse causes acquirer to overpay for firm. Dynegys near purchase of Enron

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows. TransCanadas acquisition of Nova Corp
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Problems with Acquisitions

Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits. Vivendis purchase of Seagram Co. Ltd.

Overly Diversified
Acquirer doesnt have expertise required to manage unrelated businesses. GE--prior to selling businesses and refocusing

Managers Overly Focused on Acquisitions

Managers lose track of core business by spending so much effort on acquisitions. Futurelink

Too Large

Large bureaucracy reduced innovation & flexibility.

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Attributes of friendly Acquisitions

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Restructuring Activities
Downsizing
Wholesale reduction of employees. Agilient Technologies cutting of its workforce by 15,000 jobs

Downscoping
Selectively divesting or closing non-core businesses. Reducing scope of operations. Leads to greater focus. Telus cutting of its workforce by 6,000 jobs

Leveraged Buyout (LBO)

A party buys a firms entire assets in order to take the firm private. Forsmann Littles buyout of Dr. Pepper
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Restructuring and Outcomes

Alternatives Short-Term Outcomes Reduced Labour Costs Reduced Debt Costs Emphasis on Strategic Controls High Debt Costs
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Long-Term Outcomes Loss of Human Capital Lower Performance Higher Performance Higher Risk
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Downsizing

Downscoping

Leveraged Buyout