Ch7-1 Chapter 7 Acquisition and Restructuring Strategies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing Ch7-2 Chapter 3 Internal Environment Chapter 2 External Environment The Strategic The Strategic Management Management Process Process The Strategic The Strategic Management Management Process Process Strategic Intent Strategic Mission Strategic Competitiveness Above Average Returns Feedback Strategy Formulation Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 6 Corporate-Level Strategy Chapter 8 International Strategy Chapter 9 Cooperative Strategies Chapter 7 Acquisitions & Restructuring Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Structure & Control Chapter 12 Strategic Leadership Chapter 13 Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes Ch7-3 Mergers and Acquisitions Mergers and Acquisitions Merger Merger A transaction where two firms agree to integrate their A transaction where two firms agree to integrate their operations on a relatively coequal basis because they operations on a relatively coequal basis because they have resources and capabilities that together may have resources and capabilities that together may create a stronger competitive advantage create a stronger competitive advantage Acquisition Acquisition A transaction where one firm buys another firm A transaction where one firm buys another firm with the intent of more effectively using a core with the intent of more effectively using a core competence by making the acquired firm a competence by making the acquired firm a subsidiary within its portfolio of businesses subsidiary within its portfolio of businesses Takeover Takeover An acquisition where the target firm did not solicit An acquisition where the target firm did not solicit the bid of the acquiring firm the bid of the acquiring firm Ch7-4 Problems in Problems in Achieving Success Achieving Success Integration Integration difficulties difficulties Inadequate Inadequate evaluation of target evaluation of target Too much Too much diversification diversification Large or Large or extraordinary debt extraordinary debt Inability to Inability to achieve synergy achieve synergy Managers overly Managers overly focused on acquisitions focused on acquisitions Too large Too large Increased Increased market power market power Overcome Overcome entry barriers entry barriers Lower risk Lower risk compared to developing compared to developing new products new products Cost of new Cost of new product development product development Increased speed Increased speed to market to market Increased Increased diversification diversification Avoid excessive Avoid excessive competition competition Acquisitions Acquisitions Reasons for Reasons for Acquisitions Acquisitions Ch7-5 Reasons for Acquisitions Reasons for Acquisitions Example: Example: Belgian-Dutch Fortis’ acquisition of American Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group Banker’s Insurance Group Example: Example: Watson Pharmaceuticals’ acquisition of TheraTech Watson Pharmaceuticals’ acquisition of TheraTech Example: Example: British Petroleum’s acquisition of U.S. Amoco British Petroleum’s acquisition of U.S. Amoco Increased Market Power Increased Market Power Acquisition intended to reduce the competitive balance of Acquisition intended to reduce the competitive balance of the industry the industry Overcome Barriers to Entry Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive “start-ups” economically unattractive Buying established businesses reduces risk of start-up Buying established businesses reduces risk of start-up ventures ventures Lower Cost and Risk of New Product Development Lower Cost and Risk of New Product Development Ch7-6 Example: Example: General Electric’s acquisition of NBC General Electric’s acquisition of NBC Example: Example: Kraft Food’s acquisition of Boca Burger Kraft Food’s acquisition of Boca Burger Example: Example: CNET’s acquisition of mySimon CNET’s acquisition of mySimon Reasons for Acquisitions Reasons for Acquisitions Increased Speed to Market Increased Speed to Market Closely related to Barriers to Entry, allows market entry Closely related to Barriers to Entry, allows market entry in a more timely fashion in a more timely fashion Diversification Diversification Quick way to move into businesses when firm currently lacks Quick way to move into businesses when firm currently lacks experience and depth in industry experience and depth in industry Reshaping Competitive Scope Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a Firms may use acquisitions to restrict its dependence on a single or a few products or markets single or a few products or markets Ch7-7 Problems with Acquisitions Problems with Acquisitions Example: Example: Marks and Spencer’s acquisition of Brooks Brothers Marks and Spencer’s acquisition of Brooks Brothers Example: Example: Intel’s acquisition of DEC’s semiconductor division Intel’s acquisition of DEC’s semiconductor division Example: Example: AgriBioTech’s acquisition of dozens of small seed AgriBioTech’s acquisition of dozens of small seed firms firms Integration Difficulties Integration Difficulties Differing financial and control systems can make integration Differing financial and control systems can make integration of firms difficult of firms difficult Inadequate Evaluation of Target Inadequate Evaluation of Target “ “ Winners Curse” bid causes acquirer to overpay for firm Winners Curse” bid causes acquirer to overpay for firm Large or Extraordinary Debt Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Costly debt can create onerous burden on cash outflows Ch7-8 Example: Example: Ford and Jaguar Ford and Jaguar Example: Example: Quaker Oats and Snapple Quaker Oats and Snapple Example: Example: GE prior to selling businesses and refocusing GE prior to selling businesses and refocusing Inability to Achieve Synergy Inability to Achieve Synergy Justifying acquisitions can increase estimate of Justifying acquisitions can increase estimate of expected benefits expected benefits Problems with Acquisitions Problems with Acquisitions Overly Diversified Overly Diversified Acquirer doesn’t have expertise required to manage Acquirer doesn’t have expertise required to manage unrelated businesses unrelated businesses Managers Overly Focused on Acquisitions Managers Overly Focused on Acquisitions Managers may fail to objectively assess the value of Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy outcomes achieved through the firm’s acquisition strategy Too Large Too Large Large bureaucracy reduces innovation and flexibility Large bureaucracy reduces innovation and flexibility Ch7-9 Attributes of Effective Acquisitions Attributes of Effective Acquisitions Complementary Assets or Resources Complementary Assets or Resources Buying firms with assets that meet current Buying firms with assets that meet current needs to build competitiveness needs to build competitiveness + Friendly Acquisitions Friendly Acquisitions Friendly deals make integration go more smoothly Friendly deals make integration go more smoothly + Careful Selection Process Careful Selection Process Deliberate evaluation and negotiations is more likely Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies to lead to easy integration and building synergies + Maintain Financial Slack Maintain Financial Slack Provide enough additional financial resources so Provide enough additional financial resources so that profitable projects would not be foregone that profitable projects would not be foregone + Ch7-10 Attributes of Effective Acquisitions Attributes of Effective Acquisitions Low-to-Moderate Debt Low-to-Moderate Debt Merged firm maintains financial flexibility Merged firm maintains financial flexibility + Flexibility Flexibility Has experience at managing change and is Has experience at managing change and is flexible and adaptable flexible and adaptable + Emphasize Innovation Emphasize Innovation Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategy firm’s overall strategy + [...]... Example: Forsmann Little’s buyout of Dr Pepper Ch7-12 Restructuring and Outcomes Alternatives Short-Term Outcomes Long-Term Outcomes Downsizing Downscoping Leveraged Buyout Ch7-13 Restructuring and Outcomes Alternatives Downsizing Short-Term Outcomes Long-Term Outcomes Reduced Labor Costs Loss of Human Capital Lower Performance Ch7-14 Restructuring and Outcomes Downsizing Short-Term Outcomes Long-Term.. .Restructuring Activities Downsizing Wholesale reduction of employees Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs Downscoping Selectively divesting or closing non-core businesses Reducing scope of operations Leads to greater focus Example: Disney’s selling of Fairchild Publications Ch7-11 Restructuring Activities Leveraged Buyout... Short-Term Outcomes Long-Term Outcomes Reduced Labor Costs Loss of Human Capital Reduced Debt Costs Alternatives Lower Performance Emphasis on Strategic Controls Higher Performance Downscoping Ch7-15 Restructuring and Outcomes Long-Term Outcomes Reduced Labor Costs Loss of Human Capital Lower Performance Emphasis on Strategic Controls Downsizing Short-Term Outcomes Reduced Debt Costs Alternatives Higher Performance . excessive competition competition Acquisitions Acquisitions Reasons for Reasons for Acquisitions Acquisitions Ch7-5 Reasons for Acquisitions Reasons for Acquisitions Example: Example: Belgian-Dutch Fortis’ acquisition. Food’s acquisition of Boca Burger Kraft Food’s acquisition of Boca Burger Example: Example: CNET’s acquisition of mySimon CNET’s acquisition of mySimon Reasons for Acquisitions Reasons for Acquisitions Increased. or markets Ch7-7 Problems with Acquisitions Problems with Acquisitions Example: Example: Marks and Spencer’s acquisition of Brooks Brothers Marks and Spencer’s acquisition of Brooks Brothers Example: Example: