Competing For Advantage

1
Competing For Advantage

• Part III Creating Competitive Advantage
• Chapter 9 Acquisition and Restructuring Strategy

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The Strategic Management Process

• Insert Figure 1.6

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Mergers, Acquisitions, and Takeovers What Are
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.

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Mergers, Acquisitions, and Takeovers What Are
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

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Reasons for Acquisitions

• Insert Figure 9.1

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Sources of Market Power

• Size of the firm
• Resources and capabilities to compete in the
  market
• Share of the market

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Types of Acquisitions to Increase Market Power

• Horizontal Acquisitions
• Vertical Acquisitions
• Related Acquisitions

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Horizontal Acquisitions

• Acquisition of a company competing in the same
  industry
• The increase of market power by exploiting
  cost-based and revenue-based synergies
• Character similarities between the firms lead to
  smoother integration and higher performance

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Vertical Acquisitions

• Acquisition of a supplier or distributor of one
  or more products
• Increase of market power by controlling more of
  the value chain

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Related Acquisitions

• Acquisition of a firm in a highly related
  industry
• Increase of market power by leveraging core
  competencies to gain a competitive advantage

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Entry Barriers that Acquisitions Overcome

• Economies of scale in established competitors
• Differentiated products by competitors
• Enduring relationships with customers that create
  product loyalties with competitors

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Cross-Border Acquisitions

• Acquisitions made between companies with
  headquarters in different countries

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New Product Development

• Significant investments of a firms resources are
  required to
• Develop new products internally
• Introduce new products into the marketplace

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Acquisition of a Competitor Outcomes

• Lower risk compared to developing new products
• Increased diversification
• Reshaping the firms competitive scope
• Learning and developing new capabilities
• Faster market entry
• Rapid access to new capabilities

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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

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Reshaping the Firms 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 firms activities
• Create strategic flexibility

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Reshaping the Firms Competitive Scope

• Acquisitions are often used
• In reaction to reduced profitability in a
  competitive environment of intense rivalry
• To reduce overdependence on a single product or
  market

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Learn and Develop New Capabilities

• Acquisitions are used to
• Gain capabilities that the firm does not possess
• Broaden the firms knowledge base
• Reduce inertia

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Reasons for Acquisitions

• Insert Figure 9.1

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Integration Challenges

• Integration involves a large number of activities
• Two disparate corporate cultures must be melded
• Effective working relationships must be built
• Different financial and control systems must be
  linked
• The status of the acquired firms employees and
  executives must be determined
• Turnover of key personnel must be minimized to
  retain crucial knowledge
• Acquired capabilities must be merged into
  internal processes and procedures

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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 with any other company
• Is possible when the two firms' assets are
  complimentary in unique ways
• Yields a competitive advantage that is difficult
  to understand or imitate

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Transaction Costs

• Transaction costs direct and indirect expenses
  incurred when firms use acquisition strategies to
  create synergy
• These costs must be added to the purchase price
  of an acquisition to adequately evaluate its
  potential value
• Firms tend to underestimate these costs, which
  negatively impacts anticipated revenue
  projections and expected cost-based synergies

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Transaction Costs

• Direct costs include legal fees and charges from
  investment bankers who complete due diligence for
  the acquiring firm
• Indirect costs include managerial time to
  evaluate target firms and complete negotiations,
  as well as the loss of key managers after an
  acquisition
• Additional costs include the actual time and
  resources used for integration processes

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Due Diligence

• Due diligence process through which a potential
  acquirer evaluates a target firm for acquisition
• Failure to complete an effective due-diligence
  process may easily result in the acquiring firm
  paying an excessive premium for the target company

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Due Diligence

• Evaluation requires that hundreds of issues be
  closely examined, including
• Financing for the intended transaction
• Differences in cultures between the acquiring
  firm and target firm
• Tax consequences of the transaction
• Actions that would be necessary to successfully
  meld the two workforces

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Large or Extraordinary Debt

• High debt can
• Increase the likelihood of bankruptcy
• Lead to a downgrade in the firms credit rating
• Preclude needed investment in activities that
  contribute to the firms long-term success

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Too Much Diversification

• Diversified firms must process more information
  of greater diversity
• Scope created by diversification may cause
  managers to rely too much on financial rather
  than strategic controls to evaluate performance
  of business units
• Acquisitions may become substitutes for innovation

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Managers Too Focused on Acquisitions

• Activities managers undertake when executing an
  acquisition strategy
• Searching for viable acquisition candidates
• Completing effective due-diligence processes
• Preparing for negotiations
• Managing the integration process after the
  acquisition is completed

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Managers Too Focused on Acquisitions

• Managerial attention can be diverted from other
  matters necessary for long-term competitive
  success (such as identifying other activities,
  interacting with important external stakeholders,
  or fixing fundamental internal problems)
• A short-term perspective and greater risk
  aversion can result for target firm's managers

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Firms Become Too Large

• Key Terms
• Bureaucratic Controls formalized supervisory
  and behavioral rules and policies designed to
  ensure that decisions and actions across
  different units of a firm are consistent

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Firms Become Too Large

• Additional costs may exceed the benefits of the
  economies of scale and additional market power
• Larger size may lead to more bureaucratic
  controls
• Formalized controls often lead to relatively
  rigid and standardized managerial behavior
• Firm may produce less innovation

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Effective Acquisitions

• Insert Table 9.1

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Restructuring

• Key Terms
• Restructuring strategy through which a firm
  changes its set of businesses or its financial
  structure

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Restructuring Three Strategies

• Downsizing
• Downscoping
• Leveraged Buyouts

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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

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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

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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)

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Leveraged Buyouts

• Management buyouts
• Employee buyouts
• Whole-firm buyouts

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Outcomes from Restructuring

• Insert Figure 9.2

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Ethical Questions

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

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Ethical Questions

• 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 differ based on 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?

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Ethical Questions

• 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?

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Ethical Questions

• What ethical issues are involved with conducting
  a robust due-diligence process?

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Ethical Questions

• Some evidence suggests that there is a direct
  relationship between a firms 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?