Acquisition

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Acquisition Restructuring Strategies
BA 495.009
Chapter Seven
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Todays Agenda

• Background on Mergers Acquisitions
• Reasons for Acquisitions
• Problems in Achieving Acquisition Success
• Effective Acquisitions
• Restructuring
• KLC-KinderCare Acquisition
• Wrap-up

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Background on Mergers Acquisitions
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Trends in MA

• Mergers Acquisitions peaked in 2000 at about
  3.4B and fell to about 1.75B in 2001
• The global volume of announced acquisition
  agreements was up 41 from 2003 to 1.95 trillion
  for 2004
• 40 45 of acquisitions in recent years have
  been made across country borders
• In In the acquisition boom between 1998 and 2000,
  acquiring firm shareholders experienced
  significant losses

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Mergers, Acquisitions, and Takeovers What are
the Differences?

• Merger
• Two firms agree to integrate their operations on
  a relatively co-equal basis.
• Acquisition
• One firm buys a controlling, or 100 interest in
  another firm with the intent of making the
  acquired firm a subsidiary business within its
  portfolio.
• Takeover
• A special type of acquisition when the target
  firm did not solicit the acquiring firms bid for
  outright ownership.

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Reasons for Acquisitions
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Reasons for Acquisitions
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Acquisitions Increased Market Power

• Market power is increased when
• There is the ability to sell goods or services
  above competitive levels.
• Costs of primary or support activities are below
  those of competitors.
• A firms size, resources and capabilities gives
  it a superior ability to compete.
• Acquisitions intended to increase market power
  are subject to
• Regulatory review
• Analysis by financial markets

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Acquisitions Increased Market Power

• Market power is increased by
• Horizontal acquisitions other firms in the same
  industry
• Vertical acquisitions suppliers or distributors
  of the acquiring firm
• Related acquisitions firms in related industries

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Market Power Acquisitions

• Acquisition of a company in the same industry in
  which the acquiring firm competes increases a
  firms market power by exploiting
• Cost-based synergies
• Revenue-based synergies
• Acquisitions with similar characteristics result
  in higher performance than those with dissimilar
  characteristics.

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Market Power Acquisitions

• Acquisition of a supplier or distributor of one
  or more of the firms goods or services
• Increases a firms market power by controlling
  additional parts of the value chain.

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Market Power Acquisitions (contd)

• Acquisition of a company in a highly related
  industry
• Acquisition target is typically a complementor,
  not a competitor.

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Acquisitions Overcoming Entry Barriers

• Entry Barriers
• 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
• Economies of scale
• Brand loyalty
• Distribution channels
• Cross-Border Acquisitions
• Acquisitions made between companies with
  headquarters in different countries
• Fastest way to enter new markets
• Provide more control over foreign operations than
  utilizing alliances
• Can be difficult to negotiate and operate because
  of the differences in foreign cultures

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Acquisitions Cost of New-Product Development and
Increased Speed to Market

• Internal development of new products is often
  perceived as high-risk activity.
• Acquisitions allow a firm to gain access to new
  and current products that are new to the firm.
• Returns are more predictable because of the
  acquired firms experience with the products.
• Must be wary of acquisitions replacing need for
  innovation in the firm.

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Acquisitions Increased 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.

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Acquisitions Reshaping the Firms Competitive
Scope

• An acquisition can
• Reduce the negative effect of an intense rivalry
  on a firms financial performance.
• Reduce a firms dependence on one or more
  products or markets.
• Reducing a companys dependence on specific
  markets alters the firms competitive scope.

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Acquisitions Learning and Developing New
Capabilities

• An acquiring firm can gain capabilities that the
  firm does not currently possess
• Special technological capability
• A broader knowledge base
• Reduced inertia
• Firms should acquire other firms with different
  but related and complementary capabilities in
  order to build their own knowledge base.

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Problems in Achieving Acquisition Success
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Problems in Achieving Acquisition Success
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Problems in Achieving Acquisition Success
Integration Difficulties

• Integration challenges 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 firms executives
• Loss of key personnel weakens the acquired firms
  capabilities and reduces its value

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Example Culture Clash
Source The Wall Street Journal, March 7, 2006, B2
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Problems in Achieving Acquisition Success
Inadequate Evaluation of the Target

• Due Diligence The process of evaluating a target
  firm for acquisition
• Ineffective due diligence may result in paying an
  excessive premium for the target company.
• Evaluation requires examining
• Financing of the intended transaction
• Differences in culture between the firms
• Tax consequences of the transaction
• Actions necessary to meld the two workforces
• The value the target firm will offer to the
  acquiring firm

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Problems in Achieving Acquisition Success Large
or Extraordinary Debt

• High debt can
• Increase the likelihood of bankruptcy
• Lead to a downgrade of the firms credit rating
• Preclude investment in activities that contribute
  to the firms long-term success such as
• Research and development
• Human resource training
• Marketing

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Problems in Achieving Acquisition Success
Inability to Achieve Synergy

• Synergy When assets are worth more when used in
  conjunction with each other than when they are
  used separately.
• Transaction costs
• Firms experience transaction costs when they use
  acquisition strategies to create synergy.
• Firms tend to underestimate indirect costs when
  evaluating a potential acquisition.

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Problems in Achieving Acquisition Success Too
Much Diversification

• Diversified firms must process more information
  of greater diversity.
• Increased operational scope created by
  diversification may cause managers to rely too
  much on financial rather than strategic controls
  to evaluate business units performances.
• Strategic focus shifts to short-term performance.
• Acquisitions may become substitutes for
  innovation.

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Problems in Achieving Acquisition Success
Managers Overly Focused on Acquisitions

• Managers invest substantial time and energy in
  acquisition strategies in
• 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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Problems in Achieving Acquisition Success
Managers Overly Focused on Acquisitions

• Managers in target firms operate in a state of
  virtual suspended animation during an
  acquisition.
• Executives may become hesitant to make decisions
  with long-term consequences until negotiations
  have been completed.
• The acquisition process can create a short-term
  perspective and a greater aversion to risk among
  executives in the target firm.

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Problems in Achieving Acquisition Success Too
Large

• Additional costs of controls 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.
• The firm may produce less innovation.

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Effective Acquisitions
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Attributes of Successful Acquisitions

• Target firm has resources/core competencies that
  are complementary to the acquiring firm
• Acquisition is friendly
• Effective due diligence is conducted
• Acquiring firm has financial slack
• Merged firm maintains low to moderate debt
  position
• Merged firm continues RD
• Acquiring firm manages change well

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Results of Successful Acquisitions

• Higher probability of synergy and ultimately,
  competitive advantage
• Faster, more effective integration
• Overpayment for acquisition is avoided
• Financing is easier and less costly to obtain
• Avoidance of trade-offs associated with high debt
• Long-term competitive advantage

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Restructuring
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Restructuring

• A strategy through which a firm changes its set
  of businesses or financial structure.
• Failure of an acquisition strategy often precedes
  a restructuring strategy.
• Restructuring may occur because of changes in the
  external or internal environments.
• Restructuring strategies
• Downsizing
• Downscoping
• Leveraged buyouts

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Types of Restructuring Downsizing

• A reduction in the number of a firms employees
  and sometimes in the number of its operating
  units.
• May or may not change the composition of
  businesses in the companys portfolio.
• Typical reasons for downsizing
• Expectation of improved profitability from cost
  reductions
• Desire or necessity for more efficient operations

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Types of Restructuring Downscoping

• A divestiture, spin-off or other means of
  eliminating businesses unrelated to a firms core
  businesses.
• A set of actions that causes a firm to
  strategically refocus on its core businesses.
• May be accompanied by downsizing, but not
  eliminating key employees from its primary
  businesses.
• Smaller firm can be more effectively managed by
  the top management team.

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Restructuring Leveraged Buyouts (LBO)

• A restructuring strategy whereby a party buys all
  of a firms assets in order to take the firm
  private.
• Significant amounts of debt may be incurred to
  finance the buyout.
• Immediate sale of non-core assets to pare down
  debt.
• Can correct for managerial mistakes
• Can facilitate entrepreneurial efforts and
  strategic growth.

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Restructuring Outcomes
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KLC-KinderCare Merger
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Wrap-up
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Wrap-up

• Background on Mergers Acquisitions
• Reasons for Acquisitions
• Problems in Achieving Acquisition Success
• Effective Acquisitions
• Restructuring
• KLC-KinderCare Acquisition
• Questions