Strategic Management: Merger and Acquisition Strategies
Chapter 7: Merger and Acquisition Strategies and Restructuring
Learning Objectives
By the end of this chapter, you should be able to:
7.1 Differentiate between merger and acquisition strategies in firms competing in the global economy.
7.2 Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness.
7.3 Describe seven problems that work against achieving success when using an acquisition strategy.
7.4 Describe the attributes of effective acquisitions.
7.5 Distinguish among the common forms of restructuring strategies.
7.6 Explain the short- and long-term outcomes of the different types of restructuring strategies.
7-1 Merger and Acquisition Strategies
Popularity of M&A:
M&A strategies have been popular among U.S. firms for many years,
They played a central role in the restructuring of U.S. businesses during the 1980s and 1990s,
M&A strategies are used with greater frequency in many regions around the world today.
The central aim of these strategies is to create more value for all firm stakeholders, although they are challenging to implement effectively.
Research Insights:
Shareholders of acquired firms often earn above-average returns from acquisitions.
Shareholders of acquiring firms typically see returns close to zero.
The stock price of the acquiring firm often falls immediately after the transaction is announced.
Determining the worth of a target firm is difficult, increasing the likelihood that a firm will pay a premium, which can lead to negative outcomes if it exceeds the actual value once integrated.
Mergers, Acquisitions, and Takeovers: What Are the Differences?
Merger:
A strategy where two firms agree to integrate their operations on a relatively coequal basis.
Acquisition:
A strategy through which a firm buys most or all of a company’s stock intending to make the acquired firm a subsidiary within its portfolio.
Takeover:
A special type of acquisition where the target firm does not solicit the acquiring firm’s bid; these are often considered unfriendly or "hostile" acquisitions.
Frequency:
Acquisitions are more common than mergers and takeovers.
7-2 Reasons for Acquisitions
Firms pursue acquisition strategies to:
Increase Market Power: Growing presence in current markets or entering new ones.
Overcome Entry Barriers: By acquiring existing firms.
Avoid Costs of Developing New Products: Accelerates market entry.
Reduce Risk: Diversifies risks associated with entering new businesses.
Increase Diversification: Using both related and unrelated diversification strategies through acquisitions.
Reshape Competitive Scope: Developing a different portfolio of businesses to decrease dependency on specific products or markets.
Enhance Learning: Developing new capabilities through acquisitions, broadening knowledge, and reducing inertia, especially in cross-border scenarios.
Increased Market Power
Definition: Market power is present when a firm can sell goods/services above competitive levels or maintain lower costs.
Market Power Sources:
Firm's size, quality of resources, and market share.
Acquisition Types to Increase Market Power:
Horizontal Acquisitions: Targeting competitors to exploit synergies.
Vertical Acquisitions: Acquiring suppliers or distributors to control parts of the value chain.
Related Acquisitions: Acquiring firms in closely related industries for resource integration.
Regulatory Review:
Acquisitions are subject to review by government bodies.
Overcoming Entry Barriers
Entry Barriers: Factors that increase the cost and difficulty for new firms entering a market.
Firms may acquire existing businesses to mitigate high entry barriers.
Cross-Border Acquisitions: These can be challenging due to different cultures and obstacles between countries.
Cost of New Product Development and Increased Speed to Market
Developing new products internally can be resource-intensive and slow.
Acquisition allows for faster market access with more predictable returns compared to internal development.
Lower Risk Compared to Developing New Products
Acquisition outcomes are generally more predictable than those of new product development, preventing over-reliance on others for innovation and maintaining the company's capability to drive wealth creation.
Increased Diversification
It's rare for a firm to develop new products internally for diversification.
Acquisitions support both related and unrelated diversification, with higher success probabilities observed in more related acquisitions compared to unrelated ones.
Reshaping the Firm’s Competitive Scope
Acquisitions can reduce dependency on specific products or markets to shield from intense rivalry and its negative effects on financial performance.
Learning and Developing New Capabilities
Firms may acquire to access new capabilities and reduce inertia. Acquiring diverse talent through cross-border acquisitions can enrich knowledge and abilities.
7-3 Problems in Achieving Acquisition Success
Success Rates:
Only about 20% of mergers and acquisitions achieve success, leading to disappointing results or outright failures, particularly in technology sectors.
Integration Difficulties:
Integration is a significant determinant of M&A success, often fraught with challenges due to cultural differences and organizational politics. Key challenges include:
Melding corporate cultures.
Linking financial and information control systems.
Building working relationships amid differing management styles.
Establishing leadership structures for the integrated entity.
Inadequate Evaluation of Target
Due Diligence: A thorough evaluation of a target firm is necessary, covering several factors:
Financing, cultural differences, tax implications, and integration requirements.
A comprehensive assessment includes evaluating financial positions, accounting standards, strategic fit, and potential integration issues.
Large or Extraordinary Debt
Debt Risks: Firms must be wary of creating unsustainable debt levels from acquisition premiums or bidding wars.
Junk Bonds: Historically used to finance acquisitions, they involve high risk and potentially volatile interest rates; however, their usage has declined.
Inability to Achieve Synergy
Synergy: Created when combined units generate more value than when working independently, delivering gains for shareholders.
Types of Synergy:
Economies of Scale: Cost savings from increased production.
Economies of Scope: Cost advantages from sharing resources.
Private Synergy: Results from unique asset combinations that competitors can't easily replicate, developed through complexities of direct and indirect transaction costs.
Too Much Diversification
Over-diversification can harm firm performance, shifting managers’ focus from strategic goals to financial controls and restricting investments in internal innovation.
Managers Overly Focused on Acquisitions
Management must balance involvement in acquisitions with attention to essential long-term strategies, as excessive focus on M&A can detract from overall competitiveness.
Too Large
Larger firm sizes can complicate management, causing diseconomies of scale and necessitating bureaucratic controls that may stifle innovation.
7-4 Effective Acquisitions
Characteristics of Effective Acquisitions:
Complementary resources supporting new capability development.
Friendly acquisitions for easier integration.
Thorough due diligence prior to purchasing.
Sufficient financial slack for operational flexibility.
Managing debt levels, possibly through divestiture of underperforming units.
Experience in adapting to changes emphasized in the integrated firm.
Focus on R&D and innovation.
Flexible organizations facilitating smoother integrations.
7-5 Restructuring
Definition: A strategy that changes a firm's business and financial structures, often focusing on fewer products and markets.
Usage: Addressing unmet expectations from acquisitions or adapting to external environmental changes, with activist investors often advocating for restructuring.
Types of Restructuring Strategies
Downsizing: Reducing workforce and operating units while possibly maintaining organizational structure.
Downscoping: Elimination of unrelated businesses, often positively affecting performance and refocusing core competencies.
Leveraged Buyouts (LBO): Taking a firm private often to rectify management issues or enhance operations; focuses on concentration around core businesses.
Restructuring Outcomes
Research indicates downsizing can lead to negative perceptions impacting stock performance; thus firms should approach it cautiously.
Downscoping typically yields better short and long-term performance compared to downsizing or LBOs, as focusing on core businesses generally enhances competitiveness.