Description
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs.
Acquisition and Restructuring Strategies
Chapter 7
Merger, Acquisition and Take over
• Merger – It’s a strategy through which two firms agree to integrate their operations on a relatively coequal basis • Acquisition – It’s a strategy through which on 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 – It is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid
Reasons of Acquisition
• Increased market power – when firm is able to sell its products above competitive levels or when the costs of its primary or support activities are lower than those of its competitors • To increase market power, firms often use horizontal, vertical and related acquisitions
Horizontal Acquisition
• The acquisition of a company competing in the same industry as the acquiring firm is referred to as a horizontal acquisition • Horizontal acquisition increase a firm’s market power by exploiting cost based and revenue based synergies • Horizontal acquisition results in higher performance when the firms have similar characteristics
Vertical acquisition
• A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services
Related Acquisition
• The acquisition of a firm in a highly related industry is referred as related acquisition
Overcoming entry barriers
• Barriers to entry are factors associated with the market or with the firms currently operating in it which increase the expense and difficulty faced by new ventures trying to enter that particular market • Facing entry barriers created by economies of scale and differentiated products, a new entrant may find acquiring an established company to be more effective than entering the market as a competitor offering good s or services that is unfamiliar to the current market
Cross border acquisitions to reduce entry barrier problem
• Acquisition made between companies with headquarters in different countries are called cross border acquisitions • These acquisitions are often used to overcome entry barriers
Cost of new product development and increased speed to the market
• Developing new products internally and successfully introducing them into the market place often requires significant investment and carries a lot of risk also • Acquisition are another means a firm can use to gain access to new products and to current products that are new to the firm
Lower risk compared to developing new products
• Because the outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process, managers may view acquisition as lowering risk
Increased diversification
• Firms may use acquisition for diversification • Firms might find it difficult to develop a new product for a new market and in a case of unrelated diversification the firm would go for acquisition
Reshaping the competitive scope
• Intense rivalry and competition can affect a firm’s profitability and so to reduce the negative affect of rivalry on profitability a firm may go for acquisition to lessen its dependence on one or more products or markets • Reducing a firm’s dependence on a specific market alters the firm’s competitive scope
Learning and Developing new capabilities
• Some acquisitions are done in order to gain capabilities a firm does not possess • Acquisition may be used to acquire a special technological capability
• Integration problems – arises due to different corporate culture, linking financial and control system, building effective working relationships, resolving problems regarding status of the newly acquired firm’s executive • Inadequate evaluation of target – The potential acquirer evaluates the target firm through a process called Due diligence in which hundreds of items are examined like financing for internal transaction, differences in culture, tax consequences of the transaction, actions needed to meld the two workforces • Due diligence is performed by investment bankers/accountants/management consultants etc at times this can be done by an internal team • If the due diligence is not done properly it may result in acquiring firm paying an excessive premium for the target company • Research shows that in times of high stock prices due diligence is relaxed and so the purchase price is driven by other factors rather than rigorous assessment of where, when and how management can drive real performance gains
Problems in achieving acquisition success
Problems in achieving acquisition success
• Large or extraordinary debt – debt was supposed to discipline managers but has negative consequences like likelihood of bankrupcy, downgrading by rating agencies, elimination/postponement of investments and R&D • Inability to generate synergy – it is achieved by efficiencies derived from economies of scale and economies of scope and by sharing resources • Private synergy is created when the combination and integration of the acquiring and acquired firms assets yield capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company and this can happen if the firms’ assets are complementary in unique ways
Problems in achieving acquisition success
• Too much diversification • Managers overly focused on acquisition • Too large size of the firm post acquisition
Effective acquisition
It happens when 1. The resources of target firm are complementary to acquired firm’s assets giving rise to unique capabilities and core competencies 2. Friendly acquisition work better than hostile acquisition 3. Proper due diligence processes like deliberate and caref8ul selection of target firms and an evaluation of the relative health of those firms (financial health, cultural fit and value of human resources 4. Keeping low or medium size of debt 5. An emphasis of innovation 6. Having flexibility and adaptability
doc_802133328.ppt
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs.
Acquisition and Restructuring Strategies
Chapter 7
Merger, Acquisition and Take over
• Merger – It’s a strategy through which two firms agree to integrate their operations on a relatively coequal basis • Acquisition – It’s a strategy through which on 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 – It is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firm’s bid
Reasons of Acquisition
• Increased market power – when firm is able to sell its products above competitive levels or when the costs of its primary or support activities are lower than those of its competitors • To increase market power, firms often use horizontal, vertical and related acquisitions
Horizontal Acquisition
• The acquisition of a company competing in the same industry as the acquiring firm is referred to as a horizontal acquisition • Horizontal acquisition increase a firm’s market power by exploiting cost based and revenue based synergies • Horizontal acquisition results in higher performance when the firms have similar characteristics
Vertical acquisition
• A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services
Related Acquisition
• The acquisition of a firm in a highly related industry is referred as related acquisition
Overcoming entry barriers
• Barriers to entry are factors associated with the market or with the firms currently operating in it which increase the expense and difficulty faced by new ventures trying to enter that particular market • Facing entry barriers created by economies of scale and differentiated products, a new entrant may find acquiring an established company to be more effective than entering the market as a competitor offering good s or services that is unfamiliar to the current market
Cross border acquisitions to reduce entry barrier problem
• Acquisition made between companies with headquarters in different countries are called cross border acquisitions • These acquisitions are often used to overcome entry barriers
Cost of new product development and increased speed to the market
• Developing new products internally and successfully introducing them into the market place often requires significant investment and carries a lot of risk also • Acquisition are another means a firm can use to gain access to new products and to current products that are new to the firm
Lower risk compared to developing new products
• Because the outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process, managers may view acquisition as lowering risk
Increased diversification
• Firms may use acquisition for diversification • Firms might find it difficult to develop a new product for a new market and in a case of unrelated diversification the firm would go for acquisition
Reshaping the competitive scope
• Intense rivalry and competition can affect a firm’s profitability and so to reduce the negative affect of rivalry on profitability a firm may go for acquisition to lessen its dependence on one or more products or markets • Reducing a firm’s dependence on a specific market alters the firm’s competitive scope
Learning and Developing new capabilities
• Some acquisitions are done in order to gain capabilities a firm does not possess • Acquisition may be used to acquire a special technological capability
• Integration problems – arises due to different corporate culture, linking financial and control system, building effective working relationships, resolving problems regarding status of the newly acquired firm’s executive • Inadequate evaluation of target – The potential acquirer evaluates the target firm through a process called Due diligence in which hundreds of items are examined like financing for internal transaction, differences in culture, tax consequences of the transaction, actions needed to meld the two workforces • Due diligence is performed by investment bankers/accountants/management consultants etc at times this can be done by an internal team • If the due diligence is not done properly it may result in acquiring firm paying an excessive premium for the target company • Research shows that in times of high stock prices due diligence is relaxed and so the purchase price is driven by other factors rather than rigorous assessment of where, when and how management can drive real performance gains
Problems in achieving acquisition success
Problems in achieving acquisition success
• Large or extraordinary debt – debt was supposed to discipline managers but has negative consequences like likelihood of bankrupcy, downgrading by rating agencies, elimination/postponement of investments and R&D • Inability to generate synergy – it is achieved by efficiencies derived from economies of scale and economies of scope and by sharing resources • Private synergy is created when the combination and integration of the acquiring and acquired firms assets yield capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company and this can happen if the firms’ assets are complementary in unique ways
Problems in achieving acquisition success
• Too much diversification • Managers overly focused on acquisition • Too large size of the firm post acquisition
Effective acquisition
It happens when 1. The resources of target firm are complementary to acquired firm’s assets giving rise to unique capabilities and core competencies 2. Friendly acquisition work better than hostile acquisition 3. Proper due diligence processes like deliberate and caref8ul selection of target firms and an evaluation of the relative health of those firms (financial health, cultural fit and value of human resources 4. Keeping low or medium size of debt 5. An emphasis of innovation 6. Having flexibility and adaptability
doc_802133328.ppt