Chapter 7 Flashcards
Merger
A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis.
Acquisition
An acquisition is a strategy through which one firm buys a controlling, or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. After the acquisition is completed, the management of the acquired firm reports to the management of the acquiring firm.
Takeover
A takeover is a special type of acquisition where the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions.
Reasons for Acquisitions
Increased market power, overcoming entry barriers, cost of new product development and increased speed to market, increased diversification, reshaping the firms competitive scope and learning and developing new capabilities.
Increased Market Power
Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry so a core competence can be used to gain competitive advantage in the acquiring firm’s primary market.
Horizontal Acquisitions
The acquisition of a company competing in the same industry as the acquiring firm is a horizontal acquisition.
Research suggests that horizontal acquisitions result in higher performance when the firms have similar characteristics, such as strategy, managerial styles, and resource allocation patterns (synergy).
Vertical Acquisitions
A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its products. Through a vertical acquisition, the newly formed firm controls additional parts of the value chain, which is how vertical acquisitions lead to increased market power.
Related Acquisitions
Acquiring a firm in a highly related industry is called a related acquisition. Through a related acquisition, firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities.
Overcoming Entry Barriers
Facing the entry barriers that economies of scale and differentiated products create, a new entrant may find that acquiring an established company is more effective than entering the market as a competitor offering a product that is unfamiliar to current buyers. In fact, the higher the barriers to market entry, the greater the probability that a firm will acquire an existing firm to overcome them.
Cross-Border Acquisitions
Acquisitions made between companies with headquarters in different countries are called cross-border acquisitions
Cost of New Product Development and Increased Speed to Market
Developing new products internally and successfully introducing them into the marketplace often requires significant investment of a firm’s resources, including time, making it difficult to quickly earn a profitable return.An acquisition strategy is another course of action a firm can take to gain access to new products and to current products that are new to it. Compared with internal product development processes, acquisitions provide more predictable returns as well as faster market entry.
Increased Diversification
Firms using acquisition strategies should be aware that, in general, the more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful. Thus, horizontal acquisitions and related acquisitions tend to contribute more to the firm’s strategic competitiveness than do acquisitions of companies operating in product markets that differ from those in which the acquiring firm competes.
Reshaping the Firm’s Competitive Scope
To reduce the negative effect of an intense rivalry on financial performance, firms may use acquisitions to lessen their product and/or market dependencies.
Learning and Developing New Capabilities
Firms sometimes complete acquisitions to gain access to capabilities they lack. Firms should seek to acquire companies with different but related and complementary capabilities as a path to building their own knowledge base.
Problems in Achieving Acquisition Success
Integration difficulties, inadequate evaluation of target, large debt, inability to achieve synergy, too much diversification, managers overly focused on acquisitions and too large.
Integration Difficulties
Some believe that the integration process is the strongest determinant of whether either a merger or an acquisition will be successful. The difficulties are to meld two unique corporate cultures, link different financial and control systems and build effective working relationships.
Inadequate Evaluation of Target
Due diligence is a process through which a potential acquirer evaluates a target firm for acquisition. In an effective due-diligence process, hundreds of items are examined in areas as diverse as the financing for the intended transaction, differences in cultures between the acquiring and target firm, tax consequences of the transaction. This is regularly done by investment bankers.
Large or Extraordinary Debt
Firms using an acquisition strategy want to verify that their purchases do not create a debt load that overpowers their ability to remain solvent and vibrant as a competitor.
Inability to Achieve Synergy
A firm develops a competitive advantage through an acquisition strategy only when a transaction generates private synergy. Private synergy is created when combining and integrating the acquiring and acquired firms’ assets yield capabilities and core competencies. Private synergy is possible when firms’ assets are complementary in unique ways.
Too Much Diversification
At some point, however, firms can become over diversified. Regardless of the type of diversification strategy implemented, however, the firm that becomes overdiversified will experience a decline in its performance and likely a decision to divest some of its units.
Why does a high level of diversification have a negative effect on long-term performance?
The scope created by additional amounts of diversification often causes managers to rely on financial rather than strategic controls to evaluate business units’ performance. Using financial controls, such as return on investment (ROI), causes individual business-unit managers to focus on short-term outcomes at the expense of long-term investments.
Managers Overly Focused on Acquisitions
Company experiences show that participating in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success, such as identifying and taking advantage of other opportunities and interacting with important external stakeholders.
Too Large
Most acquisitions result in a larger firm, which should create or enhance economies of scale. However, size can also increase the complexity of the managerial challenge and create diseconomies of scope; that is, not enough economic benefit to outweigh the costs of managing the more complex organization created through acquisitions.
Effective acquisitions attributes
Acquired firm has assets and resources that are complementary to the acquiring firm’s business, acquisition is friendly, acquiring firm conducts good due diligence, merged firms maintain low to moderate debt, acquiring firm has a consistent emphasis on innovation and the acquiring firm manages changes well and is flexible.
