MAN 4720

Vertical Acquisitions

A firm acquiring a supplier or distributor of one or more of its products The newly formed firm controls additional parts of the value chain, which leads to increased market power

Private Synergy

A firm develops a competitive advantage through an acquisition when a transaction generates private synergy Private synergy is created when combining and integrating the acquiring and acquiring firms' assets yield capabilities and core competencies that could not be developed by combining and integrating either firms' assets with another company. Private synergy is: -Possible when firms' assets are complementary in unique ways -Difficult to create -Difficult for competitors to understand and imitate -Affected by direct transaction costs (legal fees, charges by investment banks to conduct due diligence) and indirect transaction costs (the time spent evaluating targets and negotiating the acquisition)

__________ are unsecured obligations that are not tied to specific assets for collateral.

Junk Bonds

Cross-border acquisitions are primarily made to:

Overcome barriers to entry in another country

Pappelbon Enterprises recently acquired a chain of convenience stores offering both fuel and food. Pappelbon is now surprised and dismayed to find that the gas pumps have been poorly maintained and will need to be replaced at considerable expense. All of the following statements accurately reflect this EXCEPT:

Pappelbon's management was overly focused on acquisitions

Which of the following statements is false?

Private synergy is easy for competitors to understand and imitate

When substantial debt is used to finance acquisitions, firms with successful acquisitions:

Reduce the debt quickly

Downscoping

Refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core businesses Downscoping: -Has a more positive effect of firm performance than does downsizing -Causes firms to refocus on their core business -Is often used with downsizing simultaneously -Is used more frequently in U.S. firms than in European companies

Magma, Inc., acquired Vulcan, Inc., three years ago. Effective integration of the two companies' culture was never achieved, and the two firms' assets were not complementary. It is very likely that Magma will:

Restructure

A leveraged buyout refers to a(n):

Restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private.

The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms:

With insufficient diversification

Research has shown that approximately what percent of mergers and acquisitions, while not clear failures, produce disappointing results?

60

1. Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately __________ percent of innovations fail to achieve adequate returns.

88

A primary reason for a firm to pursue an acquisition is to:

Achieve greater market power

Reasons for Acquisitions

-Increase market power -Overcome entry barriers to new markets or regions -Avoid the costs of developing new products and increase the speed of new market entries -Reduce the risk of entering a new business -Become more diversified -Reshape their competitive scope by developing a different portfolio of businesses -Enhance their learning as the foundation for developing new capabilities

Merger and Acquisition Strategies

-Played a central role in the restructuring of U.S. businesses during the 1980s and 1990s -Are being used with greater frequencies in many regions of the world today -Are used to try to create more value for all firm stakeholders -Are challenging to effectively implement

Research shows that:

-Shareholders of acquired firms often earn above-average returns from acquisitions -Shareholders of the acquiring firms typically earn returns that are close to zero -The acquiring firm's stock price often falls immediately after the transaction is announced

Effective Acquisitions

-The acquiring and target firms have complementary resources that are the foundation for developing new capabilities. -The acquisition is friendly, thereby facilitating integration of the firm's resources. -The target firm is selected and purchased on the basis of completing a thorough due-diligence process. -The acquiring and target firms have considerable slack in the form of cash or debt capacity. -The newly formed firm maintains a low or moderate level of debt by selling off portions of the acquired firm or some the acquired firm's poorly performing units. -The acquiring and acquired firms have experience in terms of adapting to change. -R&D and innovation are emphasized in the new firm.

Problems in Achieving Acquisition Success

-The difficulty of effectively integrating the firms involved -Incorrectly evaluating the target firm's value -Creating debt loads that preclude adequate long-term investments -Overestimating the potential for synergy -Creating a firm that is too diversified -Creating an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing the acquisition -Developing a combined firm that is too large, necessitating extensive use of bureaucratic, rather than strategic, controls

Managers Overly Focused on Acquisitions

A considerable amount of managerial time and energy is required for acquisition strategies to be used successfully. Activities with which managers become involved include: -Searching for viable acquisition candidates -Completing effective due-diligence processes -Preparing for negotiations -Managing the integration process after completing the acquisition Participating in and overseeing these activities can divert managerial attention from other matters that are necessary for long-term competitive success. Finding the appropriate degree of involvement with the firm's acquisition strategy is a challenging, yet important, task for managers.

Due diligence

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 such as: -Financing for the intended transaction -Differences in cultures between the acquiring and target firm -Tax consequences of the transaction -Actions that would be necessary to successfully meld the two workforces When conducting due diligence, companies almost always work with intermediaries, such as a large investment bank, to facilitate their due-diligence efforts

Downsizing

A reduction the number of a firm's employees and, sometimes, in the number of its operating units. Downsizing is a legitimate strategy to adjust firm size and is not necessarily a sign of organizational decline -Downsizing is an intentional managerial strategy that is used for the purpose of improving firm performance -With downsizing, firms make intentional decisions about resources to retain and resources to eliminate -Organizational decline is an unintentional outcome of what turned out to be a firm's ineffective competitive actions -With organizational decline, firms lose access to an array of resources, many of which are critical to current and future performance.

Leveraged Buyouts

A restructuring strategy whereby a party (typically a private equity firm) buys all of a firm's assets in order to take the firm private. Traditionally, LBOs were used as a restructuring strategy: -To correct for managerial mistakes -Because the firm's managers were making decisions that primarily served their own interests rather than those of shareholders However, some firms complete LBOs to build firm resources and expand their operations rather than simply to restructure a distressed firm's assets Significant amounts of debt are commonly incurred to finance a buyout There are 3 types of LBOs: Management buyouts (MBOs), Employee buyouts (EBOs), Whole-firm buyouts

Restructuring

A strategy through which a firm changes its set of businesses or its financial structure Commonly, firms focus on fewer products and markets following restructuring Restructuring strategies are: -Generally used to deal with acquisitions that are not reaching expectations -Sometimes used because of changes detected in the external environment by the firm Firms use 3 types of restructuring strategies: downsizing, downscoping, leveraged buyouts

Acquisition

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 -Acquisitions are more common than mergers and takeovers

Related Acquisitions

Acquiring a firm in a highly related industry Firms seek to create value through the synergy that can be generated by integrating resources and capabilities

Without effective due diligence, the:

Acquiring firm is likely to pay for an acquisition

SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the growing technical translation software market. This market is dominated by firms making highly differentiated products. To enter this market, SpeakEasy would be best served if it considers a(n):

Acquisition of a highly related firm in the technical translation market

Cross-Border Acquisitions

Acquisitions made between companies with headquarters in different countries Cross-border acquisitions can be difficult to implement due to various obstacles and differences in foreign cultures.

Overcoming Entry Barriers

Barriers to entry are factors associated with a market, or the firms currently operating in it, that increase the expense and difficulty new firms encounter when trying to enter a particular market. -Ex: Economies of scale and customer loyalty The higher the barriers to entry, the greater the probability that a firm will acquire an existing firm to overcome them. -This allows the acquiring firm to gain immediate access to an attractive market

Too Much Diversification

Because of the need to process additional amounts of information, related diversified firms become over diversified with a smaller number of business units than do firms using an unrelated diversification strategy. Over diversification can negatively affect a firm's overall 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 causes managers to focus on generating short-term profits at the expense of long-term investments -Costs associated with acquisitions may result in fewer allocations to activities that are linked to internal innovation

When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is intense, the firm may wish to __________ by making an acquisition.

Broaden its competitive scope

Thomas is an upper-middle-level manager for a firm that has been actively involved in acquisitions over the last 10 years. The firm has grown much larger as a result. Thomas has been dismayed to find that recently the managerial culture of the firm has been turning more and more to ____________ controls.

Bureaucratic

__________ is most often used when the goal is to refocus on the company's business.

Downscoping

__________ refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core businesses.

Downscoping

An investor is analyzing two firms in the same industry which are basically identical. She is looking for long-term performance from her investment. Both firms are undergoing restructuring. One firm is involved in substantial downsizing, and the other firm is undertaking aggressive downscoping. The investor should invest in the:

Downscoping firm because this will cause the firm to refocus on its core business.

Inadequate Evaluation of Target

Due diligence should: -Evaluate the accuracy of the financial position of the target -Evaluate the accounting standards used by the target -Examine the quality of the strategic fit between the two companies -Examine the ability of the acquiring firm to effectively integrate the target to realize the potential gains from the deal Commonly, firms are willing to pay a premium to acquire a company they believe will increase their ability to earn above-average returns. -The acquiring firm should effectively examine each acquisition target in order to determine the appropriate amount of premium to pay

Learning and Developing New Capabilities

Firms sometimes complete acquisitions to gain access to capabilities they lack Through acquisitions, firms can: broaden their knowledge base, reduce inertia Firms increase the potential of their capabilities when they acquire diverse talent through cross-border acquisitions -Firms should seek to acquire companies with different but related and complementary capabilities as a path to building their own knowledge base

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 Large or extraordinary debt can result from: -Bidding wars, paying a large premium

Bureaucratic Controls

Formalized supervisory and behavioral rules and policies designed to ensure consistency of decisions and actions across a firm's units. Bureaucratic controls often results in rigid and standardized managerial behavior, which may produce less innovation over time.

A leveraged buyout will often result in a short-term outcome of __________, which, in turn, leads to a long-term outcome of __________.

High debt costs, higher risk

Increased Diversification

It is relatively uncommon for a firm to develop new products internally to diversify its product lines. -It is difficult for companies to develop products that differ from the current lines for markets in which they lack experience Acquisition strategies can be used to support the use of both related and unrelated diversification strategies. -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

Whole-firm LBOs tend to result in all of the following negative outcomes EXCEPT:

Inefficient operations

Cost of New Product Development and Increased Speed to Market

Internal product development is often perceived as a high-risk activity. -Many firms are not able to achieve adequate returns compared to the amount of capital they invest to develop and commercialize the product An acquisition strategy allows a firm to gain access to new products and to current products that are new to it. -Compared with internal product development process, acquisitions provide: More predictable returns, faster market entry

Increased Market Power

Market power exists when either: -A firm is able to sell its good or services above competitive levels -The costs of a firm's primary or support activities are lower than those of its competitors Market power is usually derived from: -The size of the firm -The quality of the resources it uses to compete -Its share of the market(s) in which it competes To increase market power, firms use: -Horizontal, Vertical and Related acquisitions

Compared to internal product development, acquisitions allow:

More accurate prediction of return on investment

Acquisitions can take a lot of time for top level managers for all the following reasons EXCEPT:

Only top managers can perform the required due diligence

Market power is derived primarily from the:

Size of a firm and its resource and capabilities

Junk Bonds

Supported firms' earlier efforts to take on large amounts of debt when completing acquisitions -Are a financing option through which risky acquisitions are financed with money (debt) that provide a large potential return to lenders (bondholders) Junk bonds: -Are used less frequently today -Are commonly called high-yield bonds -Are unsecured obligations that are not tied to specific assets for collateral -Contain high and volatile interest rates -Potentially expose companies to greater financial risk

Inability to Achieve Synergy

Synergy exists when the value created by units working together exceeds the value that those units could create working independently -That is, synergy exists when assets are worth more when used in conjunction with each other than when they are used separately For shareholders, synergy generates gains in their wealth that they could not duplicate or exceed through their own portfolio diversification decisions Synergy is created by: -The efficiencies derived from economies of scale -The efficiencies derived from economies of scope -Sharing resources (human capital and knowledge) across the businesses in the newly created firm's portfolio

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n):

Takeover or unfriendly acquisition

A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product, instead of adopting a strategy of developing new products in-house. All of the following arguments are correct EXCEPT:

The acquisition of Taylor should be primarily for defensive rather than strategic reasons.

Horizontal Acquisitions

The acquisition of a company competing in the same industry as the acquiring firm -Increase a firm's market power by exploiting cost-based and revenue-based synergies

Integration Difficulties

The integration process: -Is considered by some to be the strongest determinant of whether either a merger or an acquisition is successful -Is difficult and challenging -Tends to generate uncertainty and often resistance because of cultural clashes and organizational politics Among the challenges associated with integration processes are the need to: -Meld two or more unique corporate cultures -Link different financial and information control systems -Build effective working relationships (particularly when management styles differ) -Determine the leadership structure and those who will fill it for the integrated firm

Too Large

The larger firm size generated by acquisitions can: -Increase the complexity of the managerial challenge -Create diseconomies of scope These complexities generated by the larger size often lead managers to implement more bureaucratic controls to manager to combined firm's operations.

Research results indicate all of the following EXCEPT:

The majority of acquisitions increase long-term value for the acquiring firm

Lower Risk Compared to Developing New Products

The outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process. -As such, managers may view acquisitions as a way to avoid risky internal ventures as well as risky research and development investments -However, managers must not allow acquisitions to become a substitute for internal innovation -Being dependent on others for innovation leaves a firm vulnerable and less capable of mastering its own destiny when it comes to using innovation as a driver of wealth creation

Reshaping the Firm's Competitive Scope

The reduce the negative effect of an intense rivalry on financial performance, firms may use acquisitions to lessen their product and/or market dependencies -Reducing a company's dependence on specific products of markets shapes the firm's competitive scope

The expenses incurred by firms trying to create synergy through acquisition are called __________ costs.

Transaction

In a merger:

Two firms agree to integrate their operations on a relatively coequal basis

Sales of watches among teenagers and twenty-somethings are declining rapidly as this age group uses cellphones, iPods, and other devices to tell time. A company that specializes in selling inexpensive watches to this age group may wish to consider __________ in order to develop new products other than watches.

Unrelated diversification

Baby Doe's, a designer and manufacturer of children's clothing, has decided to purchase a retail chain specializing in children's clothing. This purchase is a(n):

Vertical acquisition

The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is an example of a(n):

Vertical acquisition