Understanding Business
Strategy
Concepts & Cases
Part 3: Strategy
Chapter 7: Acquiring and Integrating Businesses
Copyright © 2009 South-Western, a part of Cengage Learning
All rights reserved.
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Power Point Presentation by Dr. Leslie A. Korb
Georgian Court University
Chapter 7: Acquiring and Integrating
Businesses
 An acquisition is a transaction in which a firm
buys a controlling interest in another firm with
the intention of either making it a subsidiary
business or combining it with its current
business or businesses
 A takeover is a specialized type of acquisition
in which the target firm does not solicit the
acquiring firm’s offer
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Chapter 7: Acquiring and Integrating
Businesses
 A merger is a transaction in which firms agree
to combine their operations on a relatively
equal basis
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Reasons for Acquisitions
 Reduce Costs
 Gain Market Power
 Increase Growth
 Learn to Build Capabilities
 Manage Risk and Other Financial Objectives
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Reduce Costs
 Using horizontal acquisitions to reduce costs
 Gain scale economies through horizontal
acquisitions
 Increases in productivity
 Reduce the competition
 Using vertical acquisitions to increase scale
and to gain market power
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Gain Market Power
 Use horizontal and vertical acquisitions to
gain market power
 Reduce overcapacity by eliminating duplicate
operations
 Problems: firms can pay too much for an
acquisition
 Making an acquisition pay off may result in
more drastic action – selling off productive
assets
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Increase Growth
 If the acquiring firm is the first or one of the
first to make such acquisitions in the industry
- an advantage in market power and position

Tata Motors is an example.
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Learn to Build Capabilities
 Target companies often have unique
employee skills, organizational technologies,
or superior knowledge that are available to
the acquiring firm only through acquisitions
 Pooling the companies’ combined resources
and capabilities may enable development of
new “centers of excellence” for specialized
products in new markets
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Manage Risk & Other
Financial Objectives
 Some firms choose to use acquisitions to
diversify their operations, thereby reducing
their dependence on performance in an
intensely competitive market
 At times, firms also make acquisitions to gain
access to tax advantages or to reduce
business or financial risk
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Screening, Selecting &
Negotiating
 Research suggests that financial acquirers
(such as Kohlberg Kravis Roberts [KKR])
experience higher valuations in their
acquisitions than do corporate acquisitions

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Public versus Private firms and adequate
information
Screening enables the acquiring party to
identify the acquisition opportunities that exist
while at the same time determining the
appropriate price
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Screening, Selecting &
Negotiating
 Key issues requiring careful analysis should
be identified early in the negotiating process

Due Diligence
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Analyzing competitors
Evaluating the target firm’s value
Understanding the synergies that may be created
between the target and acquiring firms
Determining top price decisions and walk away
terms
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Integration Success
 More likely when an integration team,
including employees from the acquiring firm
and the acquired firm, is formed and charged
with full responsibility to integrate the two
companies to create value
 Opportunities for increased growth as
learning occurs
 Leverage the capabilities of both firms to
create value
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Pitfalls and Prevention
 Because combined firms often lose target firm
managers through turnover, it is important to
retain key executives and other valuable
human capital, especially if the acquiring firm
wants to gain new skills from the acquired
firm
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Anchoring and overconfidence
Excessive debt
Overdiversification
Managers overly involved in the process
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Acquisition Failure &
Restructuring
 Sometimes acquisitions fail
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Divestiture
1981: Sears and Dean Witter Reynolds
Leveraged Buyouts (LBOs) – merger repair
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