Chapter 7
Acquisition and Restructuring Strategies
Hitt, Ireland, and Hoskisson
Acquisition is increasingly popular
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Acquisition strategies are increasingly
popular due to
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Globalization
Deregulation of many industries in different
economies
favorable legislation
Resulting increase in number and size of
domestic and cross-border acquisitions,
especially from emerging economies.
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Definitions

Merger
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Acquisition
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A strategy through which two firms agree to integrate their
operations on a relatively coequal basis. Few true mergers
actually occur, because one party is usually dominant in
regard to market share or firm size.
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.
Takeover

A special type of an acquisition strategy wherein the target
firm does not solicit the acquiring firm’s bid.
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Reasons for acquisition strategies
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Firms use acquisition strategies to
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Increase market power
Overcome entry barriers to new markets or
regions
Avoid product development cost; increased speed
to market
Reduce the risk of entering a new business
Become more diversified
Avoid excessive competition
Learn and develop new capabilities
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Problems
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Problems with using an acquisition strategy
include
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Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Too much diversification
Managers overly focused on acquisitions
Too large, resulting in bureaucracy
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Characteristics of effective
acquisitions
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Characteristics include:
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the acquiring and target firms have
complementary resources that can be the basis of
core competencies in the newly created firm
the acquisition is friendly, thereby facilitating
integration of the two firms’ resources
the target firm is selected and purchased based
on thorough due diligence
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Characteristics, continued
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the acquiring and target firms have considerable
slack in the form of cash or debt capacity
the merged firm maintains a low or moderate level
of debt by selling off portions of the acquired firm
or some of the acquiring firm’s poorly performing
units
the acquiring and acquired firms have experience
in terms of adapting to change; and
R&D and innovation are emphasized in the new
firm.
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Restructuring
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Downscoping
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Restructuring through downscoping should
reduce the firm’s level of diversification and
refocus on core businesses.
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Leveraged buyouts (LBOs)
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Definition
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a firm is purchased
(largely through debt) so
that it can become a
private entity
Goal
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3 types of LBOs
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to improve efficiency,
performance so firm can
be sold successfully in 58 years
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management buyouts
(MBOs)
employee buyouts
(EBOs)
whole-firm LBOs.
Restructuring
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Goal
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To gain or reestablish effective strategic control of
the firm.
Downscoping
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Of the three restructuring strategies, downscoping
is aligned the most closely with establishing and
using strategic controls and usually improves
performance more on a comparative basis.
Copyright © 2008 Cengage