AA2016/2017
Business Strategy
Chapter 8
Merger and Acquisition Strategies
KNOWLEDGE OBJECTIVES
•  Explain the popularity of merger and acquisition
strategies in firms competing in the global economy.
•  Discuss reasons why firms use an acquisition strategy
to achieve strategic competitiveness.
•  Describe seven problems that work against achieving
success when using an acquisition strategy.
•  Name and describe the attributes of effective
acquisitions.
•  Define the restructuring strategy and distinguish
among its common forms.
•  Explain the short- and long-term outcomes of the
different types of restructuring strategies.
Merger and Acquisition Strategies
•  M&A can be used because when there are
uncertainties in the competitive landscape and the
company want to make a step towards growth
•  Often used also together with international strategies
•  Should be used to increase firm value and lead to
strategic competitiveness and above average returns
•  The reality is that returns are typically close to zero
for acquiring firm
Mergers, Acquisitions, and Takeovers: What Are
the Differences?
Merger
A merger is a strategy through which two firms
agree to integrate their operations on a
relatively coequal basis.
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
Acquisition
portfolio.
A takeover is a special type of acquisition wherein
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
Lower Risk Compared to Developing New Products
Increased Diversification
Reshaping the Firm’s Competitive Scope
Learning and Developing New Capabilities
Reasons for Acquisitions
Increased Market Power
•  Exists when a firm is able to sell its goods or services
above competitive levels or when the costs of its
primary or support activities are lower than those of
its competitors
•  Sources of market power include
■  Size of the firm
■  Resources and capabilities to compete in the
market
■  Share of the market
•  Entails buying a competitor, a supplier, a distributor,
or a business in a highly related industry
Reasons for Acquisitions
Increased Market Power
• Horizontal Acquisitions
■ 
■ 
Acquirer and acquired companies compete in the same
industry
Horizontal integration and industry consolidation
• Vertical Acquisitions
■ 
■ 
■ 
Firm acquires a supplier or distributor of one or more of its
goods or services
Forward and backward vertical integration
Leads to control over additional parts of the value chain
• Related Acquisitions
■ 
■ 
Firm acquires another company in a highly related industry
Creates value through synergy and integration of resources
and capabilities
Reasons for Acquisitions
Overcoming Entry Barriers
• New product markets or industries – product diversification
• New international markets – geographic diversification
■ 
■ 
Cross-border acquisitions – those made between companies
with headquarters in different country
Example: The purchase of U.K. carmakers Jaguar and Land
Rover by India’s Tata Motors is an example of a cross-border
acquisition.
Reasons for 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
• Acquisitions can be used to gain access to new products
and to current products that are new to the firm
• Can also provide more predictable returns and faster market
entry (product and geographic)
Reasons for Acquisitions
Lower Risk Compared to Developing New Products
• Easier to estimate acquisition outcomes versus internal
product development
• Internal development has a very high failure rate
Reasons for Acquisitions
Increased Diversification
• Most common mode of diversification when entering new
markets with new products
• Acquisition strategies can be used to support use of both
unrelated and related diversification strategies
• Difficult to internally develop products for markets in which a
firm lacks experience
• The more related the acquisition the higher the chances for
success
Reasons for Acquisitions
Reshaping the Firm’s Competitive Scope
• Can be used to lessen a firms dependence on one or more
products or markets
Learning and Developing New Capabilities
• When you acquire a firm you also acquire its skills and
capabilities
• Firms should seek to acquire companies with different but
related and complementary capabilities in order to build their
own knowledge base
Reasons for Acquisitions
Problems in Achieving Success
Increased Market Power
Integration difficulties
Overcoming Entry Barriers
Inadequate
evaluation of target"
Cost of New Product
Development and Increased
Speed to Market
Lower Risk Compared to
Developing New Products
Increased Diversification
Reshaping the Firm’s
Competitive Scope
Learning and Developing
New Capabilities
Large or"
extraordinary debt"
Inability to"
achieve synergy"
"
Too much"
diversification"
Managers overly"
focused on acquisitions"
Too large"
Problems in Achieving Success
Integration difficulties
• Post-acquisition integration is the most important
determinant of shareholder value creation
• Culture, financial and control systems, working relationships
• Status of newly acquired firm’s executives
Inadequate evaluation of target
• Due diligence – process through which a potential acquirer
evaluates a target firm for acquisition
• Can result in paying excessive premium for target company
Problems in Achieving Success
Large or extraordinary debt
• Some firms take on too much debt when acquiring other
firms
Junk bonds: unsecured high-risk debt instruments with high
interest rates
• High debt can negatively effect the firm
- Increases the likelihood of bankruptcy
- Can lead to a downgrade in a firm’s credit rating
- May prevent from needed investment in other activities
(R&D, human resource training, marketing)
Problems in Achieving Success
Inability to achieve synergy
• Synergy: exists when the value created by units working together
exceeds the value those units cold create working independently
Achieved when the two firms' assets are complementary in unique ways
Yields a difficult-to-understand or imitate competitive advantage
Generates gains in shareholder wealth that they could not duplicate or
exceed through their own portfolio diversification decisions
• Private synergy: Occurs when the combination and integration of
acquiring and acquired firms' assets yields capabilities and core
competencies that could not be developed by combining and
integrating the assets with any other company
Very difficult to create private synergy
• Firms tend to underestimate costs and overestimate synergy
Problems in Achieving Success
Too much diversification
• Firms can become overdiversified which can lead to a
decline in performance
• Diversified firms must process more information of greater
diversity – they can be harder to manage
• Scope created by diversification may cause managers to
rely too much on financial rather than strategic controls to
evaluate performance of business units
• Acquisitions may become substitutes for internal innovation
Problems in Achieving Success
Managers overly focused on acquisition
•  Necessary activities with an acquisition strategy include
Searching for viable acquisition candidates
Completing effective due-diligence processes
Preparing for negotiations
Managing the integration process after the acquisition
• Can divert managerial attention from other matters
necessary for long-term competitive success
Problems in Achieving Success
Too large
•  Larger size may lead to more bureaucratic controls
■ 
Bureaucratic controls
• Formalized controls often lead to relatively rigid and
standardized managerial behavior
• Additional costs may exceed the benefits of the economies
of scale and additional market power
• Firm may produce less innovation
Table Attributes of Successful Acquisitions"
Effective Acquisitions
Restructuring
• Restructuring is a strategy through which a firm changes its
set of businesses or its.
• Firms use three types of restructuring strategies:
Restructuring
Downsizing
Downscoping
Leveraged buyouts
Restructuring
Downsizing
• Reduction in number of firms’ employees (and possibly
number of operating units) that may or may not change the
composition of businesses in the company's portfolio
• An intentional proactive management strategy
Downscoping
• Refers to divesture, spin-off, or some other means of
eliminating businesses that are unrelated to firms’ core
businesses
• Strategic refocusing on core businesses
• Often includes downsizing
Restructuring
Leveraged buyouts (LBOs)
• One party buys all of a firm's assets in order to take the firm
private (or no longer trade the firm's shares publicly)
• Private equity firm: Firm that facilitates or engages in taking
a public firm private
• Three types of LBOs
Management buyouts
Employee buyouts
Whole-firm buyouts