Chapter 7 Operations MNGT and TQM

CHAPTER 7
ACQUISITION AND RESTRUCTURING STRATEGIES
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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.
KNOWLEDGE OBJECTIVES
● 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.
OPENING CASE
TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR
OUTCOMES
■ Online social networks, such as Facebook, have

caused Procter & Gamble (P&G) to reallocate
their advertising resources away from television
to more digital formats.
■ When Microsoft announced that it would acquire

Skype Global S.A.R.L., the leading Internet
telecommunications company for $8.5 billion,
there were both positive and negative
attributions about the deal in the media.
OPENING CASE
OUTCOMES
■ Because Skype was founded and headquartered

outside the U.S. (Luxembourg), Microsoft was
able to use cash that was not repatriated into
the U.S. to pay for the deal, and in so doing, it
avoided paying U.S. income tax.
■ The Skype investment seems to be a bargain;
the $8.5 billion represents a cost of $14.70 per
customer. Comparatively, when Skype was
bought by eBay in 2005, it paid $45.60 per user.
OPENING CASE
OUTCOMES
CHALLENGES:
● Whether Microsoft will be able to utilize
the service and integrate it into its focus on
business customers relative to the consumer
focus of Skype
● Whether Microsoft will be able to
incorporate the Skype service into its various
devices and software platforms
OPENING CASE
OUTCOMES
DEFENSIVE RATIONALE
● If Microsoft did not buy Skype, it may have
ended up in the hands of a competitor such as
Google, who might be able to use it to
strengthen its ecosystem at the expense of
Microsoft.
OFFENSIVE STRATEGY
● Google’s acquisition strategy is usually to
acquire earlier-stage companies than Microsoft’s
deal to acquire Skype. Google purchased
YouTube for $1.6 billion in 2006.
OPENING CASE
OUTCOMES
■ Facebook has a somewhat different approach

to acquisitions, having recently purchased
Snaptu. Snaptu provides application software
for services such as Facebook, Twitter, and
LinkedIn, which allows these services to be
featured on phones.
■ Facebook has made 11 acquisitions since
2007; however, almost none of the acquired
companies’ services has survived as
independent businesses.
OPENING CASE
OUTCOMES
■ Online commerce is moving into a consumer-

oriented retail phase, of which firms such as
Facebook and Amazon are seeking to take
advantage.
■ Acquisitions are a quick way to move into the

space that these tech giants see evolving, such as
Microsoft seeking to broaden its communication
base, Google expanding beyond search to
experiment with new models of advertising, and
Facebook’s attempts to learn from the human
capital that they are able to acquire.
POPULARITY OF MERGER AND
ACQUISITION STRATEGIES
• Popular strategy in the U.S. for many

years
• Source of firm growth and above-average
returns
• Some believe that M&A strategies played
a central role in the restructuring of U.S.
businesses during the 1980s and 1990s
and that they continue generating benefits
in the twenty-first century
• Heavily influenced by external environment
• Tight credit markets
• Political changes in foreign countries’
orientation toward M&A
• During the recent financial crisis, tightened
credit markets made it more difficult for firms
to complete “megadeals” (> $10 billion)
• Then U.S. deals picked up in 2011, where
“first-quarter deal volume rose 45% to $290.8
billion, compared with $200.6 billion” in 2010
• Cross-border acquisitions heighten during
currency imbalances, from strong currency
countries to weaker currency countries, such
as the U.S.
• Firms use M&A strategies to create value for
all stakeholders
• M&A value creation applies equally to all
strategies (business-level, corporate-level,
international, and cooperative)
• Can be used because of uncertainty in the
competitive landscape
• Increase market power because of
competitive threat
• Spread risk due to uncertain environment
• Shift core business into different markets
• Manage industry and regulatory changes
Intent:
Increase firm’s strategic competitiveness and
value; historically returns are close to zero so
it rarely works as planned
• M&A value creation is challenging
• GOOD NEWS: Shareholders of ACQUIRED
firms often earn above-average returns from
acquisitions
• BAD NEWS: Shareholders of ACQUIRING
firms earn returns that are close to zero: In 2/3
of all acquisitions, the acquiring firm’s stock
price fell immediately after the intended
transaction was announced
• This negative response reflects investors’
skepticism about projected synergies being
captured
MERGERS, ACQUISITIONS, AND TAKEOVERS:
WHAT ARE THE DIFFERENCES?
MERGER
Two firms agree to integrate their operations on
a relatively co-equal basis
 There are few TRUE mergers because one
firm usually dominates in terms of market
share, size, or asset value
ACQUISITION
One firm buys a controlling, 100 percent interest
in another firm with the intent of making the
acquired firm a subsidiary business within its
portfolio
MERGERS, ACQUISITIONS, AND TAKEOVERS:
WHAT ARE THE DIFFERENCES?
TAKEOVER
Special type of acquisition strategy wherein
the target firm did not solicit the acquiring
firm's bid
HOSTILE TAKEOVER
Unfriendly takeover that is undesired by the
target firm
RATIONALE FOR STRATEGY
Pre-announcement returns of hostile
takeovers are largely anticipated and
associated with a significant increase in the
bidder’s and target’s share price
REASONS FOR ACQUISITIONS AND
PROBLEMS IN ACHIEVING SUCCESS
FIGURE 7.1
Reasons for
Acquisitions
and Problems
in Achieving
Success
REASONS FOR ACQUISITIONS
Increased Market Power
Market Leadership results from Market Power
Factors increasing market power:
● The ability to sell goods or services above
competitive levels
● Costs of primary or support activities are below
those of competitors
● Size of the firm, resources, and capabilities to
compete in the market and share of the market
● Purchase of a competitor, a supplier, a
distributor, or a business in a highly related
industry
Market power is increased by:
●Horizontal acquisitions: other firms in the same
industry
McDonald’s acquisition of Boston Market (successful?)
●Vertical acquisitions: suppliers or distributors of the
acquiring firm
Walt Disney Company’s acquisition of Fox Family
Worldwide
●Related acquisitions: firms in related industries
• Acquirer and acquired
companies compete in the same
Horizontal industry
Acquisitions
• Firm’s market power is
increased by exploiting:
 Cost-based synergies
Similar characteristics:
• Strategy  Revenue-based synergies
• Managerial styles • Acquisitions with similar
• Resource allocation
patterns characteristics result in higher
• Previous alliance performance than those with
management experience
dissimilar characteristics
• Acquisition of a supplier
Horizontal
Acquisitions or distributor of one or
more of the firm’s goods
or services
Vertical  Increases a firm’s
Acquisitions market power by
controlling additional
parts of the value chain
• Acquisition of a company in a
Horizontal highly related industry
Acquisitions • Value creation takes place
through the synergy that is
generated by integrating
Vertical resources and capabilities
Acquisitions
 Because of the difficulty in
implementing synergy,
Related related acquisitions are often
Acquisitions difficult to implement
Horizontal, Vertical, and Related
Acquisitions
Acquisitions intended to increase
market power are subject to:
•Regulatory review
•Analysis by financial markets
Overcoming Entry Barriers
Entry Barriers
• Factors associated with the market or with the
firms operating in it that increase the expense and
difficulty faced by new ventures trying to enter that
market
• Economies of scale
• Differentiated products
Cross-Border Acquisitions
• Acquisitions made between companies with
headquarters in different countries
• Are often made to overcome entry barriers
• Can be difficult to negotiate and operate because of the
differences in foreign cultures
Cross-Border Acquisitions
• In the current global competitive
landscape, firms from other nations
may use an acquisition strategy more
frequently than firms in North
America and Europe.
• The Strategic Focus underscores the
different approaches to cross-border
acquisitions by Chinese, Indian, and
Brazilian corporations.
Cost of New Product Development
and Increased Speed to Market
• Internal development of new products is often
perceived as high-risk activity.
• Acquisitions allow a firm to gain access to new
and current products that are new to the firm.
• Compared with internal product development,
acquisitions:
• Are less costly
• Have faster market penetration
• Have more predictable returns due to the
acquired firms’ experience with the products
Lower Risk Compared to
Developing New Products
• Outcomes for an acquisition can be more
easily and accurately estimated than the
outcomes of an internal product development
process.
• Acquisition strategies are a common means of
avoiding risky internal ventures and risky R&D
investments.
• Acquisitions may become a substitute for
innovation, and thus should always be strategic
rather than defensive in nature.
Increased Diversification
• Using acquisitions to diversify a firm is the
quickest and easiest way to change its
portfolio of businesses.
• Both related diversification and unrelated
diversification strategies can be
implemented through acquisitions.
• The more related the acquired firm is to the
acquiring firm, the greater is the probability
that the acquisition will be successful.
Reshaping the Firm’s Competitive
Scope
An acquisition can:
• Reduce the negative effect of an intense
rivalry on a firm’s financial performance.
• Reduce a firm’s dependence on one or
more products or markets.
Reducing a company’s dependence on
specific markets alters the firm’s
competitive scope
Learning and Developing New
Capabilities
An acquiring firm can gain capabilities that the
firm does not currently possess:
• Special technological capability
• A broader knowledge base
• Reduced inertia
Firms should acquire other firms with different
but related and complementary capabilities in
order to build their own knowledge base
PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
Integration
Difficulties
Inadequate
Too Large
Target Evaluation
PROBLEMS WITH
Managers ACQUISITIONS
Overly Focused on Large or
Acquisitions Extraordinary Debt
Too Much Inability to

Diversification Achieve Synergy
ACQUISITION SUCCESS
● Acquisition strategies are not problem-free,
even when pursued for value-creating reasons.
● Research suggests:
20% of all mergers and acquisitions are
successful
60% produce disappointing results
20% are clear failures, with technology
acquisitions reporting even higher failure
rates
ACQUISITION SUCCESS
Greater acquisition success accrues to firms
able to:
1. select the “right” target
2. avoid paying too high a premium (by
doing appropriate due diligence)
3. integrate the operations of the acquiring
and target firm effectively
4. retain the target firm’s human capital, as
illustrated by Facebook’s approach
described in the opening case
ACQUISITION SUCCESS
Integration Difficulties
Integration challenges include:
• Melding two disparate corporate cultures
• Linking different financial and control
systems
• Building effective working relationships
(particularly when management styles
differ)
• Resolving problems regarding the status of
the newly acquired firm’s executives
• Loss of key personnel weakening the
acquired firm’s capabilities and reducing its
ACQUISITION SUCCESS
Inadequate Evaluation of Target
Due Diligence
• The process of evaluating a target firm for acquisition
• Ineffective due diligence may result in paying an
excessive premium for the target company
Evaluation requires examining:
• The financing of the intended transaction
• The differences in culture between the firms
• The tax consequences of the transaction
• Actions necessary to meld the two workforces
• BOTH the accuracy of the financial position and
accounting standards used AND the quality of the strategic
fit and the ability of the acquiring firm to effectively
integrate the target
ACQUISITION SUCCESS
Large or Extraordinary Debt
• Junk bonds: Financing option whereby risky acquisitions
are financed with money (debt) that provides a large
potential return to lenders (bondholders)
• High debt (e.g., junk bonds) can:
• Increase the likelihood of bankruptcy
• Lead to a downgrade of the firm’s credit rating
• Preclude investment in activities that contribute to the
firm’s long-term success such as:
• Research and development
• Human resource training
• Marketing
ACQUISITION SUCCESS
Inability to Achieve Synergy
Synergy: when assets are worth more when used in
conjunction with each other than when they are used
separately
• Synergy is created by the efficiencies derived from
economies of scale and economies of scope and by
sharing resources (e.g., human capital and knowledge)
across the businesses in the merged firm.
• Firms experience transaction costs when they use
acquisition strategies to create synergy
• Firms tend to underestimate indirect costs when
evaluating a potential acquisition
ACQUISITION SUCCESS
Inability to Achieve Synergy
Private synergy: when the combination and
integration of the acquiring and acquired firms’
assets yields capabilities and core competencies
that could not be developed by combining and
integrating either firm’s assets with another
company
• Advantage: It is difficult for competitors to
understand and imitate
• Disadvantage: It is also difficult to create
ACQUISITION SUCCESS
Too Much Diversification
Diversified firms must process more
information of greater diversity.
• Increased operational scope created by
diversification may cause managers to rely too
much on financial rather than strategic controls
to evaluate business units’ performances
• Strategic focus shifts to short-term performance
• Acquisitions may become substitutes for
innovation
ACQUISITION SUCCESS
Too Much Diversification
Overdiversification
• Related diversification requires more information processing
than does unrelated diversification
• Due to the additional information processing, related
diversified firms become overdiversified with fewer business
units than do unrelated diversifiers
• Overdiversification leads to a decline in performance, after
which business units are often divested
• Even when a firm is not overdiversified, a high level of
diversification can have a negative effect on its long-term
performance
ACQUISITION SUCCESS
Managers Overly Focused on
Acquisitions
WHY: MORE FUN TO MAKE THE DEALS
THAN TO RUN THE COMPANY
• Managers invest substantial time and energy in
acquisition strategies in:
• Searching for viable acquisition candidates
• Completing effective due-diligence processes
• Preparing for negotiations
• Managing the integration process after the acquisition
is completed
ACQUISITION SUCCESS
Managers Overly Focused on
Acquisitions
• Managers in target firms operate in a state of
virtual suspended animation during an
acquisition.
• Executives may become hesitant to make
decisions with long-term consequences until
negotiations have been completed.
• The acquisition process can create a short-
term perspective and a greater aversion to
risk among executives in the target firm.
ACQUISITION SUCCESS
Too Large
• Additional costs and complexity of management
may exceed the benefits of the economies of scale
and additional market power, creating
diseconomies of scope
• More bureaucratic controls result from size:
• Formal rules and policies ensure consistency of
decisions and actions
• Formalized controls often lead to relatively
rigid and standardized managerial behavior
• The firm may produce less innovation
EFFECTIVE ACQUISITIONS
TABLE 7.1
Attributes of
Successful
Acquisitions
EFFECTIVE ACQUISITION STRATEGIES
Complementary Buying firms with assets that meet
Assets/Resources current needs to build competitiveness
Friendly Friendly deals make integration go

Acquisitions more smoothly
Due Diligence/Careful Deliberate evaluation and negotiations

Selection Process are more likely to lead to easy
integration and building synergies
Maintain Financial Provide enough additional financial

Slack resources so that profitable projects may
be capitalized upon rather than forgone
EFFECTIVE ACQUISITION STRATEGIES
Attributes Results
Low-to- Merged firm maintains
Moderate Debt financial flexibility
Sustained Continue to invest in

Emphasis R&D as part of the
on Innovation firm’s overall strategy
Flexibility Has experience at

managing change and
is flexible and adaptable
RESTRUCTURING
A strategy through which a firm changes its
set of businesses or financial structure
• Failure of an acquisition strategy often
precedes a restructuring strategy
• Restructuring may occur because of
changes in the external or internal
environments
Restructuring strategies:
• Downsizing
• Downscoping
• Leveraged buyouts
RESTRUCTURING
• Reduction in the number of a
DOWNSIZING firm’s employees and in the
number of its operating units,
but it does not change the
essence of the business
• Refers to divestiture, spin-off, or
some other means of eliminating
DOWNSCOPING businesses that are unrelated to
a firm’s core businesses
• A party buys all of the assets of

LEVERAGED a business, financed largely with
BUYOUT debt, and takes the firm private
RESTRUCTURING
• Tactical
• Short-term
DOWNSIZING • Cut labor costs
• Acquisition failed to create
anticipated value
• Paid too much for target
• Strategic
• Long-term
• Focus on core businesses
DOWNSCOPING • More positive effect on firm
performance than downsizing
RESTRUCTURING
Downsizing: a reduction in the number of
a firm’s employees and sometimes in
the number of its operating units
• May or may not change the composition
of businesses in the company’s portfolio
Typical reasons for downsizing:
• Expectation of improved profitability
from labor cost reductions
• Desire or necessity for more efficient
operations
RESTRUCTURING
Downscoping: a divestiture, spin-off or
other means of eliminating businesses
unrelated to a firm’s core businesses
• A set of actions that causes a firm to
strategically refocus on its core businesses
and reduce the diversity of its business
portfolio
• May be accompanied by downsizing, but
must avoid eliminating key employees
• Smaller firm can be more effectively
managed by the top management team
RESTRUCTURING
DOWNSCOPING AND GLOBALIZATION
• U.S. firms use downscoping more frequently
than do European companies
• Conglomerate-building has been the trend in
Europe, Latin America, and Asia
• Some Asian and Latin American conglomerates
have begun to adopt Western corporate
strategies, i.e., refocusing on their core businesses
• Downscoping has occurred simultaneously with
globalization and market liberalization, which
have greatly enhanced competition
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
• Significant amounts of debt may be incurred to finance
the buyout
• Immediate sale of non-core assets to pare down debt
● Can correct for managerial mistakes
• Managers making decisions that serve their own
interests rather than those of shareholders
RESTRUCTURING
LEVERAGED BUYOUTS (LBOs)
● Three types of LBOs
1. Management buyouts (MBOs)
2. Employee buyouts (EBOs)
3. Whole-firm buyouts
● MBOs, moreso than EBOs and whole-firm buyouts, lead to

downscoping, increased strategic focus, and improved
performance
● Why LBOs?
■ Protection against a capricious financial market
■ Allows owners to focus on developing innovations and
bringing them to market
■ A form of firm rebirth to facilitate entrepreneurial efforts
RESTRUCTURING
LEVERAGED BUYOUTS (LBOs)
Considered a significant innovation in the financial
restructuring of firms, HOWEVER, they can involve
negative trade-offs:
■ First, the resulting large debt increases the firm’s
financial risk, as is evidenced by the number of companies
that filed for bankruptcy in the 1990s after executing a
whole-firm LBO
■ A short-term and risk-averse managerial focus results in
these firms failing to adequately invest in R&D and other
core competency drivers
Most LBOs have been completed in mature

industries where stable cash flows are possible
RESTRUCTURING
RESTRUCTURING OUTCOMES
• Short-term
• Reduced costs: labor and debt
• Emphasis on strategic controls
• Long-term
• Loss of human capital
• Performance: higher/lower
• Higher risk
RESTRUCTURING
FIGURE 7.2
Restructuring
and Outcomes
THANK YOU AND GOD BLESS!

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CHAPTER 7

ACQUISITION AND RESTRUCTURING STRATEGIES

● Explain the popularity of merger and

● Discuss reasons why firms use an acquisition

● Describe seven problems that work against

● Name and describe the attributes of effective

● Define the restructuring strategy and

● Explain the short- and long-term outcomes

■ Online social networks, such as Facebook, have

■ When Microsoft announced that it would acquire

■ Because Skype was founded and headquartered

■ Facebook has a somewhat different approach

■ Online commerce is moving into a consumer-

■ Acquisitions are a quick way to move into the

• Popular strategy in the U.S. for many

Too Much Inability to

Friendly Friendly deals make integration go

Due Diligence/Careful Deliberate evaluation and negotiations

Maintain Financial Provide enough additional financial

Sustained Continue to invest in

Flexibility Has experience at

• A party buys all of the assets of

● MBOs, moreso than EBOs and whole-firm buyouts, lead to

Most LBOs have been completed in mature

• Emphasis on strategic controls

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