Chapter 9: Acquisitions and mergers

versus other growth strategies

Growth

strategies

Internal

development
Acquisitions
Joint ventures

Mergers and acquisitions as a method

of corporate expansion
Advantages

strategy

of mergers as an expansion

Speed

into the market

Lower cost (e.g. exchange of shares)
Acquisition of intangible assets
Access to overseas markets
Disadvantages

strategy

Exposure

of mergers as an expansion

to business risk
Exposure to financial risk
Acquisition premium
Managerial competence
Integration problems

Types of mergers

Horizontal mergers
Increase

market power

Vertical mergers
Control

of supply chain
Control of distribution

Conglomerate mergers
Diversification

Evaluating the corporate and competitive

nature of a given acquisition proposal
Aspects of a merger that will have an
impact on the firms competitive position
include:
Increased market power
Creation of barriers to entry
Supply chain security
Economies of scale
Economies of scope

Financial synergy: tax and debt benefits

Developing an acquisition strategy

Motives for acquisition

Acquire undervalued firms,

for

this strategy to work, predator firm must

be able to
Find firms that are undervalued
Access to necessary funds
Skills in executing the acquisition

Diversity to reduce risk

Diversifying

by acquisition versus diversifying

across traded shares

Criteria for choosing an appropriate

target for acquisition
The main criteria that are consistent with
the underlying motive are:

Benefits for acquiring undervalued firms

Diversification
Operating synergy
Tax savings
Increase the debt capacity
Disposal of cash slack
Access to cash resources
Control of the company
Access to key technology

Creating synergies
Revenue synergy
Increased market power
Marketing synergies
Strategic synergies

Cost synergy
Economies of scale
Synergie
s
2+2=5

Financial synergy
Diversification
Cash slack
Tax benefits
Debt capacity

Explaining high failure rate of acquisitions

in enhancing shareholder value
Agency theory
Errors in valuing a target firm
Market irrationality
Pre-emptive theory
Window dressing
Poor integration management