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Management of Strategy Concepts International Edition 10Th Edition Ireland Solutions Manual Full Chapter PDF
Management of Strategy Concepts International Edition 10Th Edition Ireland Solutions Manual Full Chapter PDF
Chapter 7
Strategic Acquisition and Restructuring
KNOWLEDGE OBJECTIVES
1. Explain the popularity of merger and acquisition strategies in firms competing in the
global economy.
2. Discuss reasons why firms use an acquisition strategy to achieve strategic
competitiveness.
3. Describe seven problems that work against achieving success when using an acquisition
strategy.
4. Name and describe the attributes of effective acquisitions.
5. Define the restructuring strategy and distinguish among its common forms.
6. Explain the short- and long-term outcomes of the different types of restructuring
strategies.
CHAPTER OUTLINE
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7-1
Chapter 7: Strategic Acquisition and Restructuring
RESTRUCTURING
Downsizing
Downscoping
Leveraged Buyouts
Restructuring Outcomes
SUMMARY
REVIEW QUESTIONS
EXPERIENTIAL EXERCISES
VIDEO CASE
NOTES
LECTURE NOTES
OPENING CASE
Technology Giants’ Acquisition Strategies and Their Outcomes
The Opening Case sets up the central theme for Chapter 7—acquisition strategy.
Companies profiled in the case include Microsoft, Google, and Facebook. These three
firms are using acquisitions to move quickly into market space that they see developing.
Through its acquisition of Skype, Microsoft is seeking to broaden its communication
base. Google‘s acquisition of YouTube is seen as a move to gain access to new models of
advertising. Facebook‘s acquisition of Snaptu (and several other companies) appears to
be focused on obtaining the human capital necessary to further develop evolving aspects
of its business.
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different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
7-2
Chapter 7: Strategic Acquisition and Restructuring
In the latter half of the 20th century, acquisition became a prominent strategy used by major
corporations to achieve growth and meet competitive challenges. Even smaller and more
focused firms began employing acquisition strategies to grow and enter new markets.
However, acquisition strategies are not without problems; a number of acquisitions fail.
Thus, the chapter focuses on how acquisitions can be used to produce value for the firm‘s
stakeholders.
Acquisitions have been a popular strategy among US firms for many years. Some believe
that this strategy played a central role in the restructuring of US businesses during the 1980s,
1990s, and into the 21st century.
Increasingly, acquisition strategies are becoming more popular with firms in other nations
(e.g., those of Europe). In fact, about 40 to 45 percent of the acquisitions in recent years have
been made across country borders (i.e., where a firm headquartered in one country acquires a
firm headquartered in another country).
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7-3
Chapter 7: Strategic Acquisition and Restructuring
Evidence suggests that at least for acquiring firms, acquisition strategies may not result in
desirable outcomes. Studies have found that shareholders of acquired firms often earn above-
average returns from an acquisition, whereas shareholders of acquiring firms are less likely to
do so. In approximately two-thirds of all acquisitions, the acquiring firm‘s stock price falls
immediately after the intended transaction is announced, indicating investors‘ skepticism
about the likelihood that the acquirer will be able to achieve the synergies required to justify
the premium.
Before starting the discussion of the reasons for acquisitions, problems related to
acquisitions, and long-term performance, three terms should be defined because they will be
used throughout this chapter and Chapter 10.
A merger is a transaction where two firms agree to integrate their operations on a relatively
co-equal basis because they have resources and capabilities that together may create a
stronger competitive advantage.
An acquisition is a transaction where 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.
Whereas most mergers represent friendly agreements between the two firms, acquisitions
sometimes can be classified as unfriendly takeovers. A takeover is an acquisition—and
normally not a merger—where the target firm did not solicit the bid of the acquiring firm and
often resists the acquisition (a hostile takeover).
Teaching Note: You may find it helpful to refer students to Figure 7.1, which
lists the reasons for acquisitions (discussed more fully in the sections that
follow).
As discussed in Chapter 6, a primary reason for acquisitions is that they enable firms to gain
greater market power. Acquisitions to meet a market power objective generally involve
buying a supplier, a competitor, a distributor, or a business in a highly related industry.
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7-4
Chapter 7: Strategic Acquisition and Restructuring
Though a number of firms may feel that they have an internal core competence, they may be
unable to exploit their resources and capabilities because of a lack of size.
Horizontal Acquisitions
When a competitor in the same industry is acquired, a firm has engaged in a horizontal
acquisition. Horizontal acquisitions increase a firm‘s market power by exploiting cost-based
and revenue-based synergies.
Research suggests that horizontal acquisitions of firms with similar characteristics result in
higher performance than when firms with dissimilar characteristics combine their operations.
Examples of important similar characteristics include strategy, managerial styles, and
resource allocation patterns.
Horizontal acquisitions are often most effective when the acquiring firm integrates the
acquired firm‘s assets with its own assets, but only after evaluating and divesting excess
capacity and assets that do not complement the newly combined firm‘s core competencies.
Vertical Acquisitions
A vertical acquisition has occurred when a firm acquires a supplier or distributor that is
positioned either backward or forward in the firm‘s cost/activity/value chain.
Related Acquisitions
When a target firm in a highly related industry is acquired, the firm has made a related
acquisition.
It is important to note that acquisitions intended to increase market power are subject to
regulatory review, as well as analysis by financial markets.
As discussed in Chapter 2, barriers to entry represent factors associated with the market
and/or firms operating in the market that make it more expensive and difficult for new firms
to enter the market.
When barriers to entry are present, the firm‘s best choice may be to acquire a firm already
having a presence in the industry or market. In fact, the higher the barriers to entry into an
attractive market or industry, the more likely it is that firms interested in entering will follow
acquisition strategies.
Entry barriers firms face when trying to enter international markets are often great.
Commonly, acquisitions are used to overcome entry barriers in international markets. It is
important to compete successfully in these markets since global markets are growing faster
than domestic markets. Also, five of the emerging markets (China, India, Brazil, Mexico, and
Indonesia) are among the fastest growing economies in the world.
STRATEGIC FOCUS
Cross-Border Acquisition by Firms from Emerging Economies: Leverage Resources to
Gain a Larger Global Footprint and Market Power
In the Strategic Focus a number of cross-border acquisitions, in which the acquiring firm is
from an emerging market country, and the target firm is from a developed market country,
are identified. Examples include acquirers from Spain, China, India, and Brazil. Through
these types of acquisitions, emerging market firms are able to enter foreign developed
country markets as well as industries outside their domestic market. However, research
indicates that emerging market acquirers (especially government-owned entities) tend to pay
a higher purchase premium and must contend with more political scrutiny than firms from
other developed countries. Emerging market cross-border acquisitions of developed country
firms are likely to continue as emerging market economies have significant financial reserves
as both the US dollar and euro have lost value. In addition to the economics of these deals,
acquirers are able to bring acquired technologies/knowledge back to their domestic markets.
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7-6
Chapter 7: Strategic Acquisition and Restructuring
Cross-Border Acquisitions
Acquisitions between companies with headquarters in different countries are called cross-
border acquisitions.
Historically, US firms have been the most active acquirers of companies outside their
domestic market. However, in the global economy, companies throughout the world are
choosing this strategic option with increasing frequency. In recent years, cross-border
acquisitions have represented as much as 40 percent of the total number of acquisitions made
annually.
Acquisitions represent a viable strategy for firms that wish to enter international markets
because:
This may be the fastest way to enter new markets
They provide more control over foreign operations than do strategic alliances with a
foreign partner
Also of concern to firms‘ managers is achieving adequate returns from the capital invested to
develop and commercialize new products—an estimated 88 percent of innovations fail to
achieve adequate returns. Perhaps contributing to these less-than-desirable rates of return is
the successful imitation of approximately 60 percent of innovations within four years after
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7-7
Chapter 7: Strategic Acquisition and Restructuring
the patents are obtained. Because of outcomes such as these, managers often perceive
internal product development as a high-risk activity.
As discussed earlier, internal product development processes can be risky, in that entering a
market and earning an acceptable return on investment requires significant resources and
time. All the same, acquisition outcomes can be estimated easily and accurately (as compared
to the outcomes of an internal product development process), causing managers to view
acquisitions as carrying lowering risk.
Teaching Note: Not long ago, P&G acquired premium dog and cat food
manufacturer Iams Co. to support the launch of its pet products into
supermarket chains and mass merchandisers such as Walmart. Having
assessed the potential of Iams in the marketplace, P&G managers were
confident they would achieve positive results through their strategy; thus, they
may have considered entry into the premium pet-food market through
acquisition to be less risky than entering the market via internal product
development.
Because acquisitions recently have become such a common means of avoiding risky internal
ventures, they could become a substitute for innovation, which has a serious downside (e.g.,
the decline of Cisco systems).
Teaching Note: Although they often enable firms to offset the risk of internal
ventures and of developing new products, acquisitions are not without risks of
their own. Acquisition-related risks are discussed later in this chapter.
Increased Diversification
It should be easier for firms to develop new products and/or new ventures within their current
markets because of market-related knowledge, but firms that desire to enter new markets may
find that current product-market knowledge and skills are not transferable to the new target
market.
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7-8
Chapter 7: Strategic Acquisition and Restructuring
Using acquisitions to diversify a firm is the quickest and often the easiest way to change its
portfolio of businesses—e.g., Goodrich evolved from a tire maker to a top-tier aerospace
supplier through 40+ acquisitions.
Firms must be careful when making acquisitions to diversify their product lines because
horizontal and related acquisitions tend to contribute more to strategic competitiveness, and
thus they are more successful than diversifying acquisitions.
To reduce intense rivalry‘s negative effect on financial performance, a firm may use
acquisitions as a way to restrict its dependence on a single or a few products or markets.
Teaching Note: The following are examples of auto manufacturers that have
gone through acquisitions to reduce dependence of too few businesses:
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7-9
Chapter 7: Strategic Acquisition and Restructuring
Some acquisitions are made to gain capabilities that the firm does not possess—e.g.,
acquisitions used to acquire a special technological capability. Acquiring other firms with
skills and capabilities that differ from its own helps the acquiring firm learn new knowledge
and remain agile, but firms are better able to learn these capabilities if they share some
similar properties with the firm‘s current capabilities.
One of Cisco System‘s primary goals in its early acquisitions was to gain access to
capabilities that it did not currently possess through its commitment to learning. The firm
developed an intricate process to quickly integrate the acquired firms and their capabilities
(knowledge) after an acquisition is completed.
Figure Note: Figure 7.1 presents the reasons for making acquisitions and the
problems encountered. A comment that problems are discussed in ensuing
sections is appropriate.
Research suggests that perhaps 20 percent of all mergers and acquisitions are successful,
approximately 60 percent produce disappointing results, and the last 20 percent are clear
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7-10
Chapter 7: Strategic Acquisition and Restructuring
Integration Difficulties
Integration problems or difficulties that firms often encounter can take many forms. Among
them are:
Melding disparate corporate cultures
Linking different financial and control systems
Building effective working relationships (especially when management styles differ)
Problems related to differing status of acquired and acquiring firms‘ executives
FIGURE 7.1
Reasons for Acquisitions and Problems in Achieving Success
Seven reasons for acquisitions are presented in the left column whereas seven problems in
achieving acquisition success are presented in the right hand bubble-column of Figure 7.1.
To summarize, the seven reasons that firms (and managers) implement acquisition strategies
are to:
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7-11
Chapter 7: Strategic Acquisition and Restructuring
The seven reasons for poor performance of acquisitions or problems faced in attempts to
achieve success are:
Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Too much diversification
Managers overly focused on acquisitions
Too large
Note: Problems encountered as firms try to successfully achieve their objectives and create
value from acquisitions are discussed in detail in the next sections of this chapter.
It is important to maintain the human capital of the target firm after the acquisition to
preserve the organization‘s knowledge. Turnover of key personnel from the acquired firm
can have a negative effect on the performance of the merged firm.
Teaching Note: The following are examples of firms and the steps they took
to preserve human capital through the acquisition process.
When AllliedSignal acquired Honeywell, the firm set an aggressive
timetable to merge their operations into a $24 billion industrial powerhouse
in six months, despite the great diversification involved. This required a
team to develop and implement the integration.
Rapid integration is one of the guidelines that DaimlerChrysler uses for
successful firm integration in a global merger or acquisition. Managers are
encouraged to deal with unpopular issues immediately and honestly so
employees will be able to anticipate the effects the integration is likely to
have on them.
Cisco Systems is quick to integrate acquisitions with its existing operations.
Focusing on small companies with products and services related closely to
its own, some believe that the day after Cisco acquires a firm, employees
in that company feel as though they have been working for Cisco for
decades.
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7-12
Chapter 7: Strategic Acquisition and Restructuring
Due diligence is a process through which a firm evaluates a target firm for acquisition. In an
effective due-diligence process hundreds of items are examined in areas as diverse as the
financing for the intended transaction, differences in cultures between the acquiring and
target firm, tax consequences of the transaction, and actions that would be necessary to
successfully meld the two workforces.
Teaching Note: For the reasons below, firms often pay too much for acquired
businesses:
Acquiring firms may not thoroughly analyze the target firm, failing to
develop adequate knowledge of its true market value.
Managers’ overconfidence may cloud the judgment of acquiring firm
managers.
Shareholders (owners) of the target must be enticed to sell their stock, and
this usually requires that acquiring firms pay a premium over the current
stock price.
In some instances, two or more firms may be interested in acquiring the
same target firm. When this happens, a bidding war often ensues and
extraordinarily high premiums may be required to purchase the target firm.
Teaching Note: Some acquirers overpaying for target firms include the
following:
British retailer Marks & Spencer paid $750 million for Brooks Brothers of
the United States, but the acquisition was still unsuccessful after more than
ten years of integration.
Sony paid a 28 percent premium for CBS Records and a 60 percent
premium for Columbia Pictures.
Bridgestone paid a 60 percent premium for Firestone, and its winning bid
was 38 percent higher than a competing bid from Pirelli.
National City Corporation agreed to acquire First of America for a price that
was 3.8 times book value and 22.9 times First’s estimated 1998 earnings—
National City’s stock fell 5.9 percent.
First Union Corp. paid 5.3 times book value when it acquired CoreStates
Financial Corp.
Federated paid $10 per share for Broadway Department Stores when
Broadway’s stock was selling for $2 per share, a 400 percent premium in a
transaction valued at $1.6 billion to acquire Broadway’s prime West Coast
real estate locations.
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7-13
Chapter 7: Strategic Acquisition and Restructuring
In addition to overpaying for targets, many acquirers must finance acquisitions with
relatively high-cost debt.
In the 1980s, investment bankers developed a new financing instrument for acquisitions, the
junk bond. Junk bonds represented a new financing option in which risky investments were
financed with money (debt) that provided a high return to lenders (bond holders). Junk bonds
offer relatively high rates, some as high as 18 to 20 percent during the 1980s.
Acquiring firms also face the challenge of correctly identifying and valuing any synergies
that are expected to be realized from the acquisition. This is a significant problem because to
justify the premium price paid for target firms, managers may overestimate both the benefits
and value of synergy.
Teaching Note: As pointed out earlier, the average return to acquiring firm
shareholders is near zero, and many of these lead to negative returns for
acquiring firm shareholders.
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7-14
Chapter 7: Strategic Acquisition and Restructuring
Anheuser-Busch acquired Eagle Snacks and Campbell Taggart with the stated
purpose of achieving synergies. Anheuser-Busch believed that this distribution-
related synergy between snack foods, bakery products, and beer that could be
leveraged, while its expertise in the use of yeast in the brewing process could be
applied to Campbell Taggart‘s bread-making process.
However, distribution synergies were not available as beer, bread, and snack foods
were ordered by different store product managers. Frito-Lay responded with new
products and improved distribution to offset the threat of Eagle Snacks. In fact,
distribution became more complex and more expensive.
As a result, Anheuser-Busch sold Eagle Snacks and spun off the Campbell Taggart
unit so it could focus its efforts on expanding its presence in international beer
markets, where synergies are more likely to be available with its domestic beer
market.
Firms experience transaction costs when using acquisition strategies to create synergy. Direct
costs include legal fees and charges from investment bankers. Managerial time to evaluate
target firms and then to complete negotiations and the loss of key managers and employees
post-acquisition are indirect costs.
In general, firms using related diversification strategies outperform those using unrelated
diversification strategies. However, conglomerates (i.e., those pursuing unrelated
diversification) can also be successful.
In the drive to diversify the firm‘s product line, many firms overdiversified during the 60s,
70s, and 80s.
Teaching Note: Controls are discussed in more detail in Chapters 11 and 12.
Financial controls may be emphasized when managers feel that they do not have sufficient
expertise or knowledge of the firm‘s various businesses. When this happens, top-level
managers are not able to adequately evaluate the strategies and strategic actions taken by
division or business unit managers. As a result,
When they lack a rich understanding of business units‘ strategies and objectives, top-
level managers tend to emphasize the financial outcomes of strategic actions rather
than the appropriateness of the strategy itself.
This forces division or business unit managers to become short-term performance-
oriented.
The problem is more serious when manager compensation is tied to short-term
financial outcomes.
Long-term, risky investments (such as R&D) may be reduced to boost short-term
returns.
In the final analysis, long-term performance deteriorates.
As noted earlier in this chapter, acquisitions can have a number of negative effects. They
may result in greater levels of diversification (in products, markets, and/or industries), absorb
extensive managerial time and energy, require large amounts of debt, and create larger
organizations. As a result, acquisitions can have a negative impact on investments in research
and development and thus on innovation.
Reducing the emphasis on R&D and on innovation may result in the firm losing its strategic
competitiveness unless the firm operates in mature industries in which innovation is not
required to maintain competitiveness.
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7-16
Chapter 7: Strategic Acquisition and Restructuring
If firms follow active acquisition strategies, the acquisition process generally requires
significant amounts of managerial time and energy.
The desire to merge is like an addiction in many companies: Doing deals is much more fun
and interesting than fixing fundamental business problems.
Due diligence and negotiating with the target often include numerous meetings between
representatives of the acquirer and target, as well as meetings with investment bankers,
analysts, attorneys, and in some cases, regulatory agencies. As a result, top-level managers of
acquiring firms often pay little attention to long-term, strategic matters because of time (and
energy) constraints.
STRATEGIC FOCUS
The Acquisitions and Mergers to Form Citigroup: Divestitures Associated with the
Failed Concept of the Financial Supermarket
In the late 1990s Citigroup was pursuing a ‗financial supermarket‘ strategy in which it could
serve every financial need of customers. However, as a result of weak economic conditions
and governmental pressure, Citi has been moving to restructure its business portfolio and
move away from the financial supermarket concept. To accomplish this it has divested
several businesses including Traveler‘s Group, Discover Financial Services, Smith Barney,
CitiFinancial, and some of its private equity assests. This corporate restructuring is aimed at
helping Citigroup focus on its core banking business and meet new regulatory requirements.
Teaching Note: Over the years, a good deal of attention has be focused on
acquisitions. Divestitures have received much less attention. Whereas many
acquisitions involve the purchase of businesses that are being divested by the
seller, most accounts focus on how the acquisition makes a contribution to the
acquirer. Students should realize that divestitures can also serve an important
strategic purpose. As the Strategic Focus illustrates, divestitures are useful
because they allow firms to restructure their business portfolios to undo poor
previous decisions (to acquire the firms that are now being divested), to adapt to
changing environmental conditions, and/or strategically refocus the business
portfolio around new strategic thrusts.
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7-17
Chapter 7: Strategic Acquisition and Restructuring
Too Large
Firms can reach economies of scale by growing. But after a certain size is achieved, size can
become a disadvantage as firms reach a point where they suffer from what is called
―diseconomies of scale.‖ This implies that problems related to excess growth may be similar
to those that accompany overdiversification.
Other actions taken to enable more effective management of increased firm size include
increasing or establishing bureaucratic controls, represented by formalized supervisory and
behavioral controls such as rules and policies designed to ensure consistency across different
units‘ decisions and actions.
On the surface (or in theory), bureaucratic controls may be beneficial to large organizations.
However, they may produce overly rigid and standardized behavior among managers. The
reduced managerial (and firm) flexibility can result in reduced levels of innovation and less
creative (and less timely) decision making.
EFFECTIVE ACQUISITIONS
Research has identified attributes that appear to be associated consistently with successful
acquisitions:
When a firm‘s assets are complementary (highly related) with the acquired firm‘s
assets and create synergy and, in turn, unique capabilities, core competencies, and
strategic competitiveness
When targets were selected and ―groomed‖ through earlier working relationships
(e.g., strategic alliances)
When the acquisition is friendly, thereby reducing animosity and turnover of key
employees
When the acquiring firm has conducted due diligence
When management is focused on research and development
When acquiring and target firms are flexible/adaptable (e.g., from executive
experience with acquisitions)
When integration quickly produces the desired synergy in the newly created firm,
allowing the acquiring firm to keep valuable human resources in the acquired firm
from leaving
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7-18
Chapter 7: Strategic Acquisition and Restructuring
TABLE 7.1
Attributes of Successful Acquisitions
Successful acquisitions generally are characterized by the following attributes and results:
Target and acquirer having complementary assets and/or resources that result in a high
probability of achieving synergy and gaining competitive advantage
Making friendly acquisitions to facilitate integration speed and effectiveness and reducing
any acquisition premium
Target selection and negotiation processes that result in the selection of targets having
resources and assets that are complementary to the acquiring firm‘s core business, thus
avoiding overpayment
Maintaining financial slack to make acquisition financing less costly and easier to obtain
Maintaining a low to moderate debt position, which lowers costs and avoids the trade-offs
of high debt and lowers the risk of failure
Possessing flexibility and skills to adapt to change to facilitate integration speed and
achievement of synergy
Continuing to invest in R&D and emphasizing innovation to maintain competitive
advantage
Teaching Note: One way to teach the finer points of the M&A process is to
see its parallels with marriage and courtship. Though the source is rather
dated now, Jemison & Sitkin (1986, Academy of Management Review)
offered an interesting analysis based on this framework. Their points are too
extensive to comment on here, but reference to their writings is helpful.
RESTRUCTURING
From the 1970s into the 2000s, divesting businesses from company portfolios and
downsizing accounted for a large percentage of firms‘ restructuring strategies. Restructuring
is a global phenomenon.
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7-19
Chapter 7: Strategic Acquisition and Restructuring
Sometimes firms use a restructuring strategy because of changes in their external and internal
environments. For example, opportunities sometimes surface in the external environment that
are particularly attractive to the diversified firm in light of its core competencies. In such
cases, restructuring may be appropriate.
Downsizing
In the late 1980s, early 1990s, and early 2000s, thousands of jobs were lost in private and
public organizations in the United States. One study estimates that 85 percent of Fortune
1000 firms have used downsizing as a restructuring strategy. Moreover, Fortune 500 firms
terminated more than one million employees, or 4 percent of their collective workforce, in
2001 and into the first few weeks of 2002. This trend continued in many industries. For
instance, in 2007, Citigroup signaled that it cut 15,000 jobs and up to five percent of its
workforce overtime, in the process taking a $1 billion charge.
Firms use downsizing as a restructuring strategy for different reasons. The most frequently
cited reason is that the firm expects improved profitability from cost reductions and more
efficient operations.
Downscoping
Downscoping refers to the divestiture, spin-off, or other means of eliminating businesses that
are unrelated to the firm‘s core business. In other words, downscoping refocuses the firm on
its core businesses.
Whereas downscoping often includes downsizing, the former is targeted so that the firm does
not lose key employees from core businesses (because such losses can lead to the loss of core
competencies).
Note: Indicate to students that the requirements and characteristics of strategic leadership
by a firm’s top management team are discussed more fully in Chapter 12.
Leveraged Buyouts
A leveraged buyout (LBO) refers to a restructuring action whereby the management of the
firm and/or an external party buys all of the assets of the business, largely financed with debt,
and thus takes the firm private.
Often, LBOs are used as a restructuring strategy to correct for managerial mistakes or
because managers are making decisions that primarily serve their personal interests rather
than those of shareholders.
In other words, a firm is purchased by a few (new) owners using a significant amount of debt
(in a highly leveraged transaction) and the firm‘s stock is no longer traded publicly.
In general, the new owners restructure the private firm by selling a significant number of
assets (businesses) both to downscope the firm and to reduce the level of debt (and
significant debt costs) used to finance the acquisition.
A primary intent of the new owners is to improve the firm‘s efficiency. This enables them to
sell the firm (outright to another owner or by a public stock underwriting), thus capturing the
value created through the restructuring. It is not uncommon for those buying a firm through
an LBO to restructure the firm to the point that it can be sold at a profit within a five- to
eight-year period.
There are three types of leveraged buyouts: management buyouts (MBO), employee buyouts
(EBO), and whole-firm buyouts where another firm takes the firm private (LBO). Research
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7-21
Chapter 7: Strategic Acquisition and Restructuring
has shown that management buyouts can also lead to greater entrepreneurial activity and
growth.
Restructuring Outcomes
Downsizing often does not lead to higher firm performance; in fact, research has shown that
downsizing contributed to lower returns for both US and Japanese firms. The stock markets
in the firms‘ respective nations evaluated downsizing negatively. Investors concluded that
downsizing would have a negative effect on companies‘ ability to achieve strategic
competitiveness in the long term. Investors also seem to assume that downsizing occurs as a
consequence of other problems in a company.
Downsizing tends to result in a loss of human capital in the long term. Losing employees
with many years of experience with the firm represents a major loss of knowledge. As noted
in Chapter 3, knowledge is vital to competitive success in the global economy. Thus, in
general, research evidence and corporate experience suggest that downsizing may be of more
tactical (or short-term) value than strategic (or long-term) value.
Downscoping generally leads to more positive outcomes in both the short and the long term
than does downsizing or engaging in a leveraged buyout (see Figure 7.2). Downscoping‘s
desirable long-term outcome of higher performance is a product of reduced debt costs and the
emphasis on strategic controls derived from concentrating on the firm‘s core businesses. In
so doing, the refocused firm should be able to increase its ability to compete.
Although whole-firm LBOs have been hailed as a significant innovation in the financial
restructuring of firms, there can be negative trade-offs.
The resulting large debt increases the financial risk of the firm
The intent of the owners to increase the efficiency of the bought-out firm and then sell it
within five to eight years can create a short-term and risk-averse managerial focus
These firms may fail to invest adequately in R&D or take other major actions designed to
maintain or improve the company‘s core competence.
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7-22
Chapter 7: Strategic Acquisition and Restructuring
FIGURE 7.2
Restructuring and Outcomes
1. Why are merger and acquisition strategies popular in many firms competing in
the global economy? (pp. 175–176)
Acquisition strategies are increasingly popular around the world. Because of globalization,
deregulation of multiple industries in many different economies, favorable legislation, etc.,
the number of domestic and cross-border acquisitions is high (though the frequency has
slowed recently). As is the case for all strategies, acquisitions indicate a choice a firm has
made regarding how it intends to compete. Because each strategic choice affects a firm‘s
performance, the possibility of diversification merits careful analysis. A firm may make an
acquisition to increase its market power because of a competitive threat, to enter a new
market because of the opportunity available in that market, or to spread the risk due to the
uncertain environment. In addition, a firm may acquire other companies as options that allow
the firm to shift its core business into different markets as volatility brings undesirable
changes to its primary markets.
2. What reasons account for firms’ decisions to use acquisition strategies as a means
to achieving strategic competitiveness? (pp. 176–183)
Firms often choose to follow acquisition strategies (1) to increase market power (by
becoming larger); (2) to overcome entry barriers (by acquiring a firm with a position in the
target industry); (3) to reduce cost of new-product development and increase the speed to
market entry; (4) to reduce the risk associated with developing new products internally; (5) to
diversify both firm and managerial risk by increasing the level of diversification; (6) to
reshape the firm‘s competitive scope; and (7) to boost learning and the development of new
capabilities.
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7-23
Chapter 7: Strategic Acquisition and Restructuring
3. What are the seven primary problems that affect a firm’s efforts to successfully
use an acquisition strategy? (pp. 183–191)
Firms following acquisition strategies face seven major problems. (1) They may face
difficulty in successfully integrating the two firms. This is especially true when integration
involves melding disparate corporate cultures, linking disparate financial and control
systems, building effective working relationships when management styles differ, and when
the status of acquired firm executives is uncertain. (2) Owing to inadequate evaluation of the
target firm (a process known as due diligence), acquirers may pay more for the target firm
than it is worth. (3) If the acquisition is financed with debt, as many were in the 1980s, the
costs related to a significant increase in debt—interest payments and debt repayment—may
squeeze the firm‘s cash flow and limit managerial flexibility resulting in the firm passing up
attractive long-term investment opportunities. It is also important to note that debt also has
positive effects since leverage can assist a firm in its development, allowing it to take
advantage of attractive expansion opportunities. (4) Acquiring firms also may overestimate
the existence and value of synergies from combining the two firms. In many cases, the value
to be gained from synergy is overestimated due to a failure to consider the integration and
coordination costs that may be incurred. (5) Too much diversification may mean that the
portfolio of businesses that the firm owns is beyond the expertise of managers, that
management depends too much on financial controls (rather than more effective strategic
controls), and that acquisitions may become a substitute for innovation. (6) Managers may be
overly focused on acquisitions and neglect the firm‘s core businesses. (7) The combined firm
may become too large to manage efficiently and effectively, as the firm experiences
diseconomies of scale or bureaucratic controls stifle decision making.
4. What are the attributes associated with a successful acquisition strategy? (pp.
191–192)
As identified in Table 7.1, the following attributes tend to lead to successful acquisitions:
Acquired firm has assets or resources that are complementary to the acquiring firm‘s core
business
Acquisition is friendly
Acquiring firm selects target firms and conducts negotiations carefully and deliberately
Acquiring firm has financial slack (cash or a favorable debt position)
Merged firm maintains low to moderate debt position
Has experience with change and is flexible and adaptable
Sustained and consistent emphasis on R&D and innovation
5. What is the restructuring strategy, and what are its common forms? (pp. 193–
194)
Defined formally, restructuring is a strategy through which a firm changes its set of
businesses and/or financial structure. There are three common forms of restructuring
strategies.
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7-24
Chapter 7: Strategic Acquisition and Restructuring
A leveraged buyout (LBO) is a restructuring strategy whereby a party buys all of a firm‘s
assets in order to take it private. Once the transaction is complete, the company‘s stock is no
longer traded publicly. It is common for the firm to incur significant amounts of debt to
finance a leveraged buyout. The three types of leveraged buyouts include management
buyouts (MBO), employee buyouts (EBO), and a whole firm buyout (the last occurring when
another company or partnership purchases an entire company instead of a part of it).
6. What are the short- and long-term outcomes associated with the different
restructuring strategies? (pp. 194–195)
As identified in Figure 7.2, the short-term outcome from downsizing is a reduction in labor
costs, but this yields two negative long-term outcomes—loss of human capital and lower
performance. Downscoping leads to reduced debt costs and an emphasis on strategic
controls, which in turn produce higher firm performance as a long-term outcome. Finally,
leveraged buyouts can lead to higher performance (long-term) through an emphasis on
strategic controls, but it also yields high debt costs (short-term) that produce higher risk for
the firm (long-term).
To prepare for this exercise the instructor should prepare an example as a go by for
students. Included below is one they are likely to have heard about, if not they are likely
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7-25
Chapter 7: Strategic Acquisition and Restructuring
to find interesting. The key take away from this exercise is to provide them a real life
event to research and apply the concepts from the text. By analyzing press reports, market
data, and viewing the deal pre and post event, a picture of why deals emerge and their
impact can be viewed.
Below is an example and a way to organize this assignment from the viewpoint of Whole
Foods Acquisition of Wild Oats.
Executed August 31, 2007 Whole Foods (WFMI) acquiring company with Wild Oats
(OATS) the target. This example originated from Yahoo Finance US Mergers and
Acquisitions Monthyl Calendar for August 2007.
June 5, 2007
Fortune magazine online reports that the FTC will be suing to stop the acquisition
claiming that the organice market will be substantially reduced in competition if this
acquisition is allowed to proceed. Shares of WFMI drop, OATS increase.
http://www.forbes.com/2007/06/05/wholefoods-wildoats-organics-markets-equities-
cx_ra_0605markets24.html
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7-26
Chapter 7: Strategic Acquisition and Restructuring
http://www.huliq.com/32218/whole-foods-market-closes-acquisition-of-wild-oats-
markets
November 6, 2008
Motley Fool online- Thanks for nothing
Rash of unexpected costs slashes earnings – 4th quarter income drops 96%. FTC still
pursuing litigation costing $15-20m in legal fees for firm.
http://www.fool.com/investing/general/2008/11/06/thanks-for-nothing-wild-oats.aspx
Quarterly high and low stock price for 2007 and 2008 (in US
$)
High Low
2008
October 1, 2007 to January 20, 2008 53.65 34.37
January 21, 2008 to April 13, 2008 42.48 29.99
April 14, 2008 to July 6, 2008 36.03 22.63
July 7, 2008 to September 28, 2008 24.22 17.37
2007
September 25, 2006 to January 14, 2007 66.25 45.27
January 15, 2007 to April 8, 2007 52.43 42.13
April 9, 2007 to July 1, 2007 48.06 37.96
July 2, 2007 to September 30, 2007 49.49 36.00
When the acquisition was announced the high stock price was 52.43 and in the latest
quarter reported the price is $24.22, more than a 50% drop in value.
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7-27
Chapter 7: Strategic Acquisition and Restructuring
This would also be a good time to have students discuss the ―management discussion and
analysis of financial condition and results of operation:, which will be found in terms
similar for each public firm in their 10k filing.
The purpose of this exercise is to help students understand the challenges associated with
a merger strategy predicated on synergies. While both Cadbury and Schweppes had
strong brand recognition in their respective markets, there was little in the way of overlap
by combining both firms. This example is also useful for illustrating the role of
shareholder activism, as well as different mechanisms for divestiture. Students are asked
to prepare a PowerPoint presentation that addresses the following questions:
For a class debrief, it is useful to ask two or three teams to make a brief presentation of
their findings. The instructions in the textbook indicate that there should be one slide per
question. The brevity of these presentations means that you should be able to have two or
three teams present in ten or fifteen minutes, leaving additional time for discussion.
The following Wall Street Journal articles can be helpful for leading a debrief on the
assignment:
In breakup, CEO of Cadbury faces his biggest deal; parting of the firm‘s candy
and drinks businesses may put both in play. WSJ, March 16, 2007, page A1.
Cadbury Schweppes PLC: U.S. Beverages division may be spun off, not sold.
WSJ, August 2, 2007.
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7-28
Chapter 7: Strategic Acquisition and Restructuring
In the March 16, 2007 announcement, CEO Stitzer noted that the company had been
considering separating the candy and beverage units for some time. Shareholders had
often made such a recommendation previously, based on an expectation that the two
companies were undervalued following the merger. However, the timing suggests a
different reason for the announcement: only days before, investor Nelson Peltz of Trian
Fund Management had purchased a 2.98% stake in Cadbury Schweppes. Peltz had made
previous acquisitions of companies such as H.J. Heinz and Tiffany‘s, and was an
advocate of breaking up the candy and beverage units.
One of the factors hindering the success of the merger was the inability of the firms to
realize synergies. While both segments may appear very similar on the surface, the WSJ
articles indicate that each had very different production and distribution systems.
Another possible factor is that the CEO was very focused on acquisitions: Stitzer was a
merger and acquisition lawyer to joining Cadbury Schweppes, and was a major advocate
of the firm‘s decision to acquire Dr. Pepper, 7 Up, Dentyne, Bubaloo, and Trident.
In the March 16 WSJ article, Stitzer laid out three approaches for separating Schweppes:
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Chapter 7: Strategic Acquisition and Restructuring
And then along came the world wide recession which shaved more value off the
divestiture. While Cadbury Schweppes termed this a demerger, it in actuality was a
spinoff of existing businesses within their corporate portfolio. Under the spin off, for
every 100 shares an existing Cadbury Schweppes shareholder owned, they received 64
shares in Cadbury and 12 shares in DrPepper Snapple Group.
The video opens with a typical price conscious consumer who is the target of the merger
between Southwest and AirTran. AirTran executives assert that with the merger, the
potential exists to spread discount airfares farther is even greater. Discount carriers are
known for stimulating competition and helping to lower airfares. Consolidation of major
carriers such as United and Continental airlines brings the number of major carriers in the
US to only four.
In general the average consumer is finding fewer seats and higher prices and feels the
airlines have worked hard to make flying not fun. Despite not pleasing the customer, the
industry is making money again with critical profit centers known as add-on fees. With
$25 for a checked bag, $35 for phone reservations, and up to $300 to change a
reservation, major airlines have made $2.4 billion in profits with $1.3 billion coming
from add-on fees with $745 million from checked bags alone.
Southwest charges no fees for changing flights or for the first two checked bags and the
merger with AirTran may help lower ticket prices in the industry. Individuals say that
wherever Southwest goes, they will pressure their competitors to refrain from excessive
fees in the long haul.
What would make the arrangement between Southwest and AirTran a merger and
not an acquisition?
o Text: A merger is a strategy through which two firms agree to integrate
their operations on a relatively co-equal basis. An acquisition is a strategy
though 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.
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7-30
Chapter 7: Strategic Acquisition and Restructuring
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
1. Evidence indicates that the shareholders of many acquiring firms gain little or nothing in
value from the acquisitions. Why, then, do so many firms continue to use an acquisition
strategy?
2. Of the problems that affect the success of an acquisition, ask students which one they
believe is the most critical in the global economy. Why? What should firms do to make
certain that they do not experience such a problem when they use an acquisition strategy?
3. Have students use the Internet to read about acquisitions that are currently underway and
to choose one of these acquisitions. Based on the firms‘ characteristics and experiences
and the reasons cited to support the acquisition, do they feel it will result in increased
strategic competitiveness for the acquiring firm? Why or why not?
4. Have students research recent merger and acquisition activity that is taking place
throughout the global economy. Are most of the transactions they found between
domestic companies or are they cross-border acquisitions? What accounts for the nature
of what they found?
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Chapter 7: Strategic Acquisition and Restructuring
5. What is synergy, and how do firms create it through mergers and acquisitions? In the
students‘ opinion, how often do acquisitions create private synergy? What evidence can
they cite to support their position?
6. What can a top management team do to ensure that its firm does not become diversified
to the point of earning negative returns from its diversification strategy?
7. Some companies enter new markets through internally developed products, whereas
others do so by acquiring other firms. What are the advantages and disadvantages of each
approach?
8. How do the Internet‘s capabilities influence a firm‘s ability to study acquisition
candidates?
Ethics Questions
1. Some evidence suggests that there is a direct and positive relationship between a firm‘s
size and its top-level managers‘ compensation. If this is so, what inducement does that
relationship provide to upper-level executives? What can be done to influence the
relationship so that it serves shareholders‘ interests?
2. When a firm is in the process of restructuring itself by divesting some assets and
acquiring others, managers may have incentives to restructure in ways that increase their
power base and compensation package. Does this possibility explain at least part of the
reason for the less-than-encouraging outcomes of acquisitions for shareholders of the
acquiring firm?
3. When shareholders increase their wealth through downsizing, does this come, to some
degree, at the expense of loyal employees—those who have worked diligently to serve
the firm in terms of accomplishing its vision and mission? If so, what actions would
students take to be fair to both shareholders and employees if they were charged with
downsizing or ―smartsizing‖ a firm‘s employment ranks? What ethical base would they
employ to make decisions regarding downsizing?
4. Are takeovers ethical? If not, why not?
5. Is it ethical for managers to acquire other companies just because industry competitors
are doing so?
Internet Exercise
Many Internet sites, including the US Federal Trade Commission‘s official site at
http://www.ftc.gov., offer information on mergers and acquisitions. With the increasing
number of cross-border mergers and acquisitions, the FTC has been required to work closely
with other foreign antitrust enforcers to regulate the new era of the global transaction. For
example, the United States and the European Union have a bilateral agreement on antitrust
enforcement.
*e-project: Trace the history of some relatively recent large mergers and acquisitions—e.g.,
Daimler and Chrysler, BP Amoco and Arco, and Vodafone and Mannesmann. Use their
websites and any other sources you find to obtain information on the official regulatory
agencies that were involved in granting or denying permission for these mergers.
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7-32
Another random document with
no related content on Scribd:
You may laugh, children, but it is true. The dolphin had a servant,
who was also a dolphin, but of the family of the Globiceps. These are
so called because of their round heads, which look like the globes
used in the electric lighting of streets.
The young dolphin was playing in the water. He tried to attract
Pinocchio’s attention in many ways. He spouted water through the
hole which every dolphin has at the top of his head. He called to the
marionette. He smiled at the youngster. It was of no use. Pinocchio,
with his wooden nose in the air and his dough cap on one ear, would
not even turn his head.
“I wonder if he is deaf or blind?” the dolphin finally said, loudly
enough to be heard.
Pinocchio turned with a start.
“For your own benefit, I just wish to say that I am not now and never
have been deaf,” he said as haughtily as he could.
“Then why do you look at me in that fashion? And why don’t you
answer me?” was the reply.
“I am acting just as a gentleman should toward those who are
beneath him,” said Pinocchio.
“I don’t know which of us is the better of the two. All I do know is, that
my father was the richest inhabitant of the sea and that the other
dolphins considered him their king.”
“King?” mumbled Pinocchio, who knew himself to be the son of a
poor carpenter, earning so little that he never had a penny in his
pocket.
“But king or not, what does it matter? In this world we are all equal,
for we have all been created by God. Listen, my dear marionette.
Come here. As we are to travel such a long distance together, we
should be friends. Are you willing to be my friend?”
These pleasing words made Pinocchio see how stupid and how rude
he had been.
“Think of it! A fish (oh, no, I mean a sea animal) giving me lessons in
politeness!” Then turning to the dolphin, he said, “Yes, we shall be
friends. What is your name?”
“Marsovino. And yours?”
“Pinocchio.”
“A beautiful name. Come, shake hands.”
“Very willingly,” replied Pinocchio.
The good little animal stuck one of his fore fins out of the water for
Pinocchio to shake.
“And what is the tutor’s name?” said the boy of wood to the boy of
the sea.
“The tutor is a dolphin of the Tursio family, but I call him father. Is it
true that you are coming with us on our travels?”
“Yes,” said the marionette, proudly. “And I am able to teach you.”
“Teach me! That’s strange. How do you expect to teach me?”
“You will soon find out. You talk rather disrespectfully to me. I have
been in all the schools of the kingdom. And you? You probably have
never been on land for twenty-four hours.”
Marsovino looked at the marionette smilingly, but made no reply.
Pinocchio walked up and down with his hands in his pockets and his
hat at an angle of forty-five degrees, ruffling his feathers at the
brilliant remark he had made.
As soon as Tursio came near, Marsovino asked him if he were ready.
“Yes. Everything is finished,” was the reply. “Are you ready,
Pinocchio?”
“Yes. I am ready. Let us start.”
“Start? How? Do you mean to say that you are coming under the sea
with that suit?”
“Of course. It’s the only one I have.”
“A suit of paper! The very idea! Luckily I have prepared for this.
Here, Globicephalous,” he said to his servant, “give me that little suit
of ray leather,—the one I had you make this morning.”
“Splendid,” cried Pinocchio, clapping his hands. “Now I have a new
suit.”
Putting it on, he looked at himself in the water. Seeing how dark and
unbecoming it appeared, he turned to Tursio and said excitedly:
“I don’t want this. It is too ugly. I like my pretty flowered-paper one
better.”
“Your paper one Globicephalous will carry in his satchel for you.
Should you wear it in the water, it would be spoiled.”
“I want my pretty suit,” insisted Pinocchio. “If any one saw me in this
thing, he would ask me if I had been through the coal-hole.”
“But yours will be ruined if you wear it in the water, I tell you.”
“I want mine. I want mine,” wailed Pinocchio.
“Very well. Globicephalous, take the paper suit out of the traveling
bag and give it to the boy.”
The marionette turned, expecting to see an ordinary traveling bag.
Instead, he saw Globicephalous take an enormous oyster out of the
water.
“Isn’t that strange! Oyster shells for a traveling bag!”
“Strange? Why, what is strange about that?” asked Tursio.
“What is its name?” asked Pinocchio.
“That is the giant Tridacna. They are the largest oyster shells
known.”
“How large the animal inside must be,” observed Pinocchio, with a
yawn.
“Yes. It is very large, and also very beautiful. The center of the body
is a violet color dotted with black. Around this is a green border. At
the extreme edge the colors change from deepest to lightest blue.
Yes, indeed. It is very beautiful.”
“What a good meal it would make,” thought Pinocchio. His only wish
was for a good dinner, but in order to be polite he said, “Who would
ever think that there are such things under the sea!”
“Why, you have been in every school in the kingdom and don’t know
that?”
“Books on the subject you can find everywhere.”
Pinocchio bit his lips, but did not say a word. Quickly he dressed
himself again in his paper suit and declared himself ready to start.
“All right! Come along!” said the dolphin, stretching a fin out to help
Pinocchio along.
The marionette started to walk into the water. He had not gone far,
however, before his paper suit began to leave him. Hastening back
to the shore, he very meekly put on the ray-leather suit which
Globicephalous handed to him.
“Remember, my boy,” said Tursio, “that in this world of ours we must
think not only of the beauty but also of the usefulness of things. Also,
do not forget that a boy who never learns anything will never be
anything.”
“But I have learned much,” answered Pinocchio. “To prove this to
you, I can now tell you of what material this suit is made.”
“I have told you already. It is of ray leather. Do you know what a ray
is?”
“Surely I know. You may give it another name. Still, it must be that
white animal on four legs. You know. The one the shepherds shear
during some month or other.”
“Mercy!” cried Tursio. “You are talking about sheep. They give wool
to man.”
Pinocchio, without moving an eyelid, went on:
“Yes, that’s true. I have made a mistake. I should have said it is that
plant that bears round fruit, that when it opens....”
“Worse and worse,” interrupted the old dolphin. “What are you
talking of, anyway? That is the cotton plant. Marsovino, please
explain to this boy, who has read all the books in the world, what a
ray is.”
So Marsovino went on: “A ray is a fish, in shape like a large fan. It
has a very long tail, which it uses as a weapon.”
“To what class of fishes does it belong?” asked Pinocchio.
“It belongs to the same class as the lampreys, which look like
snakes, the torpedo,—”
“Be careful never to touch that fellow,” here interrupted Tursio.
“—the sawfish and the squaloids,—that is, the common shark and
the hammerhead.”
“The saw? The hammer?” observed Pinocchio. “If I find them, I must
keep them for my father. He is a carpenter, but so poor that he
seldom has money with which to buy tools.”
“Let us hope that you will never meet the saw, the terrible
hammerhead, or even the common shark,” said Tursio.
Pinocchio made no answer, but in his heart he kept thinking, “I am
very much afraid that the dolphins are teaching me, not I the
dolphins.”
Tursio then handed Pinocchio a small shell of very strange shape. It
looked like a helmet.
“Wear this, Pinocchio,” he said. “It will make a pretty cap for you.”
“It is very pretty. What is it?”
“It is a very rare shell.”
“But it is only one shell. Where is its mate?”
“It has none. It is a univalve. That means it has only one shell. The
tellines have two shells, and are therefore called bivalve. Another
kind looks like a box with a cover.”
“But does an animal live in there?”
“Of course. Every shell has its mollusk.”
“Mollusk?” repeated Pinocchio.
“Yes. The small animals that live in shells are called by that name.”
“They have a very soft body. By means of a member, called a foot,
they get such a strong hold on rocks that it is very hard to tear them
off.”
“Some mollusks have a strong golden-colored thread by which they
also hang to rocks. Why, people have even made cloth out of these
threads.”
Pinocchio cared little for all this explanation. He looked at himself in
the water, and was, after all, very much pleased with himself.
“This cap seems made for me,” he said. “Too bad I have no feather
for it.”
“Perhaps we shall find one on our journey,” laughed Tursio.
“Where will you get it? In the sea?”
“Yes, in the sea,” answered Tursio, in a tone which made the
impudent marionette almost believe him.
CHAPTER IV
“Well, children, let us hasten. If we talk so much,
the sun will rise and find us here. Come, Pinocchio!
Jump on my back and let us start.”
There was no need for Tursio to repeat his
command. In the twinkling of an eye, Pinocchio was
riding on the dolphin’s back, holding on tightly to the
dorsal fin.
“But why did the large one swallow the small one?” asked Pinocchio.
“Because the little one probably wanted to run away from the nest. It
was too soon, the little one was too young to take care of himself; so
the father took the only means he had to save the youngster from an
enemy,” patiently explained Tursio.
Just then a small fish attracted the dolphin’s attention.
“Boys,” he said, “do you see that tiny fish? It is called the pilot fish. It
is the shark’s most faithful friend. Wherever goes the shark, there
goes the pilot fish.”
“Now, Pinocchio,” he continued after a pause, “I shall leave you with
Globicephalous. Marsovino and I are going to pay a visit to the
dolphin Beluga, who is a great friend of mine. He usually lives in the
polar seas, but on account of his health, he has come to warmer
waters. We shall return this evening, if all be well. Meet us near
those two mountains which are so close together that they form a
gorge. You may take a walk with Globicephalous, but be sure to be
at that spot to-night.”
“I am ashamed to be seen with a servant,” began Pinocchio.
“You are a fine fellow,” answered Tursio, with sarcasm. “Do you
know what you should do? Buy a cloak of ignorance and a throne of
stupidity, and proclaim yourself King of False Pride of the Old and
the New World!”
With this remark Tursio turned to his pupil, and the two swam away.