St. Rose College Educational Foundation Inc.

College of Business and Accountancy

Samput, Paniqui, Tarlac

CHAPTER 7:

ACQUISITION AND RESTRUCTURING STRATEGIES

Apostol, John Henry

Dumantay, Joy Lean Mae

Lacsamana, Joules

Mr. Alvin Manzon, MBA

Instructor
THE POPULARITY OF MERGER AND ACQUISITION STRATEGIES

The acquisition strategy has been a popular strategy among U.S. firms for many years.

Some believe that this strategy played a central role in an effective restructuring of U.S.

businesses during the 1980s and 1990s and into the 21st century. 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. For instance, Clear Channel Communications built its business by

buying radio stations in many geographic markets when the Telecommunications Act of

1996 changed the regulations regarding such acquisition. However, more recently Clear

Channel has been suggested to have too much market power and is now likely to split

into three different businesses. The strategic management process calls for an acquisition

strategy to increase a firm’s strategic competitiveness as well as its returns to

shareholders. Thus, an acquisition strategy should be used only when the acquiring firm

will be able to increase its value through ownership of an acquired firm and the use of its

assets. However, evidence suggests that, at least for the acquiring firms, acquisition

strategies may not always result in these desirable outcomes.

 The acquisition strategy is when one company buys another company. This has

been a popular strategy for American companies for a long time. Some people

think that this strategy helped make American businesses better in the 1980s,

1990s, and even now in the 21st century. It's like one company helping another

company to become stronger by joining forces. A company might buy another

company to become stronger in the market because of competition, to enter a new

 market with more opportunities, or to reduce the risk when things are uncertain.

It's like buying a new tool to protect yourself from competition, explore new

opportunities, or stay safe when things are unpredictable. In 1996, there was a

law called the Telecommunications Act that allowed Clear Channel

Communications to buy radio stations in many different areas. This helped Clear

Channel grow its business. However, some people think Clear Channel now has

too much control over the radio market. As a result, there are suggestions that

Clear Channel might have to divide its business into three separate companies.

The strategic management process involves using an acquisition strategy to help

a company become more competitive and make more money for its shareholders.

This strategy should only be used when the company buying another one can

make itself more valuable by owning the acquired company and using its

resources. It's like buying something that will help you become stronger and make

more money in the long run. Despite the plans, research shows that sometimes

when companies buy other firms, it doesn't always lead to the good results they

hoped for. This means that even though they thought buying another company

would make them stronger or more successful, it doesn't always work out that

way.

MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE

DIFFERENCES?

MERGER

A strategy through which two firms agree to integrate their operations on a relatively

coequal basis.
  A merger is a strategic agreement where two companies integrate their

operations on an equal basis, sharing control and resources to create a stronger

combined entity.

ACQUISITION

A strategy through which one firm buys a controlling, or 100 percent, interest in another

firm with the intent of making the acquired firm a subsidiary business within its portfolio.

 Acquisition is a strategic move where a company buys a controlling or 100

percent stake in another company to incorporate it as a subsidiary. This allows

the acquiring company to expand its business portfolio and influence in the

market. For example, when Facebook acquired Instagram in 2012, it purchased a

controlling interest in the photo-sharing platform to integrate it into its business

operations as a subsidiary.

TAKEOVER

A special type of an acquisition strategy wherein the target firm does not solicit the

acquiring firm’s bid.

 Takeover is a specific type of acquisition strategy where the target company does

not actively seek or request the acquiring company's bid. In a takeover, the

acquiring firm makes an offer to purchase a controlling interest in the target

company without the target company's prior approval or invitation.

REASONS FOR ACQUISITIONS

1. INCREASED MARKET POWER

A primary reason for acquisitions is to achieve greater market power. Most acquisitions

that are designed to achieve greater market power.

 Companies often acquire other businesses to gain more control and influence in

the market. Market power means a company can sell its products at higher prices

or operate with lower costs compared to its competitors. This power usually

comes from the company's size, resources, capabilities, and its share of the

market. This increased market power allows the company to have a stronger

position in the industry and potentially earn higher profits.

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 below those of its

competitors.

 Market power refers to a company's ability to impact the market by setting prices

higher than its competitors or by operating with lower costs. When a company

has significant market power, it can dominate the market, control prices, and

potentially reduce competition. This allows the company to control prices in the

market and limit the competition's ability to attract customers with lower-priced

alternatives.
TO INCREASE THEIR MARKET POWER, FIRMS OFTEN USE:

A. Horizontal Acquisition

The acquisition of a company competing in the same industry as the acquiring

firm is referred to as a horizontal acquisition. Horizontal acquisitions increase a

firm’s market power by exploiting cost-based and revenue-based synergies.

 Horizontal acquisition happens when a company buys another company that is in

the same industry. This type of acquisition helps the buying company become

stronger in the market by combining their costs and revenues with the acquired

company. Research shows that horizontal acquisitions work better when the

companies involved have similar characteristics

B. Vertical_Acquisition

A vertical acquisition refers to a firm acquiring a supplier or distributor of one or

more of its goods or services. A firm becomes vertically integrated through this

type of acquisition in that it controls additional parts of the value chain.

 Vertical acquisition occurs when a company buys a supplier or distributor of its

products or services. This type of acquisition allows the company to control more

steps in the production or distribution process, making it vertically integrated.

C. Related Acquisition

The acquisition of a firm in a highly related industry is referred to as a related

acquisition.

However, because of the difficulty in achieving synergy, related acquisitions are

often difficult to value.

  Related acquisition happens when a company buys another company in a closely

related industry. These acquisitions can be challenging to evaluate because it is

hard to achieve the expected benefits from combining the two companies.

2. OVERCOMING ENTRY BARRIERS

Facing the entry barriers created by economies of scale and differentiated

products, a new entrant may find acquiring an established company to be more

effective than entering the market as a competitor offering a good or service that

is unfamiliar to current buyers.

 When a new company faces challenges entering a market due to factors like

economies of scale and unique products, it may choose to buy an existing

company instead of starting from scratch. This strategy can be more effective as it

gives the new entrant immediate access to the market, especially when the

barriers to entry are high.

Barriers to entry are factors associated with the market or with the firms currently

operating in it that increase the expense and difficulty faced by new ventures trying to

enter that particular market.

 Barriers to entry are obstacles in a market that make it more expensive and

challenging for new businesses to enter and compete. These barriers can be

related to the market itself or the existing companies operating in it, creating

difficulties for new ventures trying to establish themselves.

ACQUISITION OFTEN USE TO OVERCOME ENTRY BARRIERS:

A. Cross-Border Acquisition

Acquisitions made between companies with headquarters in different countries

are called cross-border acquisitions. These acquisitions are often made to

overcome entry barriers. Compared with a cross-border alliance, a cross-border

acquisition gives a firm more control over its international operations.

 Cross-border acquisitions occur when companies from different countries buy

each other. These acquisitions help companies overcome barriers to entering

foreign markets. Unlike cross-border alliances where companies cooperate,

cross-border acquisitions give a company more control over its international

operations.

3. COST OF NEW PRODUCT DEVELOPMENT AND INCREASED SPEED TO

MARKET

Developing new products internally and successfully introducing them into the

marketplace often require significant investments of a firm’s resources, including

time, making it difficult to quickly earn a profitable return.

 Creating and launching new products within a company can be costly and time-

consuming. It is challenging to make a quick profit because a lot of resources,

such as money and time, need to be invested in the development process.

4. LOWER RISK COMPARED TO DEVELOPING NEW PRODUCTS

Because the outcomes of an acquisition can be estimated more easily and

accurately than the outcomes of an internal product development process,

managers may view acquisitions as lowering risk.

 Acquiring another company is often seen as less risky than developing new

products internally. This is because the potential outcomes of an acquisition can

be predicted more accurately compared to the uncertain results of creating new

products from scratch. Managers prefer acquisitions as they perceive them to be

less risky.

5. INCREASED DIVERSIFICATION

Acquisitions are also used to diversify firms. Based on experience and the insights

resulting from it, firms typically find it easier to develop and introduce new

products in markets currently served by the firm. Using acquisitions to diversify a

firm is the quickest and, typically, the easiest way to change its portfolio of

businesses.

 Companies use acquisitions to diversify their business operations. Through

acquisitions, companies can quickly expand into new markets or introduce new

products. It is often easier for companies to enter markets they are already

familiar with rather than starting from scratch. Acquisitions provide a fast and

straightforward way for companies to change their mix of businesses.

6. RESHAPING THE FIRM’S COMPETITIVE SCOPE

To reduce the negative effect of an intense rivalry on their financial performance,

firms may use acquisitions to lessen their dependence on one or more products or

markets. Reducing a company’s dependence on specific markets alters the firm’s

competitive scope.
  Companies sometimes use acquisitions to change their competitive position and

reduce the impact of strong competition on their financial performance. By

acquiring other businesses, companies can decrease their reliance on specific

products or markets, which helps them broaden their competitive reach.

PROBLEMS IN ACHIEVING ACQUISITION SUCCESS:

1. INTEGRATION DIFFICULTIES

Integrating two companies following an acquisition can be quite difficult.

Integration challenges include melding two disparate corporate cultures, linking

different financial and control systems, building effective working relationships

and resolving problems regarding the status of the newly acquired firm’s

executives.

 When two companies join together after one buys the other, it can be really hard

to make everything work smoothly. One big problem is combining the different

ways the two companies do things, like their company cultures and how they

handle money and control. It's also important to build good relationships between

the employees of both companies and solve any issues that come up with the

executives of the company that was bought.

2. INADEQUATE EVALUATION OF TARGET

The failure to complete an effective due diligence process may easily result in the

acquiring firm paying an excessive premium for the target company.

 When a company doesn't properly evaluate the business it wants to buy, it can end

up paying too much for that company. This happens because without checking
 everything carefully, the buyer might not realize the true value of the target

company and end up spending more than it should.

Due diligence is a process through which a potential acquirer evaluates a target

firm for acquisition. This is commonly performed by investment bankers,

accountants, lawyers, and management consultants specializing in that activity,

although firms actively pursuing acquisitions may form their own internal due-

diligence team.

 Due diligence is like doing homework before buying a company. It involves

experts like investment bankers, accountants, lawyers, and consultants who look

closely at the target company to understand if it's a good investment. Companies

buying other businesses may even set up their own team to do this research.

3. LARGE OR EXTRAORDINARY DEBT

To finance a number of acquisitions completed during the 1980s and 1990s, some

companies significantly increased their levels of debt. A financial innovation

called junk bonds helped make this increase possible.

 Having a lot of debt can cause problems when trying to make acquisitions

successful. During the 1980s and 1990s, some companies took on excessive debt

to finance their acquisitions. This high level of debt can put a strain on the

company's finances and make it harder to manage, impacting the success of the

acquisitions. The use of junk bonds, a risky financial tool, to increase debt levels

can further complicate the situation by potentially leading to financial instability

and affecting the overall success of the acquisitions.

 Junk bonds are a financing option through which risky acquisitions are financed

with money (debt) that provides a large potential return to lenders (bondholders).

Because junk bonds are unsecured obligations that are not tied to specific assets

for collateral, interest rates for these high-risk debt instruments.

 Junk bonds are like risky loans that companies take out when they need money.

These bonds are called "junk" because they are considered more likely to not be

paid back. Companies that issue junk bonds are often struggling financially or

are new, so they have to offer higher interest rates to attract investors. Investors

who buy these bonds take a higher risk but can earn more money if things go

well.

4. INABILITY TO ACHIEVE SYNERGY

Synergy exists when the value created by units working together exceeds the

value those units could create working independently. This created by the

efficiencies derived from economies of scale and economies of scope and by

sharing resources across the businesses in the merged firm.

 The inability to achieve synergy can be a problem in acquisition success because

it means that the merged companies are not creating as much value together as

they could on their own. Synergy is about the benefits of working together, like

cost savings from being bigger or sharing resources, that should make the merger

stronger. If synergy isn't achieved, it means the merger may not be as successful

as hoped, as the companies are not working together as efficiently as expected.

Private synergy is created 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.

 Private synergy refers to the additional value that two companies can create by

working together after a merger or acquisition. It means that by combining their

strengths and resources, the companies can achieve more success than they could

on their own. Private synergy often leads to increased efficiency, cost savings,

and improved performance, benefiting both companies involved in the merger.

5. TOO MUCH DIVERSIFICATION

At some point, firms can become overdiversified. The level at which

overdiversification occurs varies across companies because each firm has

different capabilities to manage diversification. Because of additional information

processing, related diversified firms become overdiversified.

 Having too much diversification can be a problem in achieving acquisition

success because when a company diversifies too much, it can spread itself too

thin and become less effective. Each company has its own strengths and abilities

to handle different businesses. If a company tries to manage too many different

businesses, it can become overwhelmed and less efficient in making decisions.

This can lead to challenges in processing information effectively and hinder the

success of acquisitions.

6. MANAGERS OVERLY FOCUSED ON ACQUISITIONS

Both theory and research suggest that managers can become overly involved in

the process of making acquisitions. The overinvolvement can be surmounted by

learning from mistakes and by not having too much agreement in the board room.
 Managers being too focused on acquisitions can hinder the success of the

process. When managers are overly involved, they may not see the bigger picture

or make decisions based on emotions rather than sound judgment. This can lead

to mistakes and prevent them from learning from errors. Additionally, if there is

too much agreement in the boardroom, it can limit diverse perspectives and

critical evaluation of the acquisition strategy. Furthermore, if leaders blame

failure on others instead of acknowledging their own excessive involvement, it

can prevent them from addressing the actual issues and improving future

acquisition processes.

7. TOO LARGE

The complexities generated by the larger size often lead managers to implement

more bureaucratic controls to manage the combined firm’s operations.

Bureaucratic controls are formalized supervisory and behavioral rules and policies

designed to ensure consistency of decisions and actions across different units of a

firm. In the long run, the diminished flexibility that accompanies rigid and

standardized managerial behavior may produce less innovation. Because of

innovation’s importance to competitive success, the bureaucratic controls

resulting from a large organization can have a detrimental effect on performance.

 Being too large can pose challenges in achieving acquisition success because

larger size often brings increased complexities that can make it difficult for

managers to effectively oversee the combined operations of the merged firms. To

manage the larger entity, managers may implement more bureaucratic controls,
 which are formal rules and policies to maintain consistency in decision-making

and actions across different units. However, excessive bureaucracy can slow

down decision-making, stifle innovation, and create rigid structures that hinder

adaptability and agility. This can impede the integration process, hamper

effective communication, and limit the ability to respond promptly to market

changes, ultimately affecting the success of the acquisition.

ATTRIBUTES OF SUCCESSFUL ACQUISITIONS

Attribute: Acquired firm has assets or resources that are complementary to the acquiring

firm’s core business.

Result: High probability of synergy and competitive advantage by maintaining strengths

 Attribute: The acquired firm possesses assets or resources that complement the

core business of the acquiring firm. These assets or resources can enhance the

capabilities or offerings of the acquiring company.

 Result: When the acquired firm has complementary assets, there is a high

probability of synergy and competitive advantage for the combined entity. By

leveraging the strengths of both companies, the merged entity can achieve greater

efficiency, innovation, and market competitiveness.

Attribute: Acquisition is friendly.

Result: Faster and more effective integration and possibly lower premiums.

 When an acquisition is considered friendly, it indicates that the process is

collaborative and mutually agreed upon by both the acquiring and target
 companies. This amicable relationship often results in a quicker and more

efficient integration of the two entities and may lead to the possibility of lower

acquisition premiums being paid by the acquiring company.

Attribute: Acquiring firm conducts effective due diligence to select target firms and

evaluate the target firm’s health.

Result: Firms with strongest complementarities are acquired and overpayment is avoided.

 When the attribute of an acquisition involves the acquiring firm conducting

thorough due diligence to carefully select target companies and assess the target

firm's financial health, it often leads to acquiring firms choosing targets with the

strongest complementarities. This strategic approach helps in avoiding

overpayment for acquisitions and ensures that the acquired firms align well with

the acquiring company's strategic goals and capabilities.

Attribute: Acquiring firm has financial slack (cash or a favorable debt position).

Result: Financing (debt or equity) is easier and less costly to obtain.

 When the attribute of an acquisition involves the acquiring firm having financial

slack, such as ample cash reserves or a favorable debt position, the result is that

financing for the acquisition, whether through debt or equity, becomes easier and

less costly to obtain. This financial strength allows the acquiring firm to fund the

acquisition more readily and at more favorable terms, enhancing the overall

feasibility and success of the transaction.

Attribute: Merged firm maintains low to moderate debt position.

Result: Lower financing cost, lower risk, and avoidance of trade-offs that are associated

with high debt.

 It sounds like the merged firm made a strategic decision to maintain a low to

moderate debt position, which has resulted in lower financing costs, reduced risk,

and the avoidance of trade-offs that often come with high levels of debt. This

shows that they are prioritizing financial stability and sustainability in their

operations. It’s great to see companies making thoughtful decisions that benefit

their long-term growth and success.

Attribute: Acquiring firm has sustained and consistent emphasis on R&D and innovation.

Result: Maintain long-term competitive advantage in markets.

 When the acquiring firm prioritizes and maintains a sustained focus on research

and development (R&D) as well as innovation, the outcome is the ability to

uphold a long-term competitive advantage in the markets. This strategic emphasis

enables the firm to stay ahead of competitors, adapt to market changes, and

introduce innovative products or services that cater to customer needs, ultimately

securing a leading position in the market.

Attribute: Acquiring firm manages change well and is flexible and adaptable.

Result: Faster and more effective integration facilitates achievement of synergy.

 When the attribute of an acquiring firm is its adeptness at managing change,

being flexible, and adaptable, the result is a faster and more effective integration

process that facilitates the achievement of synergy. By demonstrating agility and

 adaptability, the acquiring firm can navigate transitions smoothly, respond to

challenges effectively, and align the operations of the acquired company with its

own, leading to the realization of synergies and enhanced overall performance.

RESTRUCTURING

Restructuring is a strategy through which a firm changes its set of businesses or its

financial structure. Restructuring is a global phenomenon. The failure of an acquisition

strategy is often followed by a restructuring strategy.

 Restructuring is a strategy that involves a company making changes to its

business operations or financial setup. It is a common practice worldwide. When

an acquisition strategy does not work out as planned, companies often resort to

restructuring to address the issues that led to the failure of the acquisition.

THREE RESTRUCTURING STRATEGIES THAT FIRMS USE:

A. DOWNSIZING

A reduction in the number of a firm’s employees and, sometimes, in the number

of its operating units, but it may or may not change the composition of businesses

in the company’s portfolio.

 Downsizing refers to a company reducing the number of its employees and,

sometimes, its operating units. This action does not necessarily involve changing

the types of businesses the company is involved in.

B. DOWNSCOPING

Downscoping refers to divestiture, spin-off, or some other means of eliminating

businesses that are unrelated to a firm’s core businesses. Downscoping is

described as a set of actions that causes a firm to strategically refocus on its core

businesses.

 Downscoping involves a company getting rid of businesses that are not related to

its main operations. This can be done through selling off those businesses,

creating separate companies, or using other methods to eliminate them.

Downscoping is a strategic move that helps a company concentrate on its core

operations.

C. LEVERAGED_BUYOUTS

A leveraged buyout (LBO) is a restructuring strategy whereby a party buys all of a

firm’s assets in order to take the firm private. Firms that facilitate or engage in

taking public firms or a business unit of a firm private are called private equity

firms.

 A leveraged buyout (LBO) is a strategy where a party purchases all the assets of

a company to make it a private entity. Private equity firms are companies that

help make this happen by buying public companies or specific business units and

turning them into private businesses.

RESTRUCTURING OUTCOMES

 Restructuring strategies include downsizing, downscoping (divesting non-core

businesses), and leveraged buyouts, which are used to address issues arising from

failed acquisitions. Restructuring outcomes can include improved efficiency and

profitability, cost reduction, enhanced flexibility, synergies, and financial stability,

among other benefits.