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Chapter 7: Strategic Acquisition and Restructuring
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
Opening Case Technology Giants‘ Acquisition Strategies and Their Outcomes

THE POPULARITY OF MERGER AND ACQUISITION STRATEGIES
Mergers, Acquisitions, and Takeovers: What Are the Differences?
REASONS FOR ACQUISITIONS
Increased Market Power
Overcoming Entry Barriers
Strategic Focus Cross-Border Acquisitions by Firms from Emerging Economies: Leverage
Resources to Gain a Larger Global Footprint and Market Power
Cost of New Product Development and Increased Speed to Market
Lower Risk Compared to Developing New Products
Increased Diversification
Reshaping the Firm‘s Competitive Scope
Learning and Developing New Capabilities
PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
Integration Difficulties
Inadequate Evaluation of Target
Large or Extraordinary Debt
Inability to Achieve Synergy
Too Much Diversification
Managers Overly Focused on Acquisitions
Strategic Focus The Acquisitions and Mergers to Form Citigroup: Divestitures
Associated with the Failed Concept of the Financial Supermarket
Too Large
EFFECTIVE ACQUISITIONS
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
7-1
RESTRUCTURING
Downsizing
Downscoping
Leveraged Buyouts
Restructuring Outcomes
SUMMARY
REVIEW QUESTIONS
EXPERIENTIAL EXERCISES
VIDEO CASE
NOTES
LECTURE NOTES
Chapter Introduction: With continued merger and acquisition activity, this

chapter is very important. Much of the chapter’s material is summarized in
Figure 7.1, which can be used to help students mentally organize what they
learn in the chapter about mergers and acquisitions by examining reasons of
acquisitions and problems in achieving success.
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.
Teaching Note: In fast-cycle industries companies often lack the time to

develop businesses or capabilities that it needs to complement their
existing businesses or capitalize on changing conditions in a timely
manner. Acquisitions can help firms achieve their objectives much faster
than other options. To drive this point home, ask students why Microsoft,
Google, and Facebook, three financially solid companies, didn’t just
develop the businesses/capabilities that they obtained through the profiled
acquisitions. Then, ask students why they think the target firms agreed to
be acquired. Truly successful acquisitions provide benefits to both parties.
7-2
Explain the popularity of acquisition strategies in

1
firms competing in the global economy.
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.
THE POPULARITY OF MERGER AND ACQUISITION STRATEGIES
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).
Merger and acquisition trends:

 There were five waves of mergers and acquisitions in the 20th century, the last two in the
1980s and 1990s.
 There were 55,000 acquisitions valued at $1.3 trillion in the 1980s.
 Acquisitions in the 1990s exceeded $11 trillion in value.
 World economies (especially the US economy) slowed in the new millennium, reducing
M&As completed.
 Mergers and acquisitions peaked in 2000 at about $3.4 billion and fell to about $1.75
billion in 2001.
 The global volume of announced acquisition agreements was up 41 percent from 2003 to
$1.95 trillion for 2004, the highest level since 2000, and the pace in 2005 was significantly
above the level of 2004.
 Although the frequency of acquisitions has slowed, their number remains high.
 In the latest acquisition boom between 1998 and 2000, acquiring firm shareholders
experienced significant losses relative to the losses in all of the 1980s.
A firm may make an acquisition to do the following:

 Increase its market power because of a competitive threat
 Enter a new market because of an available opportunity
 Spread the risk due to the uncertain environment
 Shift its core business into more favorable markets (e.g., because of industry or regulatory
changes)
7-3
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.
Mergers, Acquisitions, and Takeovers: What Are the Differences?
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).
Discuss reasons why firms use an acquisition strategy to

2
achieve strategic competitiveness.
REASONS FOR ACQUISITIONS
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).
Increased Market Power
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.
7-4
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.
Teaching Note: Remind students that, as discussed in Chapter 6, during the

1960s and 1970s, both horizontal and related acquisitions were discouraged
as they were regularly challenged by agencies of the federal government. The
ability of firms to make horizontal acquisitions increased in the 1980s because
of changes in the interpretation and enforcement of antitrust laws and
regulations by the courts and the Justice Department.
It is important to note that acquisitions intended to increase market power are subject to
regulatory review, as well as analysis by financial markets.
Overcoming Entry Barriers
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.
It may be difficult to enter a market dominated by large, established competitors. As noted in

Chapter 2, such markets may require:
7-5
 Investments in large-scale manufacturing facilities that enable the firm to achieve

economies of scale so that it can offer competitive prices
 Significant expenditures in advertising and promotion to overcome brand loyalty toward
existing products
 Establishing or breaking into existing distribution channels so that goods are convenient to
customers
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.
Teaching Note: Students may be surprised that cross-border acquisitions of the

type described in the Strategic Focus are taking place. The more accepted
scenario is one in which developed market acquirers purchase firms in emerging
markets. Though emerging market acquirers may have the resources and
opportunity to engage in cross-border acquisitions of developed market
companies, capabilities to manage/integrate the acquired firms is another issue.
Ask students to identify the skill sets/capabilities that emerging market acquirers
should possess to ensure that their developed market acquisitions perform at
acceptable levels.
7-6
Cross-Border Acquisitions
Acquisitions between companies with headquarters in different countries are called cross-
border acquisitions.
Teaching Note: Chapter 9 examines cross-border alliances and the

justification for their use. Cross-border acquisitions and cross-border alliances
are alternatives firms consider while pursuing strategic competitiveness.
Compared to a cross-border alliance, a firm has more control over its
international operations through a cross-border acquisition.
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.
Some trends in cross-border acquisitions:

 Because of relaxed regulations, the amount of cross-border activity among nations within
the European community also continues to increase.
 Many large European corporations have approached the limits of growth within their
domestic markets and thus seek growth in other markets.
 Many European and US firms participated in cross-border acquisitions across Asian
countries that experienced a financial crisis due to significant currency devaluations in
1997, and this facilitated the survival and restructuring of many large Asian companies
such that these economies recovered more quickly than they would have otherwise.
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
Cost of New Product Development and Increased Speed to Market
Acquisitions also may represent an attractive alternative to developing new products

internally due to the cost and time required to start a new venture and achieve a positive
return.
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
7-7
the patents are obtained. Because of outcomes such as these, managers often perceive
internal product development as a high-risk activity.
Internal development of new products is often perceived by managers to be costly and to

represent high risk investments of firm resources. Although sometimes costly, it may be in
the firm‘s best interest to acquire an existing business because:
 The acquired firm has established sales volume and customer base, thus yielding
predictable returns.
 The acquiring firm gains immediate market access.
In addition to representing attractive prices, large pharmaceutical firms have used

acquisitions to supplement products in the pipeline with projects from undervalued
biotechnology companies; thus, this is one way to appropriate new products.
Lower Risk Compared to Developing New Products
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.
7-8
Acquisitions also may have gained in popularity as a related or horizontal diversification

strategy (enabling rapid moves into related markets or to expand market power) and as an
unrelated diversification strategy because of the changes in regulatory interpretation and
enforcement of antitrust laws discussed in Chapter 6.
United Technologies: A Mini-Case
Both related diversification and unrelated diversification can be implemented through

acquisitions. For example, United Technologies has used acquisitions to build a
conglomerate firm by assembling a portfolio of stable and noncyclical businesses
(including Otis Elevator Co. and Carrier air conditioning) since the mid-1970s in order
to reduce its dependence on the volatile aerospace industry. Its main businesses have
been Pratt & Whitney jet engines, Sikorsky helicopters, and aerospace-parts-maker
Hamilton Sundstrand. It has also acquired a hydrogen fuel cell business. However,
perceiving an opportunity in security due to problems at airports and because security
has become a top concern for both governments and corporations, United Technologies
acquired Chubb PLC, a British electronic security company, for $1 billion. With its
acquisition of Kidde PLC in the same general business in 2004 for $2.84 billion, UTC
will have obtained 10 percent of the world‘s market share in electronic security. All
businesses UTC purchases are involved in manufacturing industrial and commercial
products. However, many involve relatively low technology (e.g., elevators, air
conditioners, and security systems).
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.
Teaching Note: Remember, related diversification seeks lower costs through

economies of scope, synergy, and resource sharing, whereas unrelated
diversification hopes to realize financial economies and better internal
resource allocation among diverse businesses.
Reshaping the Firm’s Competitive Scope
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:
7-9
 General Motors acquired Electronic Data Systems and Hughes Aerospace

to lessen its dependence on the domestic automobile market (where its
market share had declined from approximately 50 percent in 1980 to less
than 30 percent 10 years later) and escape intense competition with
Japanese automakers. However, GM later sold these businesses to focus
its efforts on its core automobile business.
 DaimlerChrysler considered expanding into financial and computer
services, aftermarket sales, and electronics and satellite systems to pursue
more desirable operating margins in areas that are more attractive than are
alliances or acqhuisitions in car manufacturing.
 Ford management considered making the company the world’s leading
consumer services business that specializes in the automotive sector by
tapping all sectors in after-sales markets, including repairs, replacement
parts, and product servicing. To evaluate its success in reshaping the firm’s
competitive scope through diversification, Ford would measure its
performance against world-class consumer firms, regardless of industry
(i.e., rather than using the traditional yardsticks of rival automakers).
Learning and Developing New Capabilities
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.
Describe seven problems that work against developing a

3
competitive advantage using an acquisition strategy.
PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
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
7-10
failures. Successful acquisitions generally involve a well-conceived strategy in selecting the

target, the avoidance of paying too high a premium, and employing an effective integration
process.
A number of problems accompany an acquisition strategy. Acquisition-related problems

shown in Figure 7.1 that are discussed in this section are:
 Difficulties integrating the two firms after the acquisition is completed
 Paying too much for the target (acquired) firm or inappropriately or inadequately
evaluating the target
 The cost of financing the acquisition, related to large or extraordinary debt
 Overestimating the potential for gains from capabilities and/or synergy
 Excessive or too much diversification
 Management being preoccupied or overly focused on acquisitions
 The combined firm becoming too large
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
The importance of integration success should not be underestimated. Without successful

integration, a firm achieves financial diversification, but little else. Consider these points.
 The post-acquisition integration phase may be the single most important determinant of
shareholder value creation (or value destruction) in mergers and acquisitions.
 Managers should understand the large number of activities associated with integration
processes.
Teaching Note: Several years ago, Intel acquired Digital Equipment’s

semiconductors division. On the day Intel began to integrate the acquired
division into its operations, six thousand deliverables were to be completed by
hundreds of employees working in dozens of countries.
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:
7-11
 Increase market power

 Overcome entry barriers
 Reduce the cost of new product development and increase speed to market
 Lower risk compared to developing new products
 Increase diversification
 Avoid excessive competition
 Learn and develop new capabilities
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.
7-12
Inadequate Evaluation of Target
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.
Due diligence 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.
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.
7-13
Teaching Note: An example of effective due diligence was DaimlerChrysler’s

1999 decision not to acquire Nissan Motor Company. DaimlerChrysler wanted
Nissan to expand its access to global auto markets, especially those in
Southeast Asia. But the target had $22 billion in debt, which caused concern
among DaimlerChrysler executives and derailed the acquisition.
Large or Extraordinary Debt
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.
Teaching Note: Junk bonds are considered by many to be a new financing

option, not because they are new, but because they represented the first
instances in which non-investment grade (below a B rating) securities were
used to raise funds by companies whose securities were normally rated as
investment grade.
Teaching Note: A number of well-known and well-respected finance scholars

argue in favor of firms utilizing significantly high levels of leverage because
debt discourages managers from misusing funds (for example, by making bad
investments) because debt (and interest) repayment eliminates the firm’s
“free cash flow.”
Inability to Achieve Synergy
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.
To achieve a sustained competitive advantage through an acquisition, acquirers must realize

private synergies and core competencies that cannot easily be imitated by competitors.
Private synergy refers to the benefit from merging the acquiring and target firms that is due
to the unique assets that are complementary between the two firms and not available to other
potential bidders for that target firm.
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.
7-14
Anheuser-Busch: A Case Example
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.
In addition, competition in the beer industry increased and Anheuser-Busch

management felt that Eagle and Campbell Taggart diverted their attention away from
their core business, resulting in delays in new product introduction and a loss of
momentum.
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.
These general problems may be encountered in many acquisitions. However, there

are many other causes of the poor long-term performance of acquisitions. In fact,
some of the reasons for poor long-term performance also may lead to the problems
already discussed.
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.
Too Much Diversification
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.
As detailed in Chapter 6, information processing requirements are greater for a related

diversified firm (compared to its unrelated counterparts) due to its need to effectively and
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efficiently coordinate the linkages and interdependencies on which value-creation through

activity sharing depends.
In addition to increased information processing requirements and managerial expertise,

overdiversification may result in poor performance when top-level managers emphasize
financial controls over strategic controls.
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.
Teaching Note: The experiences of many firms indicate that

overdiversification may lead to ineffective management, primarily because of
the increased size and complexity of the firm. As a result of ineffective
management, the firm and some of its businesses may be unable to maintain
their strategic competitiveness. This results in poor performance.
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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Managers Overly Focused on Acquisitions
If firms follow active acquisition strategies, the acquisition process generally requires
significant amounts of managerial time and energy.
For the acquiring firm this takes the form of:

 Searching for viable candidates
 Completing effective due diligence
 Preparing for negotiations with the target firm
 Managing the integration process post-acquisition
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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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.
4 Name and describe the attributes of effective acquisitions.
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
Table Note: The attributes or characteristics of successful acquisitions and

their results are summarized in Table 7.1.
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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
Note: The table also lists seven “results” of successful acquisitions.
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.
Define the restructuring strategy and distinguish among its

5
common forms.
RESTRUCTURING
Restructuring refers to changes in the composition of a firm‘s set of businesses and/or

financial structure.
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.
During this period, restructuring can take several forms:

 Downsizing, primarily to reduce costs by laying off employees or eliminating operating
units
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 Downscoping to reduce the level of firm unrelatedness

 Leveraged buyouts to restructure the firm‘s assets by taking it private
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
Once thought to be an indicator of organizational decline, downsizing is now recognized as a

legitimate restructuring strategy and has been one of the most common restructuring
strategies adopted by US firms.
Downsizing represents a reduction in the number of employees, and sometimes in the

number of operating units, but may or may not represent a change in the composition of the
businesses in the firm‘s portfolio.
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
Compared to downsizing, downscoping has a more positive effect on firm performance.
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).
As indicated by the discussion of overdiversification earlier in the chapter, reducing the

diversity of businesses in the portfolio enables top-level managers to manage the firm more
effectively because:
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 The firm is less diversified as a result of downscoping

 Top-level managers can better understand the core and related businesses
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.
Teaching Note: There are many examples of downscoping strategies. Two

of these with which students are likely to be familiar are the following:
 General Motors’ successful spin-off of EDS
 PepsiCo’s spin-off of its fast-food businesses (Taco Bell, Pizza Hut, KFC)
US firms use downscoping as a restructuring strategy more frequently than do European

companies. However, there has also been an increase in downscoping by Asian and Latin
American firms as they adopt Western business practices.
Teaching Note: Research has shown that refocusing is not usually

successful unless the firm has adequate resources to have the flexibility to
formulate the necessary strategies to compete effectively.
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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has shown that management buyouts can also lead to greater entrepreneurial activity and
growth.
Explain the short- and long-term outcomes of the different

6
types of restructuring strategies.
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.
Teaching Note: In free-market based societies, downsizing has generated a

host of entrepreneurial opportunities for individuals to operate their own
businesses. In fact, as discussed in Chapter 13, start-up ventures in the
United States are growing at three times the rate of the national economy.
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.
Figure Note: Restructuring alternatives—downscoping, downsizing, and

leveraged buyouts—and short- and long-term outcomes are summarized in
Figure 7.2.
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FIGURE 7.2
Restructuring and Outcomes
As illustrated in Figure 7.2,

 Downsizing reduces labor costs, but the long-term results are a loss of human capital and
lower performance.
 Downscoping reduces debt costs and emphasizes strategic controls, which result in higher
performance.
 Leveraged Buyouts provide an emphasis on strategic controls but increases debt costs; the
long-term outcome is an increase in performance, but also greater firm risk.
— ANSWERS TO REVIEW QUESTIONS
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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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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Downsizing is 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. Thus, downsizing is an intentional proactive management strategy,
whereas decline is an environmental or organizational phenomenon that the firm cannot
avoid and that leads to erosion of the organization‘s resource base.
As compared to downsizing, the downscoping restructuring strategy has a more positive

effect on firm performance. Downscoping refers to divestiture, spin-offs, or some other
means of eliminating businesses that are unrelated to a firm‘s core businesses.
Commonly, downscoping is referred to as a set of actions that results in a firm strategically

refocusing on its core businesses. A firm that downscopes often also downsizes
simultaneously. However, it does not eliminate key employees from its primary businesses
while doing so because such action could lead to the loss of one or more core competencies.
Instead, a firm simultaneously downscoping and downsizing becomes smaller by reducing
the diversity of businesses in its portfolio.
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).
INSTRUCTOR'S NOTES FOR EXPERIENTIAL

—
EXERCISES
EXERCISE 1: HOW DID THE DEAL WORK OUT?
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
7-25
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.
February 22, 2007

Wall Street Journal’s Smart Money comments.
 On the unexpected announcement both firms‘ shares closed up higher, 14% and
17% respectively. Cash deal is valued at $565m, Management at Whole Foods
has already approved the deal.
 This allows Whole Foods to take out its biggest rival: You can categorize this
acquisition in multiple ways; horizontal acquisition; market power; related
acquisition (therefore subject to regulatory review).
 Both firms‘ shares are in turmoil for the preceding 12 months. Poor performance
as an antecedent for acquisition.
 Organic market is getting new competitors as other stores add organic offerings
such as Wal Mart and Safeway.
http://www.smartmoney.com/investing/stocks/market-applauds-whole-foods-wild-oats-
merger-20829/
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
July 12, 2007

Reuters reports that Whole Foods CEO John Mackey for years has been commenting
under an alias ―rahodeb” at a Yahoo finance chat forum on the success of Whole
Foods and predicting a bleak future for Wild Oats. This was cited by the FTC as part
of the antitrust suit.
http://www.reuters.com/article/internetNews/idUSN1133440820070712
August 29, 2007

Huliq News
Deal closes
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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
Sept 28, 2008

Whole Foods 10K filing- annual report for fiscal year
Wild Oats had 109 operating under four brands Wild Oats Marketplace (nationwide),
Henry‘s Farmers Market (in Southern California), Sun Harvest (in Texas), and Capers
Community Market (in British Columbia). On September 30, 2007, WFMI sold all 27
Henry‘s Farmers Market and eight Sun Harvest store locations and a related Riverside,
CA distribution center, for approximately $165 million. In fiscal year 2008, it closed 13
Wild Oats stores and relocated six stores in connection with the opening of new Whole
Foods Market stores in those areas. In 2008, the Company completed the conversion of
all Wild Oats stores to the Company‘s purchasing and information systems, transitioned
all Wild Oats employees to its payroll, benefits and incentive compensation plans,
eliminated all corporate positions at the Wild Oats home office in Boulder, CO, and
rebranded 45 Wild Oat stores with Whole Foods Market store fronts and signage.
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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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.
Firms 2008 annual report 10K

http://www.sec.gov/Archives/edgar/data/865436/000110465908073613/a08-
29339_110k.htm#Item1_Business__114322
EXERCISE 2: CADBURY SCHWEPPES: TOO MUCH OF A SUGAR RUSH?
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:
1. Why did Cadbury decide to divest itself of the beverage business?

2. What does it mean that Cadbury listed the separation as a demerger?
3. What factors hindered the success of a combined Cadbury Schweppes?
Do you feel that both the beverage and confectionary businesses are better off, or
worse off, separated?
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.
 A Bittersweet Victory?; With Cadbury's U.S. Drinks Unit Likely to Be Split

Off, Shareholders Might Be Disappointed -- at First Aaron O. Patrick and
Betsy McKay. Wall Street Journal. (Eastern edition). New York, N.Y.: Apr 11,
2008. pg. C.1
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 Corporate News: Cadbury Reports Solid First-Half Results Michael Carolan

and Aaron O. Patrick. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul
31, 2008. pg. B.5
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.
The lack of substantial synergies is one reason in favor of divesting Schweppes.

According to the WSJ reporting investor Peltz argued that the firms biggest competitors
and most successful were the ones that remained focused in their strategy and did not
stray into somewhat unrelated acquisition strategies. Revenues from a sale could help
Cadbury either reduce its debt, or to acquire a more closely related firm. One downside
of a divestiture is that Schweppes provides the majority of the firm‘s net income, despite
representing a smaller proportion of sales. Finally, the separation of the two companies
increases the likelihood that Cadbury might subsequently become the target of a
takeover.
In the March 16 WSJ article, Stitzer laid out three approaches for separating Schweppes:
 Direct sale, probably to private equity.
 Breaking Cadbury and Schweppes into two independent public companies
 Selling part of Schweppes initially, with a goal of eventually selling off

Cadbury‘s remaining ownership stake.
In the six months following the announcement, Cadbury Schweppes reported a

substantial drop in profit and narrower margins, which could make the beverage unit less
attractive to private equity firms. According to the August 2 WSJ article, a spin-off
versus private equity sale could mean substantially less money for Cadbury: An estimate
6.5 billion British pounds for a spin-off, versus 7-8 billions pounds for a sale.
7-29
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.
— INSTRUCTOR'S NOTES FOR VIDEO EXERCISES

Title: THE POWER OF A MERGER: SOUTHWEST
RT: 2:01
Topic Key: Mergers, Acquisitions, Restructuring
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.
Also check out http://www.southwest.com
Suggested Discussion Questions and Answers
 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.
7-30
o Merger: Southwest and AirTran are integrating operations to spread low

cost air fare around but each business operates independently.
 What reasons do you think Southwest and AirTran had for merging? What
approach(es) did they use?
o Reasons: Increased low cost air fare market power and overcoming entry
by other low cost carriers
o Approaches: Keeping value chain activities cost below the competition,
maintain economies of scale in low cost air fare, increased speed to the
market, and broadened the cost of acquisition by other firms
 Why would the Southwest/AirTran merger not be successful?
o Whereas integration difficulties, inadequate evaluation of target, inability
to achieve synergy, too much diversification, overfocus on acquisitions,
being too large, and large debt may be reasons that all mergers and
acquisitions may not be successful, the only reason that Southwest and
AirTran may not be successful is that they may not achieve synergy. The
other reasons don‘t apply to this merger.
 What strategies would you recommend to Southwest should they need to
restructure?
o Text: Restructuring is a strategy through which a firm changes its set of
businesses or its financial structure.
o Strategies for Restructuring: Downsize, Downscope, a Leverage Buyout,
or simple focus on the core business are all options
— ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
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?
7-31
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.
7-32
Another random document with
no related content on Scribd:
keeping themselves busy until the shock of parting had worn off a bit
for Polly. Over our second cup of coffee she started to talk about it.
"It's a strange thing to say but I'm glad Harry's gone. I just know he
never would have been happy with me if he hadn't done it."
"Why do you think that?" I asked.
"He never did tell me much about his people ... no more than he told
you-all. I knew he was holding out on me but it wasn't any of my
business. These English people don't brag much about themselves
and their families. Anyway I knew he felt real bad when he got the S-
Flu because as soon as he knew he was sterile he tried to tell me to
go find somebody else. He seemed to think because he couldn't give
me children I wouldn't want him. I told him I didn't hanker to marry a
stud horse but it didn't do much good. I guess having no mother and
father and then losing his chance to have kids of his own made him
feel low. Maybe this will get it out of his head and he'll be OK," she
paused, "that is, if he ever comes back. Somehow I feel deep down
that he won't."
"Oh, don't be silly, Polly," Pat shut her up. "You got up too early this
morning. Here, have some more hot coffee."
With the coming of spring across the cold northern continents, the big
counter-offensive had begun. For years the agricultural scientists had
prepared for such an occasion and now they went into action.
Naturally it was all top secret but we were among the privileged few,
since the border-line between the world of plant pathology and the
diseases of man and animals had grown increasingly vague. It was
essential that we know of their work and they of ours. Many of the
original discoveries in virology had been made by botanical scientists
and the first virus to be crystallized, the tobacco mosaic, was a
disease confined to the plant world.
Since the Geophysical Year of 1958 and the advent of the space
satellites, the meteorologists had made tremendous advances. Using
information derived from the weather globes circling the earth, with
their data on sun-spots and radar maps of storm centers, plus the
mass of information now available through the weather stations in the
polar regions, at sea and on land, the weather predictors had become
extremely accurate. With seeding techniques, electronically
controlled, they had made a start at changing the weather, although,
up to now, little of this had been done because of a lack of
international agreements. Now they were free to try out their ideas. It
was interesting to follow in the newspapers the results of their work,
and even more interesting to see how the peoples of the world tried
to explain the various events. The great pandemics raging across the
earth had resulted in a rush to the churches and the rise of all sorts of
weird sects, prophets and calamity howlers. This frantic search for
security renewed itself when the new wave of disaster began. To
avert suspicion, for a while at least, and also because these great
forces could not easily be localised, our NATO allies had to suffer with
the Communists. Only the heads of the British Government knew,
and they, with their usual courage, had agreed to endure, with the
promise of American aid.
The first attack was a weather offensive. Using the jet streams which
flowed swiftly to the east, swarms of tiny balloons were released by
planes from the American Navy supercarriers in the Atlantic, and from
the bombers of the Strategic Air Command cruising in the
stratosphere above them. By the use of timing devices these deadly
little toys destroyed themselves and dropped the new electronic
seeders into the moisture-filled clouds rolling from the Atlantic across
Europe. The wettest spring in recorded history was the result. Fields
were almost untillable and the hay and grain crops that were planted
were never harvested. The wet weather favored the growth of fungus
and the rusts and blights so carefully cultivated by our agronomists
and seeded into the winds that blew over Europe and Asia, thrived on
what remained of the harvest. Further to the east the winds, now
emptied of their moisture, sucked water from the steppes of Siberia,
where the great new collective farms ordered by Khrushchev had torn
up the grasslands. Dust storms scoured off the topsoil. No plants
could grow. No animal could survive, lacking both food and water.
The greatest migration in living memory was the result. The trek of
the Okies out of the dust bowl of the early thirties was a mere trickle
compared to the flood of refugees that poured east into Russia or
south, down into the desert lands of the Middle East and over the
Himalayan barriers. Many died before they got to the borders of India
and the other Islamic lands. Many were killed by the reinforced border
guards determined to prevent the spread of disease and famine in
their own ravaged territories.
Of course the Communists retaliated, or perhaps it was in part the
result of our own interference with nature. That fall, early frost hit the
West Coast and blizzards screamed down from the Arctic over the
plains. Our grain crops were ruined and much of our late fruit and
vegetables. And now the "Folly of the Fifties", as one presidential
candidate had called the price support programs, paid an unexpected
dividend. From every cave and warehouse, from dumps and silos and
refrigerator rooms, the stores of grain and potatoes, butter and meat,
poured out by truck and train. Convoys of food ships had already left
for the NATO countries. The terrible death toll of the measlepox made
available sufficient food for the rice eaters of the Indian subcontinent
from their existing supplies, since the weather war had had little effect
in those regions. Africa, its own population decimated by the same
measlepox disease, was left to its rich resources.
The Reds were not yet beaten. Desperate for food, they gambled
boldly. The Soviet premier himself appealed to the United States and
Canada for aid, in a shrewd psychological move. He knew we did not
want to announce to the world that we were at war. It was doubtful if
even our own people would believe it. World opinion would be likely
to turn against us and uninformed or unbelieving governments, side
with the Communists to isolate us. We had to help them, at least in
appearance. In spite of tremendous losses the Soviets still
outnumbered us and, if pushed too far, might start the long-awaited
march into the vacuum left by the dying populations of Asia and the
evacuation of our bases, daring us to start an all-out war.
The counterstroke was a masterpiece. Supplies of flour and other
prepared foods were rushed, in great fleets of ships, to the European
ports of the Russian Empire. Every pound of flour, every ton of meat,
every cask of butter had been treated with the new tasteless and
odorless contraceptive compound which our scientists had recently
discovered. We never knew if the Russians found out why their
women were not getting pregnant ... the rate of conception drops off
in starvation in any case. It did not matter. They had two choices, to
eat or to die.
In June, six weeks after he had left Sea Island, we heard again from
Harry. Of course Polly had had letters, but purely personal ones as
Harry had been much too busy to do more than write, "I love you,
wish you were here" notes. Now, finally, he gave us some news. Polly
came bursting into the coffee room one morning waving a sheaf of
electron pictures in one hand and a bundle of closely written pages in
the other.
"I got a big letter from Harry this morning," she said to the three of us
around the table. "Would y'all like to hear the news?"
"Aw, Polly, I don't want to hear that mush," I kidded her, "Why don't
you sell it to True Love Confessions magazine?"
"You shut your big mouth, man, and open your ears."
"Go ahead Polly. Never mind funny boy here," Pat said.
"Harry says they have a big lab set up in the main hospital in Victoria
... that's the city on the island, Hong Kong itself, and they're working
shifts, twenty-four hours a day, to try to attenuate the measlepox
virus."
"Brother! What a job!" I exclaimed. "One mistake and you've had it."
"Too right, you have!" the Chief said feelingly, his long forgotten
Australian slang coming to the surface.
"They had to get out of Kowloon, he says because the refugees
sneaked through the barriers into the New Territories and spread the
disease. It was terrible because there were about three million people
crowded in there. Now most of them are dead and the police patrol all
around the island, day and night, to keep others from landing. He
says almost all the British, except soldiers, have left. They send them
to some small island first and then, if they haven't got any disease,
they can go home to England. The research team is behind barbed
wire and almost nobody is allowed in or out—but their quarters are
comfortable."
"Hot and cold running maids, I suppose," I said.
"If you were there they'd be running, all right."
"Shut up, John. Go on Polly," Pat said and pinched my arm.
"They haven't succeeded in weakening the virus yet and if they kill it
with formalin or one of the usual methods it won't work as a vaccine."
"What ways have they tried?" Hallam said.
"He doesn't say. There's one thing I don't like," she said thoughtfully.
"He has an idea that if they went into China they might find survivors
of the pox in areas where the disease has almost died down and get
some serum from them, or perhaps find that the measlepox is
weakened in those areas and could be used."
"It's too bad our agents didn't get enough vaccine for testing," I said.
"It would have saved exposing our men to that sort of danger."
"One of his ideas is to give volunteers serum from recovered cases
and then let them get the measlepox."
"You mean like giving children gamma globulin shots after they've
been exposed to measles so they'll get just a mild case of the disease
and be protected for life?" Pat asked.
"That's the general idea," the Chief said. "Then, too, he might want to
look at the animal population in the area. There's a theory that
cowpox was originally smallpox that got into cattle. Now if you get
cowpox, as milkmaids in England often did many years ago, on their
hands, you probably won't catch smallpox. That's how the legend
arose that milkmaids had lovely complexions. They didn't get
smallpox and so their faces weren't scarred like most people in the
eighteenth century. Jenner got the original idea for vaccination from
that. The same thing might apply to measlepox. If he could find a mild
form of it in some animal we could use that as a vaccine. We try to do
this in the Lab by inoculating animals. Harry wants to go out into the
devastated areas and see if nature has done it for him."
"That may be soon, Doctor," Polly said, "but I'll bet he's also hoping to
pick up news of his folks."
"Could be," Hallam agreed, "but they are very small pins in a terribly
big haystack, if still alive."
"That crazy man," Polly murmured. "I know he'll kill himself yet. If he
doesn't get the pox the Reds will catch him."
"There's not too much danger from the Chicoms right now," I said.
"The way they are dying out, the border guard must have holes in it
big enough to take a division of troops through, let alone a small
reconnaissance party."
In the early summer of 1963 Pat had completely recovered from her
miscarriage. The Chief and I had suffered nothing more than mild
colds from the FS-flu. We had set up new experiments to see if we
could temper the destructiveness of the virus with the intention of
confining its effects to the human race.
"I have no compunction about using it on the human race," Hallam
said. "The human being has free will and should be prepared to take
the consequences of his follies and work out his own salvation."
I had to agree.
One late summer day when the tests were running smoothly he said
to me, "John, I think you should take Pat out of here for a month.
There's no point in isolation now we are all recovered, and you need
a rest."
"What about you?" I said.
"I'll take a break after you get back. Besides, I want you to do a little
experimenting on your vacation."
I wondered out loud what was coming next.
"Well," he smirked, "this is a good chance for a honeymoon and you
might find out for me how permanent the sterility effects of the original
FS-flu are."
I couldn't think of a more pleasant experiment.
The United Church ceremony was a quiet one. Both Pat and I felt
that, having been married before and having subsequently made
fools of ourselves, we didn't want much fuss this time. The ceremony
was quiet but the party that followed certainly was not. Dr. Hallam had
recently moved into a penthouse apartment in the swanky new Lion
Heights district overlooking Howe Sound and the Straits of Georgia.
From the church it was a quick run out to his home, followed all the
way by the hooting automobiles of half the Laboratory staff and a
good crowd from the Hospital itself.
From the corner living room of the apartment there was a magnificent
view south to Point Grey and the University. Off to the southwest, in
the haze of late afternoon, the Olympic mountains glimmered faintly
across the water and the dark silhouette of the Island cut the western
horizon. To escape for a moment from the uproar, I had moved out
onto the rooftop garden and, with my arm around Pat, watched the
slow ending of the day. Behind us the french doors opened as Hallam
joined us. The buzz of talk and laughter, heightened by the cocktails,
broke the quiet of our thoughts and died again as he closed the doors
behind him.
"This really is a lovely spot," Pat said to him. "Will you pardon a
woman's curiosity and tell me, isn't it terribly expensive?"
Hallam grinned. "It would be except that I'm part owner of the building
and get a cut rate."
We stood there quietly, absorbed in the view, then Pat took Hallam's
arm. "Let's go in now," she said. "We will have to leave soon."
The noise came at us in waves as we opened the door. Little knots of
people were all over the rooms, talking, laughing, eating, moving
about and re-forming new groups.
"They obviously don't need us," I whispered to Pat. "Let's get out of
here." I winked at the boss and he shook both hands to us,
prizefighter fashion, as we slipped out.
The Ferguson glided into the driveway without the motor running as I
tried to escape. A roar of hand-clapping, cheers, jeers and yells broke
out above. It was too late for them to catch us so they waved and
shouted words of tipsy wisdom. A few ribald male remarks were
stifled by feminine hands and the last howls and shrieks faded back
up the hill. At the bottom I stopped and removed the inevitable tin
cans and old shoes, brushed off all visible confetti and moved on
towards Horseshoe Bay. The sloop was ready. While I started the
motor and cast off, Pat changed into slacks and sweater in the cabin
and then got busy making sandwiches and coffee. I set our course
around Bowen Island, heading for the Sunshine Coast and the long
winding fiords that split the timbered ranges.
It was hours later. At Pat's suggestion I had gone below for a rest and
then had relieved her while she did the same. We wanted to get well
away from the big city and the ocean traffic before we stopped. About
two o'clock she wandered up from below. The moon was high now
and in the clean cool light we were close to shore. Here the coast
was deserted and, as we skirted a rocky point, a small cove
appeared, the entrance barely large enough for the yacht. The moon,
going over to the west, shot its light through the gap to show a sandy
beach dimly outlined at the farther side.
"John, let's look in there. It seems a likely place to stop."
I cut the motor and glided through the entrance, trusting the smooth
unbroken surface to cover enough depth for the boat. The million
pinpoint lights of our phosphorescent track died away as we slowed.
The bowsprit almost overhung the sloping beach when I dropped
anchor.
"Plenty of depth here," I said quietly, reluctant to break the silence. "It
should be a good spot to spend the night."
Sheltered by the northern arm of the cove, the remains of an old
cabin hugged the rising slope. In front of it, in the little clearing, a few
old fruit trees, branches broken with age, spotted the grass. The
small stream that probably had tempted this early settler ran at one
side of the cleared land, the water spreading out to glitter over the
stones and sand of the beach before losing itself in the dark salty bay.
"What a wonderful place for a swim," Pat whispered, her eyes
enormous in her shadowed face.
The air was still warm, with enough breeze to discourage any
mosquitoes.
Quickly Pat stripped and stood there proudly, waiting for me. To keep
her hair dry she had put on a white bathing cap and, in that pale light,
she shone like some strange shaven statue from an old Egyptian
tomb. She moved and the illusion disappeared. Naked, I reached for
her and pulled her close. For a moment she clung to me and then,
teasingly, she pushed me away and dived over the side. The water
was cold and the chill of it on my skin soon relieved the tension the
sight of her body had aroused in me. For a while we swam and
splashed in the shallows, then I loaded the dinghy with towels and
blankets, threw in a flask of rum with some cokes to dilute it and we
went ashore. Her hand in mine, we walked around the tiny cove, the
sand coming up pleasantly between our toes and the cool salty water
sparkling on our skins. I brushed it out of my hair and Pat shivered as
the fine spray hit her bare skin.
"Better get warmed up," I said, and led her back to the clearing.
There, from a deep pool dug in the stream by that early settler, I
poured fresh water over her and rubbed vigorously with my hands to
get off the salt and warm her up. The throbbing aching torment of my
desire returned. She moved closer, her tongue wet on my lips.
In the soft grey glow of late moonlight, her face, twisted for a time by
the agony of her passion, was smiling calm and her eyes looked up at
me serenely. I rolled away from her and pulled the blanket over us.
She cuddled into my shoulder and slept.
CHAPTER 11
The sunny days slid by as we explored farther and farther north. The
weather held fair all that month except for a few quick showers that
washed the warm decks and cooled the quiet air. There was little
good sailing weather but we didn't worry. There was fishing enough,
swimming enough, and loving enough to fill the days and nights.
In a deep side channel of Louise Inlet, I was trolling one day in the
fourth week. Pat held the tiller and the engine, throttled back hard,
barely puttered along. Then, above the noise, the sound of a more
powerful engine rose and gained rapidly in intensity. Around the bend
from the main channel an amphibian swung into view and banked to
glide down over us. It banked again, full circle, and the pilot let down
and taxied up behind our boat. I stopped the engine and waited. The
small door on the passenger side opened and a bare head stuck out.
I recognized that full, cheery face.
"For the love of Pete! It's the Chief," I yelled above the motor.
Pat nodded, not too happily. Her woman's intuition was probably
working overtime. A short time later we anchored inshore. The Boss
and his grim-looking pilot climbed aboard.
"Lord, we've had a time finding you two," Hallam sighed. "This is
Colonel Jones, United States Air Force."
I raised my eyebrows at Pat. Neither the man's flying suit nor the
plane's markings had shown any indication of their military nature.
"How do you do sir," I said, as I shook his hand. "Are you up here on
a vacation?"
"Strictly business, I'm afraid," he said crisply.
"Business? With whom?"
"With you." The lips opened and shut in his face like a ventriloquist's
dummy.
He was strictly business, I thought. "With me?" I turned to Hallam.
"What have I done now?"
He didn't smile at my feeble joke. "It's not what you've done, John, it's
what they want you to do. Colonel Jones is from the CIA."
"Oh oh, the cloak and dagger boys," I thought. "Trouble coming up."
Out loud I said, "We might as well sit down and be comfortable while
we talk. Pat, how about some beer?"
The Colonel was obviously impatient but he tried to swallow his
irritability with his beer.
"It's nice being a civilian at times," I was thinking. "I don't have to take
any more guff from the brass. This guy's obviously a West Point type
in a hurry and it must gall him to have to wait on my royal pleasure.
He wants something. Let him wait for it!"
It was a rebellious thought but I'd been prodded painfully by his
classmates on occasion in the past. I couldn't resist getting a little of
my own back.
"All three of you are cleared for Top Secret," Jones said. "I checked
before I came out here."
I took a long drag at the bottle. "What about yourself, Colonel?" I
smiled thinly at him.
Silently, stone-faced, he showed his credentials. Pat frowned at me.
She thought I was being unnecessarily cool to a guest. Rivalries in
the service meant nothing to her.
I grinned at him and the tension eased. "The old routine, Colonel. I
wouldn't want to foul up with a security officer watching me."
The stern exterior cracked as he relaxed. "I hate to butt in on your
vacation like this. I had no choice. We have a deadline to meet."
"Sounds familiar," I murmured. "Submit a complete report, in five
copies, based on information you'll get tomorrow, to reach
headquarters not later than yesterday. Well, give us the bad news."
"First let me give you an estimate of the situation as we see it. That
will put you in the picture."
"You mean I'm being framed?" I joked.
He actually smiled. "The weather and biological offensive against the
Reds are now at their height," he began, "and are proving most
successful. We anticipate they will exhaust their food reserves very
soon and will be desperate for more. If they ask us, we will give them
some this winter, under certain conditions." (He was referring to the
use of the contraceptive drug in that food, as I learned later.) "That
will give them a respite, which we can't very well avoid, and the war is
expected to continue on into 1964. By early summer, some eight
months from now, we estimate that continuation of our offensive will
drive them to the wall, since we will then inform them that we cannot
give them any more supplies from our store. It is then that we can
anticipate the hidden war breaking out into the open. Even if they
retaliate in weather and bacteriological warfare, they must know we
can win because our hoarded supplies will keep us going while they
starve. They have to plan a knockout blow and yet our G-2 people
believe they will not use atomic power. They won't use it because of
its dreadful after-effects on future populations. Even the so-called
clean bombs must affect many survivors and, in an already
decimated world, they cannot afford to have contaminated survivors
from which to rebuild the race. Also, they are sure that we won't use it
if they don't. Now, as far as we can foresee, that leaves only one
other way to achieve the knockout ... by the use of nerve gases."
"But we have nerve gases too."

"Yes, of course. However, we have information from our agents in
Russia that, as a last desperate chance, they will fire their
intercontinental missiles, plus shorter range rockets from their
submarine fleet, at every major population center and key military
target in the U.S.A. and Canada. Probably, in addition to nerve gas,
the missiles will be loaded with various deadly bacterial toxins and
bacteria, and quite likely new viruses of even greater lethal power
than the measlepox, able to attack and kill people in as short a period
as twenty-four hours. We also believe that, in the temporary paralysis
of cities, military posts and air bases achieved by the nerve gases,
they will attempt to land airborne or rocket-borne troops to capture
and hold our main centres. As you know, we are not mobilized
because there isn't supposed to be a war on. Their plan might be
fantastic enough to succeed."
"Who dreamed all this up?" said Pat, skeptically.
"It's no dream," the Colonel said. "There's a strong moderate element
in Russia today, mainly in the Armed Forces and the new managerial
classes, that is sick of dictators and war. They have contacted us and
are ready to revolt when the Reds are a bit more disorganized and
the people still more starved and discontented."
"Where do I come in?" I said.
"You are still a Lieutenant Colonel in the army reserve."
"That's right."
"The President himself, on the advice of his counsellors, asks that
you volunteer for special duty. As there is no declared state of
emergency, you cannot be recalled. In fact if you don't want to leave
Canada he can't force you to. He simply requests that you volunteer."
"That's all lovely, and very sweet of the old boy," I said sarcastically.
"Why me?"
"On the Imjin River, in North Korea, there is a large plant which is
very busy manufacturing those deadly viruses I talked about. The
Russians have quietly taken over the country, and in fact the whole of
China, since probably there are less than fifty million healthy Chinese
alive today. The crowding into communes in the Fifties really
facilitated the spread of the measlepox we hear. We think the
Kremlinites want to keep an eye on them; probably want to sterilize
with the S-Flu, those left by the other diseases. To have such a
dangerous factory well away from their own homes and close to their
enemies in Japan, as well as reasonably convenient to the submarine
pens around Vladivostok, are other likely reasons for its location
there. Whatever the reasons, the factory is there. Now, by good luck,
the senior virologist is one of the moderates who is heartily sick of all
this killing."
"Hear, hear," the Chief said. "I know exactly how he feels."
The Colonel nodded and went on. "He has agreed to give us the
biochemical formulas of the viruses plus methods of growth, how to
make the vaccine against them, and finally a sample of each culture
to work with. We believe that if we have that information ... and also
we hope to sabotage their installation ... we can defeat the attack
before it ever starts. We plan to destroy their nerve gas centers at the
same time and aid the rebellion," he concluded, "but that doesn't
concern us here."
"I still don't see what I do," I said, although I had an uneasy suspicion.
"You were a paratrooper, weren't you? And you served in Korea."
"Yes, a long time ago," I admitted grudgingly.
"And you are a virologist?"
"You know that."
"You also speak some Japanese, Korean and Chinese."
"I wish I'd never admitted it."
"We want you to parachute into North Korea with a Special Forces
Group, go to this plant, get the necessary information and sample
viruses. The information cannot be written down for security reasons
and because of this and the dangerous nature of the viruses we feel
that only a man of your qualifications can be trusted to handle it."
"That's what I was afraid of," I said.
"Will you do it?"
"In the name of heaven, Colonel!" I exploded. "Twenty minutes ago all
I had on my mind was catching a fish for supper and now you want a
snap decision that may cost me my life."
"I'm sorry, Doctor," his face froze again, "but we haven't much time."
"The hell with deadlines," I growled. "I'm not on active duty now and
no damn chairborne Pentagon pencil pusher is going to impose a
time limit on me. Let him get out and do it himself if he can't wait."
"Unfortunately you are the best qualified," he said stiffly.
"Yeah, unfortunately for me," I sneered. "How is it the guys best
qualified for the dirtiest jobs don't seem to be best qualified for
promotion too?"
"John, please!" Pat put a hand on my shoulder.
"Sorry Colonel," I choked down my anger. "You hit some raw nerves
with that best qualified remark."
"I'm sorry too, Doctor. We know you've already done more than your
share. Perhaps if you think it over for a while, you'll want to help us."
"How do you propose to go about it," Hallam said to Jones.
"Colonel Macdonald, or a substitute, will have to renew his airborne
training and get into first class physical shape. There will also be
language school to brush up on his Korean and Japanese, with some
basic Russian."
"Why Japanese?"
"It was the official language in Korea until after World War Two and
many of the older people can speak it. What he misses in Korean he
might be able to pick up in Japanese."
"How long will this take?" Pat said.
"About six months. Then there will be a month of special preparations
for the attack itself. After that we wait for the right weather and the
psychologically correct moment. The idea is to delay until the last
possible moment before the Reds are ready to attack us and pull the
rug out from under them. We hope the confusion and loss of morale
will be so great that the partisans or maquis or whatever you want to
call them will be able to rise and overthrow the communist regime."
"Adding all this up," I said, "I gather you expect the special training to
start in about two weeks from now."
"That's right," Colonel Jones said. "That's why we need an answer
soon."
"I have one week left of my vacation before I return to Vancouver. I'll
let you know then."
"Thank you. I'll leave all the necessary information with Dr. Hallam at
his office." Jones got up, bent slightly in Pat's direction and again to
me, while he gave us a formal handshake. He climbed over the side
and got into the amphibian without a backward glance.
"I wish I hadn't had to do this," the Chief said hurriedly as his big
hands reached out for ours. "Try not to let it ruin the rest of your
vacation. God bless!" He squeezed and my hand tingled until long
after his great frame had vanished into the cabin of the flying boat.
After they had gone Pat cooked the fish I'd caught and we sat down
to eat and talk things over. I hadn't committed myself in any way. My
days as an eager beaver soldier were long gone and I was
remembering the old army saying, "Never volunteer for anything." Pat
had been unusually quiet. I knew she would go along with any
decision I made but it is still not an easy thing for a woman to sit still
while her man is thinking of committing what might turn out to be
suicide.
"Want a drink?" she asked, getting out the bottles before I could
answer. She mixed us a rum collins, taking the last of the ice from our
little refrigerator.
"Well, what are you thinking?"
"I'm thinking just how much hell the next eight months will be."
"Hell for both of us, darling," she said. She leaned across the narrow
table to kiss me. "I'm glad you want to do it. It may not win the war but
you'd never be happy again if you didn't try."
I didn't relish the idea at all but I knew she was right. I'd always been
a volunteer. It was too late to change. I heaved up off the bench and
went on deck. The stars were out now and high overhead an Alaska-
bound plane hummed by, its green and red lights winking.
"Red light ... green light ... GO," I thought and remembered again the
quivering anticipation as I stood in the door of the C-119 watching for
a little green button to flash on. I shivered with old remembered fears
and I felt Pat's arms go around me from behind as she kissed the
back of my neck. I think she sensed my trouble. She knew how I had
sweated out jumping and the long strain of combat duty.
"Come down below, sweetheart, it's bedtime. Come and let me help
you forget. There are so few nights left."
I rolled over in the soft sandy ground and pulled hard on the risers to
spill the air out of my parachute. The breeze was dying. The spotted
cloth wavered, flapped, and the canopy collapsed. I got to my feet, hit
the box and stepped out of the slack harness. Slowly I straightened
the canopy, folded it over my arms down to the back pack and
tightened the straps over it. I picked the whole thing up and zipped it
into the carrying bag. The trucks were waiting across the drop zone. I
heaved the heavy bag up across my shoulders with the handles on
each side of my neck and started towards them. My first jump was
over. I was tired ... tired... tired and quietly proud. The first one was
past. I was a paratrooper again.
"How was the jump, Colonel?" A small black haired officer of about
my own age came up behind me. Captain Balakireff, the son of White
Russian refugees and lately of Shanghai, China, spoke with a faint
accent. His thin lips and hollow cheeks reminded me of the ascetic
saints on a Russian ikon. He should be wearing a beard, I thought.
"Pretty good, Blackie. It's been a long time."
Trudging beside him through the loose sand, a tall blond and thick
chested Lithuanian Captain called Makstutis grinned down at me.
"Need a hand with that pack, Doc," he said, completely unconscious
of the difference in our ranks.
"No thanks Mak. I may not be in shape but I'm not that decrepit."
Closer to the trucks Lieutenant Pak On, a native born Korean
imitation of Balakireff awaited us. With him was Lieutenant Kim Cho
Hup, a living embodiment of the Chinese god of happiness with his
round smiling face and the figure to go with it. For all his weight, the
result probably of too much feasting on his Hawaiian island home,
Kim was quick and tough, a veteran of the early days in Korea with
the 25th Division.
These four, all war veterans and career men formed, with me, the
officers' component of a Special Forces team. With us, as we
assembled around the trucks were twenty-five enlisted men. All were
Orientals, a few native born, but mostly Hawaiian sons of immigrants.
They too were Special Forces volunteers, qualified both as
paratroopers and rangers. Each had a specialty, weapons,
demolition, signal, engineer, medical, and each could take over at
least one other job in an emergency. They had to be fluent in one of
three languages, Korean, Japanese or Mandarin Chinese.
We jumped as a team in two sticks, led by the Slavic officers. As
senior officer I acted as jump-master in training although in the actual
attack I was to be protected rather than to command. The operations
plan was simple. We were to drop in North Korea in high mountain
country near our objective. The three whites would masquerade as
Russian officers. We hoped to pass as inspectors or medical health
officers touring the country with a North Korean Army escort. As the
Russians had taken control in China and North Korea, we should be
able to get by, at least for a while, considering the disorganized state
of that plague-tortured peninsula. A rendezvous with the agent who
had contacted the enemy virologist would be arranged. From then on
it was up to us. Afterwards we were to be evacuated by submarine
from a pre-designated spot on the coast.
We climbed into the trucks. As they rolled down the road back to our
quarters, I pulled Pat's latest letter from my pocket and skimmed once
more through its well remembered pages. Because of the danger she
was no longer working with the research project but was helping Polly
on the electron microscope.... Polly had heard from Harry.... He was
in Formosa training with the Americans and Nationalist Chinese for a
landing on the Chinese mainland ... he had sold them on the idea....
Polly was worried of course.... She was too ... would I please be
careful ... she loved me and missed me so much ... she wanted me to
come home safely.
I folded the letter and put it away. I'd be coming home all right! On
that I was determined. No damned disease, no stupid Communist
fanatic was going to stop me!
The emphasis on pure physical conditioning changed although we
continued our long marches and strenuous exercises. Now we
worked constantly in Russian or Korean uniforms, used enemy
equipment and talked Russian or Korean. It was hard at first but
gradually I achieved a basic knowledge sufficient to deceive a casual
observer.
A week before Christmas General Rawlins, the Special Forces
commander, called me into his office. He came around his desk as I
saluted.
"You're looking fit, Macdonald. The instructors tell me your team is
progressing very nicely."
"Thank you sir."
"In view of their reports I am letting you and your men off for
Christmas and New Years. Air transportation will be arranged as far
as possible. Warn your men again about security regulations. See the
Chief of Staff for the details." His normally stern face cracked into a
smile and he stuck out his hand.
"Merry Christmas," he said.
The day following my return to Vancouver was Christmas Eve. Polly

and Pat and I drove out to have dinner with Dr. Hallam in his hill-top
apartment. We found him dressed in a white chef's cap and apron
busily sugaring the top of a ham. In a moment the girls found aprons
of their own and began to get in his way. I got busy with the brandy
bottle and the egg nog.

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Opening Case Technology Giants‘ Acquisition Strategies and Their Outcomes

Chapter Introduction: With continued merger and acquisition activity, this

Teaching Note: In fast-cycle industries companies often lack the time to

Explain the popularity of acquisition strategies in

THE POPULARITY OF MERGER AND ACQUISITION STRATEGIES

Merger and acquisition trends:

A firm may make an acquisition to do the following:

Mergers, Acquisitions, and Takeovers: What Are the Differences?

Discuss reasons why firms use an acquisition strategy to

REASONS FOR ACQUISITIONS

Increased Market Power

Teaching Note: Remind students that, as discussed in Chapter 6, during the

Overcoming Entry Barriers

It may be difficult to enter a market dominated by large, established competitors. As noted in

 Investments in large-scale manufacturing facilities that enable the firm to achieve

Teaching Note: Students may be surprised that cross-border acquisitions of the

Teaching Note: Chapter 9 examines cross-border alliances and the

Some trends in cross-border acquisitions:

Cost of New Product Development and Increased Speed to Market

Acquisitions also may represent an attractive alternative to developing new products

Internal development of new products is often perceived by managers to be costly and to

In addition to representing attractive prices, large pharmaceutical firms have used

Acquisitions also may have gained in popularity as a related or horizontal diversification

United Technologies: A Mini-Case

Both related diversification and unrelated diversification can be implemented through

Teaching Note: Remember, related diversification seeks lower costs through

Reshaping the Firm’s Competitive Scope

 General Motors acquired Electronic Data Systems and Hughes Aerospace

Learning and Developing New Capabilities

Describe seven problems that work against developing a

PROBLEMS IN ACHIEVING ACQUISITION SUCCESS

failures. Successful acquisitions generally involve a well-conceived strategy in selecting the

A number of problems accompany an acquisition strategy. Acquisition-related problems

The importance of integration success should not be underestimated. Without successful

Teaching Note: Several years ago, Intel acquired Digital Equipment’s

 Increase market power

Inadequate Evaluation of Target

Due diligence is commonly performed by investment bankers, accountants, lawyers, and

Teaching Note: An example of effective due diligence was DaimlerChrysler’s

Large or Extraordinary Debt

Teaching Note: Junk bonds are considered by many to be a new financing

Teaching Note: A number of well-known and well-respected finance scholars

Inability to Achieve Synergy

To achieve a sustained competitive advantage through an acquisition, acquirers must realize

Anheuser-Busch: A Case Example

In addition, competition in the beer industry increased and Anheuser-Busch

These general problems may be encountered in many acquisitions. However, there

Too Much Diversification

As detailed in Chapter 6, information processing requirements are greater for a related