Mergers Acquisitions and Takeovers What are the Differences

Mergers, Acquisitions, and Takeovers: What are the Differences? • Merger Ø A strategy through which two firms agree to integrate their operations on a relatively co-equal basis • Acquisition Ø A strategy through which one firm buys a controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio • Takeover Ø A special type of acquisition when the target firm did not solicit the acquiring firm’s bid for outright ownership Copyright © 2004 South-Western. All rights reserved. 1

Adapted from Figure 7. 1 Reasons for Acquisitions Cost new product development/increased speed to market Increased diversification Acquisitions Increased market power Overcoming entry barriers Avoiding excessive competition Lower risk compared to developing new products Copyright © 2004 South-Western. All rights reserved. Learning and developing new capabilities 2

Market Power Acquisitions Horizontal Acquisitions • Acquisition of a company in the same industry in which the acquiring firm competes increases a firm’s market power by exploiting: Ø Cost-based synergies Ø Revenue-based synergies • Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics Copyright © 2004 South-Western. All rights reserved. 3

Market Power Acquisitions (cont’d) Horizontal Acquisitions Vertical Acquisitions • Acquisition of a supplier or distributor of one or more of the firm’s goods or services Copyright © 2004 South-Western. All rights reserved. Ø Increases a firm’s market power by controlling additional parts of the value chain 4

Market Power Acquisitions (cont’d) Horizontal Acquisitions • Acquisition of a company in a highly related industry Vertical Acquisitions Ø Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement Related Acquisitions Copyright © 2004 South-Western. All rights reserved. 5

Adapted from Figure 7. 1 Too large Problems in Achieving Success Acquisitions Too much diversification Integration difficulties Inadequate evaluation of target Managers overly focused on acquisitions Large or extraordinary debt Copyright © 2004 South-Western. All rights reserved. Inability to achieve synergy 6

Attributes of Successful Acquisitions Table 7. 1 Copyright © 2004 South-Western. All rights reserved. 7

Restructuring • A strategy through which a firm changes its set of businesses or financial structure Ø Failure of an acquisition strategy often precedes a restructuring strategy Ø Restructuring may occur because of changes in the external or internal environments • Restructuring strategies: Ø Downsizing Ø Downscoping Ø Leveraged buyouts Copyright © 2004 South-Western. All rights reserved. 8

Types of Restructuring: Downsizing • A reduction in the number of a firm’s employees and sometimes in the number of its operating units Ø May or may not change the composition of businesses in the company’s portfolio • Typical reasons for downsizing: Ø Expectation of improved profitability from cost reductions Ø Desire or necessity for more efficient operations Copyright © 2004 South-Western. All rights reserved. 9

Types of Restructuring: Downscoping • A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses • A set of actions that causes a firm to strategically refocus on its core businesses Ø May be accompanied by downsizing, but not eliminating key employees from its primary businesses Ø Firm can be more effectively managed by the top management team Copyright © 2004 South-Western. All rights reserved. 10

Restructuring: Leveraged Buyouts • A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private Ø Significant amounts of debt are usually incurred to finance the buyout • Can correct for managerial mistakes Ø Managers making decisions that serve their own interests rather than those of shareholders • Can facilitate entrepreneurial efforts and strategic growth Copyright © 2004 South-Western. All rights reserved. 11

Restructuring and Outcomes Adapted from Figure 7. 2 Copyright © 2004 South-Western. All rights reserved. 12