Strategic Management

Part II: Strategic Actions:

Strategy Formulation
Chapter 7: Strategic Acquisition and
Restructuring

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Chapter 7: Strategic Acquisition and
Restructuring

• Overview: Six content areas

– Why firms use acquisition strategies
– Seven problems working against developing a
competitive advantage using an acquisition strategy
– Attributes of effective acquisitions
– Restructuring strategy vs common forms
– Short & long-term outcomes of different restructuring
strategies

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Introduction:
Merger vs. Acquisition vs. Takeover (Cont’d)

• Acquisition
– One firm buys a controlling, 100 percent interest in
another firm with the intent of making the acquired
firm a subsidiary business within its portfolio.
• In 2016, Engro Corporation was acquired by Dutch-based
company FriesLand Campina in $450million to enter Pakistan
market
• Paktel acquired by China Mobile and rebranded as Zong
Pakistan
• Tameer MicroFinance Bank now owned by Telenor and
renamed as Telenor Micro Finance Bank
• Nestle acquired Milkpak Group to enter in dairy market
• Dawlance was acquired by Arçelik Group in November 2016
for $258m

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Introduction:
Merger vs. Acquisition vs. Takeover (Cont’d)

• Merger
– Two firms agree to integrate their operations on a
relatively co-equal basis
• In 2006, Habib Bank merged with Metropolitan Bank Limited,
later named as Habib Metropolitan Bank Limited
• Takeover
– Special type of acquisition strategy wherein the target
firm did not solicit the acquiring firm's bid
– Hostile Takeover: Unfriendly takeover that is
unexpected and undesired by the target firm

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Chapter 7: Strategic Acquisition and
Restructuring

• Overview: Six content areas

– Popularity of acquisition strategies for firms competing
in the global economy
– Why firms use acquisition strategies
– Seven problems working against developing a
competitive advantage using an acquisition strategy
– Attributes of effective acquisitions
– Restructuring strategy vs common forms
– Short & long-term outcomes of different restructuring
strategies

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Reasons for Acquisitions
• 1. Increased market power
– Sources of market power include
• Size of the firm, resources and capabilities to compete in the
market and share of the market
– Horizontal Acquisitions
• Acquirer and acquired companies compete in the same industry
• i.e., McDonald’s acquisition of Boston Market
– Vertical Acquisitions
• Firm acquires a supplier or distributor of one or more of its
goods or services; leads to additional controls over parts of the
value chain
• i.e., Walt Disney Company’s acquisition of Fox Family
Worldwide.
– Related Acquisitions
• Firm acquires another company in a highly related industry

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Reasons for Acquisitions (Cont’d)

• 2. Overcoming entry barriers

– Acquire existing firms with competitive advantage in
the market to reduce the entry risk of customers’
loyalty, economies of scale and differentiated products.
• 3. Cost of new product development and
increased speed to market
– Developing new products internally and successfully
introducing them is difficult and increase the reach-
time to the market
• 4. Lower risk compared to developing new
products
– Substitute of internal innovation and acquisition
success is more easy to predict

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
(Cont’d)

• 5. Increased diversification
– Difficult for the firm to enter the market which is
unrelated to their product line, so the acquisition
strategy is more effective when firm lack expertise.

• 6. Reshaping firm’s competitive advantage

– To reduce the intense rivalry and dependence on a single
market i.e. Samsung as a Conglomerate operating in
Chip-making industry, mobile phones, ship builder,
consumer electronic maker etc)

• 7. Learning and developing new capabilities

– To increase knowledge base, firms acquire companies
with different but related and complementary capabilities
© 2016 Cengage Learning India Pvt. Ltd. All rights
reserved.
Chapter 7: Strategic Acquisition and
Restructuring

• Overview: Six content areas

– Popularity of acquisition strategies for firms competing
in the global economy
– Why firms use acquisition strategies
– Seven problems working against developing a
competitive advantage using an acquisition
strategy
– Attributes of effective acquisitions
– Restructuring strategy vs. common forms
– Short & long-term outcomes of different restructuring
strategies

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
 Problems in Achieving
Acquisition Success
• 1. Integration difficulties
– Difficulty in managing both firms simultaneously
– Cultural clashes and organizational politics
– Perception of fairness among employees
– Difficult to determine leadership structure
• 2. Inadequate evaluation of target
– Due diligence process to evaluated the acquired firm
– Tax imposition, financial situations, HR structure
– Take the help of third party i.e. accounting/financial firms
• 3. Large or extraordinary debt
– Increase the financial expenses
– Risk of insolvency
Problems in Achieving
Acquisition Success (Cont’d)

• 4. Inability to achieve synergy

– Synergy: Value created by units exceeds value of units
working independently
• Achieved when the two firms' assets are complementary in
unique ways
• Example: SouthWest Airline’s acquisition of AirTran which 21
international cities to the SW Airline’s Network

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Problems in Achieving
Acquisition Success (Cont’d)

• 5. Too much diversification

– Diversified firms must process more information of
greater diversity, hard to manage
– Rely more on financial performance rather than
strategic contribution of a unit to the long-term
profitability
– More reliance on acquisitions rather internal innovation

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Problems in Achieving
Acquisition Success (Cont’d)

• 6. Managers overly focused on acquisitions

– Necessary activities with an acquisition strategy
• Search for viable acquisition candidates
• Complete effective due-diligence processes
• Prepare for negotiations
• Managing the integration process after the acquisition
– Diverts attention from matters necessary for long-term
competitive success (I.e., identifying other external
opportunities and threats, interacting with important
external stakeholders, or fixing fundamental internal
problems)

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Problems in Achieving
Acquisition Success (Cont’d)

• 7. Too large
– After acquisition, firm become too large to maintain
control resulting in;
– Bureaucratic controls
• Formalized supervisory and behavioral rules and policies
designed to ensure consistency of decisions and actions
across different units of a firm – formalized controls decrease
flexibility

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Chapter 7: Strategic Acquisition and
Restructuring

• Overview: Six content areas

– Popularity of acquisition strategies for firms competing
in the global economy
– Why firms use acquisition strategies
– Seven problems working against developing a
competitive advantage using an acquisition strategy
– Attributes of effective acquisitions
– Restructuring strategy vs. common forms
– Short & long-term outcomes of different restructuring
strategies

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Effective Acquisitions
• Complementary assets or resources helps in
creating synergy
• Friendly acquisitions facilitate integration of firms
• Effective due-diligence process (assessment of
target firm by acquirer, such as books, culture, etc.)
• Financial slack
• Low debt position
– High debt can…
• Increase the likelihood of bankruptcy
• Lead to a downgrade in the firm’s credit rating
• Preclude needed investment in activities that contribute to the
firm’s long-term success
• Consistent focus on innovation and R&D
• Managers are flexible and adaptable to change
Chapter 7: Strategic Acquisition and
Restructuring

• Overview: Six content areas

– Popularity of acquisition strategies for firms competing
in the global economy
– Why firms use acquisition strategies
– Seven problems working against developing a
competitive advantage using an acquisition strategy
– Attributes of effective acquisitions
– Restructuring strategy vs. common forms
– Short & long-term outcomes of different
restructuring strategies

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Restructuring

• Restructuring defined: Firm changes set of

businesses or financial structure
• Three restructuring strategies
– 1. Downsizing
• Reduction in number of firms’ employees or business units
that do not change the business nature and improves the
performance
– 2. Downscoping or Divesting
• Eliminating businesses unrelated to firms’ core businesses
through divesture
• Example: Coca Cola divest its bottling operations in North
India to divest three plants

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Restructuring (Cont’d)

• Three restructuring strategies (Cont’d)

– 3. Leveraged buyouts (LBOs) –

• One party buys all of a firm's assets in order to take the firm
private (or no longer trade the firm's shares publicly)
• Three types of LBOs
– Management buyouts
– Employee buyouts
– Whole-firm buyouts

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Restructuring

• Restructuring Outcomes
– Short-term
• Reduced costs: labor and debt
• Emphasis on strategic controls
– Long-term
• Loss of human capital
• Performance: higher/lower
• Higher risk

© 2016 Cengage Learning India Pvt. Ltd. All rights

reserved.
Restructuring and Outcomes