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Acquisition and Restructuring Strategies

Chapter 7

Merger, Acquisition and Take over

Merger Its a strategy through which two firms agree to integrate their operations on a relatively coequal basis Acquisition Its a strategy through which on 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 It is a special type of an acquisition strategy wherein the target firm does not solicit the acquiring firms bid

Reasons of Acquisition
Increased market power when firm is able to sell its products above competitive levels or when the costs of its primary or support activities are lower than those of its competitors To increase market power, firms often use horizontal, vertical and related acquisitions

Horizontal Acquisition
The acquisition of a company competing in the same industry as the acquiring firm is referred to as a horizontal acquisition Horizontal acquisition increase a firms market power by exploiting cost based and revenue based synergies Horizontal acquisition results in higher performance when the firms have similar characteristics

Vertical acquisition
A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services

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

Overcoming entry barriers

Barriers to entry are factors associated with the market or with the firms currently operating in it which increase the expense and difficulty faced by new ventures trying to enter that particular market Facing entry barriers created by economies of scale and differentiated products, a new entrant may find acquiring an established company to be more effective than entering the market as a competitor offering good s or services that is unfamiliar to the current market

Cross border acquisitions to reduce entry barrier problem

Acquisition made between companies with headquarters in different countries are called cross border acquisitions These acquisitions are often used to overcome entry barriers

Cost of new product development and increased speed to the market

Developing new products intenally and successfully introducing them into the market place often requires significant investment and carries a lot of risk also Acquisition are another means a firm can use to gain access to new products and to current products that are new to the firm

Lower risk compared to developing new products

Because the outcomes of an acquisition can be estimated more easily and accurately than the outcomes of an internal product development process, managers may view acquisition as lowering risk

Increased diversification
Firms may use acquisition for diversification Firms might find it difficult to develop a new product for a new market and in a case of unrelated diversification the firm would go for acquisition

Reshaping the competitive scope

Intense rivalry and competition can affect a firms profitability and so to reduce the negative affect of rivalry on profitability a firm may go for acquisition to lessen its dependence on one or more products or markets Reducing a firms dependence on a specific market alters the firms competitive scope

Learning and Developing new capabilities

Some acquisitions are done in order to gain capabilities a firm does not possess Acquisition may be used to acquire a special technological capability

Integration problems arises due to different corporate culture, linking financial and control system, building effective working relationships, resolving problems regarding status of the newly acquired firms executive Inadequate evaluation of target The potential acquirer evaluates the target firm through a process called Due diligence in which hundreds of items are examined like financing for internal transaction, differences in culture, tax consequences of the transaction, actions needed to meld the two workforces Due diligence is performed by investment bankers/accountants/management consultants etc at times this can be done by an internal team If the due diligence is not done properly it may result in acquiring firm paying an excessive premium for the target company Research shows that in times of high stock prices due diligence is relaxed and so the purchase price is driven by other factors rather than rigorous assessment of where, when and how management can drive real performance gains

Problems in achieving acquisition success