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ACQUISITIONS & RESTRUCTURING (PROBLEM IN ACQUISITION (too much…
ACQUISITIONS & RESTRUCTURING
Differences
Merger
Integration of operation between two fims
Takeover
A company gets control of another company by buying shares
the target firm did not solicit the acquiring firm bid for the outright ownership
Acquisition
A firm buys another company in order to take control
make the acquired firm a subsidiary business within it's portfolio
Increased Market Power
Acquisitions are subject to
regulatory review
government scrutiny
analysis by financial market
need to understand the political/ legal segment of general environment
How to increase market power
Vertical Acquisition
Acquisition of a supplier or distributor of one or more firm's good / services
Related Acquisition
Acquisition of a company in a highly related industry
have the difficulty in implementing strategy
difficult to implement
Horizontal Acquisition
Company competes in the same industry
exploiting
cost-based revenue synergies
revenue-based synergies
similar characteristic result in higher performance
Factors increasing market power
Firm's size, resources and capabilities to compete
cost of production are lower than competitors
Ability to sell goods and services
Benefits
Overcome Entry Barrier
How?
increasing economics of scale
differentiated product
acquisition of established company is easier than entering market
acquisition between companies with headquarters in different countries can overcome entry barrier
Cost of New Product Development & Increase Speed to Market
Benefits
allow firm to gain access to new and current product
return are more predictable
problem :
new product internally require significant investment of firm's resources
Lower Risk Compared to Developing New Product
acquisition outcomes can be estimated easily
manager view acquiring as lowering risk
Increased Diversification
Entering new markets with new product
easiest way to change portfolio of business
both related & unrelated diversification can be implemented
Reshaping Firm's Competitive Scope
Benefits
reduce the negative effect of an intense rivalry (financial)
reduce firm's dependent on product and market
Learning and Developing New Capabilities
Acquire other firm with different but related and complementary capabilities
to build own knowledge base
gain capabilities that firm do not posses
special technology capabilities
broaden firm's knowledge base
reduce inertia
PROBLEM IN ACQUISITION
Too large
-
Additional costs of controls + additional market power
Larger size may lead to more bureaucratic controls
Formalised controls often lead to relatively rigid and standardised managerial behaviour
Firm may produce less innovation
manager overly focused on acquisition
Managing the integration process after the acquisition is completed
Preparing for negotiations
Completing effective due-diligence processes
Searching for viable acquisition candidates
too much diversification
cause manager to rely too much on financial
focus more on short term outcomes
inability to achieve synergy
experience transaction cost (can be direct / indirect)
direct cost : legal fees + charges by investment bank
underestimate indirect cost
large debt
increased likelihood to bankruptcy
lead to downgrade of the firm's credit rating
inadequate evaluation of target
due diligence
process of evaluating a target firm for acquisition
evaluation requires examining
difference culture between the firm
tax consequences of transaction
action necessary to meld two workforce
integration difficulties
challenges
linking different financial and control system
building effective relationship
resolving problems regarding the status of required firm's executive
RESTRUCTURING
strategy which a firm changes its set of business or financial structure
why restructuring?
failure of acquisition strategy
changes in external / internal environment
restructuring strategy
downsizing
reduction number of firm's employees
sometimes can be operating units
reason:
expect to improve profitability form cost reduction
more efficient operations
outcome
long-term
lost human capital
lower performance
short-term
reduced cost labour
down-scoping
eliminating business that is unrelated to firm's core business
set of actions
refocus on its core business
maybe accompanied by downsizing
not eliminating key employee from primary business
-effectively managed by top management team
outcome
short-term
reduced debt cost
emphasis on strategic control
Long-term
higher performance
leveraged buyouts
a party buys all firm's asset
to take the firm private
can correct for managerial mistake
facilitate entrepreneurial effort & strategic growth
outcome
long-term
high risk
high performance
short-term
high debt cost
emphasis on strategic control