Merger
Strategy through which two firms agree to integrate their operations on a relatively coequal basis
Acquisition
Strategy through 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.
Takeover
Special type of acquisition where the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions.
Horizontal acquisition
The acquisition of a company competing in the same industry as the acquiring firm.
Vertical acquisitions
A firm acquiring a supplier or distributor of one or more of its products.
Related acquisitions
Acquiring a firm in a highly related industry.
Why acquire?
- Increased market power (selling goods/service above competitive levels, reduced costs that competitors)
- Increased diversification
- Overcoming entry barriers (economies of scale and differentiated products)
- Reduced cost of new product development and increased speed to market
- Lower risk compared to developing new products (reduced risk of startup ventures)
- Reshaping firm’s competitive scope
- Learning and developing new capabilities
Why should you not acquire (problems)?
- Integration difficulties (complex set of organizational processes that are difficult and challenging)
- Inadequate evaluation of target (poor DD, poor accuracy of financials and balance sheet)
- Large debt
- Inability to achieve synergy (value created by units working together)
- Too much diversification
- Over-focused managers on acquisition (prepping for negotiations, viable acquisition candidates, effective DD)
- Too large of a firm post-acquisition
Restructuring
A strategy through which a firm changes its set of businesses or its financial structure
Types of restructuring
- Downsizing
- Downscoping
- Liquidation
Downsizing
Wholesale reduction of employees
Downscoping
Selectively divesting or closing non-core businesses
Liquidation
Selling all of a company’s assets, in parts, for their tangible worth
Leveraged buyout (LBO)
Party (private quity firm) buys all firm’s assets in order to take the firm private
Downsizing leads to….
Reduced labour costs, loss of human capital, lower performance
Downscoping leads to…
Reduced debt costs, emphasis on strategic controls, higher performance
Leveraged buyout leads too…
Emphasis on strategic controls, high debt costs, higher performance, higher risk
