Define all those: Merger, Acquisition and Takeover
- Merger: two comps agree to integrate their operations on a relatively co-equal basis
- Acquisition: on firm buys either a controlling share or totality of a company in the intent of making acquired company a subsidiary business within its portfolio
- Takeover: an acquisition in which the target firm did not solicit the acquiring firm’s bid for outright ownership.
7 reasons for acquisition (be able to name at least 5)
- increased market power
- overcoming barriers to entry
- cost of new product dev, & increase speed to market
- lower risk than developing new products
- learning and developing new capabilities
- reshaping firm’s competitive scope
- increased diversification
What factors increase market power ?
- vertical integration of suppliers or distributors of the acquiring firm
- horizontal acquisition of other firms in the same industry
- related acquisitions of firms in related industries
What conditions makes the factors increasing market power relevant/important?
when:
- there is the ability to sell goods or services above competitive levels
- cost of primary or support activities are lower than those of competitors
- a firm’s size, resources and capabilities give it a superior ability to compete
What vertical integration and how does it affect market power?
It’s when a firm acquires either backward or forward in the value chain, letting them control additional parts of said chain.
Differentiate horizontal and related acquisition
- horizontal: when a firm acquires a competitor of the same industry
- related: target firm of a highly related industry is acquired
What do firms seek through related and horizontal and related acquisition? How do those increase market power?
They seek to create value through synergy generated by integrating some of their resources and capabilities to their acquirees’ operations
increases market power by exploiting:
- cost-based synergies
- Revenue-based synergies
What acquisitions are made to overcome entry barriers? Any difficulty that comes with them?
Cross-border acquisition: acqu. made between firms headquartered in different countries.
- can be difficult to negotiate and operate because of country level differences, culture differences.
Explain the cost of new product dev, & increase speed to market reason for acquisitions.
- internal development of new products is often perceived as high risk
- More easy to estimate outcome of acquisition
Thus, acquisition can be seen as less risky than R&D, however, acquisitions may discourage or even suppress innovation
Explain the « learning and developing new capabilities » reason for acquisitions
A firm can gain capabilities they don’t possess:
- special technological capability
- a broader knowledge base
- reduced inertia
Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base.
explain increased diversification
- acquisitions to diversify is the quickest and easiest way to change its portfolio of businesses
- both related and unrelated diversification strategies can be implemented through acquisitions
- The more related the firms are, the more likely the acquisition will be successful.
Explain reshaping the firm’s competitive scope
acquisition can:
- reduce the negative effects of an intense rivalry on a firm’s financial performance.
- reduce a firm’s dependence on one or more products or markets
Reducing dependence on specific markets increase the firm’s competitive scope
7 problems in achieving acquisition success
- integration difficulty
- inadequate target evaluation
- extraordinary debt
- too large
- too much diversification
- managers overly focused on acquisitions
- inability to achieve synergy
Name the four integration challenges
- melding two different cultures
- linking different financial and controls systems
- building effective working relationships
- resolving problems regarding the status of newly acquired firm’s executives
Attributes of successful acquisitions and their results
- acquired firms has assets or resources that are complementary to the acquiring firm’s core business –» high prob of synergy and competitive adv by maintaining strengths
- faster and more effective integration and possibly lower premiums–» acquisition is friendly
- Acquiring firm conducts effective due diligence to select target firms and evaluate their health–» firms with strongest complementarities are acquired and overpayment is avoided
- financing is less costly–» acquiring firm has financial slack
- merged firms maintain low to moderate debt positions–» lower risk of bkrptcy and avoidance of high debt tradeoffs
- acquiring firm maintains long term comp adv in markets–» acquiring firm has sustained and consistent emphasis on R&D and innovation
- acquiring firms manages change well and is flexible and adaptable–» faster and more effective integration facilitates achievement of synergy
Describe value- creating diversification
- econ of scope (rel. diversification): sharing activities, transferring core competencies
- Market power (rel diversification): blocking comp through multipoint competition, vertical integration
- Financial economies (unrelated div): efficient internal capital allocation, business restructuring
