Chapter 7: Merger and Acquisition Strategies 225downscoping causes them to refocus on their core business.^96 Managerial effectiveness
increases because the firm has become less diversified, allowing the top management
team to better understand and manage the remaining businesses.^97
Firms often use the downscoping and downsizing strategies simultaneously. When
doing this, firms need to avoid layoffs of key employees, as such layoffs might lead to a
loss of one or more core competencies. Instead, a firm that chooses to simultaneously
engage in downscoping and downsizing should intentionally become smaller as a result
of decisions made to reduce the diversity of businesses in its portfolio, allowing it to focus
on its core areas as a result.^98
In general, U.S. firms use downscoping as a restructuring strategy more frequently
than do European companies—in fact, the trend not too long ago in Europe, Latin
America, and Asia was to build conglomerates. In Latin America, these conglomerates
are called grupos. More recently though, many Asian and Latin American conglomer-
ates have chosen to downscope their operations as a path to refocusing on their core
businesses. This recent downscoping trend has occurred simultaneously with increasing
globalization and with more open markets that have greatly enhanced competition.^99
7-5c Leveraged Buyouts
A leveraged buyout (LBO) is a restructuring strategy whereby a party (typically a private
equity firm) buys all of a firm’s assets in order to take the firm private.^100 Once a private
equity firm completes this type of transaction, the target firm’s company stock is no
longer traded publicly.
Traditionally, leveraged buyouts were used as a restructuring strategy to correct for
managerial mistakes or because the firm’s managers were making decisions that primarily
served their own interests rather than those of shareholders.^101 However, some firms com-
plete leveraged buyouts for the purpose of building firm resources and expanding their
operations rather than simply to restructure a distressed firm’s assets.
Significant amounts of debt are commonly incurred to finance a buyout; hence, the
term leveraged buyout. To support debt payments and to downscope the company to con-
centrate on the firm’s core businesses, the new owners may quickly sell a number of assets.
Indeed, it is not uncommon for those buying a firm through an LBO to restructure the
firm to the point that it can be sold at a profit within a five- to eight-year period.
Management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts,
in which one company or partnership purchases an entire company instead of a part of
it, are the three types of LBOs. In part because of managerial incentives, MBOs, more so
than EBOs and whole-firm buyouts, have been found to lead to downscoping, increased
strategic focus, and improved performance.^102 Research shows that management buyouts
can lead to greater entrepreneurial activity and growth.^103 As such, buyouts can represent
a form of firm rebirth to facilitate entrepreneurial efforts and stimulate strategic growth
and productivity.^104
7-5d Restructuring Outcomes
The short- and long-term outcomes that result from use of the three restructuring strat-
egies are shown in Figure 7.2. As indicated, downsizing typically does not lead to higher
firm performance.^105 In fact, some research results show that downsizing contributes to
lower returns for both U.S. and Japanese firms. The stock markets in the firms’ respective
nations evaluate downsizing negatively, believing that it has long-term negative effects
on the firms’ efforts to achieve strategic competitiveness. Investors also seem to conclude
that downsizing occurs as a consequence of other problems in a company.^106 This assump-
tion may be caused by a firm’s diminished corporate reputation when a major downsizing
is announced.^107