Chapter 7: Merger and Acquisition Strategies 227
SUMMARY
■ Mergers and acquisitions as a strategy are popular for com-
panies based in countries throughout the world. Through
this strategy, firms seek to create value and outperform rivals.
Globalization and deregulation of multiple industries in many
of the world’s economies are two of the reasons for this
popularity among both large and small firms.
■ Firms use acquisition strategies to
■ increase market power
■ overcome entry barriers to new markets or regions
■ avoid the costs of developing new products and increase
the speed of new market entries
■ reduce the risk of entering a new business
■ become more diversified
■ reshape their competitive scope by developing a different
portfolio of businesses
■ enhance their learning as the foundation for developing
new capabilities
■ Among the problems associated with using an acquisition
strategy are
■ the difficulty of effectively integrating the firms involved
■ incorrectly evaluating the target firm’s value
■ creating debt loads that preclude adequate long-term
investments (e.g., R&D)
■ overestimating the potential for synergy
■ creating a firm that is too diversified
■ creating an internal environment in which managers
devote increasing amounts of their time and energy to
analyzing and completing the acquisition
■ developing a combined firm that is too large, necessitat-
ing extensive use of bureaucratic, rather than strategic,
controls
■ Effective acquisitions have the following characteristics:
■ the acquiring and target firms have complementary resources
that are the foundation for developing new capabilities
■ the acquisition is friendly, thereby facilitating integration of
the firms’ resources■ the target firm is selected and purchased on the basis of
completing a thorough due-diligence process
■ the acquiring and target firms have considerable slack in
the form of cash or debt capacity
■ the newly formed firm maintains a low or moderate level
of debt by selling off portions of the acquired firm or some
of the acquiring firm’s poorly performing units
■ the acquiring and acquired firms have experience in terms
of adapting to change
■ R&D and innovation are emphasized in the new firm
■ Restructuring is used to improve a firm’s performance by
correcting for problems created by ineffective management.
Restructuring by downsizing involves reducing the number
of employees and hierarchical levels in the firm. Although it
can lead to short-term cost reductions, the reductions may be
realized at the expense of long-term success because of the
loss of valuable human resources (and knowledge) and overall
corporate reputation.
■ The goal of restructuring through downscoping is to reduce
the firm’s level of diversification. Often, the firm divests unre-
lated businesses to achieve this goal. Eliminating unrelated
businesses makes it easier for the firm and its top-level
managers to refocus on the core businesses.
■ Through a leveraged buyout (an LBO), a firm is purchased
so that it can become a private entity. LBOs usually are
financed largely through debt, although limited partners
(institutional investors) are becoming more prominent.
General partners have a variety of strategies, and some
emphasize equity versus debt when limited partners
have a longer time horizon. Management buyouts (MBOs),
employee buyouts (EBOs), and whole-firm LBOs are the
three types of LBOs. Because they provide clear managerial
incentives, MBOs have been the most successful of the three.
Often, the intent of a buyout is to improve efficiency and
performance to the point where the firm can be sold suc-
cessfully within five to eight years.
■ Commonly, restructuring’s primary goal is gaining or rees-
tablishing effective strategic control of the firm. Of the three
restructuring strategies, downscoping is aligned most closely
with establishing and using strategic controls and usually
improves performance more on a comparative basis.