CHAPTER 6

Acquisition
Involves pooling of interests by two business entities which results in common ownership; an
acquisition normally involves a larger company (a predator) acquiring a smaller company (a
target). Acquisitions often experience more resistance from staff than mergers as the acquired
business will be the less powerful partner and will have less influence on future decisions.
Acquisitions are usually easier to control as the predator can more easily and quickly dictate
controls, working methods, power structures etc. There are also more opportunities to remove
excess or inefficient senior management in the acquired business than would be possible with a
merger.
Advantages:
 Quick way to grow
 There may be synergies
 Necessary strategic capabilities can be acquired
 Overcomes barriers to entry
 Enhances reputation with finance providers
Disadvantages:
 Can lead to cultural clashes
 Maybe very expensive
 Synergies are not automatic
 There could be legal barriers like competition act
 Problem areas of company also come as part of acquisition
 All parts of the target company must be acquired and it also requires good management
skills, otherwise acquisition can lead to major failure

Potential Sources of Synergy

The theory that 2+2=5

Synergy means two companies, together, can earn profit greater than separate earnings
combined, it has the following benefits:
 Sales Synergy: increase in market share as customer base widens
 Cost Synergy: there will be decrease in total cost as a result of increase in activity level
 Profit Synergy: consequent increase in total profit

Sharing of assets, better utilization, effective working capital management, and cheaper
financing all will improve seasonality. All these measures will also enhance cash flow position.
There will be sharing of knowledge, risk reduction, effective corporate parenting, and company
will emphasize more on growth.

Corporate Parenting: one company wants to become head office of individual business units. In
fact, it is a parent-subsidiary relationship where parent company should have ability to manage
subsidiaries or business units. Corporate parenting is to do the following:
 Value addition in product/service
  Cost efficiency is needed after acquisition, otherwise the decision could be an incorrect
decision

Organic Growth
When a company is expanding its business operations by starting its own setup; organic growth
spreads cost over a number of years. There is no issue of cultural clashes and company can
decide at initial stage which approach of organizational structure will be suitable for business. It
is easy to leave the market, if needed. However, due to lack of experience in new areas, there
could be failure as well. It is not attractive for finance providers and there could be barriers to
entry. It is a slow process and could be loss making if business environment is changing rapidly.

Joint Ventures
When two different companies combine their risk, resources, and liabilities to achieve certain
objectives, but they will not destroy their existing separate identities; it is usually viable where
two companies are managing a highly risky project and want to share the risk. Companies can
share their running costs as well as their learning from each other and will continue to focus on
relative strengths. It is better to work as a company rather than becoming each other’s
competitor. There will be disputes among the two managements and will try to protect their
interests at the cost of other company. It will not be possible for each company to keep its core
competencies confidential.

Well Structured Strategic Alliance

Where two different companies are combining their business activities to maximize their profit;
strategic alliance is a primary step towards joint venture where both the businesses will provide
benefit to each other. There are several characteristics associated with WSSA:
 Strategic Synergy: long term synergy
 Positioning Opportunity: it will help to increase market position of both the businesses
and both will be able to maximize the benefit of their strategic capabilities

No company holds indefinite financial resources; therefore it is essential to obtain benefit from
each other in the form of alliance. Less risk and cooperative spirit will improve motivation of
workforce. Both the companies are clear about their purposes: there should be win-win
situation for each company.

Franchising
It is an arrangement where franchisor grants a license to franchisee against payment of an
initial deposit as security/capital for the business. Franchisor provides expertise to franchisee
where he will train him and his team.

Advantages of franchising are as follows:

 Cash inflow rather than out flow
 Brand development becomes convenient
 Easy to terminate contract
  Efficient way to test market before full investment
 Franchisee has more appropriate knowledge of the locality
 Franchisor management can focus on long term issues rather than short term

Disadvantages:
 Sharing of profit
 Sharing of confidential information and strategic capabilities
 Lack of goal congruence
 Loss of control over quality
 All the franchisees will not perform in the same way
 At times, it is difficult to attract franchisee

Portfolio Analysis
It is relevant when a company is selling number of products and they are expected to maximize
profit from each product. The company will use following models for portfolio analysis:
 Boston Consulting Group Matrix: it focuses on two variables, relevant with each and
every product:
Market Growth: overall market of product/service is rising or falling
Market Share: total sales of the company out of total market sales

Low High

Low Dog Cash Cow

Market
Questions
Growth
High Mark/Problem Star
Child

Market Share

Question Mark is relevant with new product, and Problem Child is relevant with
unsuccessful product.
Problem child will either become a star or a dog.
Star is likely to become Cash Cow.
Cash Cow needs discontinuance otherwise it will become a dog.
 Public Sector Portfolio Matrix: it deals with tax payers money because public sector
organizations are managed by government; therefore, it is expected to use public
resources efficiently

Public
Need High Star Political
Hot Box
Funding
Effectiveness Low Golden Fleece Discontinuance

High Low
Value for Money

Golden Fleece: effective project but over funded

Star: effective and well funded
Hot Box: very popular but not effective
Discontinuance: neither public desire, nor effective

 Ashridge Portfolio: it is relevant with corporate parenting where a company will

consider two factors before acquisition:
1. Ability to Add Value
2. Opportunities to Add Value

Low Alien Territory Value Trap

Ability
to
Add High Ballast Heartland
Value

Low High

Opportunity to Add Value