CHAPTER V

MERGER AND ACQUISITION STRATEGIES

 Introduction
 Merger and acquisition strategies are the roadmap for the corporate development
efforts of an organization. The strategies on merger and acquisition are devised to
transform the strategic business plan of the organization to a list of target
acquisition prospects. The merger and acquisition strategies offer a framework,
which evaluates acquisition candidates and helps the organization to identify the
suitable ones.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Learning Objectives

01 02 03 04
UNDERSTAND KNOW THE ANALYZE THE DEFINE THE
THE REASONS PROBLEMS IN EFFECTIVE RESTRUCTURING
FOR ACHIEVING ACQUISITIONS
ACQUISITIONS ACQUISITIONS
SUCCESS

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 MERGER AND ACQUISITION STRATEGY
Mergers, and Acquisitions
 A merger is a strategy through which two firms agree to integrate their operations
on a relatively coequal basis.
 An acquisition is a 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.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS
 Increased Market Power
 Overcoming Entry Barriers
 Cost of New Product Development and Increased Speed to Market
 Lower Risk Compared to Developing New Products
 Learning and Developing New Capabilities

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS
1. INCREASED MARKET POWER
Market Leadership results from Market Power
Factors increasing market power:
 The ability to sell goods or services above competitive levels
 Purchase of a competitor, a supplier, a distributor, or a business in a highly related
industry

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS
1. INCREASED MARKET POWER
Market power is increased by:
Horizontal acquisitions: other firms in the same industry
Example: A candy company that purchasing another candy company with different products
but a similar production schedule.
Vertical acquisitions: suppliers or distributors of the acquiring firm
Example: Walt Disney Company’s acquisition of Fox Family Worldwide
Related acquisitions: firms in related industries

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS
2. OVERCOMING ENTRY BARRIERS
Entry Barriers
Factors associated with the market or with the firms operating in it that increase
the expense and difficulty faced by new ventures trying to enter that market
• Differentiated products
Cross-Border Acquisitions
Acquisitions made between companies with headquarters in different countries

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS
3. COST OF NEW PRODUCT DEVELOPMENT AND INCREASED SPEED TO MARKET
 Internal development of new products is often perceived as high-risk activity.
 Compared with internal product development, acquisitions:
 Are less costly
 Have more predictable returns due to the acquired firms’ experience with the products

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 REASONS FOR ACQUISITIONS
4. LOWER RISK COMPARED TO DEVELOPING NEW PRODUCT
 Outcomes for an acquisition can be more easily and accurately estimated than the outcomes of
an internal product development process.
 Acquisitions may become a substitute for innovation, and thus should always be strategic rather
than defensive in nature.
5. LEARNING AND DEVELOPING NEW CAPABILITIES
 Firms should acquire other firms with different but related and complementary capabilities
in order to build their own knowledge base

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 PROBLEMS IN ACHIEVING ACQUISITION
SUCCESS

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
 Integration Difficulties
 Inadequate Evaluation of Target

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 PROBLEMS IN ACHIEVING
ACQUISITION SUCCESS
Integration Difficulties
 Integration challenges include:
 Linking different financial and control systems
 Resolving problems regarding the status of the newly acquired firm’s executive

Inadequate Evaluation of Target

 Ineffective due diligence may result in paying an excessive premium for the
target company

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 EFFECTIVE ACQUISITION

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 EFFECTIVE ACQUISITION
A company should acquire another company only when they know they can do
one of the followings things:
 improve the target company's performance, reduce operating costs or improve
margins of a newly acquired company, increase production of new capital or
invest in winners early to help them develop their businesses with the parent
company’s capabilities.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 RESTRUCTURING

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 RESTRUCTURING
A strategy through which a firm changes its set of businesses or financial structure
 Failure of an acquisition strategy often precedes a restructuring strategy
 Restructuring may occur because of changes in the external or internal environments

Restructuring strategies:
 Downsizing: a reduction in the number of a firm’s employees and sometimes in the number of its
operating units
 Downscoping: a divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s
core businesses
 Leveraged buyouts: one party buys all of a firm's assets in order to take the firm private (or no longer
trade the firm's shares publicly)

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

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