Chapter 7

Acquisition and Restructuring

Strategies

CA
 Key Definitions

Restructuring
refers to changes in the composition of a firm’s set of
business and/or financial structure. It often involves
divesting business to strategically refocus operations to
develop greater competitive advantage.

Merger
is a transaction where two firms agree to integrate their
operations on a relatively co-equal basis because they
have resources and capabilities that together may create a
stronger core competence.

Chapter 7 2
 Key Definitions

Acquisition
is a transaction where a firm buys a controlling interest in
another firm and incorporates the target as one of its
subsidiaries.

Takeover
is an acquisition where the target firm did not solicit the bid of
the acquiring firm.

Horizontal Acquisition
is an acquisition of a competing firm.

Chapter 7 3
 Key Definitions

Related Acquisition
is an acquisition of a firm in a highly related industry.

Barriers to Entry
make it more expensive for new firms to enter a market.

Junk Bonds
are a financing option where riskier acquisitions are
financed with debt providing a higher return to the lender
(often referred to as the bondholder).

Chapter 7 4
 Key Definitions

Private Synergy
is a benefit from merging two firms that is due to a unique
resource or set of resources complimentary between the two
firms, and not available to other potential bidders.

Leverage
is the ratio of total debt to total equity.

Bureaucratic Controls
are the formalized rules and policies that are designed to
ensure consistency across different units’ decisions and
actions.

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 Key Definitions
Downsizing
is the reduction in number of employees, and sometimes the
number of operating units, but may not represent a change in
the composition of business in the corporation’s portfolio.

Restructuring
refers to changes in the composition of a firm’s set of
business and/or financial structure.

Downscoping
refers to the divestiture, spin off, or other means of
eliminating business that are unrelated to the firm’s core
business.

Chapter 7 6
 Acquisitions: Their Reasons and Problems
Reasons for Problem in achieving
acquisitions success

Increased
power market
Integration of
two firms
Overcome
entry barriers

Overpayment
Increased speed

Acquisitions
Lower risk compared to
developing new products High Cost

Increased
diversification
Overestimate of
synergy
Avoid competition
Chapter 7 7
Reasons for Poor Performance

!
Overdiversi-
fication
Poor
Managerial
Performance
energy absorption

Excess debt

Too large

Restructuring
Acquisition as a
substitute for
innovation
Chapter 7 8
 Downscoping

As businesses are divested

or spun off, employment at
some of them is often
reduced or eliminated …

Chapter 7 9
 Leverage Buyouts
With all this bond money,
my management team is going
are a restructuring action, to take this company
whereby the management private.
of the firm, and/or an
external party buys all of the
assets of the business,
largely financed with debt,
and thus, take the firm
private.

Chapter 7 10
The end …

Chapter 7 11