Hitt13e PPT Ch07

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
CHAPTER
7
Merger and Acquisition Strategies
LEARNING OBJECTIVES
Studying this chapter should provide you with the strategic
management knowledge needed to:
7-1 Explain the popularity of merger and acquisition strategies in
firms competing in the global economy.
7-2 Discuss reasons why firms use an acquisition strategy to achieve
strategic competitiveness.
7-3 Describe seven problems that work against achieving success
when using an acquisition strategy.
7-4 Name and describe the attributes of effective acquisitions.
7-5 Define the restructuring strategy and distinguish among its
common forms.
7-6 Explain the short- and long-term outcomes of the different types
of restructuring strategies.
7-1 The Popularity of Merger
and Acquisition Strategies (slide 1 of 2)
• Merger and acquisition (M & A) strategies have
been popular among U.S. firms for many years.
• M & A strategies:
• Played a central role in the restructuring of U.S.
businesses during the 19 80s and 19 90s
• Are being used with greater frequencies in many
regions of the world today
• Are used to try to create more value for all firm
stakeholders
• Are challenging to effectively implement
7-1 The Popularity of Merger
and Acquisition Strategies (slide 2 of 2)
• Research shows that:
• Shareholders of acquired firms often earn above-average
returns from acquisitions.
• Shareholders of the acquiring firms typically earn returns that are
close to zero.
• The acquiring firm’s stock price often falls immediately after the
transaction is announced.
• Determining the worth of a target firm is difficult.
• This difficulty increases the likelihood a firm will pay a premium
to acquire a target.
• Paying a premium that exceeds the value of a target once
integrated with the acquiring firm can result in negative outcomes.
7-1a Mergers, Acquisitions, and
Takeovers: What Are the Differences?
• 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.
• After the acquisition is completed, the management of the acquired firm
reports to the management of the acquiring firm.
• A takeover is a special type of acquisition where the target firm
does not solicit the acquiring firm’s bid; thus, takeovers are
unfriendly acquisitions.
• Acquisitions are more common that mergers and takeovers.
7-2 Reasons for Acquisitions
• 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
7-2a Increased Market Power (slide 1 of 3)
• Market power exists when either:
• A firm is able to sell its goods or services above competitive levels.
• The costs of a firm’s primary or support activities are lower than those of
its competitors.
• Market power is usually derived from:
• The size of the firm
• The quality of the resources it uses to compete
• Its share of the market(s) in which it competes
• Most acquisitions that are designed to achieve greater market
power entail buying a competitor, a supplier, a distributor, or a
business in a highly related industry so that a core competence can
be used to gain competitive advantage in the acquiring firm’s
primary market.
• To increase market power, firms use:
• Horizontal acquisitions
• Vertical acquisitions
• Related acquisitions
• These three types of acquisitions are subject to regulatory review by
the government.
Horizontal Acquisitions
• The acquisition of a company competing in the same industry as the
acquiring firm is a horizontal acquisition.
• Horizontal acquisitions:
• Increase a firm’s market power by exploiting cost-based and revenue-
based synergies
• Result in higher performance when the firms have similar characteristics
Vertical Acquisitions
• A vertical acquisition refers to a firm acquiring a supplier or
distributor of one or more of its products.
• Through a vertical acquisition, the newly formed firm controls
additional parts of the value chain, which leads to increased market
power.
Related Acquisitions
• Acquiring a firm in a highly related industry is called a related
acquisition.
• Through a related acquisition, firms seek to create value through the
synergy that can be generated by integrating resources and
capabilities.
7-2b Overcoming Entry Barriers
• Barriers to entry are factors associated with a market, or the firms
currently operating in it, that increase the expense and difficulty new
firms encounter when trying to enter a particular market.
• Examples: Economies of scale and customer loyalty
• The higher the barriers to entry, the greater the probability that a firm
will acquire an existing firm to overcome them.
• This allows the acquiring firm to gain immediate access to an attractive
market.
Cross-Border Acquisitions
• Acquisitions made between companies with headquarters in
different countries are called cross-border acquisitions.
• Cross-border acquisitions can be difficult to implement due to
various obstacles and differences in foreign cultures.
7-2c Cost of New Product Development
and Increased Speed to Market (slide 1 of 2)
• Internal product development is often perceived
as a high-risk activity.
• Many firms are not able to achieve adequate returns
compared to the amount of capital they invest to
develop and commercialize the product.
7-2c Cost of New Product Development
and Increased Speed to Market (slide 2 of 2)
• An acquisition strategy allows a firm to gain
access to new products and to current products
that are new to it.
• Compared with internal product development
processes, acquisitions provide:
• More predictable returns
• This is because the performance of the acquired firm’s products
can be assessed prior to completing the acquisition.
• Faster market entry
7-2d Lower Risk Compared to
Developing New Products
• The outcomes of an acquisition can be
estimated more easily and accurately than the
outcomes of an internal product development
process.
• As such, managers may view acquisitions as a way to
avoid risky internal ventures as well as risky research
and development (R & D) investments.
• However, managers must not allow acquisitions to become a
substitute for internal innovation.
• Being dependent on others for innovation leaves a firm
vulnerable and less capable of mastering its own destiny when
it comes to using innovation as a driver of wealth creation.
7-2e Increased Diversification
• It is relatively uncommon for a firm to develop new

products internally to diversify its product lines.
• It is difficult for companies to develop products that differ from
the current lines for markets in which they lack experience.
• Acquisition strategies can be used to support the use of
both related and unrelated diversification strategies.
• The more related the acquired firm is to the acquiring firm, the
greater is the probability that the acquisition will be successful.
• Thus, horizontal acquisitions and related acquisitions tend to
contribute more to the firm’s strategic competitiveness than do
acquisitions of companies operating in product markets that differ
from those in which the acquiring firm competes.
7-2f Reshaping the
Firm’s Competitive Scope
• To reduce the negative effect of an intense
rivalry on financial performance, firms may use
acquisitions to lessen their product and / or
market dependencies.
• Reducing a company’s dependence on specific
products or markets shapes the firm’s competitive
scope.
7-2g Learning and
Developing New Capabilities
• Firms sometimes complete acquisitions to gain
access to capabilities they lack.
• Through acquisitions, firms can:
• Broaden their knowledge base
• Reduce inertia
• Firms increase the potential of their capabilities when
they acquire diverse talent through cross-border
acquisitions.
• Firms should seek to acquire companies with different
but related and complementary capabilities as a path
to building their own knowledge base.
7-3 Problems in Achieving
Acquisition Success
• Among the problems associating 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
• 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, necessitating
extensive use of bureaucratic, rather than strategic, controls
7-3a Integration Difficulties
• The integration process:
• Is considered by some to be the strongest determinant of whether either
a merger or an acquisition is successful
• Is difficult and challenging
• Tends to generate uncertainty and often resistance because of cultural
clashes and organizational politics
• Among the challenges associated with integration processes are the
need to:
• Meld two or more unique corporate cultures
• Link different financial and information control systems
• Build effective working relationships (particularly when management
styles differ)
• Determine the leadership structure and those who will fill it for the
integrated firm
7-3b Inadequate Evaluation
of Target (slide 1 of 2)
• Due diligence is a process through which a potential
acquirer evaluates a target firm for acquisition.
• In an effective due-diligence process, hundreds of items are
examined in areas such as:
• Financing for the intended transaction
• Differences in cultures between the acquiring and target firm
• Tax consequences of the transaction
• Actions that would be necessary to successfully meld the two
workforces
• When conducting due diligence, companies almost
always work with intermediaries, such as a large
investment bank, to facilitate their due-diligence efforts.
7-3b Inadequate Evaluation
of Target (slide 2 of 2)
• Due diligence should:
• Evaluate the accuracy of the financial position of the target
• Evaluate the accounting standards used by the target
• Examine the quality of the strategic fit between the two
companies
• Examine the ability of the acquiring firm to effectively integrate
the target to realize the potential gains from the deal
• Commonly, firms are willing to pay a premium to acquire
a company they believe will increase their ability to earn
above-average returns.
• The acquiring firm should effectively examine each acquisition
target in order to determine the appropriate amount of premium
to pay.
7-3c Large or Extraordinary Debt
(slide 1 of 2)
• Firms using an acquisition strategy want to verify

that their purchases do not create a debt load
that overpowers their ability to remain solvent
and vibrant as a competitor.
• Large or extraordinary debt can result from:
• Bidding wars
• Paying a large premium
• Executives sometimes pay a large premium because they
are influenced by:
• Hubris
• Escalation of commitment to complete a particular transaction
• Self-interest
7-3c Large or Extraordinary Debt
(slide 2 of 2)
• Junk bonds supported firms’ earlier efforts to take on

large amounts of debt when completing acquisitions.
• Junk bonds are a financing option through which risky
acquisitions are financed with money (debt) that provides a large
potential return to lenders (bondholders).
• Junk bonds:
• Are used less frequently today
• Are commonly called high-yield bonds
• Are unsecured obligations that are not tied to specific assets for
collateral
• Contain high and volatile interest rates
• Potentially expose companies to greater financial risk
7-3d Inability to Achieve Synergy
(slide 1 of 2)
• Synergy exists when the value created by units working together

exceeds the value that those units could create working
independently.
• That is, synergy exists when assets are worth more when used in
conjunction with each other than when they are used separately.
• For shareholders, synergy generates gains in their wealth that they
could not duplicate or exceed through their own portfolio
diversification decisions.
• Synergy is created by:
• The efficiencies derived from economies of scale
• The efficiencies derived from economies of scope
• Sharing resources (e.g., human capital and knowledge) across the
businesses in the newly created firm’s portfolio
7-3d Inability to Achieve Synergy
(slide 2 of 2)
• A firm develops a competitive advantage through an

acquisition when a transaction generates private synergy.
• Private synergy is created when combining and integrating the
acquiring and acquired firms’ assets yield capabilities and core
competencies that could not be developed by combining and
integrating either firms’ assets with another company.
• Private synergy is:
• Possible when firms’ assets are complementary in unique ways
• Difficult to create
• Difficult for competitors to understand and imitate
• Affected by direct transaction costs (e.g., legal fees, charges by
investment banks to conduct due diligence) and indirect transaction
costs (e.g., the time spent evaluating targets and negotiating the
acquisition)
7-3e Too Much Diversification
• Because of the need to process additional amounts of

information, related diversified firms become
over diversified with a smaller number of business units
than do firms using an unrelated diversification strategy.
• Over diversification can negatively affect a firm’s overall
performance.
• The scope created by additional amounts of diversification often
causes managers to rely on financial, rather than strategic,
controls to evaluate business units’ performance.
• Using financial controls causes managers to focus on generating
short-term profits at the expense of long-term investments.
• Costs associated with acquisitions may result in fewer
allocations to activities that are linked to internal innovation.
7-3f Managers Overly
Focused on Acquisitions
• A considerable amount of managerial time and energy is
required for acquisition strategies to be used successfully.
• Activities with which managers become involved include:
• Searching for viable acquisition candidates
• Completing effective due-diligence processes
• Preparing for negotiations
• Managing the integration process after completing the acquisition
• Participating in and overseeing these activities can divert
managerial attention from other matters that are necessary for
long-term competitive success.
• Finding the appropriate degree of involvement with the
firm’s acquisition strategy is a challenging, yet important,
task for managers.
7-3g Too Large
• The larger firm size generated by acquisitions can:

• Increase the complexity of the managerial challenge
• Create diseconomies of scope
• That is, the costs of managing the more complex organization
outweigh the economic benefits.
• These complexities generated by the larger size often
lead managers to implement more bureaucratic controls
to manage the combined firm’s operations.
• Bureaucratic controls are formalized supervisory and behavioral
rules and policies designed to ensure consistency of decisions
and actions across a firm’s units.
• Bureaucratic controls often result in rigid and standardized
managerial behavior, which may produce less innovation over time.
Figure 7.1
Reasons for Acquisitions and Problems in Achieving Success
7-4 Effective Acquisitions (slide 1 of 2)
• 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 firm’s
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 acquired 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.
7-4 Effective Acquisitions (slide 2 of 2)
• Research evidence suggests that the probability

of being able to create value through
acquisitions increases when the nature of the
acquisition and the processes used to complete
it are consistent with the “attributes of successful
acquisitions” (shown on the following two slides).
Table 7.1
Attributes of Successful Acquisitions (slide 1 of 2)
Attributes Results
1. Acquired firm has assets or 1. High probability of synergy and
resources that are complementary competitive advantage by
to the acquiring firm’s core business maintaining strengths
2. Faster and more effective 2. Acquisition is friendly
integration and possibly lower
premiums
3. Acquiring firm conducts effective 3. Firms with strongest
due diligence to select target firms complementarities are acquired and
and evaluate the target firm’s health overpayment is avoided
(financial, cultural, and human
resources)
Table 7.1
Attributes of Successful Acquisitions (slide 2 of 2)
Attributes Results
4. Financing (debt or equity) is easier 4. Acquiring firm has financial slack
and less costly to obtain (cash or a favorable debt position)
5. Merged firm maintains low to 5. Lower financing cost, lower risk
moderate debt position (e.g., of bankruptcy), and avoidance
of trade-offs that are associated
with high debt
6. Acquiring firm maintains long-term 6. Acquiring firm has a sustained and
competitive advantage in markets consistent emphasis on R&D and
innovation
7. Acquiring firm manages change 7. Faster and more effective
well and is flexible and adaptable integration facilitates achievement
of synergy
7-5 Restructuring
• Restructuring is a strategy through which a firm changes its set of
businesses or its financial structure.
• Commonly, firms focus on fewer products and markets following
restructuring.
• Restructuring strategies are:
• Generally used to deal with acquisitions that are not reaching
expectations
• Sometimes used because of changes detected in the external
environment by the firm
• Firms use three types of restructuring strategies:
1. Downsizing
2. Down scoping
3. Leveraged buyouts
7-5a Downsizing
• Downsizing is a reduction in the number of a firm’s
employees and, sometimes, in the number of its
operating units.
• Downsizing is a legitimate strategy to adjust firm size
and is not necessarily a sign of organizational decline.
• Downsizing is an intentional managerial strategy that is used for
the purpose of improving firm performance.
• With downsizing, firms make intentional decisions about resources
to retain and resources to eliminate.
• Organizational decline is an unintentional outcome of what
turned out to be a firm’s ineffective competitive actions.
• With organizational decline, firms lose access to an array of resources,
many of which are critical to current and future performance.
7-5b Down scoping
• Down scoping refers to divestiture, spin-off, or

some other means of eliminating businesses
that are unrelated to a firm’s core businesses.
• Down scoping:
• Has a more positive effect on firm performance than
does downsizing
• Causes firms to refocus on their core business
• Is often used with downsizing simultaneously
• Is used more frequently in U.S. firms than in European
companies
7-5c Leveraged Buyouts (slide 1 of 2)
• A leveraged buyout (L B O) 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.
• Traditionally, L B Os were used as a restructuring
strategy:
• To correct for managerial mistakes
• Because the firm’s managers were making decisions that
primarily served their own interests rather than those of
shareholders
• However, some firms complete L B Os to build firm
resources and expand their operations rather than
simply to restructure a distressed firm’s assets.
7-5c Leveraged Buyouts (slide 2 of 2)
• Significant amounts of debt are commonly incurred to
finance a buyout.
• To support debt payments and to down scope the firm to focus
on its core businesses, a number of assets may be quickly sold.
• Often, the intent of a buyout is to improve efficiency and
performance to the point where the firm can be sold successfully
within five to eight years.
• There are three types of L B Os:
1. Management buyouts (M B Os)
2. Employee buyouts (E B Os)
3. Whole-firm buyouts
• Because they provide clear managerial incentives,
MBOs have been the most successful of the three.
Figure 7.2
Restructuring and Outcomes
APPENDIX
NOTE TO INSTRUCTOR: Choose from the following questions (also found in the text at the end of the chapter)
to conduct in-class discussions around key chapter concepts.
Discussion:
• Why are merger and acquisition strategies

popular in many firms competing in the global
economy?
Discussion:
• What reasons account for firms’ decisions to use

acquisition strategies as a means to achieving
strategic competitiveness?
Discussion:
• What are the seven primary problems that affect

a firm’s efforts to successfully use an acquisition
strategy?
Discussion:
• What are the attributes associated with a

successful acquisition strategy?
Discussion:
• What is the restructuring strategy, and what are

its common forms?
Discussion:
• What are the short- and long-term outcomes

associated with the different restructuring
strategies?

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Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.

• Firms use acquisition strategies to:

• It is relatively uncommon for a firm to develop new

• Firms using an acquisition strategy want to verify

• Junk bonds supported firms’ earlier efforts to take on

• Synergy exists when the value created by units working together

• A firm develops a competitive advantage through an

• Because of the need to process additional amounts of

• The larger firm size generated by acquisitions can:

• Research evidence suggests that the probability

• Down scoping refers to divestiture, spin-off, or

• Why are merger and acquisition strategies

• What reasons account for firms’ decisions to use

• What are the seven primary problems that affect

• What are the attributes associated with a

• What is the restructuring strategy, and what are

• What are the short- and long-term outcomes

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