Acquisitions and Restructuring

 Very popular strategy during the 20 th

Century.

 55,000 acquisitions in the 1980s worth $1.3 trillion.

 Pace of acquisitions picked up in the 1990s.
 40-45 of acquisitions in recent years involved cross-border transaction
 Acquisitions and Restructuring
 Acquisition Types:
• Mergers:
 Two firms join and integrate operations as co-equals.
 Chrysler – Diamler Benz example.

• Acquisitions:
 One firm buys a controlling interest in another firm with the intent to
make the other firm a division or subsidiary of the acquiring firm.
 In general these agreements are friendly but do not result in a co-equ
relationship.
 Novell’s acquisition of German-based SuSE gives Novell an in-house
source for Linux desktop and server operating systems.

• Hostile Takeovers:
 Acquisition bid is unsolicited.
 Generally results in incumbent management being removed.
 Yahoo’s takeover bid for HotJobs to thwart TMP Worldwide
(a rival of Yahoo).
 Rationales for Making Acquisitions

Increase Learn and develop

market power new capabilities

Overcome Reshape firm’s

entry barriers competitive scope

Acquisitions
Cost of new Increase
product development diversification

Lower risk compared

Increase speed to developing new
to market products
 Acquisitions and Restructuring
 Rationales for Making Acquisitions

• Market Power
 Gain size to exploit core competencies.
 Usually a horizontal acquisition but may involve vertical or related
acquisitions (Disney – Fox Family Worldwide).
 Time-Warner merger, financial and banking industry consolidation

• Overcome Entry Barriers

 Overcome barriers by acquiring firm in the industry.
 Whirlpool’s acquisition of Phillips Electronics appliance business

• Cost and speed of new product development and introduction

 Acquisitions can provide access to new products much more quickly
and at a lower cost than internal development of new products.
 Many firms in the pharmaceutical industry use acquisitions to enter
markets quickly, to overcome the high costs of developing products
internally, and to increase the predictability of returns on their
investments.
 Acquisitions and Restructuring
 Rationales for Making Acquisitions
• Lower risk of new product development
 Acquisitions may reduce the risk of new product introduction
versus internal development.
 The outcome of an acquisition can be more easily estimated than
the investments required to develop new products internally.
 R&D expenditures are, by definition, risky in nature.

• Increase diversification

 Proprietary knowledge and technology may not be transferable to other

industries.
 Difficult to develop new products for other markets when the firm has lit
to do with existing products.
 Acquisitions and Restructuring
 Rationales for Making Acquisitions
• Reshape competitive scope

 Often used when industry outlook is poor or firm performance is declinin

 GM’s acquisition of EDS and Hughes Aircraft.

• Learn and develop new capabilities

 Acquire capabilities that the firm does not currently have.
 Research has shown that firms can broaden their technology base,
acquire new capabilities and overcome inertia through acquisitions.
 Miller Brewing Company’s acquisition of Kraft helped to reduce the
inertia present in its General Foods division
 Problems With Acquisitions

Inadequate Resulting firm

evaluation of target is too large

High degree of Leverage

Acquisitions Too much
diversification

Managers overly Inability to

focused on acquisitions achieve synergy

Integration
difficulties
 Acquisitions and Restructuring
 Corporate Restructuring
• Unraveling of the conglomerate diversification wave of the 1970s and early
1980s.
• Two primary types (voluntary and involuntary).
• Over the past two decades over 2/3 of all acquired businesses have been
divested, millions of employees have been removed through downsizing.
• Over $1.2 trillion has changed hands in the U.S. alone.
• Four primary triggers for restructuring activity:

 Environmental
 Governance
 Strategy
 Performance
 Antecedents of Restructuring

Environment

Governance

Restructuring

Strategy

Financial
Performance Restructuring
 Acquisitions and Restructuring
 Corporate Restructuring
 Environmental
- Competition
- Takeover threats
- tax motivations

 Governance
- Weak governance
• Ineffective management
• Complacent board
• Inadequate incentives
• Lack of ownership concentration (institutional investor
activism).
 Acquisitions and Restructuring
 Corporate Restructuring
 Strategy
- Poor strategy or implementation
- Overdiversification
- Leverage

 Performance
- Poor or declining performance
- Difference between desired and actual performance
- Assets are undervalued
- Perceived threat of takeover
 Acquisitions and Restructuring
 Corporate Restructuring
• Modes of restructuring
 Financial restructuring

- LBOs (divisional MBOs)

- Employee stock options plans (ESOPs)
- Equity financed share repurchases
- Targeted share repurchases (greenmail)
- Leveraged recapitalizations
• Leveraged cash-outs
• Leveraged share repurchases
• Securities swaps (debt for equity)
 Acquisitions and Restructuring
 Corporate Restructuring
• Modes of restructuring
 Asset restructuring

- Downsizing

• Employee layoffs
• Mixed results
• 89% cite expense reduction (46% succeeded)
• 67% for competitive advantage (19% succeeded)
• Which employees leave or stay?

- Downscoping

• Divestitures (sell-offs, spin-offs, split-ups)

• Plant closings
• Liquidations
 Acquisitions and Restructuring
 Corporate Restructuring
• Divestitures (sell-offs versus spin-offs)

Spin-off
 Spin-off represents a pro-rata distribution of shares of a
subsidiary to shareholders.
 Occurs within the hierarchy.
 Terms and valuation of the assets are set
internally
 Parent stockholders create new board and
TMT.
Sell-off
 Parent can maintain ties with spun-off unit.
 Sell-offs: Assets are sold to another firm for cash and/or
securities.
 Occurs outside the hierarchy.
 Value determined by market forces.
 Acquiring firm absorbs and governs the sold-off
assets as
part of its hierarchy.
 Acquisitions and Restructuring
 Corporate Restructuring
• Involuntary restructuring (tender offer)
 Options are similar to voluntary restructuring but more immediate.
 Actions designed to thwart the takeover.
- Financial
• Shark repellents
• Poison pills
• Leveraged recapitalizations
• Greenmail
• Litigation
- Asset
• Scorched earth defense - defensive asset restructuring
• Crown jewel sales - sell sought after unit
• Pac-man defense - target launches attempt to acquire bidder
- Third Party
• White knight defense
• Other bidder (competitive bid situation)
 Acquisitions and Restructuring
 Corporate Restructuring
• Restructuring outcomes
 Strategy

• Focus on related or unrelated units (less total diversification)

• Innovation

 Employee effects

• Trust of management
• Poor communication
• Motivation
• Turnover
 Performance (market)

• Generally positive (except when fighting a takeover)

• Determined by use of funds