7 - Merger and Acquisition Strategies

Question 1

popularity of M&A strategies

Answer 1

can be used in uncertain environments:

• increase market power because of competitive threat
• spread risks
• shift core business into different markets

Question 2

merger

Answer 2

2 firms integrate their operations on a relatively equal basis

Question 3

acquisition

Answer 3

one firm buys a controlling, 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

Question 4

takeover

Answer 4

type of acquisition strategy where the target firm did not solicit the acquiring firm’s bid

Question 5

reasons for acquisitions

Answer 5

increase market power
overcome entry barriers (cross border acquisitions)
speed to market
lower risk + cost of NPD
increased diversification
reshape firm's CA
learn + develop new capabilities

Question 6

sources of market power

Answer 6

size of firm
unique resources + capabilities
market share

Question 7

ways of increasing market power

Answer 7

horizontal acquisitions (acquiring a firm in same industry)
= exploits cost-based + revenue-based synergies

vertical acquisitions (acquire supplier/distributor)
= increase control in value chain

related acquisitions (acquiring firm in highly related industry)
= create value through synergy

Question 8

acquisitions: problems in succeeding

Answer 8

integration difficulties
inadequate evaluation of target
large or extraordinary debt
inability to achieve synergy
too much diversification
managers hyperfocused on acquisitions
too large (bureaucratic control + additional costs...)

Question 9

attributes of successful acquisitions

Answer 9

complementary assets + resources
friendly acquisitions
effective due-diligence process
financial slack
low debt position
innovation
flexibility + adaptability

Question 10

restructuring

Answer 10

firm changes set of businesses or financial structure

• downsizing
• downscoping
• leveraged buyouts

Question 11

downsizing

Answer 11

reduction in n of firms’ employees (+ possibly n of operating units) that may or may not change the composition of businesses in the company’s portfolio

Question 12

downscoping

Answer 12

eliminating businesses unrelated to firms’ core businesses

Question 13

leveraged buyouts (LBO)

Answer 13

party buys all of a firm’s assets in order to take the firm private

• management buyouts
• employee buyouts
• whole-firm buyouts

Question 14

outcomes of restructuring

Answer 14

short term

• reduced labour costs (downsizing)
• high debt costs (LBO)
• reduced debt costs (downscoping)
• emphasis on strategic controls (downscoping + LBO)

long term

• loss of human capital (downsizing)
• impact performance
• high risk (LBO)