8.2 Strategic Acquisition and Restructuring

Question 1

What are some difficulties of acquisition? (Give 4)

Answer 1

• mixing two distinct cultures
• linking different financial and control systems
• forming effective working relationships (esp. with different management styles)
• fixing problems with keeping/firing acquired firm’s executives

Question 2

Define due diligence.

Answer 2

A process where a potential acquirer evaluates a target firm for acquisition.

Question 3

What are examples of characteristics examined during due diligence?

Answer 3

• financing for intended transaction
• tax consequences of the transaction
• culture differences between the firms
• actions necessary to combine the two workforces

Question 4

What does the failure of due diligence of the acquiring firm result to?

Answer 4

Paying an excessive premium for the target firm.

Question 5

What are five problems that are the result of acquisition?

Answer 5

1) Large debt
2) Inability to achieve synergy
3) Too much diversification
4) Managers overly focused on acquisitions
5) Too large

Question 6

Define junk bonds.

Answer 6

Unsecured high-risk debt instruments with high interest rates.

Risky financial acquisitions are payed with money (debt) that provides large potential returns to lenders (bondholders).

Question 7

Are junk bonds being used more frequently or less frequently now?

Answer 7

Less frequently.

Question 8

What negative effects does high debt have on firms?

Answer 8

• Increased likelihood of bankruptcy

- downgrade of credit rating

Question 9

Define credit rating.

Answer 9

Estimate on a firm’s ability to fulfil their financial commitments based on previous dealings.

Question 10

When does synergy exist?

Answer 10

When value of firms working together is higher than when firms work independently.

Question 11

Define private synergy.

Answer 11

Combination and integration of acquiring and acquired firms’ assets cannot be developed if either firm combines assets with a different firm.

Question 12

What makes private synergy possible?

Answer 12

Complimentary assets; difficult for competitors to imitate.

Question 13

Are related or unrelated diversification firms more likely to over diversify?

Answer 13

Related diversification

Question 14

What causes over diversification?

Answer 14

Too much information to process.

Question 15

What can over diversification lead to?

Answer 15

• acquisition becomes a substitute for innovation (instead of enhancing products)
• managers being unsure how to assess performance of a company (rely on financial controls because they don’t fully understand strategies/objectives of the firm’s business units)

Question 16

Why might managers overly focus on acquisition?

Answer 16

• searching for acquisition candidates
• due-diligence processes
• preparing for negotiations
• managing integration after acquisition

Question 17

What is a consequence of mangers overly focusing on acquisition?

Answer 17

Not taking advantage of opportunities.

Question 18

Define bureaucratic control.

Answer 18

Supervised behavioural rules/policies to ensure consistency of decisions and actions across all units of a firm.

Question 19

What is a negative effect of bureaucratic control?

Answer 19

Less flexibility and innovation from greater standardisation (manager enforced).

Question 20

What are two consequences of a firm being too large?

Answer 20

• great costs

- bureaucratic control

Question 21

What are attributes of successful acquisitions? Give 7 attributes. (Look at table in summary to revise the effects)

Answer 21

1) Complementary assets
2) Friendly
3) Effective due diligence by acquiring firm.
4) Acquiring firm has financial stack (cash or favourable debt position)
5) Merged firm maintains low to moderate debt position.
6) Acquiring firm has sustained emphasis on R&D and innovation.
7) Acquiring firm manages change well; is flexible and adaptable.

Question 22

Define restructuring.

Answer 22

A strategy where a firm changes its set of businesses or its financial structure.

Question 23

What three strategies are used for restructuring?

Answer 23

1) Downsizing
2) Down scoping
3) Leveraged buyouts

Question 24

Define downsizing.

Answer 24

Change in number of firm’s employees or operating units; might not change company’s portfolio.

Loss of human capital, lower performance.

Question 25

When is downsizing used?

Answer 25

• when a firm paid too much to the acquired firm
• newly formed firm has duplicate organisational structures
• for short term tactical cost reductio (labor cut)

Question 26

Define down scoping.

Answer 26

Eliminating businesses unrelated to the company’s core business.

Higher performance.

Question 27

Which has a more positive effect (downsizing vs down scoping) and why?

Answer 27

Down scoping because it causes firms to refocus on their core business.

Question 28

What does down scoping include? And is it long term or short term?

Answer 28

A long term strategy that sometimes includes downsizing (firms try to keep key players though).

Question 29

Define leveraged buyouts.

Answer 29

Party buys all the firm’s assets to take the firm private (not sharing firm shares/stocks publicly).

High risk but higher performance.

Question 30

What are Private Equity Firms?

Answer 30

Firms that engage in making public firms or a business unit private.

Question 31

Name the three types of LBO’s (leveraged buyouts). Look at table for revision.

Answer 31

1) Mangement buyouts
2) Employee buyouts
3) Whole firm buyouts