8.2 Strategic Acquisition and Restructuring Flashcards
What are some difficulties of acquisition? (Give 4)
- 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
Define due diligence.
A process where a potential acquirer evaluates a target firm for acquisition.
What are examples of characteristics examined during due diligence?
- financing for intended transaction
- tax consequences of the transaction
- culture differences between the firms
- actions necessary to combine the two workforces
What does the failure of due diligence of the acquiring firm result to?
Paying an excessive premium for the target firm.
What are five problems that are the result of acquisition?
1) Large debt
2) Inability to achieve synergy
3) Too much diversification
4) Managers overly focused on acquisitions
5) Too large
Define junk bonds.
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).
Are junk bonds being used more frequently or less frequently now?
Less frequently.
What negative effects does high debt have on firms?
- Increased likelihood of bankruptcy
- downgrade of credit rating
Define credit rating.
Estimate on a firm’s ability to fulfil their financial commitments based on previous dealings.
When does synergy exist?
When value of firms working together is higher than when firms work independently.
Define private synergy.
Combination and integration of acquiring and acquired firms’ assets cannot be developed if either firm combines assets with a different firm.
What makes private synergy possible?
Complimentary assets; difficult for competitors to imitate.
Are related or unrelated diversification firms more likely to over diversify?
Related diversification
What causes over diversification?
Too much information to process.
What can over diversification lead to?
- 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)
Why might managers overly focus on acquisition?
- searching for acquisition candidates
- due-diligence processes
- preparing for negotiations
- managing integration after acquisition
What is a consequence of mangers overly focusing on acquisition?
Not taking advantage of opportunities.
Define bureaucratic control.
Supervised behavioural rules/policies to ensure consistency of decisions and actions across all units of a firm.
What is a negative effect of bureaucratic control?
Less flexibility and innovation from greater standardisation (manager enforced).
What are two consequences of a firm being too large?
- great costs
- bureaucratic control
What are attributes of successful acquisitions? Give 7 attributes. (Look at table in summary to revise the effects)
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.
Define restructuring.
A strategy where a firm changes its set of businesses or its financial structure.
What three strategies are used for restructuring?
1) Downsizing
2) Down scoping
3) Leveraged buyouts
Define downsizing.
Change in number of firm’s employees or operating units; might not change company’s portfolio.
Loss of human capital, lower performance.
When is downsizing used?
- 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)
Define down scoping.
Eliminating businesses unrelated to the company’s core business.
Higher performance.
Which has a more positive effect (downsizing vs down scoping) and why?
Down scoping because it causes firms to refocus on their core business.
What does down scoping include? And is it long term or short term?
A long term strategy that sometimes includes downsizing (firms try to keep key players though).
Define leveraged buyouts.
Party buys all the firm’s assets to take the firm private (not sharing firm shares/stocks publicly).
High risk but higher performance.
What are Private Equity Firms?
Firms that engage in making public firms or a business unit private.
Name the three types of LBO’s (leveraged buyouts). Look at table for revision.
1) Mangement buyouts
2) Employee buyouts
3) Whole firm buyouts
