Chapter 7 - Mergers & Acquisitions

Question 1

Mergers

Answer 1

Def: its a strategy through which 2 firms agree to integrate their operations on a relatively coequal basis

Question 2

Acquisition

Answer 2

Def: Strategy through which one firm buys controlling, or 100%, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. After the acquisitions, the manager of the acquired firm reports to the manager of the acquiring firm.

Question 3

Takeover

Answer 3

Def: a special type of acquisition where the target firm does not solicit the acquiring firm’s bid. Are mostly unfriendly acquisitions.

Question 4

Reasons for Acquisitions (7)

Answer 4

• Increase market power
  -Increase diversification
  -Overcoming entry barriers
  -Reshaping firm’s competitive scope
  -Learning and developing new capabilities
  -Cost of new product development & increase speed to market
  -Lower risk than developing new products

Question 5

Increase market power (Acquisitions)

Answer 5

Def : Ch6. Main reason for acquisitions. Most acquisitions are designed to achieve greater market power entail buying a competitor, supplier, distributor, businesses in a highly related industry. (Vertical, horizontal, related)

Question 6

Horizontal Acquisitions (market power)

Answer 6

Def: acquisition of a company competing in the same industry as the acquiring firm. Exploiting cost-based and revenue-based synergies

Question 7

Vertical Acquisitions (market power)

Answer 7

Def: acquiring a supplier or distributor of one or more of its products. Gets to control additional parts of the value chain , that’s how they gain market power

Question 8

Related Acquisitions (market power)

Answer 8

Def: acquiring a firm in a highly related industry. Firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities

Question 9

Overcoming Entry Barriers (acquisitions)

Answer 9

Adv: gain immediate access to a market that is attractive to it.
Factors that make it difficult and expensive for new firms:
-economies of scale
-differentiated products
Cross-border acquisitions: between companies with headquarters in different countries.
-might be difficult to operate because of differences in foreign cultures

Question 10

Cost of new product development and increased speed to market (acquisitions)

Answer 10

-Internal Development of new products is often perceived as a high risk activity
-Acquisitions allow a firm to gain access to new and current products that are new to the firm
-Lower Risk compared to developing new products
-Managers view acquisitions as lower risk
-Acquisitions may discourage or suppress innovation

Question 11

Learning and developing new capabilities

Answer 11

-special technology capability
-a broader knowledge base
-reduced inertia
Firms should acquire other firms with different but related and complementary capability in order to build their own knowledge base

Question 12

Increased diversification

Answer 12

Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses
The more related the acquired firm is to the acquiring firm, the greater the probability that the acquisitions will be successful

Question 13

Reshaping the Firm’s competitive scope

Answer 13

An acquisition can:
-reduce the negative effect of an intense rivalry on a firm’s financial performance
-reduce a firm’s dependence on one or more products or markets
Ex: Dean Foods only sell small dairies, but with competitions building up, they need to diversify. Go to cheese, etc

Question 14

Cons of Acquisitions (7)

Answer 14

-Integration difficulties
-Inadequate target evaluation
-Extraordinary debt
-Too large
-Too much diversification
-Managers overly focused on acquisitions
-Inability to achieve synergy

Question 15

Integration difficulties

Answer 15

Integration processes are the need to :
-meld 2 or more unique corporate cultures
-link different financial and information control systems
-build effective working relationships (particular when management styles differ)
-determine the leadership structure and those who will fill it for the integrated firm

Question 16

Inadequate evaluation of target

Answer 16

When a firm overestimate the value of synergies or the value of future growth potential associated with an acquisition, the premium they pay may prove to be too large

Question 17

Large or extraordinary debt

Answer 17

Pretty direct

Question 18

Inability to achieve synergy

Answer 18

The attractiveness of private synergy is that because of its uniqueness, it is difficult for competitors to understand and imitate , meaning that a competitive advantage results for the firm to create it.

Question 19

Too much diversification

Answer 19

High level of diversification can have a negative effect on its long-term performance because they rely on on financial controls (profits) and dont understand the firm objectives and strategies. Reduce long-term investments to generate short-term profits can negatively affect a firm’s overall performance ability
Over-diversified firm experiences a decline in its performance

Question 20

Managers overly focused on acquisitions

Answer 20

They can be excessively involved. Need to know the appropriate degree of involvement

Question 21

Too large

Answer 21

Firm gets to a point where acquisitions are creating a degree of size that increases its inefficiency and ineffectiveness. Diseconomies of scope - not enough economic benefit to outweigh the costs of managing the more complex organization created through acquisitions

Question 22

Effective acquisitions characters

Answer 22

1. Acquired firm has assets or resources that are complementary to the acquiring firm’s core business
2. Faster and more effective integration and possibility lower premiums
   3.Acquiring firm conducts effective due diligence to select target firms and evaluate the target firm’s health (financial, cultural , Human Resources)
   4.Financing (debt or equity) is easier and less costly to obtain
3. Merged firm maintains low to moderate debt position
4. Acquiring firm maintains long-term competitive advantage in markets
5. Acquiring firm manages change well and is flexible and adaptable