Chp 7

Question 1

Merger

Answer 1

Strategy through which two firms agree to integrate their operations on a relatively coequal basis

Question 2

Acquisition

Answer 2

Strategy through which one firm buys a controlling, or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.

Question 3

Takeover

Answer 3

Special type of acquisition where the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions.

Question 4

Horizontal acquisition

Answer 4

The acquisition of a company competing in the same industry as the acquiring firm.

Question 5

Vertical acquisitions

Answer 5

A firm acquiring a supplier or distributor of one or more of its products.

Question 6

Related acquisitions

Answer 6

Acquiring a firm in a highly related industry.

Question 7

Why acquire?

Answer 7

• Increased market power (selling goods/service above competitive levels, reduced costs that competitors)
• Increased diversification
• Overcoming entry barriers (economies of scale and differentiated products)
• Reduced cost of new product development and increased speed to market
• Lower risk compared to developing new products (reduced risk of startup ventures)
• Reshaping firm’s competitive scope
• Learning and developing new capabilities

Question 8

Why should you not acquire (problems)?

Answer 8

• Integration difficulties (complex set of organizational processes that are difficult and challenging)
• Inadequate evaluation of target (poor DD, poor accuracy of financials and balance sheet)
• Large debt
• Inability to achieve synergy (value created by units working together)
• Too much diversification
• Over-focused managers on acquisition (prepping for negotiations, viable acquisition candidates, effective DD)
• Too large of a firm post-acquisition

Question 9

Restructuring

Answer 9

A strategy through which a firm changes its set of businesses or its financial structure

Question 10

Types of restructuring

Answer 10

• Downsizing
• Downscoping
• Liquidation

Question 11

Downsizing

Answer 11

Wholesale reduction of employees

Question 12

Downscoping

Answer 12

Selectively divesting or closing non-core businesses

Question 13

Liquidation

Answer 13

Selling all of a company’s assets, in parts, for their tangible worth

Question 14

Leveraged buyout (LBO)

Answer 14

Party (private quity firm) buys all firm’s assets in order to take the firm private

Question 15

Downsizing leads to….

Answer 15

Reduced labour costs, loss of human capital, lower performance

Question 16

Downscoping leads to…

Answer 16

Reduced debt costs, emphasis on strategic controls, higher performance

Question 17

Leveraged buyout leads too…

Answer 17

Emphasis on strategic controls, high debt costs, higher performance, higher risk