Chapter 7 - STRATEGY
MERGER AND ACQUISITION STRATEGIES (m&a)
can be used when there are uncertainties in the competitive landscape
and a firm wants to grow
1 – Often used with international strategies
– Should be used to increase firm value and lead to strategic
competitiveness and above-average returns
– But returns are usually close to zero for an acquiring firm
Merger = a strategy through which firms agree to integrate their operations on
a relatively co-equal basis. (Two separate organisations merge into more or less
equal partners)
Acquisition = one organisation seeks to acquire another, often smaller,
organisation
-> a firm buys a controlling or 100% interest in another firm with the intent
to making the acquired firm a subsidiary business within its portfolio
1 - Takeover = (special type of acquisition) the target firm does not solicit
the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions
REASONS FOR ACQUISITIONS
(Shareholders of acquired firms often make above-average returns)
(Shareholders of acquiring firms earn returns close to zero)
. INCREASED MARKET POWER
– Exists when a firm is able to sell its good or services above
competitive levels or when the costs of its primary or support
activities are lower than competitors
– Sources of market power: size of firm, resources and capabilities
to compete in the market, share of market
– Can achieve that usually by buying a competitor, a supplier, a
distributor or a business in a highly related industry to allow core
competence and gain a competitive advantage in the acquiring
firm’s primary market
How to increase market power:
. Horizontal acquisition
– Acquisition of a company that competes in the same industry
as the acquiring firm
– Combination of resources, skills made available to each other,
gain access to important distribution channels and gain market
share quickly
– If firms have more similar characteristics, the acquisition will be
, 2
–
more successful and will results in higher performance
◆ Increase a firm’s market power by exploiting cost-based and
revenue-based synergies
. Vertical acquisition
– When a company buys another company in the same industry
but at a different stage of the production cycle
◆ It controls additional parts of the value chain
. Related acquisition
– Acquisition of a firm in a highly related industry
◆ Firms seek to create value through synergy that can be
generated through integrating some of their resources and
capabilities
. OVERCOMING ENTRY BARRIERS
– A new entrant may acquire an established firm, since that is more
effective than entering the market as a competitor offering a good
or service that is unfamiliar to current buyers
– Higher the barriers -> higher chance of acquisition
– Also used when entering international markets
– Large MNCs from developed economies seek to enter emerging
economies such as Brazil, Russia, India, and China (BRIC) because
they are among the fastest-growing economies in the world.
◆ Cross-border acquisitions = those made between companies
with headquarters in a different country
. COST OF NEW PRODUCT DEVELOPMENT AND INCREASED SPEED
TO MARKET
– Successfully developing and introducing a new product to the
market requires a significant investment of a firm’s resources and
is time consuming -> hard to quickly earn a profitable return
– Acquisitions can be used to gain access to new and current
products that are new to the firm. Compared with internal product
development processes, acquisitions provide more predictable
returns and faster entry
– Because the performance of the acquired firm’s products can be
assessed prior to completing the acquisition.
– More frequent in high-technology industries
. LOWER RISK COMPARED TO DEVELOPING NEW PRODUCTS
– Outcomes of an acquisition are easier to estimate and are more
accurate -> less risk
. INCREASED DIVERSIFICATION
– Acquisitions can be used to diversify firms as it is easier for firms
to develop and introduce a product currently served by the firm
MERGER AND ACQUISITION STRATEGIES (m&a)
can be used when there are uncertainties in the competitive landscape
and a firm wants to grow
1 – Often used with international strategies
– Should be used to increase firm value and lead to strategic
competitiveness and above-average returns
– But returns are usually close to zero for an acquiring firm
Merger = a strategy through which firms agree to integrate their operations on
a relatively co-equal basis. (Two separate organisations merge into more or less
equal partners)
Acquisition = one organisation seeks to acquire another, often smaller,
organisation
-> a firm buys a controlling or 100% interest in another firm with the intent
to making the acquired firm a subsidiary business within its portfolio
1 - Takeover = (special type of acquisition) the target firm does not solicit
the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions
REASONS FOR ACQUISITIONS
(Shareholders of acquired firms often make above-average returns)
(Shareholders of acquiring firms earn returns close to zero)
. INCREASED MARKET POWER
– Exists when a firm is able to sell its good or services above
competitive levels or when the costs of its primary or support
activities are lower than competitors
– Sources of market power: size of firm, resources and capabilities
to compete in the market, share of market
– Can achieve that usually by buying a competitor, a supplier, a
distributor or a business in a highly related industry to allow core
competence and gain a competitive advantage in the acquiring
firm’s primary market
How to increase market power:
. Horizontal acquisition
– Acquisition of a company that competes in the same industry
as the acquiring firm
– Combination of resources, skills made available to each other,
gain access to important distribution channels and gain market
share quickly
– If firms have more similar characteristics, the acquisition will be
, 2
–
more successful and will results in higher performance
◆ Increase a firm’s market power by exploiting cost-based and
revenue-based synergies
. Vertical acquisition
– When a company buys another company in the same industry
but at a different stage of the production cycle
◆ It controls additional parts of the value chain
. Related acquisition
– Acquisition of a firm in a highly related industry
◆ Firms seek to create value through synergy that can be
generated through integrating some of their resources and
capabilities
. OVERCOMING ENTRY BARRIERS
– A new entrant may acquire an established firm, since that is more
effective than entering the market as a competitor offering a good
or service that is unfamiliar to current buyers
– Higher the barriers -> higher chance of acquisition
– Also used when entering international markets
– Large MNCs from developed economies seek to enter emerging
economies such as Brazil, Russia, India, and China (BRIC) because
they are among the fastest-growing economies in the world.
◆ Cross-border acquisitions = those made between companies
with headquarters in a different country
. COST OF NEW PRODUCT DEVELOPMENT AND INCREASED SPEED
TO MARKET
– Successfully developing and introducing a new product to the
market requires a significant investment of a firm’s resources and
is time consuming -> hard to quickly earn a profitable return
– Acquisitions can be used to gain access to new and current
products that are new to the firm. Compared with internal product
development processes, acquisitions provide more predictable
returns and faster entry
– Because the performance of the acquired firm’s products can be
assessed prior to completing the acquisition.
– More frequent in high-technology industries
. LOWER RISK COMPARED TO DEVELOPING NEW PRODUCTS
– Outcomes of an acquisition are easier to estimate and are more
accurate -> less risk
. INCREASED DIVERSIFICATION
– Acquisitions can be used to diversify firms as it is easier for firms
to develop and introduce a product currently served by the firm
