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The merger of Sears and K-Mart is a classic example of a horizontal merger because the firms were direct competitors.

T

When firms restructure through divestitures, it is often a sign of a failed acquisition strategy.

T

divestiture- the partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on. In personal finance, investors selling shares of a business can be said to be divesting their interests in the company being sold.
firms using acquisitions as a substitute for internal innovations eventually encounter performance problems

Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm.

F

large or extraordinary debt, even though the cost of new product and development and increased speed to market are a reason for aquisitions

Typical returns on acquisitions for acquiring firms are close to zero.

T

A merger is defined as a transaction in which one firm purchases controlling interest in another firm.

F

merger- a strategy though which 2 firms agree to integrate their operations on a relatively equal basis.

merger- The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Basically, when two companies become one. This decision is usually mutual between both firms.

Takeovers are unsolicited and unwanted acquisitions which are uniformly hostile.

F

takeover- a special type of acquisition wherein the target firm doesn't solicit the acquiring firm's bid; thus, takeovers are unfriendly acquisitions

Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry.

T

acquisition- a strategy though which one firm buys a controlling, or 100%, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June.

T

Typically, merger and acquisition activity increases during economic booms and decreases during economic declines.

T

An acquisition of a firm in a highly related industry is referred to as a horizontal acquisition.

F

horizontal acquisition- increase a firm's market power by exploiting cost- based and revenue-based synergies. acquisition of a company competing in the same industry as the acquiring firm

vertical acquisition- a firm acquiring a supplier or distributor of 1+ of its goods or services

related acquisition- acquiring a firm in a highly related industry

Research evidence suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels.

F

Acquisitions proposed to increase market power are not subject to regulatory review, but they must ultimately satisfy the demands of the financial markets

F

Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry.

T

The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market.

F

Despite increasingly restrictive regulations, the amount of cross-border acquisition activity between nations within the European Community continues to rise.

F

A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm may lose its own ability to innovate.

T

Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy.

F

Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successful

F

The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions.

T

The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.

T

Ambrose is an account representative for a company that has recently been purchased by its main industry rival. Ambrose should be pleased because acquisitions have an 80% chance of success and his job will be more secure.

F

Due diligence is performed by investment banking firms because of laws protecting shareholders during acquisitions.

F

It is well-accepted among economists that high levels of debt discipline managers to act in shareholders' best interests. This explains the current popularity of junk bonds.

F

The effect of leverage on the acquiring firm's financial returns is negative and should be avoided.

F

Private synergies are widely present in most acquisitions.

F

Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies.

T

High levels of unrelated diversification will have a positive effect on a firm's long-term performance if managers focus on financial controls.

F

When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls.

T

Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm.

F

Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions.

T

One of the potential problems associated with acquisitions is that the size of the firm may exceed the economies of scale generated by the acquisition.

T

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

T

Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself.

T

Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from it founders. Executives and employees in both firms have "grown up" with their companies. Since both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

F

The majority of acquisitions completed during the acquisition boom of the 1970s through the 1990s did not enhance the strategic competitiveness of the firms involved.

T

Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure.

T

Green Valley Manufacturing, the major employer in the town of Green Valley, is laying off 15% of its hourly workers and about 5% of its managerial and staff employees. This is an indication that Green Valley is experiencing a decline and that the town council should be preparing for the prospect that the company will close.

F

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio.

F

Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses.

T

A leveraged buyout by a third party is often the result of managerial mistakes or management that has operated in its own self-interest rather than the firm's interest.

T

It has been found that both U.S. and Japanese firms engaging in downsizing activities achieve lower returns after downsizing.

T

The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in five to eight years. This tends to make the managers of the bought-out firm high-risk takers, since they will probably not survive the resale and thus have little to lose.

F

Horizontal acquisitions in the airline industry, such as that between American West Airlines and U.S. Airways are typically intended to:
a.
take advantage of innovations created by the other firm.
b.
reduce some of the overcapacity in the industry.
c.
control more parts of the value chain.
d.
overcome barriers to entry.

B

Chinese firms seeking to acquire U.S. firms are interested in all of the following EXCEPT
a.
gaining access to the U.S. company brand names.
b.
gaining access to critical resources held by U.S. companies.
c.
diversifying into unrelated industries in order to broaden their market scope.
d.
acquiring relationships with dealers through horizontal acquisitions.

C

Researchers have found that shareholders of acquired firms often
a.
earn above-average returns.
b.
earn below-average returns.
c.
earn close to zero as a result of the acquisi-tion.
d.
are not affected by the acquisition.

A

Company experience and research findings have shown acquisitions typically ____ for the acquiring firm.
a.
result in above-average returns
b.
provide approximately average returns
c.
result in returns near zero
d.
take some time to achieve private synergy, but eventually result in above-average returns

C

Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners
a.
resisted selling at any price.
b.
sold the company to the larger brewer.
c.
designed a poison pill to discourage a takeover.
d.
looked for smaller brewers to acquire instead of selling to the larger brewer.

B

In a merger
a.
one firm buys controlling interest in another firm.
b.
two firms agree to integrate their operations on a relatively coequal basis.
c.
two firms combine to create a third separate entity.
d.
one firm breaks into two firms.

B

There are few true mergers because
a.
few firms have complementary resources.
b.
integration problems are more severe than in outright acquisitions.
c.
one firm usually dominates in terms of market share or firm size.
d.
of managerial resistance. True mergers result in significant managerial-level layoffs.

C

A(an) ____ occurs when one firm buys a controlling, or 100% interest, in another firm.
a.
merger
b.
acquisition
c.
spin-off
d.
restructuring

B

When the target firm's managers oppose an acquisition, it is referred to as a(an)
a.
stealth raid.
b.
adversarial acquisition.
c.
hostile takeover.
d.
leveraged buyout.

C

Market power is derived primarily from the
a.
core competencies of the firm.
b.
size of a firm and its resources and capabili-ties.
c.
quality of a firm's top management team.
d.
depth of a firm's strategy.

B

A primary reason for a firm to pursue an acquisition is to
a.
avoid increased government regulation.
b.
achieve greater market power.
c.
exit a hyper-competitive market.
d.
achieve greater financial returns in the short run.

B

When a firm acquires its supplier, it is engaging in a(an)
a.
merger.
b.
unrelated acquisition.
c.
hostile takeover.
d.
vertical acquisition.

D

Related acquisitions to build market power
a.
are likely to undergo regulatory review.
b.
are rarely permitted to occur across interna-tional borders.
c.
typically involve a firm purchasing one of its suppliers or distributors.
d.
concentrate on capturing value at more than one stage in the value chain.

A

Baby Doe's, a designer and manufacturer of children's clothing, has decided to purchase a retail chain specializing in children's clothing. This purchase is a(an)
a.
merger.
b.
unrelated acquisition.
c.
horizontal acquisition.
d.
vertical acquisition.

D

Cross-border acquisitions are typically made to
a.
increase a firm's market power.
b.
reduce the cost of new product development.
c.
take advantage of higher education levels of labor in developed countries.
d.
circumvent barriers to entry in another country.

D

The presence of barriers to entry in a particular market will generally make acquisitions ____ as an entry strategy.
a.
less likely
b.
more likely
c.
prohibitive
d.
illegal

B

17. SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the growing technical translation software market. This market is dominated by firms making highly differentiated products. To enter this market SpeakEasy should consider a/an
a.
vertical acquisition of a firm that uses technical translation products.
b.
acquisition of a highly related firm in the technical translation market.
c.
cross-border merger, preferably with an Indian or Chinese company.
d.
strategy of internally developing the technical translation products needed to compete in this market.

B

Cross-border acquisitions are critical to U.S. firms competing internationally
a.
if they are to develop differentiated products for markets served.
b.
when market share growth is the focus.
c.
where consolidated operations are beneficial.
d.
if they wish to overcome entry barriers to international markets.

D

Mittal Steels' acquisition of ISG, a U.S.-owned steel company, is an example of both a cross-border acquisition and a
a.
backward vertical acquisition.
b.
forward vertical acquisition.
c.
horizontal acquisition.
d.
merger of equals.

C

The flurry of cross-border acquisitions in the steel industry by Mittal Steel and by Arcelor SA is
a.
an example of consolidation in the industry.
b.
the result of overcapacity in the steel industry causing low steel prices.
c.
a move by both firms to diversify.
d.
allowing steel manufacturing to flourish in high-wage nations such as the U.S. and Europe.

A

EverBond, a firm specializing in adhesives and glues has invented a new type of strong adhesive that can be applied and then removed by a special process without damage to even delicate materials. Once EverBond obtains the patent on this process, there is a 60% chance that its invention will be effectively imitated within ____ years.
a.
one
b.
three
c.
four
d.
six

C

Which of the following is NOT one of the primary reasons many pharmaceutical firms use acquisitions?
a.
entering markets quickly
b.
overcoming the high costs of internal product development
c.
improving predictability of returns on investment.
d.
extending patent rights on developed pharmaceuticals

D

Internal product development is often viewed as
a.
carrying a high risk of failure.
b.
the only reliable method of generating new products for the firm.
c.
a quicker method of product launch than acquisition of another firm.
d.
critical to the success of biotech and pharmaceutical firms.

A

Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition becomes a substitute for
a.
market discipline.
b.
innovation.
c.
risk analysis.
d.
international diversification.

B

Compared to internal product development, acquisitions allow
a.
immediate access to innovations in mature product markets.
b.
more predictable returns on investment.
c.
slower market entry.
d.
more effective use of company core compe-tencies.

B

Research has shown that the more ____ the greater is the probability that an acquisition will be successful.
a.
related the acquired and acquiring firms are
b.
diverse the resulting portfolio of competen-cies
c.
disparate the corporate cultures
d.
involved investment banking firms are in the due diligence process

A

When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is intense, the firm may wish to ____ by making an acquisition.
a.
increase new product speed to market
b.
broaden its competitive scope
c.
increase its economies of scale
d.
overcome entry barriers

B

The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because
a.
of barriers to entry in many industries.
b.
it is difficult for companies to develop products that differ from their current product line
c.
innovation in both the acquired and the acquiring firm is enhanced by the exchange of competencies resulting from acquisition
d.
unrelated acquisitions are usually uncompli-cated because the acquired firm is allowed to continue to function independently as it did before acquisition.

B

Sales of watches among teenagers and 20-somethings are declining rapidly as this age group uses cellphones, iPods, and other devices to tell time. A company that specializes in selling inexpen-sive watches to this age group would do well to consider ____ in order to develop new products other than watches.
a.
unrelated diversification.
b.
backward integration.
c.
forward integration.
d.
horizontal acquisitions.

A

JLB, Inc., manufacturers components for use in farm equipment. JLB sells its parts to U.S. farm equipment manufacturers. The market for tractors and farm implements needed in the U.S. is declining and there is increasing competition by foreign manufacturers of farm equipment. JLB should consider an acquisition because
a.
it is suffering from a lack of internal product development.
b.
it is overly dependent on one product market.
c.
it needs to acquire one of its foreign competi-tors so that it can conquer the entry barriers to the international market.
d.
it requires greater economies of scale.

B

Nirvana-Bound Vacations is a travel company that specializes in luxury vacations for mature travelers to India and Thailand. Nirvana-Bound has experienced little growth in its business, and its management has decided that the company needs to gain access to new knowledge, increase its capabilities, break its inertia, and become more agile by acquiring another company. The most suitable acquisition for this specific purpose would be
a.
a competing firm specializing in senior travel in Asia.
b.
a firm specializing in land-based travel for seniors in the U.S.
c.
a firm specializing in cruise vacations for mature travelers.
d.
an Indian firm specializing in cosmetic surgery vacations for Americans.

D

Research shows that about ____ percent of mergers and acquisitions are successful.
a.
20
b.
40
c.
60
d.
80

A

Each of the following is a rationale for acquisitions EXCEPT
a.
achieving greater market power.
b.
overcoming significant barriers to entry.
c.
increasing speed of market entry.
d.
positioning the firm for a tactical competitive move.

D

Problems associated with acquisitions include all of the following EXCEPT
a.
excess managerial focus on acquisitions.
b.
difficulties integrating the two firms.
c.
the high costs of financing the acquisition.
d.
excessive time spent on the due diligence process.

D

The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms
a.
insufficient diversification.
b.
having too much debt.
c.
being unable to achieve synergy.
d.
growing too large.

A

According to a researcher cited in the text, the successful completion of the ____ phase is probably the single most important determinant of shareholder value creation in mergers and acquisitions.
a.
pre-acquisition negotiations
b.
pre-acquisition due diligence
c.
post-acquisition integration
d.
post-acquisition restructuring

C

Without effective due diligence the
a.
acquiring firm is likely to overpay for an acquisition.
b.
firm may miss its opportunity to buy a well-matched company.
c.
acquisition may deteriorate into a hostile takeover, reducing the value creating potential of the action.
d.
may be unable to act quickly and decisively in purchasing the target firm.

A

Due diligence includes all of the following activities EXCEPT assessing
a.
differences in firm cultures.
b.
tax consequences of the acquisition.
c.
the level of private synergy between the two firms.
d.
the appropriate purchase price.

C

The use of high levels of debt in acquisitions has contributed to
a.
the increase in above-average returns earned by acquiring firms.
b.
an increased risk of bankruptcy for acquiring firms.
c.
the confidence of the stock market in firms issuing junk bonds.
d.
an increase in investments that have long-term payoffs.

B

High levels of debt can be a positive force because it allows firms to
a.
take advantage of expansion opportunities.
b.
postpone unnecessary investments.
c.
invest in tax avoiding ventures.
d.
discipline their managers.

A

____ are unsecured obligations that are not tied to specific assets for collateral.
a.
Bearer bonds
b.
No-load stocks
c.
Penny stocks
d.
Junk bonds

D

Which of the following statements is FALSE?
a.
Synergy resulting from an acquisition generates gains in shareholder wealth beyond what they could achieve through diversification of their own portfolios.
b.
Private synergy results when the combination of two firms yields competencies and capabili-ties that could not be achieved by combining with any other firm.
c.
Although private synergy is easy to analyze, it is difficult to create.
d.
Private synergy is more likely when the two firms in an acquisition have complementary assets.

C

Private synergy
a.
occurs in most related acquisitions and allows firms to see increased returns.
b.
is frequently achieved in conglomerates.
c.
is not easy to understand and imitate.
d.
is assessed by managers during the due diligence process.

C

The expenses incurred by firms trying to create synergy through acquisition are called ____ costs
a.
acquisition
b.
participation
c.
transaction
d.
interaction

C

Transaction costs include all of the following EXCEPT
a.
charges from investment bankers who complete due diligence for the acquiring firm.
b.
the loss of key employees following the acquisition.
c.
managers' time spent evaluating target firms.
d.
managers' time spent planning the diversifica-tion strategy of the firm.

D

Which of the following is NOT a result of over-diversification?
a.
Executives do not have a rich understanding of all of the firm's business units.
b.
Managers emphasize strategic controls rather than financial controls.
c.
Firms use acquisition as a substitute for innovation.
d.
Managers become short-term in their orientation.

B

Evidence suggests that firms using acquisitions as a substitute for internally developed innovations
a.
are able to offset the loss of research and development competencies by competencies in other areas.
b.
extend their time-to-market for new product launches.
c.
eventually encounter performance problems.
d.
can leverage their core competencies across a broader range of products.

C

When managers become overly focused on making acquisitions, it is
a.
because the skills of top executives are better used in making acquisitions than they are in daily organization operations.
b.
because it is more fun to do deals than to run the company.
c.
due to pressure from major stakeholders to diversify the firm.
d.
because acquisitions are a quick way to improve the financial standing of the firm.

B

Acquisitions can become a time sink for top level managers for all the following reasons EXCEPT
a.
the integration process after acquisition requires managerial attention.
b.
they must prepare for acquisition negotia-tions.
c.
managers are involved in the search for viable acquisition candidates.
d.
only top managers can perform the required due diligence.

D

After Hewlett-Packard bought Compaq Computer, expert opinion was that "HP's shareholders paid $24 billion in stock to buy Compaq and in exchange got relatively little value." One could predict that, as in other failed acquisitions and mergers, HP would engage in one or more of the following EXCEPT
a.
downsizing
b.
downscoping
c.
enhanced due diligence.
d.
creating spin-offs.

C

One problem with becoming too large is that large firms
a.
become excessively diverse and have difficulty focusing on strategic goals.
b.
tend to have inadequate financial controls.
c.
become attractive takeover targets.
d.
usually increase bureaucratic controls.

D

Thomas is an upper-middle level manager for a firm that has been actively involved in acquisitions over the last 10 years. The firm has grown much larger as a result. Thomas has been dismayed to find that recently the managerial culture of the firm has been turning more and more to ____ controls.
a.
bureaucratic
b.
strategic
c.
tactical
d.
organic

A

A friendly acquisition
a.
raises the price that has to be paid for a firm.
b.
enhances the complementarity of the two firms' assets.
c.
facilitates the integration of the acquired and acquiring firms.
d.
allows joint ventures to be developed.

C

____ allows the acquiring firm to keep valuable human resources in the acquired firm from leaving.
a.
Financial slack
b.
Private synergy
c.
Effective integration
d.
High compensation

C

Which of the following is NOT an attribute of a successful acquisition?
a.
The acquiring firm has a large amount of financial slack.
b.
The acquired and acquiring firms have complementary assets and/or resources.
c.
Innovation and R&D investments continue as part of the firm's strategy.
d.
Investments in advertising and image building are made quickly.

D

Typically, in a failed acquisition, the organization will
a.
restructure.
b.
go into bankruptcy.
c.
focus on building private synergy.
d.
increase integration.

A

Ambrose is a scientist working for a pharmaceutical company. His company was acquired by a rival pharmaceutical company, and now it is involved in downsizing and downscoping. Ambrose is concerned about his job security, since he is actively involved in amateur sports in his community and does not wish to disrupt his current lifestyle. Ambrose's job will be most likely to be secure if
a.
Ambrose's research is in a non-core activity.
b.
the acquisition has been financed by junk bonds.
c.
Ambrose is in a position to take a poison pill.
d.
Ambrose is a key employee in the firm's primary business.

D

Magma, Inc., acquired Vulcan, Inc., three years ago. Effective integration of the two companies' culture was never achieved, and the two firms' assets were not complementary. It is very likely that Magma will:
a.
go public through an IPO.
b.
review the due diligence information collected before the acquisition.
c.
restructure.
d.
review its tactical-level strategies.

C

Among Fortune 1000 firms, downsizing is:
a.
very rare, fewer than 10% of firms have used it.
b.
uncommon, between 10 and 20% of firms have used it.
c.
common, between 40 and 60% of firms have used it.
d.
very common, over 80% of firms have used it.

D

____ occur when a single firm creates at least two firms in a nontaxable breakoff creating at least one new equity share offering.
a.
Leveraged buyouts
b.
Hostile takeovers
c.
Shakeouts
d.
Spin-offs

D

Regulatory attention to companies that show monopolistic tendencies are a major reason for
a.
downscoping.
b.
spin-offs.
c.
cross-border acquisitions.
d.
leveraged buyouts.

B

The trend in Europe, Latin American and Asia has been
a.
related diversification.
b.
whole-firm leveraged buyouts.
c.
building conglomerates.
d.
downscoping.

C

A leveraged buyout refers to
a.
a firm restructuring itself by selling off unrelated units of the company's portfolio.
b.
a firm pursuing its core competencies by seeking to build a top management team that comes from a similar background.
c.
a restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private.
d.
an action where the management of the firm and/or an external party buy all of the assets of a business financed largely with equity.

C

The term "leverage" in leveraged buyouts refers to the
a.
firm's increased concentration on the firm's core competencies.
b.
amount of new debt incurred in buying the firm.
c.
fact that the employees are purchasing the firm for which they work.
d.
process of removing the firm's stock from public trading.

B

After a leveraged buyout, ____ typically occur(s).
a.
selling off of assets
b.
further rounds of acquisitions
c.
due diligence
d.
private synergy

A

Downsizing usually results in
a.
higher firm performance.
b.
improved reputation of the firm.
c.
an increase in human capital per employee.
d.
an entrepreneurship boom.

D

Firms use downsizing as a restructuring strategy for different reasons, but the major tactical reason is
a.
poor unit performance from decreasing industry attractiveness.
b.
decreasing market share from increasing industry competition.
c.
shifting industry characteristics.
d.
the desire to lower labor costs.

D

Which of the following is NOT one of the three main restructuring strategies?
a.
realigning
b.
downsizing
c.
downscoping
d.
leveraged buyouts

A

An investor is analyzing two firms in the same industry. She is looking for long term performance from her investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is undertaking aggressive downscoping. The investor should invest in the:
a.
downscoping firm because the higher debt load will discipline managers to act in share-holders' best interests.
b.
downscoping firm because it will be focusing on the firm's core businesses.
c.
downsizing firm because it will be making decisions based on tactical strategies.
d.
downsizing firm because it is eliminating employees who are essentially "dead weight" and are dragging down the firm's profitability.

B

Whole-firm LBOs tend to result in all the following negative outcomes EXCEPT
a.
increased risk of bankruptcy.
b.
failure to invest in R&D.
c.
risk-averse management.
d.
inefficient operations.

D

Compared with downsizing, ____ has (have) a more positive effect on firm performance.
a.
reconfiguring
b.
downscoping
c.
leveraged buyouts
d.
acquisitions

B

Downsizing may be of more ____ value than ____ value.
a.
strategic, financial
b.
political, financial
c.
short-term, long-term
d.
strategic, tactical

C

Why have acquisitions been a popular strategy in recent years?

An acquisition strategy is sometimes used because of the uncertainty in the competitive land-scape. A firm may make an acquisition to increase its market power, to enter a new market, or to spread the risk due to an uncertain environment. A firm may acquire other companies to shift its core business into different markets, sometimes triggered by a change in the industry or because of regulatory changes. An acquisition strategy should only be used when the acquiring firm will be able to increase its economic value through ownership and the use of an acquired firm's assets.

Identify and explain the seven reasons firms engage in an acquisition strategy.

(1) Increased market power. Market power allows a firm to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors. Market power is derived from the size of the firm and the firm's resources and capabilities to compete in the marketplace. Firms use horizontal, vertical, and related acquisitions to increase their size and market power. (2) Overcoming entry barriers. Firms can gain immediate access to a market by purchasing a firm with an established product that has consumer loyalty. Acquiring firms can also overcome economies of scale entry barriers through buying a firm that has already successful achieved economies of scale. In addition, acquisitions can often overcome barriers to entry into international markets. (3) Reducing the cost of new product development and increasing speed to market. Developing new products and ventures internally can be very costly and time consuming without any guarantee of success. Acquiring firms with products new to the acquiring firm avoids the risk and cost of internal innovation. In addition, acquisitions provide more predictable returns on investments than internal new product development. Acquisitions are a much quicker path than internal development to enter a new market, and they are a means of gaining new capabilities for the acquiring firm. (4) Lower risk compared to developing new products internally. Acquisitions are a means to avoid internal ventures (and R&D investments), which many managers perceive to be highly risky. However, substituting acquisitions for innovation may leave the acquiring firm without the skills to innovate internally. (5) Increased diversification. Firms can diversify their portfolio of business through acquiring other firms. It is easier and quicker to buy firms with different product lines than to develop new product lines independently. (6) Reshaping the firm's competitive scope. Firms can move more easily into new markets as a way to decrease their dependence on a market or product line that has high levels of competition. (7) Learning and developing new capabilities. By gaining access to new knowledge, acquisitions can help companies gain capabilities and technologies they do not possess. Acquisi-tions can reduce inertia and help a firm remain agile.

Describe the seven problems in achieving a successful acquisition.

Acquisition strategies present many potential problems. (1) Integration difficulties. It may be difficult to effectively integrate the acquiring and acquired firms due to differences in corporate culture, financial and control systems, management styles, and status of executives in the combined firms. Turnover of key personnel from the acquired firm is particularly negative. (2) Inadequate evaluation of target. Due diligence assesses where, when, an dhow management can drive real performance gains through an acquisition. Acquirers that fail to perform effective due diligence are likely pay too much for the target firm. (3) Large or extraordinary debt. Acquiring firms frequently incur high debt to finance the acquisition. High debt may prevent the investment in activities such as research and development, training of employees and marketing that are required for long-term success. High debt also increases the risk of bankruptcy and can lead to downgrading of the firm's credit rating. (4) Inability to achieve synergy. Private synergy occurs when the acquiring and target firms' assets are complementary in unique ways, making this synergy difficult for rivals to understand and imitate. Private synergy is difficult to create. Transaction costs are incurred when firms seek private synergy through acquisitions. Direct transaction costs include legal fees and investment banker charges. Indirect transaction costs include managerial time to evaluate target firms, time to complete negotiations, and the loss of key managers and employees following an acquisition. Firms often underestimate the indirect transaction costs of an acquisition. (5) Too much diversification. A high level of diversification can have a negative effect on the firm's long-term performance. For example, the scope created by diversification often causes managers to rely on financial controls rather than strategic controls because the managers cannot completely understand the business units' objectives and strategies. The focus on financial controls creates a short-term outlook among managers and they forego long-term investments. Additionally, acquisitions can become a substitute for innovation, which can be negative in the long run. (6) Managers overly focused on acquisitions. Firms that become heavily involved in acquisition activity often create an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing additional acquisitions. This detracts from other important activities, such as identifying and taking advantage of other opportunities and interacting with importance external stakeholders. Moreover, during an acquisition, the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed. (7) Growing too large. Acquisitions may lead to a combined firm that is too large, requiring extensive use of bureaucratic controls. This leads to rigidity and lack of innovation, and can negatively affect performance. Very large size may exceed the efficiencies gained from economies of scale and the benefits of the additional market power that comes with size.

Describe how an acquisition program can result in managerial time and energy absorption.

Typically, a substantial amount of managerial time and energy is required for acquisition strategies if they are to contribute to a firm's strategic competitiveness. Activities with which managers become involved include those of searching for viable acquisition candidates, completing effective due diligence processes, preparing for negotiations and managing the integration process after the acquisition is completed. Company experience shows that participat-ing in and overseeing the acquisition activities can divert managerial attention from other matters that are linked with long-term competitive success (e.g., identifying and acting on other opportu-nities, interacting effectively with external stakeholders).

What are the attributes of a successful acquisition program?

Acquisitions can contribute to a firm's competitiveness if they have the following attributes: (1) The acquired firm has assets or resources that are complementary to the acquiring firm's core business. (2) The acquisition is friendly. (3) The acquiring firm conducts effective due diligence to select target firms and evaluates the target firm's health (financial, cultural, and human resources). (4) The acquiring firm has financial slack. (5) The merged firm maintains low to moderate debt. (6) The acquiring firm has sustained and consistent emphasis on R&D and innovation. (7) The acquiring firm manages change well and is flexible and adaptable.

What is restructuring and what are its common forms?

Restructuring refers to changes in a firm's portfolio of businesses and/or financial structure. There are three general forms of restructuring. (1) Downsizing involves reducing the number of employees, which may include decreasing the number of operating units (2) Downscoping entails divesting, spinning-off, or eliminating businesses that are not related to the core business. It allows the firm to focus on its core business. (3) A leveraged buyout occurs when a party (managers, employees, or an external party) buys all the assets of a (publicly traded) business, takes it private, and finances the buyout with debt. Once the transaction is complete, the company's stock is no longer publicly traded.

What are the differences between downscoping and downsizing?

Downsizing is a reduction in the number of employees. It may or may not change the composition of businesses in the company's portfolio. In contrast, the goal of downscoping is to reduce the firm's level of diversification. Downscoping is accomplished by divesting unrelated businesses. With core businesses remaining, the firm and its top-level managers are able to refocus on core businesses. A firm that downscopes often also downsizes at the same time.

What is an LBO and what have been the results of such activities?

Leveraged buyouts (LBOs) are a restructuring strategy. Through a leveraged buyout, a (publicly-traded) firm is purchased so that it can be taken private. In this manner, the company's stock is no longer publicly traded. LBOs usually are financed largely through debt, and the new owners usually sell off a number of assets. There are three types of LBOs: management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts. Because they provide managerial incentives, MBOs have been the most successful of the three leveraged buyout types. MBOs tend to result in downscoping, an increased strategic focus, and improved performance.

What are the results of the three forms of restructuring?

Downsizing usually does not lead to higher firm performance. The stock markets tend to evaluate downsizing negatively, as investors assume downsizing is a result of problems within the firm. In addition, the laid-off employees represent a significant loss of knowledge to the firm, making it less competitive. The main positive outcome of downsizing is accidental, since many laid-off employees become entrepreneurs, starting up new businesses. In contrast, downscoping generally improves firm performance through reducing debt costs and concentrating on the firm's core businesses. LBOs have mixed outcomes. The resulting large debt increases the financial risk and may end in bankruptcy. The managers of the bought-out firm often have a short-term and risk-averse focus because the acquiring firm intends to sell it within five to eight years. This prevents investment in R&D and other actions that would improve the firm's core competence. But, if the firms have an entrepreneurial mind-set, buyouts can lead to greater innovation if the debt load is not too large.

Case Scenario 1: Syco Inc. (SI). Syco, Inc. (SI) was founded the late 1800s and had grown through acquisition from being primarily a large discount retailer into a highly diversified firm. Beyond retailing (still SI's dominant business), by the middle of the 1980s its lines of business included significant market positions in insurance, consumer credit cards, stock brokerage, commercial and residential real estate brokerage, and an online Internet portal. Each of the non-retail businesses was average in its relative industry performance. Consistent with the decentralized structure at SI and arms-length corporate oversight, each of these businesses was also rapidly developing their own unique brands and customer following. However, within a short period of time it became apparent that the retail business was failing. SI's vast mall-based department store holdings were suffering from deferred maintenance and merchandising that did not appear to be popular with its once large consumer base. At the same time, highly efficient and focused low-cost competitors like Wal-Mart were beginning to take significant market share from SI. On the verge of bankruptcy by early 1990, SI's management chose to sell off it insurance and real estate and stock brokerage units; it also spun off its credit card and portal businesses in separate public offerings.

1. (Refer to Case Scenario 1) Why do you suppose SI entered the non-retail businesses through acquisition? Is this a cheaper route than starting up these businesses from scratch?
2. Part 1: (Refer to Case Scenario 1) Why do you suppose that SI sold off or spun-off its non-retail businesses? Part 2: What should SI do after selling off the non-retail businesses?

1. The best answers may begin by noting that SI had no real prior experience in these non-retail businesses so they needed to either buy the relevant operations and skills or start them up from scratch. Absent such experience it is considerably more expedient to enter these businesses through acquisition, since they are likely to be able to acquire both the business and an experi-enced management team. The second question gets to the fact that SI would also likely have to pay a premium for the acquired firms since it brought no industry-specific knowledge to the bargaining table. 2. Part 1: The best answers will note that SI was probably in too many and too many different businesses. Each of these businesses had to compete in their respective industries while at the same time dealing with SI's corporate ownership. By getting out of the non-retail business SI is able to get back to its roots in retail. While of course speculative, students can debate whether or not SI chose the right business to focus its future on. From a resource-based perspective, retail had the strongest history, which would likely give SI the richest and most defensible set of valuable, rare, and costly to imitate resources in the retailing business. Part 2: This is a natural follow-on to Part 1 above. Students could begin this answer by suggest-ing that SI's diversification strategy diverted its attention from the needs of its core retailing business. Future efforts should be directed toward turning the retailing business around and aggressively trying to outmaneuver emerging and existing retailing competitors. The instructor can use this dialogue to point out that after establishing a strong industry position, SI probably viewed its retailing business as stable and unthreatened, and thus used it as means of financing its broad diversification efforts. In contrast, emerging companies like Wal-Mart viewed retailing as a growth vehicle and developed novel and lower cost structures which eventually undermined the advantages established earlier by SI.

Case Scenario 2: Raptec Raptec was incorporated in 1981 and went public on the Nasdaq Stock Market in 1986. Raptec's strategy is to become the global leader in innovative storage solutions. Raptec is an S&P 500 and a Nasdaq Stock Market 100 member. The company's hardware and software solutions for eBusiness and Internet applications move, manage, and protect critical data and digital content. Raptec operates in three principal business segments: Direct Attached Storage ("DAS"), Storage Networking Solutions ("SNS") and Software. These hardware and software products are found in high-performance networks, servers, workstations, and desktops from the world's leading OEMs, and are sold through distribution channels to Internet service providers, enterprises, medium and small businesses, and consumers. Since the time it went public, Raptec has experienced rapid growth and consistently profitable operations. In early 2002, the company announced its plan to spin-off the software segment, subsequently incorporated as Axio, Inc., in the form of a fully independent and separate company. Software was Raptec's most profitable and fastest growing segment. By mid- 2002 Raptec had completed the initial public offering of approximately 15% of Axio's stock, and then distributed the remaining Axio stock to Raptec's stockholders in a tax-free distribution.

1. Why would a successful firm like Raptec spin off its most promising business?
2. Prior to the spin-off, how would you go about identifying the respective boundaries of the Raptec and Axio businesses?
3. What risks does Raptec run in spinning off Axio?

1. The best answers will begin by noting that both hardware and software are industries character-ized by fast cycle times, which requires management to be both focused and nimble. With this background, students can then argue that the spin-off provides the management teams of Raptec and the newly formed Axio with greater focus (on hardware and software respectively), better alignment of employee incentives, and greater managerial accountability. The spin-off also provides Axio direct access to capital markets.
2. The purpose of this question is to point out how blurry the lines may be between businesses in a diversified firm-the best answers will revolve around this point. While Raptec operated in three business segments, this does not guarantee that each operated as independent organizations within Raptec. In fact, Raptec likely benefited from tremendous operational and market synergies among its three primary lines of business, and such synergies are typically accomplished through formal coordination and integration mechanisms like organizational structure, systems, and processes. A useful analogy here can be drawn to Palm, Inc., and its PDA product the Palm Pilot. Given that consumers view the Palm PDA as a monolithic product (they don't think of it as separate hardware and software, where would you begin to draw the dividing line if Palm wanted to split up its hardware and software businesses?
3.The best answers will point out that the spin-off strategy makes sense only to the extent that the benefits described in the answer to question 1 considerably outweigh the costs arising from breaking up the firm and its lost opportunities for within-firm synergies. If Raptec has been successful because of its ability to uniquely couple hardware and software, along with the fact that it possesses inside knowledge about the technological advances in each business, then breaking up the firm may actually break-up and destroy a potential core competency. Also, once a firm has broken itself up into distinct legal entities there is nothing to prevent one of the players from preying on the others' most profitable related businesses. For instance, Axio may start moving into parts of the hardware business that, from its inside experience with Raptec, it knows are highly profitable when combined with Axio's proprietary software.

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