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Chapter 4
Planning: Developing Business and
Acquisition Plans—Phases 1 & 2 of the Acquisition Process
Examination Questions and Answer
1. A planning-based acquisition process consists of both a business plan and acquisition plan, which drive all subsequent
phases of the acquisition process. True or False
2. A business plan articulates a mission or vision for the firm and a strategy for realizing that mission. True or False
3. Determining where a firm should compete starts with deciding who the firm’s current or potential customers are and what
are their needs. True or False
4. Market segmentation involves identifying customers with common characteristics and needs. True or False
5. An analysis of markets should involve current and potential customers, as well as current and potential competitors, but
it should exclude suppliers. True or False
6. A competitive self-assessment involves an analysis of the firm’s absolute strengths and weaknesses. True or False
7. A firm’s core competencies refer to those skills which are required to produce the firm’s primary products but
which have little or no application in producing related products. True or False
8. Core competencies should be defined as narrowly as possible. True or False
9. A corporate mission statement should be defined as broadly as possible since it seeks to describe the corporation’s reason
for being, and it should not exclude the firm from pursuing any significant opportunities. True or False
10. The market targeted by the firm should reflect the fit between the corporation‘s primary strengths and competencies and
its ability to satisfy customer needs better than the competition. True or False
11. Corporate objectives are defined as what is to be accomplished within a specific period. True or False
12. A firm should choose that strategy from among the range of reasonable alternatives that enables it to achieve its stated
objectives in an acceptable time period without regard for resource constraints. True or False
13. A price or cost leader in an industry is usually the firm with the largest market share. True or False
14. The experience curve is most important in analyzing industries with low fixed costs. True or False
15. A cost leadership strategy can be highly destructive to the firm with the largest market share if pursued concurrently by a
number of firms with very different market shares. True or False
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16. A differentiation strategy is one in which customers believe that various competitors have significantly different cost
structures. True or False
17. A differentiation strategy is one in which a firm’s products are perceived by customers to be slightly different from other
firms’ products in the same industry. True or False
18. Firms adopting a focus strategy tend to concentrate their efforts by selling a few products to a single market and compete
primarily on price. True or False
19. Firms adopting a focus strategy compete primarily based on their superior understanding of how to satisfy their customers
needs better than the competition. True or False
20. Coca Cola is an example of a company that pursues both a differentiation and cost leadership strategy. True or False
21. The evolution of the growth of a product can be characterized in four stages: embryonic, growth, maturity, and decline.
This description is called a business attractiveness matrix. True or False
22. Strong sales growth and low entry barriers characterize the embryonic and growth stages of a product’s life cycle.
True or False
23. An acquisition plan defines the objectives to be achieved by acquiring another firm, management’s preferences as to how
the acquisition process should be managed, resources required, and the roles and responsibilities of those responsible for
implementing the plan. True or False
24. An acquisition plan is developed if management determines that an acquisition or merger is required to implement the
firm’s business strategy. True or False
25. Resource limitations in developing the acquisition plan include money, borrowing capacity, as well as management time
and skills. True or False
26. Operating risk addresses the ability of the buyer to manage the acquired company. True or False
27. An acquisition is one of many options available for implementing a firm’s business plan. True or False
28. Financial risk refers to the buyer’s willingness and ability to leverage a transaction as well as the willingness of
shareholders to accept near-term earnings per share dilution. True or False
29. Examples of management preferences used in an acquisition plan include their preference for an asset or stock purchase
or openness to partial rather than full ownership of the target firm. True or False
30. While management’s upfront involvement in the acquisition process is crucial, management should largely disengage
from the process until the transaction is completed. True or False
31. Market profiling entails collecting sufficient data to accurately assess and characterize a firm’s competitive environment
within its chosen markets. True or False
32. Potential competitors include firms (both domestic and foreign) in the current market, those in related markets, current
customers, and current suppliers. True or False
33. The market or markets in which a firm chooses to compete should reflect the fit between the firm’s primary strengths and
its ability to satisfy customers needs better than the competition. True or False
34. A cost leadership strategy is most appropriate when pursued concurrently by a number of firms in the same industry with
approximately the same market share. True or False
35. The joint venture may represent an attractive alternative to a merger or acquisition. True or False
36. Stakeholders only include a firm’s shareholders. True or False
37. The implementation strategy refers to the way in which a firm chooses to implement its business strategy. True or False
38. A merger or acquisition is generally not considered an example of an implementation strategy. True or False
39. Contingency plans are actions that are taken as an alternative to the firm’s current business strategy. True or False
40. Good planning expedites sound decision making. True or False
41. Planning in advance of a merger or an acquisition necessarily slows down decision making. True or False
42. A collection of markets is said to comprise an industry. True or False
43. A corporate mission statement seeks to describe the corporation’s purpose for being and where the corporation hopes to
go. True or False
44. A diversification strategy involves a firm moving into only those businesses which are unrelated to the firm’s current core
business. True or False
45. Management can obtain insight into the firm’s probable future cash requirements and in turn its value by determining its
position in its industry’s product life cycle. True or False
46. Accounting considerations rarely affect the decision to buy another business rather than to build the business internally.
True or False
47. Overpayment risk involves the dilution of EPS or a reduction in its growth rate resulting from paying significantly more
than the economic value of the acquired firm. True or False
48. Acquisition plan objectives should be directly linked to key business plan objectives. True or False
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49. The acquisition plan provides the detail needed to implement effectively the firm’s business strategy, True or False
50. The acquisition plan establishes a schedule of milestones to keep the process on track and clearly defines the authority
and responsibilities of the individual charged with managing the acquisition process. True or False
Circle only one of the options.
1. All of the following represent commonly found components of a well-constructed business plan except for
a. Mission statement
b. Strategy
c. Acquisition plan
d. Objectives
e. Tactical or implementation plans
2. Which of the following represent key components of the acquisition process
a. Business plan
b. Integration plan
c. Search plan
d. Negotiation process
e. All of the above
3. Which of the following best defines market segmentation
a. The identification of customers with common characteristics and needs
b. The identification of customers with heterogeneous characteristics and needs
c. The grouping of customers with different characteristics
d. The process of reducing large markets into smaller markets without regard to customer characteristics
e. The process of identifying the various markets that comprise an industry without regard to customer
characteristics
4. Determining how to compete requires a firm’s management to consider which of the following factors?
a. Factors critical to successfully competing in its targeted markets
b. An external market analysis
c. An evaluation of what criteria customers use to make buying decisions
d. Availability of product substitutes
e. All of the above
5. Determining where a firm should compete requires management to consider which of the following factors?
a. Determining the firm’s current customers only
b. Determining the firm’s potential customers only
c. Determining the needs of current and potential customers, as well as suppliers
d. Determining the needs of potential suppliers only
e. A and D only
6. Market profiling requires an analysis of all of the following factors except for:
a. Customers
b. Suppliers
c. Core competencies
d. Current and potential competitors
e. Product or service substitutes
7. All of the following questions are relevant for conducting a self-assessment or internal analysis of the firm except for
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a. What are the firm’s critical strengths and weaknesses as compared to the competition?
b. Can the firm’s critical strengths be easily duplicated and surpassed by the competition?
c. Can the firm’s critical strengths be used to gain strategic advantage in the firm’s chosen market?
d. What are the least important factors customers consider in making purchasing decisions?
8. Which of the following examples represents the best application of a firm’s primary core competence?
a. Honda Motors manufactures cars, motorcycles, lawnmowers, and snow blowers
b. IBM provides both software services and manufactures computer hardware
c. PepsiCo manufactures and distributes soft drinks and manages restaurant chains
d. Microsoft sells operating system software and access to the internet through its MSN subscription service
e. McDonalds sells hamburgers and pizza.
9. What is the core competence underlying Honda Corporation product offering?
a. Product distribution
b. Marketing
c. Internal combustion engine design
d. Exterior design
e. Organizational structure
10. In selecting an appropriate business strategy, all of the following are relevant questions except for
a. Does the firm have sufficient resources to implement the strategy?
b. Have all reasonable alternatives available for implementing the strategy been evaluated?
c. What are the key assumptions underlying the various strategic options under consideration?
d. What do the firm’s targeted customers primarily consider in making purchasing decisions?
e. Why might an acquisition be preferred to a joint venture in implementing the business strategy?
11. In a conducting a self-assessment, a firm should consider all of the following except for
a. The degree on government regulation in its targeted markets
b. The effectiveness of its R&D activities
c. Product quality
d. Responsiveness to changing customer needs
e. Brand name recognition
12. A good mission statement should be
a. Very broadly defined
b. Very narrowly defined
c. Reference the firm’s targeted markets, product or service offering, distribution channels and management’s core
operating beliefs
d. Describe only the purpose of the corporation
e. A and C only
13. All of the following represent generic business strategies except for
a. Cost leadership
b. Differentiation
c. Focus
d. Market segmentation
e. A and D
14. All of the following are true about experience curves except for
a. Applicable primarily to differentiation strategies
b. Applicable primarily to cost leadership strategies
c. Reflect declining average unit costs due to increasing accumulated production levels
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d. Reflect both economies of scale and the introduction of more efficient production methods as output increases
e. Often found in commodity-type industries
15. All of the following are true about product life cycles except for
a. Strong sales growth and low barriers to entry often characterize the early stages of a product’s introduction
b. New entrants have substantially poorer cost positions, as a result of their small market shares when compared to
earlier entrants.
c. Later phases are characterized by slower market growth rates
d. During the high growth phases, firms usually experience high positive operating cash flow
e. The introduction of product enhancements can extend a firm’s product life cycle
16. An acquisition plan entails all of the following except for
a. Identifies key management objectives for making an acquisition
b. Determines important resource constraints
c. Articulates management’s preferences for acquiring stock or assets or considering competitors as possible targets
d. Constitutes the firm’s business plan
e. Defines roles and responsibilities of those on the acquisition team
17. Which of the following are ways to implement a firm’s business strategy?
a. Merge or acquisition
b. Joint venture
c. Going it alone
d. Asset swap
e. All of the above
18. Which of the following are components of an acquisition plan?
a. Timetable
b. Resource/capability evaluation
c. Management preferences
d. Objectives
e. All of the above
19. Which of the following are components of a business strategy?
a. Mission/vision
b. Objectives
c. Internal analysis
d. External analysis
e. All of the above
20. Stakeholders include which of the following groups?
a. Shareholders
b. Customers
c. Lenders
d. Suppliers
e. All of the above
21. Which of the following are true of real options?
a. Real options give management the ability to delay the implementation of a strategy
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b. Real options give management the ability to accelerate the implementation of a strategy
c. Real options give management the ability to abandon a strategy
d. Real options represent the ability of management to change their strategy after the strategy has been
implemented.
e. All of the above
22. Which of the following are not components of the negotiation phase of the acquisition process?
a. Refining valuation
b. Identifying potential target firms
c. Conducting due diligence
d. Structuring the deal
e. Developing the financing plan
23. Which of the following phases of the acquisition process contains a “feedback” loop?
a. Negotiation phase
b. Search phase
c. Integration phase
d. Post-closing evaluation phase
e. Closing
24. Which of the following are common objectives of an external analysis?
a. Determining where to compete
b. Determining how to compete
c. Identifying core competencies
d. A & B only
e. A, B, & C
25. Examples of corporate level strategies include which of the following:
a. Growth
b. Diversification
c. Operational
d. Financial
Case Study Short Essay Examination Questions
Adobe’s Acquisition of Omniture: Field of Dreams Marketing?
On September 14, 2009, Adobe announced its acquisition of Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO
Shantanu Narayen announced that the firm was pushing into new business at a time when customers were scaling back on
purchases of the company’s design software. Omniture would give Adobe a steady source of revenue and may mean investors
would focus less on Adobe’s ability to migrate its customers to product upgrades such as Adobe Creative Suite.
Adobe’s business strategy is to develop a new line of software that was compatible with Microsoft applications. As the world’s
largest developer of design software, Adobe licenses such software as Flash, Acrobat, Photoshop, and Creative Suite to website
developers. Revenues grow as a result of increased market penetration and inducing current customers to upgrade to newer
versions of the design software.
In recent years, a business model has emerged in which customers can “rent” software applications for a specific time period by
directly accessing the vendors’ servers online or downloading the software to the customer’s site. Moreover, software users have
shown a tendency to buy from vendors with multiple product offerings to achieve better product compatibility.
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Omniture makes software designed to track the performance of websites and online advertising campaigns. Specifically, its
Web analytic software allows its customers to measure the effectiveness of Adobe’s content creation software. Advertising
agencies and media companies use Omniture’s software to analyze how consumers use websites. It competes with Google and
other smaller participants. Omniture charges customers fees based on monthly website traffic, so sales are somewhat less sensitive
than Adobe’s. When the economy slows, Adobe has to rely on squeezing more revenue from existing customers. Omniture
benefits from the takeover by gaining access to Adobe customers in different geographic areas and more capital for future product
development. With annual revenues of more than $3 billion, Adobe is almost ten times the size of Omniture.
Immediately following the announcement, Adobe’s stock fell 5.6 percent to $33.62, after having gained about 67 percent since
the beginning of 2009. In contrast, Omniture shares jumped 25 percent to $21.63, slightly above the offer price of $21.50 per
share. While Omniture’s share price move reflected the significant premium of the offer price over the firm’s preannouncement
share price, the extent to which investors punished Adobe reflected widespread unease with the transaction.
Investors seem to be questioning the price paid for Omniture, whether the acquisition would actually accelerate and sustain
revenue growth, the impact on the future cyclicality of the combined businesses, the ability to effectively integrate the two firms,
and the potential profitability of future revenue growth. Each of these factors is considered next.
Adobe paid 18 times projected 2010 earnings before interest, taxes, depreciation, and amortization, a proxy for operating cash
flow. Considering that other Web acquisitions were taking place at much lower multiples, investors reasoned that Adobe had little
margin for error. If all went according to plan, the firm would earn an appropriate return on its investment. However, the
likelihood of any plan being executed flawlessly is problematic.
Adobe anticipates that the acquisition will expand its addressable market and growth potential. Adobe anticipates significant
cross-selling opportunities in which Omniture products can be sold to Adobe customers. With its much larger customer base, this
could represent a substantial new outlet for Omniture products. The presumption is that by combining the two firms, Adobe will be
able to deliver more value to its customers. Adobe plans to merge its programs that create content for websites with Omniture’s
technology. For designers, developers, and online marketers, Adobe believes that integrated development software will streamline
the creation and delivery of relevant content and applications.
The size of the market for such software is difficult to gauge. Not all of Adobe’s customers will require the additional
functionality that would be offered. Google Analytic Services, offered free of charge, has put significant pressure on Omniture’s
earnings. However, firms with large advertising budgets are less likely to rely on the viability of free analytic services.
Adobe also is attempting to diversify into less cyclical businesses. However, both Adobe and Omniture are impacted by
fluctuations in the volume of retail spending. Less retail spending implies fewer new websites and upgrades to existing websites,
which directly impacts Adobe’s design software business, and less advertising and retail activity on electronic commerce sites
negatively impacts Omniture’s revenues. Omniture receives fees based on the volume of activity on a customer’s site.
Integrating the Omniture measurement capabilities into Adobe software design products and cross-selling Omniture products
into the Adobe customer base require excellent coordination and cooperation between Adobe and Omniture managers and
employees. Achieving such cooperation often is a major undertaking, especially when the Omniture shareholders, many of whom
were employees, were paid in cash. The use of Adobe stock would have given them additional impetus to achieve these synergies
in order to boost the value of their shares.
Achieving cooperation may be slowed by the lack of organizational integration of Omniture into Adobe. Omniture will become
a new business unit within Adobe, with Omniture’s CEO, Josh James, joining Adobe as a senior vice president of the new business
unit. He will report to Narayen. This arrangement may have been made to preserve Omniture’s corporate culture.
Adobe is betting that the potential increase in revenues will grow profits of the combined firms despite Omniture’s lower
margins. Whether the acquisition will contribute to overall profit growth depends on which products contribute to future revenue
growth. The lower margins associated with Omniture’s products would slow overall profit growth if the future growth in revenue
came largely from Omniture’s Web analytic products.
Discussion Questions:
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2. What factors external to Adobe and Omniture seem to be driving the transaction? Be specific.
3. What factors internal to Adobe and Omniture seem to be driving the transaction? Be specific.
4. How would the combined firms be able to better satisfy these needs than the competition?
5. Do you believe the transaction can be justified based on your understanding of the strengths and weaknesses of the two
firms and perceived opportunities and threats to the two firms in the marketplace? Be specific.
CenturyTel Buys Qwest Communications to Cut Costs and Buy Time as the Landline Market Shrinks
Key Points:
• Market segmentation can be used to identify “underserved” segments which may sustain firms whose competitive
position in larger markets is weak.
• A firm’s competitive relative is best viewed in comparison to those firms competing in its served market rather than with
industry leading firms.
____________________________________________________________________________________________
In what could best be described as a defensive acquisition, CenturyTel, the fifth largest local phone company in the United States,
acquired Qwest Communications, the country’s third largest, in mid-2010 in a stock swap valued at $10.6 billion. While both firms
are dwarfed in size by AT&T and Verizon, these second-tier telecommunications firms will control a larger share of the shrinking
landline market.
The combined firms will have about 17 million phone lines serving customers in 37 states. This compares to AT&T and
Verizon with about 46 and 32 million landline customers, respectively. The deal would enable the firms to reduce expenses in the
wake of the annual 10 percent decline in landline usage as people switch from landlines to wireless and cable connections.
Expected annual cost savings total $575 million; additional revenue could come from upgrading Qwest’s landlines to handle DSL
Internet.
In 2010, about one-fourth of U.S. homes used only cell phones, and cable behemoth Comcast, with 7.6 million residential and
business phone subscribers, ranked as the nation’s fourth largest landline provider. CenturyTel has no intention of moving into the
wireless and cable markets, which are maturing rapidly and are highly competitive.
While neither Qwest nor CenturyTel owns wireless networks and therefore cannot offset the decline in landline customers as
AT&T and Verizon are attempting to do, the combined firms are expected to thrive in rural areas where they have extensive
coverage. In such geographic areas, broadband cable Internet access and fiber-optics data transmission line coverage are is limited.
The lack of fast cable and fiber-optics transmission makes voice over Internet protocol (VOIP)—Internet phone service offered by
cable companies and independent firms such as Vonage—unavailable. Consequently, customers are forced to use landlines if they
want a home phone. Furthermore, customers in these areas must use landlines to gain access to the Internet through dial-up access
or through a digital subscriber line (DSL).
Discussion Questions
1. How would you describe CenturyTel’s business strategy? Be specific.
2. Describe the key factors both external and internal to the firm that you believe are driving this strategy.
3. Why might the acquisition of Qwest be described as defensive?
Oracle Continues Its Efforts to Consolidate the Software Industry
Oracle CEO Larry Ellison continued his effort to implement his software industry strategy when he announced the acquisition of
Siebel Systems Inc. for $5.85 billion in stock and cash on September 13, 2005. The global software industry includes hundreds of
firms. During the first nine months of 2005, Oracle had closed seven acquisitions, including its recently completed $10.6 billion
hostile takeover of PeopleSoft. In each case, Oracle realized substantial cost savings by terminating duplicate employees and
related overhead expenses. The Siebel acquisition accelerates the drive by Oracle to overtake SAP as the world's largest maker of
business applications software, which automates a wide range of administrative tasks. The consolidation strategy seeks to add the
existing business of a competitor, while broadening the customer base for Oracle's existing product offering.
Siebel, founded by Ellison's one-time protégé turned bitter rival, Tom Siebel, gained prominence in Silicon Valley in the late
1990s as a leader in customer relationship management (CRM) software. CRM software helps firms track sales, customer service,
and marketing functions. Siebel's dominance of this market has since eroded amidst complaints that the software was complicated
and expensive to install. Moreover, Siebel ignored customer requests to deliver the software via the Internet. Also, aggressive
rivals, like SAP and online upstart Salesforce.com have cut into Siebel's business in recent years with simpler offerings. Siebel's
annual revenue had plunged from about $2.1 billion in 2001 to $1.3 billion in 2004.
In the past, Mr. Ellison attempted to hasten Siebel's demise, declaring in 2003 that Siebel would vanish and putting pressure on
the smaller company by revealing he had held takeover talks with the firm's CEO, Thomas Siebel. Ellison's public announcement
of these talks heightened the personal enmity between the two CEOs, making Siebel an unwilling seller.
Oracle's intensifying focus on business applications software largely reflects the slowing growth of its database product line,
which accounts for more than three fourths of the company's sales.
Siebel's technology and deep customer relationships give Oracle a competitive software bundle that includes a database,
middleware (i.e., software that helps a variety of applications work together as if they were a single system), and high-quality
customer relationship management software. The acquisition also deprives Oracle competitors, such as IBM, of customers for their
services business.
Customers, who once bought the so-called best-of-breed products, now seek a single supplier to provide programs that work
well together. Oracle pledged to deliver an integrated suite of applications by 2007. What brought Oracle and Siebel together in the
past was a shift in market dynamics. The customer and the partner community is communicating quite clearly that they are looking
for an integrated set of products.
Germany's SAP, Oracle's major competitor in the business applications software market, played down the impact of the merger,
saying they had no reason to react and described any deals SAP is likely to make as "targeted, fill-in acquisitions." For IBM, the
Siebel deal raised concerns about the computer giant's partners falling under the control of a competitor. IBM and Oracle compete
fiercely in the database software market. Siebel has worked closely with IBM, as did PeopleSoft and J.D. Edwards, which had
been purchased by PeopleSoft shortly before its acquisition by Oracle. Retek, another major partner of IBM, had also been recently
acquired by Oracle. IBM had declared its strategy to be a key partner to thousands of software vendors and that it would continue
to provide customers with IBM hardware, middleware, and other applications.
Discussion Questions:
1. How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some
combination of all three)? Explain your answer.
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2. What other benefits for Oracle, and for the remaining competitors such as SAP, do you see from further industry
consolidation? Be specific.
3. Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the development
of Oracle’s business strategy. Be specific.
4. In what way do you think the Oracle strategy was targeting key competitors? Be specific.
HP Redirects Its Mobile Device Business Strategy with the Acquisition of Palm
With global PC market growth slowing, Hewlett-Packard (HP), number one in PC sales worldwide, sought to redirect its business
strategy for mobile devices. Historically, the firm has relied on such partners as Microsoft to provide the operating systems for its
mobile phones and tablet computer products. However, the strategy seems to have contributed to the firm’s declining smartphone
sales by limiting its ability to differentiate its products and by delaying new mobile product introductions.
HP has been selling a smartphone version of its iPaq handheld device since 2007, although few consumers even knew HP made
such devices, since its products were aimed at business people. Sales of iPaq products fell to $172 million in 2009 from $531
million in 2007 and to less than $100 million (excluding sales of Palm products) in 2010.
With smartphone sales expected to exceed laptop sales in 2012, according to industry consultant IDC, HP felt compelled to
move aggressively into the market for handheld mobile devices. The major challenge facing HP is to overcome the substantial lead
that Apple, Google, and Research-In-Motion (RIM) have in the smartphone market.
To implement the new business strategy, HP acquired Palm in mid-2010 in a deal valued at $1.4 billion (including warrants and
convertible preferred stock). HP acquired Palm at a time when its smartphone sales were sliding, with Palm’s share of the U.S.
market dropping below 5 percent in 2010. Palm was slow to recognize the importance of applications (apps) designed specifically
for smartphones in driving sales. Palm has several hundred apps, while the number for Apple’s iPhone and Google’s Android are
in the tens of thousands.
HP is hoping to leverage Palm’s smartphone operating system (webOS) to become a leading competitor in the rapidly growing
smartphone market, a market that had been largely pioneered by Palm. HP hopes that webOS will provides an ideal common
“platform” to link the firm’s mobile devices and create a unique experience for the user of multiple HP mobile devices. The intent
