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Managers Overly Focused on Acquisitions
If firms follow active acquisition strategies, the acquisition process generally requires
significant amounts of managerial time and energy.
For the acquiring firm this takes the form of:
energy) constraints.
Too Large
Firms can reach economies of scale by growing. But after a certain size is achieved, size can
become a disadvantage as firms reach a point where they suffer from what is called
4
Name and describe the attributes of effective acquisitions.
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EFFECTIVE ACQUISITIONS
Research has identified attributes that appear to be associated consistently with successful
acquisitions:
• When a firm’s assets are complementary (highly related) with the acquired firm’s
assets and create synergy and, in turn, unique capabilities, core competencies, and
strategic competitiveness
Table Note:
The attributes or characteristics of successful acquisitions and their results are
summarized in Table 7.1.
TABLE 7.1
Attributes of Successful Acquisitions
Successful acquisitions generally are characterized by the following attributes and results:
• Target and acquirer having complementary assets and/or resources that result in a high
probability of achieving synergy and gaining competitive advantage
• Making friendly acquisitions to facilitate integration speed and effectiveness and reducing
any acquisition premium
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Note:
The table also lists seven “results” of successful acquisitions.
Teaching Note:
5
Define the restructuring strategy and distinguish among its
common forms.
RESTRUCTURING
Restructuring refers to changes in the composition of a firm’s set of businesses and/or
financial structure.
From the 1970s into the 2000s, divesting businesses from company portfolios and
downsizing accounted for a large percentage of firms’ restructuring strategies. Restructuring
is a global phenomenon.
During this period, restructuring can take several forms:
Downsizing
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Downsizing represents a reduction in the number of employees, and sometimes in the
number of operating units, but may or may not represent a change in the composition of the
businesses in the firm’s portfolio.
Downscoping
Compared to downsizing, downscoping has a more positive effect on firm performance.
Downscoping refers to the divestiture, spin-off, or other means of eliminating businesses that
are unrelated to the firm’s core business. In other words, downscoping refocuses the firm on
its core businesses.
Note:
Indicate to students that the requirements and characteristics of strategic leadership by a
firm’s top management team are discussed more fully in Chapter 12.
Teaching Note: There are many examples of downscoping strategies. Two of these
with which students are likely to be familiar are the following:
• General Motors’ successful spin-off of EDS
• PepsiCo’s spin-off of its fast-food businesses (Taco Bell, Pizza Hut, KFC)
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US firms use downscoping as a restructuring strategy more frequently than do European
companies. However, there has also been an increase in downscoping by Asian and Latin
American firms as they adopt Western business practices.
Teaching Note:
Research has shown that refocusing is not usually successful unless the firm has
adequate resources to have the flexibility to formulate the necessary strategies to
compete effectively.
Leveraged Buyouts
In other words, a firm is purchased by a few (new) owners using a significant amount of debt
(in a highly leveraged transaction) and the firm’s stock is no longer traded publicly.
In general, the new owners restructure the private firm by selling a significant number of
assets (businesses) both to downscope the firm and to reduce the level of debt (and
significant debt costs) used to finance the acquisition.
6
Explain the short- and long-term outcomes of the different
types of restructuring strategies.
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Restructuring Outcomes
Teaching Note:
In free-market based societies, downsizing has generated a host of entrepreneurial
opportunities for individuals to operate their own businesses. In fact, as discussed in
Chapter 13, start-up ventures in the United States are growing at three times the rate
of the national economy.
Downsizing tends to result in a loss of human capital in the long term. Losing employees
with many years of experience with the firm represents a major loss of knowledge. As noted
in Chapter 3, knowledge is vital to competitive success in the global economy. Thus, in
general, research evidence and corporate experience suggest that downsizing may be of more
tactical (or short-term) value than strategic (or long-term) value.
Figure Note:
Restructuring alternatives—downscoping, downsizing, and leveraged buyouts—and
short- and long-term outcomes are summarized in Figure 7.3.
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FIGURE 7.3
Restructuring and Outcomes
1. Why are merger and acquisition strategies popular in many firms competing in
the global economy?
2. What reasons account for firms’ decisions to use acquisition strategies as a
means to achieving strategic competitiveness?
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3. What are the seven primary problems that affect a firm’s efforts to successfully
use an acquisition strategy?
Firms following acquisition strategies face seven major problems. (1) They may face
difficulty in successfully integrating the two firms. This is especially true when
integration involves melding disparate corporate cultures, linking disparate financial
4. What are the attributes associated with a successful acquisition strategy?
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5. What is the restructuring strategy, and what are its common forms?
Defined formally, restructuring is a strategy through which a firm changes its set of
businesses and/or financial structure. There are three common forms of restructuring
strategies.
6. What are the short- and long-term outcomes associated with the different
restructuring strategies?
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MINI-CASE
Strategic Acquisitions and Accelerated Integration of
Those Acquisitions are a Vital Capability of Cisco Systems
Cisco has perfected the art of acquisition strategy. The technology firm seeks to provide
hardware for connectivity, from the internet to mobile networks to entertainment
services. The next stage of Cisco’s evolution appears to be “the Internet of everything”
Teaching Note:
In fast-cycle industries, like those built around information technology, companies
often lack the time to develop businesses or capabilities that they need to complement
their existing businesses or capitalize on changing external conditions in a timely
manner. Acquisitions can help firms achieve their objectives much faster than other
options. To drive this point home, ask students why Cisco doesn’t just develop
internally the businesses/capabilities that it obtains through acquisitions. Then, ask
students why they think the target firms agreed to be acquired. Students should realize
that truly successful acquisitions provide benefits to both parties.
1. Of the “Reasons for Acquisitions” section in the chapter, which reasons are
the primary drivers of Cisco’s acquisition strategy?
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2. Of the acquisitions Cisco has completed, which ones are horizontal
acquisitions and which ones are vertical acquisitions? Which of these
acquisitions do you believe have the strongest likelihood of being successful
and why?
3. Explain John Chambers’ views about acquisitions. How have his views
affected the nature of Cisco’s acquisition strategy?
4. Describe the core plan Cisco has in place to guide the integration of an
acquired firm into its operations. What are the strengths of this plan, and
what are its potential weaknesses?
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integrated and others only partially integrated or operating in a more stand-alone
fashion.
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. Evidence indicates that the shareholders of many acquiring firms gain little or nothing in
value from the acquisitions. Why, then, do so many firms continue to use an acquisition
strategy?
2. Of the problems that affect the success of an acquisition, ask students which one they
believe is the most critical in the global economy. Why? What should firms do to make
certain that they do not experience such a problem when they use an acquisition strategy?
3. Have students use the Internet to read about acquisitions that are currently underway and
to choose one of these acquisitions. Based on the firms’ characteristics and experiences
and the reasons cited to support the acquisition, do they feel it will result in increased
strategic competitiveness for the acquiring firm? Why or why not?
4. Have students research recent merger and acquisition activity that is taking place
throughout the global economy. Are most of the transactions they found between
domestic companies or are they cross-border acquisitions? What accounts for the nature
of what they found?
5. What is synergy, and how do firms create it through mergers and acquisitions? In the
students’ opinion, how often do acquisitions create private synergy? What evidence can
they cite to support their position?
6. What can a top management team do to ensure that its firm does not become diversified
to the point of earning negative returns from its diversification strategy?
7. Some companies enter new markets through internally developed products, whereas
others do so by acquiring other firms. What are the advantages and disadvantages of each
approach?
8. How do the Internet’s capabilities influence a firm’s ability to study acquisition
candidates?
Ethics Questions
1. Some evidence suggests that there is a direct and positive relationship between a firm’s
size and its top–level managers’ compensation. If this is so, what inducement does that
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relationship provide to upper-level executives? What can be done to influence the
relationship so that it serves shareholders’ interests?
2. When a firm is in the process of restructuring itself by divesting some assets and
acquiring others, managers may have incentives to restructure in ways that increase their
power base and compensation package. Does this possibility explain at least part of the
reason for the less-than-encouraging outcomes of acquisitions for shareholders of the
acquiring firm?
3. When shareholders increase their wealth through downsizing, does this come, to some
degree, at the expense of loyal employees—those who have worked diligently to serve
the firm in terms of accomplishing its vision and mission? If so, what actions would
students take to be fair to both shareholders and employees if they were charged with
downsizing or “smartsizing” a firm’s employment ranks? What ethical base would they
employ to make decisions regarding downsizing?
4. Are takeovers ethical? If not, why not?
5. Is it ethical for managers to acquire other companies just because industry competitors
are doing so?
Cengage offers additional online activities, assessments and resources inside MindTap,
our online learning platform. The following activities can be assigned within MindTap
for students to complete.
Directed Case exercises are a series of multiple choice questions designed to focus on the
concepts from the chapter utilizing the case study analysis steps, such as gaining
familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the
diagnosis and doing the action planning.
Equal Exchange
Harley-Davidson, Inc. is an American motorcycle manufacturer, founded in Milwaukee,
Wisconsin in 1903. Harley Davidson claims its brand is successful because its customers
desire more than just motorcycles. Its customers desire the motorcycles and products
because they symbolize the American dream of freedom. This is the company’s
differentiation.
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Students will review these concepts:
• Mergers and Acquisition Strategies
• Global Competition Challenges
• Restructuring Strategies
• Strategic Competitiveness
INSTRUCTOR’S NOTES FOR EXPERIENTIAL
EXERCISES
HIGHS AND LOWS OF MERGERS AND ACQUSITIONS
The text argues that mergers and acquisitions are a popular strategy for businesses both in
the United States and across borders. However, returns for acquiring firms do not always
live up to expectations. In this group exercise, students will examine the concept of
growth by acquisition by analyzing the results of an actual acquisition.
In this group project, students will have the opportunity to practice valuable strategic
management skills, including: research, public speaking, teamwork and critical thinking.
Note: Each group must get their M&A company choice approved by your instructor in
advance to avoid duplicates.
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INSTRUCTOR’S NOTES FOR VIDEO
EXERCISES
Title: Comcast Stops Plans for Merger
RT: 1:45
Topic Key: Mergers and Acquisitions, Competition, Global Economy
Following months of strong federal government opposition, Comcast pulled the plug on
its $45 billion planned merger with Time Warner Cable. The merger would have created
a company that controlled 30 percent of the U.S. paid TV market and 57 percent of the
broadband internet market. Major regulator concerns included the potential to squeeze
out competitors and raise rates on consumers.
Suggested Discussion Questions and Answers
1. Why did the government and consumers have regulatory opposition to the
proposed merger and acquisition to the proposed merger between Comcast
and Time Warner?
2. Why would Comcast’s partnership with Time Warner be considered a
merger instead of an acquisition?
3. Although the merger between Comcast and Time Warner didn’t go through,
why might Comcast continue exploring merger options?
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