Chapter 7: Merger and Acquisition Strategies
• This forces division or business unit managers to become short-term performance oriented.
Teaching Note
The experiences of many firms indicate that overdiversification may lead to ineffective
management, primarily because of the increased size and complexity of the firm. As a
result of ineffective management, the firm and some of its businesses may be unable to
maintain their strategic competitiveness. This results in poor performance.
As noted earlier in this chapter, acquisitions can have a number of negative effects. They
7-3f 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:
Chapter 7: Merger and Acquisition Strategies
Due diligence and negotiating with the target often include numerous meetings between
7-3g 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
“diseconomies of scale.” This implies that problems related to excess growth may be
similar to those that accompany overdiversification.
7-4 EFFECTIVE ACQUISITIONS
Research has identified attributes that appear to be associated consistently with successful
acquisitions such as the following:
• 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
Chapter 7: Merger and Acquisition Strategies
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
Note: The table also lists seven “results” of successful acquisitions.
Teaching Note
One way to teach the finer points of the M&A process is to see its parallels with
marriage and courtship. Though the source is rather dated now, Jemison & Sitkin
(1986, Academy of Management Review) offered an interesting analysis based on this
framework. Their points are too extensive to comment on here, but reference to their
writings is helpful.
Chapter 7: Merger and Acquisition Strategies
7-5 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:
7-5a Downsizing
Once thought to be an indicator of organizational decline, downsizing is now recognized
as a legitimate restructuring strategy and has been one of the most common restructuring
strategies adopted by U.S. firms.
Chapter 7: Merger and Acquisition Strategies
7-5b 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. Students are likely to be familiar
with the following two examples:
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.
Chapter 7: Merger and Acquisition Strategies
7-5c Leveraged Buyouts
A leveraged buyout (LBO) refers to a restructuring action whereby the management of the
firm and/or an external party buys all of the assets of the business, largely financed with
debt, and thus takes the firm private.
Often, LBOs are used as a restructuring strategy to correct for managerial mistakes or
because managers are making decisions that primarily serve their personal interests rather
than those of shareholders.
There are three types of leveraged buyouts: management buyouts (MBO), employee
buyouts (EBO), and whole-firm buyouts where another firm takes the firm private (LBO).
Research has shown that management buyouts can also lead to greater entrepreneurial
activity and growth.
6
Explain the short- and long-term outcomes of the different
types of restructuring strategies.
7-5d Restructuring Outcomes
Downsizing often does not lead to higher firm performance; in fact, research has shown
that downsizing contributed to lower returns for both U.S. and Japanese firms. The stock
Chapter 7: Merger and Acquisition Strategies
Teaching Note
In free market-based societies, downsizing has generated a host of entrepreneurial
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.
Downscoping generally leads to more positive outcomes in both the short and the long
Although whole-firm LBOs have been hailed as a significant innovation in the financial
restructuring of firms, there can be negative trade-offs.
• The resulting large debt increases the financial risk of the firm.
Figure Note
Restructuring alternatives—downscoping, downsizing, and leveraged buyouts—and
short- and long-term outcomes are summarized in Figure 7.2.
FIGURE 7.2
Restructuring and Outcomes
As illustrated in Figure 7.2:
• Downsizing reduces labor costs, but the long-term results are a loss of human capital and
lower performance.
Chapter 7: Merger and Acquisition Strategies
ANSWERS TO REVIEW QUESTIONS
1. Why are merger and acquisition strategies popular in many firms competing in the
global economy?
Acquisition strategies are increasingly popular around the world. Because of
globalization, deregulation of multiple industries in many different economies, favorable
2. What reasons account for firms’ decisions to use acquisition strategies as a means to
achieving strategic competitiveness?
Firms often choose to follow acquisition strategies (1) to increase market power (by
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 and
Chapter 7: Merger and Acquisition Strategies
4. What are the attributes associated with a successful acquisition strategy?
As identified in Table 7.1, the following attributes tend to lead to successful acquisitions:
• Acquired firm has assets or resources that are complementary to the acquiring firm’s
Chapter 7: Merger and Acquisition Strategies
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.
means of eliminating businesses that are unrelated to a firm’s core businesses.
Commonly, downscoping is referred to as a set of actions that results in a firm
strategically refocusing on its core businesses. A firm that downscopes often also
downsizes simultaneously. However, it does not eliminate key employees from its
6. What are the short- and long-term outcomes associated with the different
restructuring strategies?
The short-term outcome from downsizing is a reduction in labor costs, but this yields two
negative long-term outcomes—loss of human capital and lower performance.
Chapter 7: Merger and Acquisition Strategies
MINI CASE
Cementing a Merger of Equals between Lafarge and Holcim Has Been Difficult
Note: To prepare students for class discussion and to introduce them to the
Lafarge is a successful French-based global company specializing in cement, construction
aggregates, and concrete. Holcim is a materials company in Switzerland. They
orchestrated a merger of equals in 2014, believing that they could achieve $1.5 billion in
Teaching Note
Discuss with students the potential hurdles to successful mergers of equals. Ask which
hurdle is most likely the cause of LafargeHolcim’s poor performance. Brainstorm with
students how the two firms could have prepared themselves for the merger differently
that might have led to a better outcome.
Answers to Case Discussion Questions
1. Of the “Reasons for Acquisitions” discussed in the chapter, which reasons are the primary
drivers of Lafarge-Holcim’s merger strategy?
Leaders of both Lafarge and Holcim believed that the proposed merger would give the
2. Given that there have been performance difficulties of this “merger of equals,” which of
the “Problems in Achieving Acquisition Success” do you believe have most likely
affected this deal?
Initially, a lack of due diligence and an inadequate valuation of one of the two firms
(Holcim) caused a breakdown in the negotiations, but this issue was eventually worked
3. The new CEO, Jan Jenisch, has undertaken a restructuring strategy. Why do you think the
market reacted negatively to this plan?
Jenisch’s decision to write off $4 billion in assets revealed to investors just how badly the
4. What would you suggest the firm do to improve its restructuring plan and ultimately its
poor performance?
In hindsight, the merged firm’s poor performance might have been avoided if the two
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?
Chapter 7: Merger and Acquisition Strategies
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?
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
relationship provide to upper-level executives? What can be done to influence the
relationship so that it serves shareholders’ interests?
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
Chapter 7: Merger and Acquisition Strategies
33
INSTRUCTOR’S NOTES FOR MINDTAP
Cengage offers additional online activities, assessments and resources inside MindTap,
our online learning platform. Here is a comprehensive listing of the activities available
within each chapter of MindTap for Hitt, Ireland Hoskisson’s Strategic Management:
Competitiveness and Globalization, 13th edition:
Course Level Resource: Cornerstone to Capstone Diagnostic- features short quizzes in
Chapter Level Resources:
• What Would You Do Video
• MindTap Reader (eBook)
• Assignments:
o Multiple Choice Quiz
o Video Quiz
Course Level Case Resources:
• Text Cases (Readings)
• Group Case Activities (Group Case Assignments)
• Supplemental Cases (Readings)
ADDITIONAL INFORMATION FOR SELECT MINDTAP RESOURCES:
WHAT WOULD YOU DO? COMCAST
This exercise introduces students to strategic decisions as they are made in the real world.
Students should come to class prepared to discuss this exercise, and why they chose the
Chapter 7: Merger and Acquisition Strategies
answer they did. All answers are graded as correct – the point of the exercise is to engage
your student’s interest.
VIDEO QUIZ: COMCAST
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Comcast
RT: 1:45
Topic Key: Mergers and Acquisitions, Competition, Global Economy
Following months of strong federal government opposition, Comcast pulled the plug on its
Suggested Discussion Questions and Answers
• Why did the government and consumers have regulatory opposition to the proposed
merger and acquisition to the proposed merger between Comcast and Time Warner?
• Why would Comcast’s partnership with Time Warner be considered a merger instead
of an acquisition?
Chapter 7: Merger and Acquisition Strategies
• Although the merger between Comcast and Time Warner didn’t go through, why might
Comcast continue exploring merger options?
Chapter 7: Merger and Acquisition Strategies
GUIDED CASE: LAFARGE AND HOLCIM
This auto-graded activity asks students to read the short end-of-chapter case on
LafargeHolcim, and answer questions in the areas of Analysis, Strategy, and
Implementation & Performance.
LafargeHolcim is the result of the 2014 merger between Lafarge, a successful French-
based global company specializing in cement, construction aggregates, and concrete, and
Holcim, a materials company in Switzerland. The two firms’ leadership believed they
In answering the Guided Case Questions, students will review these concepts:
• Mergers and acquisitions
• Downscoping
Chapter 7: Merger and Acquisition Strategies
GROUP PROJECT: HIGHS AND LOWS OF MERGERS AND
ACQUISITIONS
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.
Students will be asked to:
• Identify a merger or an acquisition that was completed in the last few years.
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 the instructor in
advance to avoid duplicates.