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Chapter 7 - Chapter 7 Acquisition and Restructuring...

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Chapter 7 Acquisition and Restructuring Strategies Mergers, Acquisitions, and Takeovers: What Are the Differences? A merger is a transaction where two firms agree to integrate their operations on a relatively co-equal basis because they have resources and capabilities that together may create a stronger competitive advantage. An acquisition is a transaction where one firm buys a controlling or 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. While most mergers represent friendly agreements between the two firms, acquisitions sometimes can be classified as unfriendly takeovers. A takeover is an acquisition—and normally not a merger —where the target firm did not solicit the bid of the acquiring firm and often resists the acquisition (a hostile takeover). REASONS FOR ACQUISITIONS Increased Market Power As discussed in Chapter 6, a primary reason for acquisitions is that they enable firms to gain greater market power. Acquisitions to meet a market power objective generally involve buying a supplier, a competitor, a distributor, or a business in a highly related industry. While a number of firms may feel that they have an internal core competence, they may be unable to exploit their resources and capabilities because of a lack of size. Types of Acquisitions: Horizontal Acquisitions When a competitor in the same industry is acquired, a firm has engaged in a horizontal acquisition . Horizontal acquisitions increase a firm’s market power by exploiting cost-based and revenue-based synergies. Typically, horizontal acquisitions of firms with similar characteristics result in higher performance than when firms with dissimilar characteristics combine their operations. Examples of important similar characteristics include strategy, managerial styles, and resource allocation patterns. Vertical Acquisitions A vertical acquisition has occurred when a firm acquires a supplier or distributor, which is positioned either backward or forward in the firm’s cost/activity/value chain. Related Acquisitions When a target firm in a highly related industry is acquired, the firm has made a related acquisition . It is important to note that acquisitions intended to increase market power are subject to regulatory review, as well as to analysis by financial markets. Reasons for Acquisitions: 1. Overcoming Entry Barriers As discussed in Chapter 2, barriers to entry represent factors associated with the market and/or firms operating in the market that make it more expensive and difficult for new firms to enter the market. It may be difficult to enter a market dominated by large, established competitors. As noted in Chapter 2, such markets may require: investments in large-scale manufacturing facilities that enable the firm to achieve economies of scale so that it can offer competitive prices
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significant expenditures in advertising and promotion to overcome brand loyalty toward existing products
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