Evidence suggests that at least for acquiring firms, acquisition strategies may not result in desirable outcomes. Studies have found that shareholders of acquired firms often earn above-average returns from an acquisition, while shareholders of acquiring firms are less likely to do so. In approximately two-thirds of all acquisitions, the acquiring firm’s stock price falls immediately after the intended transaction is announced, indicating investors’ skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium. BUSINESS POLICY LEARNING NOTES
Chapter 7: Acquisition and Restructuring Strategies 7-2 Mergers, Acquisitions, and Takeovers: What Are the Differences? Before starting the discussion of the reasons for acquisitions, problems related to acquisitions, and long-term performance, three terms should be defined because they will be used throughout this chapter and Chapter 10. 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). 2 Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness. 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. 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. Research suggests that 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. Horizontal acquisitions are often most effective when the acquiring firm integrates the acquired firm’s assets with its assets, but only after evaluating and divesting excess capacity and assets that do not complement the newly combined firm’s core competencies.
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