BP&S chapter 7 Questions With Complete Solutions
Reasons for Acquisition Learning and Developing New
Capabilities
•Firms sometimes complete acquisitions to gain access to
capabilities they lack.
•Firms are better able to learn these acquired capabilities if they
share some similar properties with the firm's current capabilities.
•Thus, firms should seek to acquire companies with different but
related and complementary capabilities as a path to building
their own knowledge base.
Success rate of M&As
•Research suggests that perhaps 20 percent of mergers and
acquisitions are successful, approximately 60 percent produce
disappointing results, and the remaining 20 percent are clear
failures; evidence suggests that technology acquisitions have
even higher failure rates.
Problems in Achieving Acquisition Success Integration
difficulties
•The processes tend to generate uncertainty and often resistance
because of cultural clashes and organizational politics.
•How people are treated during the integration process relative
to perceptions of fairness is an important issue to consider when
trying to integrate the acquiring and acquired firms.
•A) meld two or more unique corporate cultures B) link different
financial and information control systems
,C) build effective working relationships (particularly when
management styles differ)
D) determine the leadership structure and those who will fill it
for the integrated firm.
Problems in Achieving Acquisition Success Inadequate
evaluation of target
•Due diligence is a process through which a potential acquirer
evaluates a target firm for acquisition.
•In an effective due-diligence process, hundreds of items are
examined in areas as diverse as the financing for the intended
transaction, differences in cultures between the acquiring and
target firm, tax consequences of the transaction, and actions that
would be necessary to successfully meld the two workforces.
Problems in Achieving Acquisition Success Inadequate
evaluation of target
•Due diligence is commonly performed by investment banks
such as Deutsche Bank, Goldman Sachs, and Morgan Stanley, as
well as accountants, lawyers, and management consultants
specializing in that activity, although firms actively pursuing
acquisitions may form their own internal due-diligence team.
•Even in instances when a company does its own due diligence,
companies almost always work with intermediaries such as large
investment banks to facilitate their due-diligence efforts.
•Research suggests that acquisition performance increases with
the number of due-diligence-related transactions facilitated
, by an investment bank, but decreases when the relationship
with a particular investment bank becomes exclusive.
Problems in Achieving Acquisition Success Inadequate
evaluation of target
•Commonly, firms are willing to pay a premium to acquire a
company they believe will increase their ability to earn above-
average returns.
•Determining the precise premium that is appropriate to pay is
challenging.
•While the acquirer can estimate the value of anticipated
synergies, it is just that—an estimate.
•Only after working to integrate the firms and then engaging in
competitive actions in the marketplace will the real value of
synergies be known.
Problems in Achieving Acquisition Success Large or
extraordinary debt
•To finance a number of acquisitions completed during the
1980s and 1990s, some companies significantly increased their
debt levels.
•Although firms today are more prudent about the amount of
debt they'll accept to complete an acquisition, those evaluating
the possibility of an acquisition for their company need to be
aware of the problem that taking on too much debt can create.
Problems in Achieving Acquisition Success Large or
extraordinary debt
Reasons for Acquisition Learning and Developing New
Capabilities
•Firms sometimes complete acquisitions to gain access to
capabilities they lack.
•Firms are better able to learn these acquired capabilities if they
share some similar properties with the firm's current capabilities.
•Thus, firms should seek to acquire companies with different but
related and complementary capabilities as a path to building
their own knowledge base.
Success rate of M&As
•Research suggests that perhaps 20 percent of mergers and
acquisitions are successful, approximately 60 percent produce
disappointing results, and the remaining 20 percent are clear
failures; evidence suggests that technology acquisitions have
even higher failure rates.
Problems in Achieving Acquisition Success Integration
difficulties
•The processes tend to generate uncertainty and often resistance
because of cultural clashes and organizational politics.
•How people are treated during the integration process relative
to perceptions of fairness is an important issue to consider when
trying to integrate the acquiring and acquired firms.
•A) meld two or more unique corporate cultures B) link different
financial and information control systems
,C) build effective working relationships (particularly when
management styles differ)
D) determine the leadership structure and those who will fill it
for the integrated firm.
Problems in Achieving Acquisition Success Inadequate
evaluation of target
•Due diligence is a process through which a potential acquirer
evaluates a target firm for acquisition.
•In an effective due-diligence process, hundreds of items are
examined in areas as diverse as the financing for the intended
transaction, differences in cultures between the acquiring and
target firm, tax consequences of the transaction, and actions that
would be necessary to successfully meld the two workforces.
Problems in Achieving Acquisition Success Inadequate
evaluation of target
•Due diligence is commonly performed by investment banks
such as Deutsche Bank, Goldman Sachs, and Morgan Stanley, as
well as accountants, lawyers, and management consultants
specializing in that activity, although firms actively pursuing
acquisitions may form their own internal due-diligence team.
•Even in instances when a company does its own due diligence,
companies almost always work with intermediaries such as large
investment banks to facilitate their due-diligence efforts.
•Research suggests that acquisition performance increases with
the number of due-diligence-related transactions facilitated
, by an investment bank, but decreases when the relationship
with a particular investment bank becomes exclusive.
Problems in Achieving Acquisition Success Inadequate
evaluation of target
•Commonly, firms are willing to pay a premium to acquire a
company they believe will increase their ability to earn above-
average returns.
•Determining the precise premium that is appropriate to pay is
challenging.
•While the acquirer can estimate the value of anticipated
synergies, it is just that—an estimate.
•Only after working to integrate the firms and then engaging in
competitive actions in the marketplace will the real value of
synergies be known.
Problems in Achieving Acquisition Success Large or
extraordinary debt
•To finance a number of acquisitions completed during the
1980s and 1990s, some companies significantly increased their
debt levels.
•Although firms today are more prudent about the amount of
debt they'll accept to complete an acquisition, those evaluating
the possibility of an acquisition for their company need to be
aware of the problem that taking on too much debt can create.
Problems in Achieving Acquisition Success Large or
extraordinary debt
