5 Reasons for Acquisitions

1. 5 reasons for Acquisitions

1. Increased market power

1) Sources of market power include

Size of the firm, resources and capabilities to compete in the market and share of the market

2) Horizontal Acquisitions

Acquirer and acquired companies compete in the same industry

i.e., McDonald’s acquisition of Boston Market

3) Vertical Acquisitions

Firm acquires a supplier or distributor of one or more of its goods or services; leads to additional controls over parts of the value chain

i.e., Walt Disney Company’s acquisition of Fox Family Worldwide.

4) Related Acquisitions

Firm acquires another company in a highly related industry

2. Overcoming entry barriers

Cross-border acquisition: headquarters in different country

3. Cost of new product development and increased speed to market

4. Lower risk compared to developing new products

5. Increased diversification

6. Reshaping firm’s competitive advantage

7. Learning and developing new capabilities

2. Problem with acquisition

1) Integration difficulties

2) Inadequate evaluation of target

3) Large or extraordinary debt

-Junk bonds: financing option whereby risky acquisitions are financed with money (debt) that provides a large potential return to lenders (bondholders)

4) Inability to achieve synergy

-Synergy: Value created by units exceeds value of units working independently.

-Achieved when the two firms' assets are complementary in unique ways

-Yields a difficult-to-understand or imitate competitive advantage.

-Private synergy: Occurs when the combination and integration of acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating the assets with any other company.

3. Generational of international strategy

Four primary reasons

1. Increased market size

Domestic market may lack the size to support efficient scale manufacturing facilities

2. Return on Investment (ROI)

Large investment projects may require global...