COMM 401/AA

STRATEGY & COMPETITION

WINTER 2023

CLASS 6
ACQUISITION/RESTRUCTURING
STRATEGY
CASE: FACEBOOK
 The Popularity of Merger
and Acquisition Strategies
• Merger and acquisition (M&A) strategies have
been popular among U.S. firms for many years.
• M&A strategies:
• Played a central role in the restructuring of U.S.
businesses during the 1980s and 1990s
• Are being used with greater frequencies in many
regions of the world today

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-1a Mergers, Acquisitions, and
Takeovers: What Are the Differences?
• A merger is a strategy through which two firms agree to integrate
their operations on a relatively coequal basis.
• In 1998, Exxon and Mobil made headlines after announcing their plans to merge. At the
time, the companies were already the first and second-largest oil producers in the United
States.
• An acquisition is a strategy through which 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.
• Google acquired Android for an estimated $50 million back in 2005. At the time, Android was
an unknown mobile startup. However, the acquisition gave Google the tools it needed to
compete in a market dominated by Microsoft and Apple.
• A takeover is a special type of acquisition where the target firm
does not solicit the acquiring firm’s bid; thus, takeovers are
unfriendly acquisitions.
• Ex: AOL And Time Warner

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Market Power Acquisitions
Horizontal • Acquisition of a firm in the same
Acquisitions industry in which the acquiring firm
competes increases a firm’s market
power by exploiting:
– Cost-based synergies
– Revenue-based synergies
• Acquisitions with similar characteristics
result in higher performance than those
with dissimilar characteristics.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Market Power Acquisitions

Horizontal • Acquisition of a supplier or distributor

Acquisitions of one or more of the firm’s goods or
services
Vertical
Acquisitions – increases a firm’s market power by
controlling additional parts of the
value chain.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Market Power Acquisitions
Horizontal
Acquisitions
• Acquisition of a firm in a highly
Vertical related industry
Acquisitions
– because of the difficulty in
attaining synergy, related
Related acquisitions are often difficult to
Acquisitions implement.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Acquisition strategies

Mfg other
ind

Mfg other
ind Distributor

Supplier Mfg Distributor

Supplier Mfg Distributor Consumers

Supplier Mfg Distributor

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-2 Reasons for Acquisitions

• Firms use acquisition strategies to:

• Increase market power
• Overcome entry barriers to new markets or regions
• Avoid the costs of developing new products and
increase the speed of new market entries
• Reduce the risk of entering a new business
• Become more diversified
• Reshape their competitive scope by developing a
different portfolio of businesses
• Enhance their learning as the foundation for
developing new capabilities
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
7-2a Increased Market Power (slide 1 of 3)
• Market power exists when either:
• A firm is able to sell its goods or services above competitive levels.
• The costs of a firm’s primary or support activities are lower than those of
its competitors.
• Market power is usually derived from:
• The size of the firm
• The quality of the resources it uses to compete
• Its share of the market(s) in which it competes
• Most acquisitions that are designed to achieve greater market power
entail buying a competitor, a supplier, a distributor, or a business in
a highly related industry so that a core competence can be used to
gain competitive advantage in the acquiring firm’s primary market.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
7-2a Increased Market Power (slide 2 of 3)
• To increase market power, firms use:
• Horizontal acquisitions
• Vertical acquisitions
• Related acquisitions

Horizontal Acquisitions
• The acquisition of a company competing in the same industry as the
acquiring firm is a horizontal acquisition.
• Horizontal acquisitions:
• Increase a firm’s market power by exploiting cost-based and revenue-
based synergies
• Result in higher performance when the firms have similar characteristics

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
7-2a Increased Market Power (slide 3 of 3)
Vertical Acquisitions
• A vertical acquisition refers to a firm acquiring a supplier or
distributor of one or more of its products.
• Through a vertical acquisition, the newly formed firm controls
additional parts of the value chain, which leads to increased market
power.

Related Acquisitions
• Acquiring a firm in a highly related industry is called a related
acquisition.
• Through a related acquisition, firms seek to create value through the
synergy that can be generated by integrating resources and
capabilities.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-2b Overcoming Entry Barriers
• Barriers to entry are factors associated with a market, or the firms
currently operating in it, that increase the expense and difficulty new
firms encounter when trying to enter a particular market.
• Examples: Economies of scale and customer loyalty
• The higher the barriers to entry, the greater the probability that a firm
will acquire an existing firm to overcome them.
• This allows the acquiring firm to gain immediate access to an attractive
market.

Cross-Border Acquisitions
• Acquisitions made between companies with headquarters in
different countries are called cross-border acquisitions.
• Cross-border acquisitions can be difficult to implement due to
various obstacles and differences in foreign cultures.
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-2c Cost of New Product Development
and Increased Speed to Market
• Internal product development is often perceived
as a high-risk activity.
• Many firms are not able to achieve adequate returns
compared to the amount of capital they invest to
develop and commercialize the product.
• An acquisition strategy allows a firm to gain access to
new products and to current products that are new to
it

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-2d Lower Risk Compared to
Developing New Products
• The outcomes of an acquisition can be
estimated more easily and accurately than the
outcomes of an internal product development
process.
• As such, managers may view acquisitions as a way to
avoid risky internal ventures as well as risky research
and development (R&D) investments.
• However, managers must not allow acquisitions to become a
substitute for internal innovation.
• Being dependent on others for innovation leaves a firm
vulnerable and less capable of mastering its own destiny when
it comes to using innovation as a driver of wealth creation.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-2e Reshaping the
Firm’s Competitive Scope
• To reduce the negative effect of an intense
rivalry on financial performance, firms may use
acquisitions to lessen their product and/or
market dependencies.
• Reducing a company’s dependence on specific
products or markets shapes the firm’s competitive
scope.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-2g Learning and
Developing New Capabilities
• Firms sometimes complete acquisitions to gain
access to capabilities they lack.
• Through acquisitions, firms can:
• Broaden their knowledge base
• Reduce inertia
• Firms increase the potential of their capabilities when
they acquire diverse talent through cross-border
acquisitions.
• Firms should seek to acquire companies with different
but related and complementary capabilities as a path
to building their own knowledge base.
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3 Problems in Achieving
Acquisition Success
• Among the problems associating with using an
acquisition strategy are:
• The difficulty of effectively integrating the firms involved
• Incorrectly evaluating the target firm’s value
• Creating debt loads that preclude adequate long-term
investments
• Overestimating the potential for synergy
• Creating a firm that is too diversified
• Creating an internal environment in which managers devote
increasing amounts of their time and energy to analyzing and
completing the acquisition
• Developing a combined firm that is too large, necessitating
extensive use of bureaucratic, rather than strategic, controls
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3a Integration Difficulties
• The integration process:
• Is considered by some to be the strongest determinant of whether either
a merger or an acquisition is successful
• Is difficult and challenging
• Tends to generate uncertainty and often resistance because of cultural
clashes and organizational politics

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3b Inadequate Evaluation
of Target (slide 1 of 2)
• 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 such as:
• Financing for the intended transaction
• Tax consequences of the transaction
• Actions that would be necessary to successfully meld the two
workforces
• The acquiring firm should effectively examine each acquisition target
in order to determine the appropriate amount of premium to pay.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3c Large or Extraordinary Debt
(slide 1 of 2)

• Firms using an acquisition strategy want to verify

that their purchases do not create a debt load
that overpowers their ability to remain solvent
and vibrant as a competitor.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3d Inability to Achieve Synergy
(slide 1 of 2)

• Synergy exists when the value created by units working together

exceeds the value that those units could create working
independently.

• Synergy is created by:

• The efficiencies derived from economies of scale
• The efficiencies derived from economies of scope
• Sharing resources (e.g., human capital and knowledge) across the
businesses in the newly created firm’s portfolio

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3e Too Much Diversification

• Overdiversification can negatively affect a firm’s overall

performance.
• The scope created by additional amounts of diversification often
causes managers to rely on financial, rather than strategic,
controls to evaluate business units’ performance.
• Costs associated with acquisitions may result in fewer
allocations to activities that are linked to internal innovation.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-3g Firm Size

• The larger firm size generated by acquisitions can:

• Increase the complexity of the managerial challenge
• Create diseconomies of scope
• That is, the costs of managing the more complex organization
outweigh the economic benefits.
• These complexities generated by the larger size often
lead managers to implement more bureaucratic controls
to manage the combined firm’s operations.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Figure 7.1
Reasons for Acquisitions and Problems in Achieving Success

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-4 Effective Acquisitions
• Effective acquisitions have the following characteristics:
• The acquiring and target firms have complementary resources that are
the foundation for developing new capabilities.
• The acquisition is friendly, thereby facilitating integration of the firm’s
resources.
• The target firm is selected and purchased on the basis of completing a
thorough due-diligence process.
• The acquiring and target firms have considerable slack in the form of
cash or debt capacity.
• The newly formed firm maintains a low or moderate level of debt by
selling off portions of the acquired firm or some of the acquired firm’s
poorly performing units.
• The acquiring and acquired firms have experience in terms of adapting
to change.
• R&D and innovation are emphasized in the new firm.
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Table 7.1
Attributes of Successful Acquisitions (slide 1 of 2)

Attributes Results
1. Acquired firm has assets or 1. High probability of synergy and
resources that are complementary competitive advantage by
to the acquiring firm’s core business maintaining strengths
2. Faster and more effective 2. Acquisition is friendly
integration and possibly lower
premiums
3. Acquiring firm conducts effective 3. Firms with strongest
due diligence to select target firms complementarities are acquired and
and evaluate the target firm’s health overpayment is avoided
(financial, cultural, and human
resources)

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Table 7.1
Attributes of Successful Acquisitions (slide 2 of 2)

Attributes Results
4. Financing (debt or equity) is easier 4. Acquiring firm has financial slack
and less costly to obtain (cash or a favorable debt position)
5. Merged firm maintains low to 5. Lower financing cost, lower risk
moderate debt position (e.g., of bankruptcy), and avoidance
of trade-offs that are associated
with high debt
6. Acquiring firm maintains long-term 6. Acquiring firm has a sustained and
competitive advantage in markets consistent emphasis on R&D and
innovation
7. Acquiring firm manages change 7. Faster and more effective
well and is flexible and adaptable integration facilitates achievement
of synergy

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-5 Restructuring
• Restructuring is a strategy through which a firm changes its set of
businesses or its financial structure.
• Commonly, firms focus on fewer products and markets following
restructuring.
• Restructuring strategies are:
• Generally used to deal with acquisitions that are not reaching
expectations
• Sometimes used because of changes detected in the external
environment by the firm
• Firms use three types of restructuring strategies:
1. Downsizing
2. Downscoping
3. Leveraged buyouts

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-5a Downsizing

• Downsizing is a reduction in the number of a firm’s

employees and, sometimes, in the number of its
operating units.
• Downsizing is a legitimate strategy to adjust firm size
and is not necessarily a sign of organizational decline.
• Downsizing is an intentional managerial strategy that is used for
the purpose of improving firm performance.
• Organizational decline is an unintentional outcome of what
turned out to be a firm’s ineffective competitive actions.
• With organizational decline, firms lose access to an array of resources,
many of which are critical to current and future performance.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-5b Downscoping

• Downscoping refers to divestiture, spin-off, or

some other means of eliminating businesses
that are unrelated to a firm’s core businesses.
• Downscoping:
• Has a more positive effect on firm performance than
does downsizing
• Causes firms to refocus on their core business
• Is often used with downsizing simultaneously
• Is used more frequently in U.S. firms than in European
companies

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-5c Leveraged Buyouts (slide 1 of 2)

• A leveraged buyout (LBO) is a restructuring strategy

whereby a party (typically a private equity firm) buys all
of a firm’s assets in order to take the firm private.
• Traditionally, LBOs were used as a restructuring
strategy:
• To correct for managerial mistakes
• Because the firm’s managers were making decisions that
primarily served their own interests rather than those of
shareholders
• However, some firms complete LBOs to build firm
resources and expand their operations rather than
simply to restructure a distressed firm’s assets.
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 7-5c Leveraged Buyouts (slide 2 of 2)

• Significant amounts of debt are commonly incurred to

finance a buyout.
• To support debt payments and to downscope the firm to focus on
its core businesses, a number of assets may be quickly sold.
• Often, the intent of a buyout is to improve efficiency and
performance to the point where the firm can be sold successfully
within five to eight years.
• There are three types of LBOs:
1. Management buyouts (MBOs)
2. Employee buyouts (EBOs)
3. Whole-firm buyouts
• Because they provide clear managerial incentives,
MBOs have been the most successful of the three.
Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 Figure 7.2
Restructuring and Outcomes

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
 WhatsApp acquisition

• In this case we exercise issue identification,

external and internal analysis, alternative
strategies and evaluating the chosen strategies.
Below you can find a list of questions that walk
you through all the above steps.

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
Q1-Market Analysis

• How big will the market for IM become? Why is it

so huge?
• How is the market structure? (porter driving
forces)

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
Q2: Internal analysis

• Sustainable Competitive Advantage

How has WhatsApp been successful since
2009? What has been its competitive
advantage? How has it got to be so big so fast in
some countries?

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
Q3:

• Is WhatsApp's position sustainable in the long

run?

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
Q4:

• Comparing with other alternatives and similar

acquisitions (instagram, etc), how do you
evaluate the Whatsapp acquisitions process?
• What (if any) does whatsapp have to be earning
to justify that price?

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
Q5:

• What are the issues that Facebook confronts

that lead it to consider this acquisition?

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
Strategy evaluation

• After all, do you think that Facebook's purchase

of WhatsApp for $22 billion (the 12th largest
acquisition in the world) is either:
• a) The most outrageous waste of shareholder
funds? Or
• b) The deal of the century?

Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.