Deck 13: Strategic Planning Options: Mergers and Acquisitions

Question 1

Briefly explain the differences between a merger, an acquisition, and a takeover.

Answer 1

$\bullet$ A merger occurs when two entities, often roughly the same size, agree that they will proceed into the future as a single organization. They are no longer separately owned and operated; their previous legal identities disappear. If they are for-profit companies, their stock shares are surrendered and replaced with ownership interests in the new entity. When the transaction occurs this way, it is called a "merger of equals."
$\bullet$ When one business takes over another business, by purchasing all of its shares or assets, and assumes control of its operations, it has acquired that business. The acquiring organization continues to exist and operate as it did before, albeit somewhat enlarged, and the acquired organization goes out of existence. The purchase may be made with cash, stock in the acquiring company, or a combination of both.
$\bullet$ In a takeover, the target firm does not seek to be acquired and often resists what it considers to be a "hostile takeover".

Question 2

Provide examples of a related acquisition and an unrelated acquisition, from the perspective of a 55-physician group practice.

Answer 2

$\bullet$ Related acquisition. The acquired firm is located forward (vertical integration), backward (vertical integration), or laterally (horizontal integration) in the acquiring firm's industry value chain. The group practice acquires a 10-physician practice in a specialty where it lacks competence.
$\bullet$ Unrelated acquisition. The acquired firm is located in an entirely different industry or market. The resulting entity, composed of disparate products and services, serving diverse customers in dissimilar markets, is often called a conglomerate. The group practice acquires the building in which it rents office space.

Question 3

Nearly 80% of mergers and acquisitions fail in one way or another. Provide four possible reasons for this.

Answer 3

$\bullet$ Organization leaders make the decision to merge or acquire as an ego boost.
$\bullet$ Decision made out of desperation by an organization on an unsound operational footing.
$\bullet$ Acquisition made on an impulse when mediocre candidate suddenly became available.
$\bullet$ Acquirer has only a superficial understanding of target organization's market.
$\bullet$ Acquiring company and target company have incompatible business models.
$\bullet$ Overestimated ability to integrate the core competencies of the two companies.
$\bullet$ Poor due diligence fails to detect critical problems and risks.
$\bullet$ Acquirer paid too high a price.
$\bullet$ Poor negotiating skills or blunders in the negotiation process.
$\bullet$ Acquisition agreed before either organization is prepared to implement it.
$\bullet$ Failure to plan for integration of the two cultures.

Question 4

The book describes 14 steps in acquiring another organization. Explain at least 7 of those steps.

Question 5

What does the term "due diligence" mean? When is it frequently performed?

Question 6

When a merger or acquisition seems imminent, there are three types of planning that are essential to facilitate the combination of two organizations. What are they?

Question 7

List four legitimate reasons why an organization might consider acquiring or merging with another one.