Question

Complete the following discussion questions (APA formatted):

What is an LBO and what have been the results of such activities?

What are the differences between downscoping and downsizing and why are each used?

What are the attributes of a successful acquisition program?

Identify and explain the seven reasons firms engage in an acquisition strategy.

Answer 1

What is an LBO and what have been the results of such activities?

LBO or Leveraged Buyout is a restructuring strategy through which a firm buys all the assets of a firm to make it private. Once the process is over the target firm’s company stock is no longer traded in public. The strategy was used to correct the management mistakes or the decisions taken by the managers for their own interest rather than shareholders. Some times LBO is used for building firm resources and expanding their operations. MBO or management buyout is a type of LBO which provides results as increased strategic focus, improved performance and leading to downscoping. MBOs can also lead to greater enterprenial activity and growth. In this way LBOs can facilitate enterprenial efforts and stimulate strategic growth and productivity which helps in the rebirth of the firm.

What are the differences between downscoping and downsizing and why are each used?

Downsizing is the reduction in numbers of the employees and the number of operating units. But downscoping is eliminating the business that does not relate to core business of the firm through divestiture or some other methods. Down scoping can affect the firm positively than downsizing as it causes the firms to refocus on their core business. Downsizing is an intentional management strategy used for improving firm’s performance and is used mostly after completing acquisitions. It should ensure procedural justice and fairness in decisions to make downsizing effective. Downscoping is used to increase the managerial effectiveness through less diversification which allows the top management to better understand and manage the core business.

What are the attributes of a successful acquisition program?

The attributes of a successful acquisition programs are

1.The presence of resources or assets with the acquired firm which are complementary to the acquiring firm’s core business.

2.Acquisition is friendly

3. Effective due diligence conducted by the acquiring firm to select target firms and evaluate the target firm’s health.

4. Acquiring firm has financial slack which refers to a favorable debt position.

5. Low to moderate debt position maintained by the merged firm.

6. Acquired firm has a sustained and consistent emphasis on R&D and innovation.

7. Acquiring firm manages change well and is flexible and adaptable.

Identify and explain the seven reasons firms engage in an acquisition strategy.

The seven reasons firms engage in an acquisition strategy are

1. Increased market power: The primary reason for acquisition is achieving market power. Market power is derived from size of the firm, quality of the resources, and the share in the market. Hence the firms try to make competitive advantage through acquiring business in a related industry.

2. Overcoming entry barriers: The barriers to entry for the firms to enter in a market include the factors that increase the expense and difficulty faced while entering in a particular market. Acquiring an established firm in the market would help the new entrants to avoid these barriers and establish their business than entering as an unfamiliar competitor.

3. Cost of new product development and increased speed to market: New product development requires significant investment of resources and time and the profits are also unpredictable. An acquisition will help the firm to avoid these challenges and gain access to new and current products with predictable profit and a faster market entry.

4. Low risk compared to developing new products: New product development may be risky and the chances of success are unpredictable which can be avoided through acquisitions

5. Increased diversification: Acquiring firms provide access to the different product lines of the acquired firm and helps the acquiring firm to diversify the business.

6. Reshaping the firm’s competitive scope: Firm can enter new markets with less competition and make profit through acquisition.

7. Learning and developing new capabilities: Companies can learn new technologies and gain capabilities they do not possess through acquisition.