Inorganic Growth Strategies

Inorganic Growth Strategies

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Inorganic Growth Strategies: Structure of the Session: 1. An opening question – How can you link this topic with our discussion on co-operative strategies? 2. Opening Case – Refer pages 152 & 153 of your textbook

3. Understanding various concepts linked with this topic 4. Strategic Focus – Refer pages 160 & 161 of your textbook

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Inorganic Growth Strategies: Broadly, the following concepts are important: 1) Merger 2) Acquisition 3) Takeover

In the above context, what can be restructuring and why it is important for any company?

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Inorganic Growth Strategies: A brief background – These strategies are popular globally – In the context of our economy, these strategies have been on a rise after liberalisation Some factors attract companies to engage in M&A – It can be positive synergies, lower valuations, weak currency, etc. Creating value through inorganic growth strategies like acquisition can be difficult For instance, two companies are involved – One is the acquired and the other is the acquiring company There can be a scepticism about the success of an acquisition – Example: Tata’s acquisition of Corus in 2007 Data suggest that 20% of all M&As are successful, 60% produce disappointing results and 20% are clear failures 4

Inorganic Growth Strategies: Merger: A coequal basis wherein two companies merge (or integrate) and become one Their independent status before merger becomes non-existent Example: In professional services, merger of Towers Perrin Foster and Crosby Inc. Watson Wyatt Worldwide Inc. Now it is Willis Towers Watson

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Inorganic Growth Strategies: Acquisition: It involves 100% purchase or control of a company (acquired) by another company (acquiring) This kind of an acquisition is a friendly acquisition because a fair bidding process is involved – In contrast, a takeover is an unfriendly acquisition Example: Referring again to our example of Tata Corus deal – Two main bidders were Tata (Indian company) and CSN (Brazilian company) Though the process was fair, the deal became an expensive one for Tata – Something referred as “winner’s curse”

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Inorganic Growth Strategies: Types of Acquisitions: Broadly, there are two types of acquisitions – Horizontal and Vertical

Horizontal Acquisitions – Acquiring a company operating in the same industry. Example: Acquisition of Ispat by JSW These acquisitions are complementary hence considered to be most effective

Vertical Acquisitions – Acquiring a supplier or a distributor. The attempt is to improvise value chain. Example: RIL’s acquisition of IPCL (Indian Petrochemicals Corporation Limited) in 2002

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Inorganic Growth Strategies: Benefits of Acquisitions: Overcoming barriers to entry – Immediate access to a market via acquisition MNCs targeting emerging economies like BRICS – In this context, what is cross-border acquisition? Acquisition of companies with headquarters in different countries. Example: Tata Motors acquisition of JLR and Land Rover

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Inorganic Growth Strategies: Benefits of Acquisitions:

The choice between acquisition or developing new products – The Case of Pfizer Acquisition should be strategic (synergies of cost and revenue) or defensive (temporary increase in sales)?

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Inorganic Growth Strategies: Benefits of Acquisitions: In order to get the desired benefits of acquisitions, the companies should: 1. Make the right selection / target 2. Avoid paying a high premium

3. Ensure a smooth integration It is important to avoid “a marriage of incompatibles” How due diligence becomes important? Is private synergy created? 10

Inorganic Growth Strategies: Successful Acquisition: Success Depends Upon: Complementary Assets

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Friendly Acquisition

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Effective due diligence

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Favourable debt position

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Consistent R&D and Innovation

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Good Change Management

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Inorganic Growth Strategies: Restructuring:

“Focus on your core business, but don’t be distracted, let other people buy assets that aren’t right for you” Generally, restructuring involves change in set of businesses or its financial structure Restructuring can be an outcome of a failed M&A or also because of some compelling external environment conditions

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Inorganic Growth Strategies: Restructuring: Restructuring can take the form of a pure restructuring wherein the company does not change its business portfolio – Rather, status of different business units or reporting relationships are altered Example: Restructuring of L&T in 2011 – Restructuring of different business verticals Downsizing and Downscoping are two important forms of restructuring

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Inorganic Growth Strategies: Restructuring:

What is Downsizing? This may not change the composition of businesses but definitely this impacts on employees of a company – It is a reduction in the number of employees of a company (or its operating units to avoid duplication of processes) It is a legitimate restructuring strategy – Can be a result of an expensive acquisition

Some companies avoid doing this – Nucor (American Steel Company) is a good example 14

Inorganic Growth Strategies: Restructuring:

What is Downscoping? Elimination of unrelated businesses within a company. Example: Ballarpur Industries divested from their glass business Downscoping compared to downsizing creates more positive impetus towards a company’s performance Downsizing and downscoping are not mutually exclusive and can be undertaken simultaneously

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