Exam 7: Acquisition and Restructuring Strategies

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

The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.

Case Scenario 3: Barracuda Inc. Barracuda Inc. has diversified beyond its early base as a lamp fixture manufacturer into multiple hardware and plumbing fixture products that it sells to professionals (i.e., plumbers and electricians) and through the large volume do-it-yourself (DIY) stores like The Home Depot and Lowe's. While this successful growth has been achieved primarily through acquisition, the company tends to let the acquired businesses run independently. It has done so by looking to fragmented industries to acquire small firms with efficient operations and good management teams. It then grows these businesses through a combination of internal cash flow and debt, and directs new sales to the professional and DIY channels. Barracuda has been particularly successful in the faucet segment, which it practically reinvented though such technological innovations as the washerless faucet, and marketing innovations like branding and good-better-best merchandising. Barracuda has leveraged this merchandising strategy across its businesses and, coupled with the explosive growth of the DIY channel, is spectacularly profitable with a net profit after tax (NPAT) of 18%. The firm's management is looking to broaden its revenue base and has identified the home furnishings business as sharing many characteristics with faucets, prior to Barracuda's entry into faucets. It plans to enter this industry through large-scale acquisitions. The landscape of the U.S. home furnishings manufacturing industry consists of many players, none with controlling share, and serious issues of overcapacity. There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average NPAT is between 4 and 5%, which also reflects the fact that few firms have good managers. While the industry is still primarily comprised of single-business family-run firms, which manufacture furniture domestically, imports are increasing at a fairly rapid rate. Some of the European imports are leaders in contemporary design. Relatively large established firms are also diversifying into the home furnishings industry via acquisition. Supplier firms to the home furnishings industry are in relatively concentrated industries (like lumber, steel, and textiles), and therefore typically offer fewer accommodations to the small furniture manufacturers. Retailers, the intermediate customer of the home furnishings industry, are becoming increasingly concentrated and the few large, successful furniture companies actually have their own stores or have dedicated showrooms in the larger department stores. Customers have many products to choose from, at many different price points, and few home furnishing products beyond those of the larger companies have established brands. Also, customers can switch easily among high and low-priced furniture and other discretionary expenditures (spanning plasma TVs to the choice of postponing any furniture purchase entirely). -(Refer to Case Scenario 3) Given the history of Barracuda, what guidelines would you suggest to management regarding their acquisition strategy in the home furnishings industry?

Daimler Benz acquired Chrysler in 1998. In 2007, Daimler divested Chrysler. An action such as this divestiture is often a sign of a failed acquisition.

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

The expenses incurred by firms trying to create synergy through acquisition are called ____ costs.

Sales of watches among teenagers and 20-somethings are declining rapidly as this age group uses cellphones, iPods, and other devices to tell time. A company that specializes in selling inexpensive watches to this age group may wish to consider ____ in order to develop new products other than watches.

Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm.

Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market to which the suppliers' products are sold. This purchase is a(an)

Large or extraordinary debt is defined as overpaying for an acquired firm.

Each of the following is a rationale for acquisitions EXCEPT

A leveraged buyout refers to

The majority of acquisitions completed during the acquisition boom of the 1970s through the 1990s did not enhance the strategic competitiveness of the firms involved.

Case Scenario 3: Barracuda Inc. Barracuda Inc. has diversified beyond its early base as a lamp fixture manufacturer into multiple hardware and plumbing fixture products that it sells to professionals (i.e., plumbers and electricians) and through the large volume do-it-yourself (DIY) stores like The Home Depot and Lowe's. While this successful growth has been achieved primarily through acquisition, the company tends to let the acquired businesses run independently. It has done so by looking to fragmented industries to acquire small firms with efficient operations and good management teams. It then grows these businesses through a combination of internal cash flow and debt, and directs new sales to the professional and DIY channels. Barracuda has been particularly successful in the faucet segment, which it practically reinvented though such technological innovations as the washerless faucet, and marketing innovations like branding and good-better-best merchandising. Barracuda has leveraged this merchandising strategy across its businesses and, coupled with the explosive growth of the DIY channel, is spectacularly profitable with a net profit after tax (NPAT) of 18%. The firm's management is looking to broaden its revenue base and has identified the home furnishings business as sharing many characteristics with faucets, prior to Barracuda's entry into faucets. It plans to enter this industry through large-scale acquisitions. The landscape of the U.S. home furnishings manufacturing industry consists of many players, none with controlling share, and serious issues of overcapacity. There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average NPAT is between 4 and 5%, which also reflects the fact that few firms have good managers. While the industry is still primarily comprised of single-business family-run firms, which manufacture furniture domestically, imports are increasing at a fairly rapid rate. Some of the European imports are leaders in contemporary design. Relatively large established firms are also diversifying into the home furnishings industry via acquisition. Supplier firms to the home furnishings industry are in relatively concentrated industries (like lumber, steel, and textiles), and therefore typically offer fewer accommodations to the small furniture manufacturers. Retailers, the intermediate customer of the home furnishings industry, are becoming increasingly concentrated and the few large, successful furniture companies actually have their own stores or have dedicated showrooms in the larger department stores. Customers have many products to choose from, at many different price points, and few home furnishing products beyond those of the larger companies have established brands. Also, customers can switch easily among high and low-priced furniture and other discretionary expenditures (spanning plasma TVs to the choice of postponing any furniture purchase entirely). -(Refer to Case Scenario 3) Given Barracuda's history, what threats does Barracuda face in entering the furniture industry through acquisition?

Private synergies are widely present in most acquisitions.

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio.

Which of the following is NOT one of the primary reasons many pharmaceutical firms use acquisitions?

Company experience and research findings have shown acquisitions typically ____ for the acquiring firm.

Case Scenario 2: Raptec Raptec was incorporated in 1991 and went public on the Nasdaq Stock Market in 1996. Raptec's strategy is to become the global leader in innovative storage solutions. Raptec is an S&P 500 and a Nasdaq Stock Market 100 member. The company's hardware and software solutions for eBusiness and Internet applications move, manage, and protect critical data and digital content. Raptec operates in three principal business segments: Direct Attached Storage ("DAS"), Storage Networking Solutions ("SNS") and Software. These hardware and software products are found in high-performance networks, servers, workstations, and desktops from the world's leading OEMs, and are sold through distribution channels to Internet service providers, enterprises, medium and small businesses, and consumers. Since the time it went public, Raptec has experienced rapid growth and consistently profitable operations. In early 2007, the company announced its plan to spin-off the software segment, subsequently incorporated as Axio, Inc., in the form of a fully independent and separate company. Software was Raptec's most profitable and fastest growing segment. By mid-2007 Raptec had completed the initial public offering of approximately 15% of Axio's stock, and then distributed the remaining Axio stock to Raptec's stockholders in a tax-free distribution. -(Refer to Case Scenario 2) What risks does Raptec run in spinning off Axio?

Case Scenario 2: Raptec Raptec was incorporated in 1991 and went public on the Nasdaq Stock Market in 1996. Raptec's strategy is to become the global leader in innovative storage solutions. Raptec is an S&P 500 and a Nasdaq Stock Market 100 member. The company's hardware and software solutions for eBusiness and Internet applications move, manage, and protect critical data and digital content. Raptec operates in three principal business segments: Direct Attached Storage ("DAS"), Storage Networking Solutions ("SNS") and Software. These hardware and software products are found in high-performance networks, servers, workstations, and desktops from the world's leading OEMs, and are sold through distribution channels to Internet service providers, enterprises, medium and small businesses, and consumers. Since the time it went public, Raptec has experienced rapid growth and consistently profitable operations. In early 2007, the company announced its plan to spin-off the software segment, subsequently incorporated as Axio, Inc., in the form of a fully independent and separate company. Software was Raptec's most profitable and fastest growing segment. By mid-2007 Raptec had completed the initial public offering of approximately 15% of Axio's stock, and then distributed the remaining Axio stock to Raptec's stockholders in a tax-free distribution. -(Refer to Case Scenario 2) Why would a successful firm like Raptec spin off its most promising business?