Nghiên cứu về hoạt động mua bán và sáp nhập công ty tại việt nam trường hợp công ty may chiến thắng và công ty may hồ gươm

vietnam national university, HANOI
school of business








Vu Thi Thu Minh





A STUDY ON Merger and acquisition
IN VIETNAM - THE CASE OF ho guom AND
CHIEN THANG garment COMPANIES






master of business administration thesis

Hanoi - 2007

vii
TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
ABSTRACT iii
TÓM TẮT v
TABLE OF CONTENTS vii
LIST OF TABLES AND FIFURES x
INTRODUCTION 1
1 Background 1
2 Problem discussion 2
3 Objectives and Aims 4
4 Research questions 5
5 Scope of work 5
6 Methodology 5
7 Data sources and processing 5
8 Significance 6
9 Limitations 6
10 Expected results 7
11 Thesis structure 7
CHAPTER 1: LITERATURE REVIEW 9
1.1 Rationales of Merger and Acquisition 9
1.1.1 Definition and classification of M&A 9
1.1.2 Business valuation 10
1.1.3 Financing M&A 11
1.1.4 Motives behind M&A 13
1.2 Guidelines for successful acquisitions 15

1.2.1 Pitfalls of acquisitions 15
1.2.2 Execution of acquisitions 17
1.3 Managing acquired companies 19

viii
1.3.1 Restructuring poorly-run enterprises 21
1.3.2 Transferring competencies 21
1.3.3 Realizing economies of scope 22
1.4 Conceptualization and emerged frame of reference 23
1.4.1 Conceptualization 23
1.4.2 Emerged frame of reference 25
CHAPTER 2: METHODOLOGY 27
2.1 Research purpose 27
2.2 Research approach 28
2.3 Research strategy 29
2.4 Data collection method 30
2.5 Sample selection 32
2.6 Data analysis 33
2.7 Reliability and validity 34
CHAPTER 3: DATA PRESENTATION AND ANALYSIS 36
3.1 Company presentation 36
3.1.1 Ho Guom Garment JSC 36
3.1.2 Chien Thang Garment JSC 39
3.2 The situation leading to the acquisition 41
3.2.1 Post-integration change of Vietnam garment and textile industry 41
3.2.2 HOGARSCO – Expansion for development 43
3.2.3 CHIGAMEX – A poorly-managed and loss-making company 46
3.3 Execution of the acquisition of CHIGAMEX by HOGARSCO 50
3.4 Managing the acquired company - CHIGAMEX 52
3.4.1 Restructuring CHIGAMEX 52

3.4.2 Transferring competencies and realizing economies of scope 58
3.4.3 Post-acquisition performance of CHIGAMEX 60
3.5 A summary on main findings from the case study 61
CONCLUSIONS AND IMPLICATIONS 64

ix
1. Conclusions 64
2. Implications 68
References 71
Appendix 1 – Interview Guide (English version) 73
Appendix 2 – Interview Guide (Vietnamese version) 74

x
LIST OF TABLES AND FIFURES
Table 2.1: Three different research purposes 27
Table 2.2: Relevant situations for different research strategies 29
Table 2.3: Six sources of evidence, strengths and weaknesses 30
Table 2.4: Case study tactics for four design tests 34
Table 3.1: Information on HOGARSCO’s factories 37
Table 3.2: HOGARSCO’s performance from 2002-2006 (VND billion) 38

Figure 1.1: Emerged frame of reference 26
Figure 2.1: An overview of the methodology chapter 27
Figure 3.1: Sales percentage by main export markets of HOGARSCO 38
Figure 3.2: Sales percentage by categories of products 38
Figure 3.3: HOGARSCO’s performance from 2002-2006 (VND billion) 39
Figure 3.4: Major export markets of Chigamex 41
Figure 3.5: Pre-acquisition organizational structure of CHIGAMEX 47
Figure 3.6: Overview of holding rate among companies 52
Figure 3.7: Post-acquisition organizational structure of CHIGAMEX 54

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LIST OF ABBREVIATIONS

M&A
HOGARSCO
CHIGAMEX
VINATEX
JSC
Merger and Acquisition
Ho Guom Garment Joint Stock Company
Chien Thang Garment Joint Stock Company
Vietnam National Textile and Garment Corporation
Joint Stock Company



Introduction


1
INTRODUCTION
This first part is intended to give an introduction to the area of research. First a
brief background discussion regarding merger and acquisition (M&A) will be
provided, followed by the problem discussion, leading to the objectives and aims,
then research questions, scope of work, significance, and the limitations of the study
will be presented and finally the outline of the thesis.
1 Background

In today’s business world, mergers and acquisitions play an important and
undisputable role in creating a sustainable competitive advantage. Although there
have always been historical merger and acquisition waves often in the periods of
high economic growth rates, decline in interest rates and rise in stock markets,
M&A gained its importance in recent years.
For the last 30 years, M&A activities have increased constantly in both number and
average size [DePamphilis, 2005]. In a very competitive and global environment
various reasons can account for companies undertaking these deals, often involving
extremely high financial payments. Market-, cost-, competitive- or government
drivers [Child et al., 2001] can all influence a company’s decision to opt for M&A
as the primary mean to quickly increase revenues [Galpin and Herndon, 1999].
More specifically, operating synergies are often mentioned as drivers for merging.
By combining complementary skills and resources both partners’ economies of
scale and scope can benefit, by spreading fixed costs for instance. Moreover,
financial synergies, diversification aims, tax advantages, pursue of market power as
well as empire building can represent reasons to engage in such costly ventures
[DePamphilis, 2005]. Generally, the justification for acquisitions lies in the
potential value they are anticipated to create in the future [Child et al., 2001].
Consequently, the combined value of both merged companies should be higher than
the sum of the individual companies. Theoretically, this value creation through
Introduction


2
mergers can be reached by using both companies’ assets more effectively by the
combined firms than by the target and bidder separated [Child et al., 2001].
Although M&As almost seem to represent a part of everyday business life and the
majority of multinational enterprises undertake more than one during their
development, the risks associated are still comparably high. Even though there have
been examples of extremely successful mergers there are findings that 50-80%

underperform their industry peers and fail to earn the expected financial returns
[DePamphilis, D., 2005]. Reasons for acquisition failure can range from
overoptimistic estimates of the target company’s value which result in extensive
overpaying; over slow integration of all operational levels in the post-acquisition
phase; poor, clashing business strategies impossible to merge [DePamphilis, D.,
2005]. Furthermore, the degree of relatedness of businesses, as well as the distance
in business or corporate culture is crucial factors to take into consideration [Child et
al., 2001; Gancel et al., 2002].
Vietnamese enterprises have been integrating into the global trend of rise in M&A
activities, especially when Vietnam is in the context of high economic growth rates,
low interest rates, strong and rapid equitisation and “hot” stock markets. Similarly,
market, cost, competitiveness, government and synergies are often mentioned as
drivers for merger and acquisitions in Vietnam. The presence of conglomerate and
group of companies in Vietnam has indicated a condensed strength and has shown
the willingness for integration into globally competitive economies.
2 Problem discussion
Due to the competitive environment of rapid change and aligned constant need for
growth and development, companies have to exploit organic sources of expansion
as well as external ones in order to compete. The options range according to the
degree of integration that is established among individual enterprises. Mergers and
acquisitions are two common and prevailing means for company growth in today’s
Introduction


3
business world. More precisely they represent options that aim at a very high
degree of integration, as opposed to cooperative agreements and joint ventures.
Generally speaking, acquisitions refer to a shift in the controlling ownership of a
company that is taken over by another company. This can occur both through share
purchases or other forms of the target’s equity as well as asset purchases. The

acquired firm can still exist as a legally-owned subsidiary of the acquiring
company, as is the case of CHIGAMEX acquisition. Mergers, by contrast, aim at
“total integration of two or more partners into a new unified corporation” [Child,
2001]. They are usually coined by a consensual environment, where beneficial
outcomes are ensured for both parties.
Acquisitions, however, can also take place in a hostile setting, where the target’s
management is passed over and the shares are purchased against the wishes of the
target company [DePamphilis, 2005]. Generally, acquisitions offer a certain degree
of choice concerning the magnitude of integration, which mergers do not permit.
Moreover, acquisitions are mostly known to be unequal partnerships [Child et. al.,
2001]. Although the terms mergers and acquisitions are often used interchangeably,
they entail very different concepts.
Horizontal acquisition takes place where the acquiring and acquired companies
produce similar product in the same industry. There is a long-standing debate in the
economics and finance literature on the motives for horizontal acquisition. Firm
management usually cites expected improvements in productive efficiencies or
synergies like scale economies and elimination of overlapping facilities as the key
reasons for undertaking horizontal acquisitions. On the other hand, some
economists express concern that by reducing the number of firms in an industry,
horizontal acquisition increase market power of customers and suppliers of the
acquiring firm’s industry. Thus, horizontal acquisitions may be undertaken
primarily to exploit the increased market power and gain at the expense of
customers and/or suppliers.
Introduction


4
In the context of global rise in M&A activities and the necessity of M&A in the
development of Vietnamese companies, the study would provide international
knowledge of M&A and analyze a practical acquisition case of HOGARSCO and

CHIGAMEX in order to draw some successful lessons for other companies in
Vietnam, therefore, the title of the thesis would be finalized as “A study on merger
and acquisition in Vietnam – The case of Ho Guom and Chien Thang garment
companies”.
Companies such as HOGARSCO have been choosing a strategy of horizontal
acquisition to consolidate their competitive advantage. Vietnam National Textile
and Garment Corporation (VINATEX) arranged the horizontal acquisition of Chien
Thang Garment JSC by Ho Guom Garment JSC in order to help CHIGAMEX
overcome the edge of bankruptcy. By pursuing horizontal acquisition, both
HOGARSCO and CHIGAMEX can obtain economies of scale or secure export
market for their products. After acquisition, the two companies will be able to
improve their competitiveness and market visibility.
3 Objectives and Aims
The objectives of the thesis are as below:
¾ Firstly, to provide a better understanding of M&A, its rationales and
international guidelines for M&A.
¾ Secondly, to review the recent upward trend in M&A activities and the context
of Vietnam garment and textile industry in 2007 to raise the demand of M&A.
¾ Thirdly, to apply theory into case study of Ho Guom and Chien Thang
garment companies to show advantages, disadvantages, successes, limitations
of the acquisition that help these two companies get inside picture of this
acquisition.
¾ Fourthly, to draw out some conclusions and suggestions for M&A activities in
Vietnam.
Introduction


5
Finally, the thesis aims to introduce international standards and practices in making
M&A and apply them into a case study in order to provide a better understanding of

M&A activities in garment sector and lessons learnt from a successful acquisition in
Vietnam.
4 Research questions
In order to reach this purpose, the following research questions have been
developed.
¾ Why do Vietnamese garment companies conduct acquisitions?
¾ How can an acquisition in Vietnamese garment sector happen?
¾ How can an acquiring company manage an acquired company?
5 Scope of work
Mergers and Acquisitions can be studied from a variety of angles. Due to time
constraints, the study will focus only on the two Vietnamese garment companies
and the acquisition of one company by the other one.
6 Methodology
The methodology practiced in the thesis is a combination of deduction approach,
qualitative method, case study strategy. The study applied the theory in analyzing a
case study with data collected from qualitative interviews. The methodology will be
described in detail in Chapter 2.
7 Data sources and processing
Among six sources of evidence for collecting data including documentation,
archival records, interviews, direct observations, participant observation and
physical artifacts, interview was chosen as the most significant source of case study
due to its positive aspects. Documentation and archival records were used as
supporting data sources. Data analysis in this research follows three steps: data
Introduction


6
reduction, data display, conclusion drawing and verification. Details on data
collection and analysis are shown in Methodology Chapter.
8 Significance

The study has made some certain contributions to the economy in generally and the
enterprises in particularly.
¾ To the economy: the study shows both motives and de-motives behind M&As
and their influences to the overall economy. The successful acquisition in the
case study has contributed to the acceleration of M&A activities in Vietnam
indicating a condensed strength and the willingness for integration into
globally competitive economies.
¾ To the enterprises: the study provides them a better understanding of why they
should take M&As, how M&As occur and how they can effectively manage
acquired enterprises in order to make a successful acquisition. The case study
where experiences of success are shared would help enterprises
9 Limitations
The topic M&A is generally not well documented in Vietnam, especially M&A
activities seem to be rather new in Vietnam so the researcher has not found best
practices concerning M&A in textile and garment industry. This thesis will
concentrate on investigating the case of two garment companies one year after the
acquisition.
The research will not evaluate the correctness of the Vinatex’s decision in favor of
HOGARSCO to take the acquisition of CHIGAMEX, since various specific factors
influence it and these are not the focus of this study.
Introduction


7
It will be necessary to interview more relevant persons, preferably from
CHIGAMEX, to deeply understand the company insight and to display a
representative image of the post-acquisition situation.
The efforts within the empirical as well as the analytical part will be concentrated
on CHIGAMEX. There is no presentation and analysis of HOGARSCO’ post-
acquisition performance in this study.

10 Expected results
The study introduces the rationales of merger and acquisition, the motives behind
mergers and acquisitions, the global practices of executing a merger or an
acquisition and managing acquired firms.
The study raises a case study of acquisition: The acquisition case of Chien Thang
Garment JSC by Ho Guom Garment JSC which will indicate (i) the reasons why Ho
Guom has taken this acquisition, (ii) the steps Ho Guom has experienced to acquire
Chien Thang and (iii) the way Ho Guom has managed the acquired firm
successfully.
Finally, the study draws out some conclusions on the case of Ho Guom and Chien
Thang and best practices from this case for lessons learnt including suggestions for
successful mergers and acquisitions.
11 Thesis structure
The thesis is divided into three main parts including introduction, content and
conclusion parts. The introduction part raises the necessity of the research,
researcher’s objectives and aims, problem statement, scope of work, data sources
and processing, methodology, thesis’s significance, limitations of research and
expected results. Content part begins with literature review, then option of
Introduction


8
methodology, and ends with data presented and analyzed through the case study.
Finally, conclusions and suggestions are drawn out from the case study.
The figure below visually shows the outline of chapters in the thesis in order to
enable the readers to get a better picture of the thesis.



Introduction

Chapter 1:
Literature Review
Chapter 2:
Methodology
Chapter 3:
Data Presentation
& Anal
y
sis
Conclusions &
Implications
Literature Review

9
CHAPTER 1: LITERATURE REVIEW
The previous part provided the background and the problem discussion of the area
of this study, leading down to the specific research questions. In this chapter,
literature related to the research questions will be reviewed. Available theories
relevant to the three research questions will be presented in the same sequential
order as stated research questions.
1.1 Rationales of Merger and Acquisition
1.1.1 Definition and classification of M&A
In business or economics, a merger is a combination of two companies into one
larger company. Such actions are commonly voluntary and involve stock swap or
cash payment to the target. Stock swap is often used as it allows the shareholders of
the two companies to share the risk involved in the deal. A merger can resemble a
takeover but result in a new company name (often combining the names of the
original companies) and in new branding; in some cases, terming the combination a
"merger" rather than an acquisition is done purely for political or marketing reasons.
An acquisition, also known as a takeover, is the buying of one company (the

‘target’) by another. An acquisition may be friendly or hostile. In the former case,
the companies cooperate in negotiations; in the latter case, the takeover target is
unwilling to be bought or the target's board has no prior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity. This is
known as a reverse takeover.
Mergers can be classified into:
Literature Review

10
¾ Horizontal mergers take place where the two merging companies produce
similar product in the same industry.
¾ Vertical mergers occur when two firms, each working at different stages in the
production of the same good, combine.
¾ Congeneric mergers occur where two merging firms are in the same general
industry, but they have no mutual buyer/customer or supplier relationship,
such as a merger between a bank and a leasing company.
¾ Conglomerate mergers take place when the two firms operate in different
industries.
The completion of a merger does not ensure the success of the resulting
organization; indeed, many mergers (in some industries, the majority) result in a net
loss of value due to problems. Correcting problems caused by incompatibility-
whether of technology, equipment, or corporate culture- diverts resources away
from new investment, and these problems may be exacerbated by inadequate
research or by concealment of losses or liabilities by one of the partners.
Overlapping subsidiaries or redundant staff may be allowed to continue, creating
inefficiency, and conversely the new management may cut too many operations or
personnel, losing expertise and disrupting employee culture. These problems are
similar to those encountered in takeovers. For the merger not to be considered a

failure, it must increase shareholder value faster than if the companies were
separate, or prevent the deterioration of shareholder value more than if the
companies were separate.
1.1.2 Business valuation
The five most common ways to valuate a business are asset valuation, historical
earnings valuation, future maintainable earnings valuation, earnings before interest
taxes depreciation and amortization valuation and shareholder's discretionary cash
flow valuation. Professionals who valuate businesses generally do not use just one
Literature Review

11
of these methods but a combination of some of them, as well as possibly others that
are not mentioned above, in order to obtain a more accurate value. These values are
determined for the most part by looking at a company's balance sheet and/or income
statement and withdrawing the appropriate information. The information in the
balance sheet or income statement is obtained by one of three accounting measures
such as a notice to reader, a review engagement or an audit.
Accurate business valuation is one of the most important aspects of M&A as
valuations like these will have a major impact on the price that a business will be
sold for. Most often this information is expressed in a Letter of opinion of value
when the business is being valuated for interest's sake. There are other, more
detailed ways of expressing the value of a business. These reports generally get
more detailed and expensive as the size of a company increases; however, this is not
always the case as there are many complicated industries which require more
attention to detail, regardless of size.
1.1.3 Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which
they are financed and partly by the relative size of the companies. Various methods
of financing an M&A deal exist:
¾ Payment by cash: Such transactions are usually termed acquisitions rather than

mergers because the shareholders of the target company are removed from the
picture and the target comes under the (indirect) control of the bidder's
shareholders alone. A cash deal would make more sense during a downward
trend in the interest rates. Another advantage of using cash for an acquisition
is that there tends to lesser chances of earning-per-share dilution for the
acquiring company. But a warning in using cash is that it places constraints on
the cash flow of the company.
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¾ Financing capital: This may be borrowed from a bank, or raised by an issue of
bonds. Alternatively, the acquirer's stock may be offered as consideration.
Acquisitions financed through debt are known as leveraged buyouts (only if
they take the target private), and the debt will often be moved down onto the
balance sheet of the acquired company.
¾ Hybrids: An acquisition can involve a combination of cash and debt, or a
combination of cash and stock of the purchasing entity.
Types of financing an acquisition can be as follows:
¾ The buyer buys the shares of the target company being purchased. Ownership
control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going business, this
form of transaction carries with it all of the liabilities accrued by that business
over its past and all of the risks that company faces in its commercial
environment.
¾ The buyer buys the assets of the target company. The cash the target receives
from the sell-off is paid back to its shareholders by dividend or through
liquidation. This type of transaction leaves the target company as an empty
shell, if the buyer buys out the entire assets. A buyer often structures the
transaction as an asset purchase to "cherry-pick" the assets that it wants and
leave out the assets and liabilities that it does not. This can be particularly

important where foreseeable liabilities may include future, unquantified
damage awards such as those that could arise from litigation over defective
products, employee benefits or terminations, or environmental damage. A
disadvantage of this structure is the tax imposed on transfers of the individual
assets, whereas stock transactions can frequently be structured as like-kind
exchanges or other arrangements that are tax-free or tax-neutral, both to the
buyer and to the seller's shareholders.
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1.1.4 Motives behind M&A
These motives are considered to add shareholder value:
¾ Economies of scale: This refers to the fact that the combined company can
often reduce duplicate departments or operations, lowering the costs of the
company relative to the same revenue stream, thus increasing profit.
¾ Increased revenue/Increased market share: This motive assumes that the
company will be absorbing a major competitor and thus increase its power (by
capturing increased market share) to set prices.
¾ Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire
and sell complementary products.
¾ Synergy: Better use of complementary resources.
¾ Taxes: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In some countries, rules are in
place to limit the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company.
¾ Geographical or other diversification: This is designed to smooth the earnings
results of a company, which over the long term smoothes the stock price of a
company, giving conservative investors more confidence in investing in the

company. However, this does not always deliver value to shareholders.
¾ Resource transfer: resources are unevenly distributed across firms [Barney,
1991]; the interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining scarce
resources.
¾ Increased market share can increase market power: In an oligopoly market,
increased market share generally allows companies to raise prices. Note that
Literature Review

14
while this may be in the shareholders' interest, it often raises antitrust
concerns, and may not be in the public interest.
However, these motives are considered not to add shareholder value:
¾ Diversification: While this may hedge a company against a downturn in an
individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a
much lower cost than those associated with a merger.
¾ Manager's hubris: Manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company.
¾ Empire building: Managers have larger companies to manage and hence more
power.
¾ Manager's compensation: In the past, certain executive management teams had
their payout based on the total amount of profit of the company, instead of the
profit per share, which would give the team a perverse incentive to buy
companies to increase the total profit while decreasing the profit per share,
which hurts the owners of the company; although compensation is linked to
profitability rather than mere profits of the company.
¾ Vertical integration: Companies acquire part of a supply chain and benefit
from the resources. However this does not add any value because as one end of
the supply chain may receive product at a cheaper cost, the other end now has

lower revenue. In addition, the supplier may find more difficulty in supplying
to competitors of its acquirer because the competition would not want to
support the new conglomerate.
In summary, a merger can happen when two companies decide to combine into one
entity or when one company buys another while an acquisition always involves the
purchase of one company by another. Synergy is the logic behind mergers and
acquisitions, the functions of synergy allow for the enhanced cost efficiency of a
Literature Review

15
new entity made from two smaller ones. Acquiring companies use various methods
to value their targets. An M&A deal can be executed by means of a cash
transaction, stock-for-stock transaction or a combination of both. Mergers can fail
for many reasons including a lack of management foresight, the inability to
overcome practical challenges and loss of revenue momentum from a neglect of
day-to-day operations.
1.2 Guidelines for successful acquisitions
Acquisitions have long been a popular vehicle for expanding scope of the
organization. However, despite this popularity, there is ample evidence that many
acquisitions fail to add value for the acquiring and acquired companies and, indeed,
often end up dissipating value. The below figure is drawn from a Mercer
Management Consulting’ study of 150 acquisitions worth more than USD 550
million (1990 - 1995) [J.Warner, J.Templeman and R.Horn, 1995].
Why do so many acquisitions apparently fail to create value? There appear to be
four major reasons: (i) companies often experience difficulties when trying to
integrate divergent corporate culture, (ii) companies overestimate the potential
economic benefits from an acquisition, (iii) acquisitions tend to be very expensive,
and (iv) companies often do not adequately screen their acquisition targets.
1.2.1 Pitfalls of acquisitions
1.2.1.1 Difficulties with post-acquisition integration

Having made an acquisition, the acquiring company has to integrate the acquired
business into its own organizational structure. Integration can entail the adoption of
common management and financial control systems, the joining together of
operations from the acquired and the acquiring company, or the establishment of
linkages to share information and personnel. When integration is attempted, many
unexpected problems can occur. Often they stem from differences in corporate
Literature Review

16
cultures. After an acquisition, many acquired companies experience high
management turnover, possibly because their employees do not like the acquiring
company’s way of doing things. It has been suggested that the loss of management
talent and expertise, to say nothing of damage from constant tension, can materially
harm the performance of the acquired unit [J.P.Walsh, 1998].
1.2.1.2 Overestimating economic benefits
Even when companies achieve integration, they often estimate the potential for
creating value by joining together different companies. They overestimate the
strategic advantages that can be derived from the acquisition and thus pay more for
the target company than it is probably worth. This tendency has been attributed to
hubris on the part of top management. Top managers typically overestimate their
ability to create value from an acquisition, primarily because rising to the top of a
corporation has given them an exaggerated sense of their own capabilities [R.Roll,
1986].
1.2.1.3 The expense of acquisition
Acquisitions of companies whose stock is publicly traded tend to be very expensive.
When a company bids to acquire the stock of another enterprise, the stock price
frequently gets bid up in the acquisition process. This is particularly likely to occur
in the case of contested bids, in which two or more companies simultaneously bid
for control of a single target company. Thus, the acquiring company must often pay
a premium over the current market value of the target.

The debt taken on to finance such expensive acquisitions can later become a noose
around the acquiring company’s neck, particularly if interest rates rise. Moreover,
if the market value of the target company prior to an acquisition was a true
reflection of that company’s worth under its management at that time, a premium of
50% over this value means that the acquiring company has to improve the
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17
performance of the acquired unit by just as much if it is to reap a positive return on
its investment. Such performance gains, however, can be very difficult to achieve.
1.2.1.4 Inadequate pre-acquisition screening
One reason for the failure of acquisitions is management’s inadequate attention to
pre-acquisition screening [P.Haspeslagh and D.Jemison, 1991]. They found that
many companies decide to acquire other firms without thoroughly analyzing the
potential benefits and costs. After the acquisition has been completed, many
acquiring companies discover that instead of buying a well-run business, they have
purchased a troubled organization.
1.2.2 Execution of acquisitions
To avoid pitfalls and make successful acquisitions, companies need to take a
structured approach with three main components: (i) target identification and pre-
acquisition screening; (ii) bidding strategy; and (iii) integration [L.L.Fray,
D.H.Gaylin, and J.W.Down, 1984; C.W.L.Hill, 1984; D.R.Willen, 1985;
Haspeslagh and Jemison, 1996; P.l.Angslinger and T.E.Copeland, 1996].
1.2.2.1 Pre-acquisition screening
Thorough pre-acquisition screening increases a company’s knowledge about
potential takeover targets; leads to a more realistic assessment of the problem
involved in executing an acquisition and integrating the acquired company into
acquiring company’s organizational structure, and lessen the risk of purchasing a
potential problem company. The screening should begin with a detailed assessment
of the strategic rationale for making the acquisition and identification of the kind of

enterprise that would make an ideal acquisition candidate.
Next, the company should scan a target population of potential acquisition
candidates, evaluating each according to a detailed set of criteria, focusing on: (i)
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18
Financials position, (ii) Product market position, (iii) Competitive environment, (iv)
Management capabilities, and (v) Corporate culture. Such an evaluation should
enable the company to identify the strengths and weaknesses of each candidate, the
extent of potential integration problems, and the compatibility of the corporate
cultures of the acquiring and the acquired companies.
The company should then reduce the list of candidates to the most favored ones and
evaluate them further. At this stage, it should sound out third parties, such as
investment bankers, whose opinions may be important and who may be able to give
the list after this process should be the acquisition target.
1.2.2.2 Bidding strategy
The objective of bidding strategy is to reduce the price that a company must pay for
an acquisition candidate. The essential element of a good bidding strategy is timing.
For example, a company always looks for essentially sound businesses that were
suffering from short-term problems due to cyclical industry factors or from problem
localized in one division. Such companies are typically undervalued and thus can be
picked up without payment of 40% or 50% premium over current market value.
With good timing, a company can make a bargain purchase.
1.2.2.3 Integration
Despite good screening and bidding, an acquisition will fail unless positive steps are
taken to integrate the acquired company into the organizational structure of the
acquiring one. Integration should centre on the source of the potential strategic
changes of the acquisition – for instance opportunities to share marketing,
manufacturing, procurement, R&D, financial, or management resources.
Integration should also be accompanied by steps to eliminate any duplication of

facilities or functions. In addition, any unwanted activities of the acquired company
should be sold. Finally, if the business activities are closely related, they will
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require a high degree of integration. In the case of a company, whose strategy is one
of unrelated diversification, the level of integration can be minimal. However, a
company requires greater integration if its strategy is concentration on a single
business and expansion.
1.3 Managing acquired companies
It has been noted, in previous parts, that acquisition, as merger, is the principal
vehicles by which companies enter new product markets and expand the size of
their operations [M.S.Salter and W.A.Weinhold, 1979]. Earlier, strategic
advantages and disadvantages of merger and acquisition have been discussed
together with guidelines for successful acquisition to avoid its pitfalls. Now it is
time to consider how to design structure and control systems to manage new
acquisitions. This issue is important because many acquisitions are unsuccessful,
and one of the main reasons is that many companies do a very poor job of
integrating new company into their corporate structure [F.T.Paine and D.J.Power,
1984].
The first factor that makes managing new acquisitions difficult is the nature of the
businesses a company acquires. If a company acquires businesses closely related to
its existing businesses, it should find it fairly easy to integrate them into its
corporate structure. The controls already being used in the acquiring company can
be adapted to the acquired company. To achieve gains from synergies, the
companies can expand its task forces or increase the number of integrating roles, so
that acquired companies are drawn into the existing structure.
If managers do not understand how to develop connection among companies to
permit gains from economies of scope, the newly-acquired company will perform
poorly. It has been argued that this is why the quality of management is so

important. A company must employ managers who have the ability to recognize the
synergies among apparently different companies with various corporate cultures,