Answer question 1 and 2 please.

1)Based on Problems in Achieving Acquisition Success,explain (speculate if necessary) how each of the 7 problems may ormay not apply to ATT’s acquisition of TWC.

2)In the lecture notes is a short list regardingEffective Acquisitions; which of these do you speculate will applyto ATT if the acquisition is approved?

Below are notes:

Problems in Achieving Acquisition Success

Research suggests that perhaps 20 percent of all mergers andacquisitions are successful, approximately 60 percent producedisappointing results, and the last 20 percent are clearfailures.

Successful acquisitions generally involve a well-conceivedstrategy in selecting the target, the avoidance of paying too higha premium, and employing an effective integration process.

Integration Difficulties

Integration problems or difficulties that firms often encountercan take many forms. Among them are:

Melding disparate corporate cultures

Linking different financial and control systems

Building effective working relationships (especially whenmanagement styles differ)

Problems related to differing status of acquired and acquiringfirms’ executives

Inadequate Evaluation of Target

Due diligence is a process through which a firmevaluates a target firm for acquisition. In an effectivedue-diligence process hundreds of items are examined in areas asdiverse as the financing for the intended transaction, differencesin cultures between the acquiring and target firm, tax consequencesof the transaction, and actions that would be necessary tosuccessfully meld the two workforces.

Due diligence is commonly performed by investment bankers,accountants, lawyers, and management consultants specializing inthat activity, although firms actively pursuing acquisitions mayform their own internal due-diligence team.

Firms often pay too much for acquiredbusinesses:

Acquiring firms may not thoroughly analyze the target firm,failing to develop adequate knowledge of its true market value.

Managers’ overconfidence may cloud the judgment of acquiringfirm managers.

Shareholders (owners) of the target must be enticed to selltheir stock, and this usually requires that acquiring firms pay apremium over the current stock price.

In some instances, two or more firms may be interested inacquiring the same target firm. When this happens, a bidding waroften ensues and extraordinarily high premiums may be required topurchase the target firm.

Large or Extraordinary Debt

In addition to overpaying for targets, many acquirers mustfinance acquisitions with relatively high-cost debt.

A number of well-known and well-respected finance scholars arguein favor of firms utilizing significantly high levels of leveragebecause debt discourages managers from misusing funds (for example,by making bad investments) because debt (and interest) repaymenteliminates the firm’s “free cash flow.”

Inability to Achieve Synergy

Acquiring firms also face the challenge of correctly identifyingand valuing any synergies that are expected to be realized from theacquisition. This is a significant problem because to justify thepremium price paid for target firms, managers may overestimate boththe benefits and value of synergy.

To achieve a sustained competitive advantage through anacquisition, acquirers must realize private synergies and corecompetencies that cannot easily be imitated by competitors.Private synergy refers to the benefitfrom merging the acquiring and target firms that is due to theunique assets that are complementary between the two firms and notavailable to other potential bidders for that target firm.

Too Much Diversification

In general, firms using related diversification strategiesoutperform those using unrelated diversification strategies.However, conglomerates (i.e., those pursuing unrelateddiversification) can also be successful.

When they lack a rich understanding of business units’strategies and objectives, top-level managers tend to emphasize thefinancial outcomes of strategic actions rather than theappropriateness of the strategy itself.

This forces division or business unit managers to becomeshort-term performance-oriented.

The problem is more serious when manager compensation is tied toshort-term financial outcomes.

Long-term, risky investments (such as R&D) may be reduced toboost short-term returns.

In the final analysis, long-term performance deteriorates.

The experiences of many firms indicate that over diversificationmay lead to ineffective management, primarily because of theincreased size and complexity of the firm. As a result ofineffective management, the firm and some of its businesses may beunable to maintain their strategic competitiveness. This results inpoor performance.

Managers Overly Focused on Acquisitions

If firms follow active acquisition strategies, the acquisitionprocess generally requires significant amounts of managerial timeand energy.

For the acquiring firm this takes the form of:

Searching for viable candidates

Completing effective due diligence

Preparing for negotiations with the target firm

Managing the integration process post-acquisition

The desire to merge is like an addiction in many companies:Doing deals is much more fun and interesting than fixingfundamental business problems.

Due diligence and negotiating with the target often includenumerous meetings between representatives of the acquirer andtarget, as well as meetings with investment bankers, analysts,attorneys, and in some cases, regulatory agencies. As a result,top-level managers of acquiring firms often pay little attention tolong-term, strategic matters because of time (and energy)constraints.

Too Large

Firms can reach economies of scale by growing. But after acertain size is achieved, size can become a disadvantage as firmsreach a point where they suffer from what is called“diseconomies of scale.” This impliesthat problems related to excess growth may be similar to those thataccompany over diversification.

Other actions taken to enable more effective management ofincreased firm size include increasing or establishingbureaucratic controls, represented by formalizedsupervisory and behavioral controls such as rules and policiesdesigned to ensure consistency across different units’ decisionsand actions.

On the surface (or in theory), bureaucratic controls may bebeneficial to large organizations. However, they may produce overlyrigid and standardized behavior among managers. The reducedmanagerial (and firm) flexibility can result in reduced levels ofinnovation and less creative (and less timely) decision making.

Effective Acquisitions

Research has identified attributes that appear to be associatedconsistently with successful acquisitions:

When a firm’s assets are complementary (highly related) with theacquired firm’s assets and create synergy and, in turn, uniquecapabilities, core competencies, and strategic competitiveness

When targets were selected and “groomed” through earlier workingrelationships (e.g., strategic alliances)

When the acquisition is friendly, thereby reducing animosity andturnover of key employees

When the acquiring firm has conducted due diligence

When management is focused on research and development

When acquiring and target firms are flexible/adaptable (e.g.,from executive experience with acquisitions)

When integration quickly produces the desired synergy in thenewly created firm, allowing the acquiring firm to keep valuablehuman resources in the acquired firm from leaving