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Assume you were just promoted to be the VP in charge of corporate strategy of a company listed on the NASDAQ with annual revenues of approximately $250 million. You received an increase in salary, received a bonus, and special grant of stock. Your bonuses were equal to your annual salary and you received restricted shares equal to twice your annual salary.
Your first task is to attend a presentation with your boss by the company's CEO (Alex) and the Executive VP (Joey), both who are sons of the founder of the company. The brothers want to make their own impression on the company. They believe they have a great acquisition idea.

Alex: Our company is doing great, and our stock is at a new high. This is our best year and we want to capitalize on it with one or two key acquisitions. Joey and I think we need to diversify. Our current business (oil) is good, but computers will run this century.

Our results with this company show we have a skilled management team. We want to exploit our skill set into new areas and develop new core competencies. We'll need new VP's in the acquired units.

We have identified a computer game company in California that seems like a good target. Their stock price is down a little, but Joey thinks the company makes great games. He has done a lot of research.

We can add a lot of value to the operation of that company. It could use some of our discipline. We get get those software guys to work at 8 in the morning and really increase production. Just moving the headquarters to Texas will save a million dollars a year.

Joey: Integration will be easy. We are an easy going bunch and we'll make their people feel right at home. The acquisition would be pretty cheap for us because we can use some of our stock. There are some other companies interested in the game company, but we can outbid them. We also have plenty of cash. Since we don't pay dividends the company's cash is growing fast with high oil prices.

What would you tell your boss of this plan (benefits, pitfalls, questions regarding the acquisition that need to be addressed, etc.), assuming only he will hear your thoughts?

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Alex and Joey:

The plan sounds exciting; however, there are many factors that need to be evaluated before pursuing on this acquisition strategy.

I agree with the fact that our company needs to diversify, however, I am more in favor of diversification in related areas, rather than in a completely new industry as it can prove to be very risky, especially when we do not possess any significant understanding about the computer software industry. Although we possess a skilled management team, we do not have sufficient expertise to manage a computer software industry. Hence, even if we acquire this entity, ...

Solution Summary

Mergers: benefits, pitfalls, questions regarding the acquisition idea of Alex & Joey