Mergers: What Can Go Wrong and How to Prevent It

John Wiley & Sons, New York, 2005

A powerful guide for seeking out the best acquisition and merger targets.

As increasingly more companies look to mergers and acquisitions (M&As) as a source of new growth and revenue, there is an even greater chance that these M&As will go bad. This insightful guide focuses on one of the most often debated and key issues in mergers and acquisitions-why some deals fail miserably and why others prosper. It provides a complete road map for what potential buyers should look for when picking a target and what characteristics of sellers they should steer clear of, as well as pitfalls to avoid during the M&A process. Real-world examples are provided of high-profile failures-Quaker Oats, United Airlines, Sears, and Mattel-and high-profile successes-General Electric and Cisco.

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TABLE OF CONTENTS:

Chapter 1 Introduction to Mergers and Acquisitions

• Background and Terminology
• Merger Process
• Economic Classifications of Mergers and Acquisitions
• Regulatory Framework of Mergers and Acquisitions
• Antitrust Laws
• State Corporation Laws
• Hostile Takeovers
• Takeover Defense
• Leveraged Transactions
• Restructurings
• Reasoning for Mergers and Acquisitions
• Trends in Mergers
• Conclusion
• Case Study: Lessons from the Failures of the
• Fourth Merger Wave

Chapter 2 Merger Strategy: Why Do Firms Merge?

• Growth
• Examples of Growth as an Inappropriate Goal
• Using M&As to Achieve Growth
• M&As in a Slow-Growth Industry as a Way to Achieve Growth
• Synergy
• Merger Gains: Operating Synergy or Revenue Enhancements—Case of Banking Industry
• Industry Clustering
• Deregulation
• Improved Management Hypothesis
• Hubris Hypothesis of Takeovers
• Winner’s Curse and the Hubris Hypothesis
• Cross-Industry Deals and Hubris
• Diversification and CEO Compensation
• Diversification That Does Seem to Work Better: Related Diversification
• Merging to Achieve Greater Market Power
• Do Firms Really Merge to Achieve Market Power?
• Merging to Achieve the Benefits of Vertical Integration
• Special Cases of Mergers Motivated by Specific Needs
• Conclusion
• Case Study: Vivendi

Chapter 3 Merger Success Research

• Criteria for Defining Merger Success Using Research Studies
• Takeover Premiums and Control
• Initial Comment on Merger Research Studies
• Research Studies
• Mergers of Equals: Acquirers versus Target Gains
• Long-Term Research Studies
• Long- versus Short-Term Performance and Method of Payment
• Bidder Long-Term Effects: Methods of Payment
• Bidder’s Performance Over the Fifth Merger Wave
• Conclusion
• Case Study: Montana Power- Moving into Unfamiliar Area

Chapter 4 Valuation and Overpaying

• Valuation: Part Science and Part Art
• Valuation: Buyer versus Seller’s Perspective
• Synergy, Valuation, and the Discount Rate
• Financial Synergies and the Discount Rate
• Toe Holds and Bidding Contests
• Bidding Contest Protections
• Overpaying and Fraudulent Seller Financials
• Valuation and Hidden Costs
• Post merger Integration Costs- Hard Costs to Measure
• Conclusion
• Case Study: AOL Time Warner

Chapter 5 Corporate Governance: Part of the Solution

• Governance Failure
• Regulatory Changes
• Corporate Governance
• Managerial Compensation and Firm Size
• Managerial Compensation, Mergers, and Takeovers
• Disciplinary Takeovers, Company Performance, and CEOs and Boards
• Managerial and Director Voting Power and Takeovers
• Shareholder Wealth Effects of Mergers and Acquisitions and Corporation Acquisition Decisions
• Post-Acquisitions Performance and Executive Compensation
• CEO Power and Compensation
• Do Boards Reward CEOs for Initiating Acquisitions and Mergers?
• Corporate Governance and Mergers of Equals
• Antitakeover Measures and Corporate Governance
• Conclusion
• Case Study: WorldCom

Chapter 6 Reversing The Error: Sell-Offs and Other Restructurings

• Divestitures
• Decision: Retain or Sell Off
• Spin-Offs
• Involuntary Spin-Offs
• Defensive Spin-Offs
• Tax Benefits of Spin-Offs
• Shareholder Wealth Effects of Sell-Offs
• Rationale for a Positive Stock Price Reaction to Sell-Offs
• Wealth Effects of Voluntary Defensive Sell-Offs
• Wealth Effects of Involuntary Sell-Offs
• Financial Benefits for Buyers of Sold-Off Entities
• Shareholder Wealth Effects of Spin-Offs
• Corporate Focus and Spin-Offs
• Equity Carve-Outs
• Benefits of Equity Carve-Outs
• Equity Carve-Outs Are Different from Other Public Offerings
• Shareholder Wealth Effects of Equity Carve-Outs
• Under Which Situations Should a Company Do a Spin-Off versus an Equity Carve-Out?
• Shareholder Wealth Effects of Tracking Stock Issuances
• Conclusion
• Case Study: Daimler Chrysler

Chapter 7 Joint Ventures and Strategic Alliances: Alternatives to Mergers and Acquisitions

• Contractual Agreements
• Comparing Strategic Alliances and Joint Ventures with Mergers and Acquisitions
• Joint Ventures
• Motives for Joint Ventures
• Regulation and Joint Ventures
• Shareholder Wealth Effects of Joint Ventures
• Shareholder Wealth Effects by Type of Venture
• Restructuring and Joint Ventures
• Potential Problems with Joint Ventures
• Strategic Alliances
• Governance of Strategic Alliances
• Shareholder Wealth Effects of Strategic Alliances
• Shareholder Wealth Effects by Type of Alliance
• What Determines the Success of Strategic Alliances?
• Conclusion
• Case Study: AT&T