Preface to the Eighth Edition

To the Reader

The dynamism of today's global economy requires corporations to restructure their businesses to remain competitive. This restructuring entails activities ranging from mergers and acquisitions (M&As) to divestitures and spin-offs to reorganization under the protection of national bankruptcy laws. Against this backdrop, this book attempts to bring clarity to what can be an exciting, complex, and sometimes-frustrating subject. Intended to help the reader think of the activities involved in mergers, acquisitions, business alliances, and other types of corporate restructuring in an integrated way, M&A activities are discussed in the context in which they occur.

This book is unique in that it is the most current, comprehensive, and cutting-edge text on M&A and corporate restructuring available. It is current in that it includes many of the most up-to-date and notable deals (e.g., Facebook's takeover of WhatsApp, the Dell privatization, and Verizon's mega buyout of Vodafone's share of Verizon Wireless), precedent setting judicial decisions (e.g., efforts to overturn defenses at Airgas and Sotheby's), new regulations (e.g., expediting backend mergers), trends (e.g., increasing role of activist investors in takeovers), and new tactics (e.g., two-tiered poison pill) employed in M&As. Most integrative case studies are new for this edition and involve transactions that have been announced or completed since 2013. It is comprehensive in that nearly all aspects of M&As and corporate restructuring are explored. It is cutting edge in that conclusions and insights are anchored by the most recent academic research, with references to more than 200 empirical studies published in leading peer-reviewed journals just since 2012. And the substantially updated content is illustrated with numerous practical exhibits, case studies involving diverse transactions, easy-to-understand numerical examples, and hundreds of discussion questions and practice exercises.

The highlights of the new edition are listed here:

 New Chapters: Two new chapters: Chapters 9 and 14. Chapter 9 discusses the basics of applying financial modeling methods to firm valuation and assists the reader in understanding the power (and limitations) of models in analyzing real world situation. Chapter 14 illustrates how complex financial models often are used to support the deal structuring process during M&A negotiations.

 New Cases: Ninety percent of the nearly 40 case studies are new and involve transactions announced or completed during the last 3 years. These cases represent friendly, hostile, highly leveraged, and cross-border deals in 10 different industries, involving public and private firms as well as firms experiencing financial distress. All end of chapter case studies begin with a "Key Objectives" section indicating what the student should learn from the case study and include discussion questions and solutions available in the online instructors' manual.

 HBR Case Study Recommendations: At the end of each chapter, the reader can choose from a number of references to popular case studies relevant to the chapter's content available through the Harvard Business School Publishing Site.

 Latest Research: This edition focuses on the most recent and relevant academic studies, some of which contain surprising insights changing the way we view this subject matter. Recent research has significant implications for academicians, students, M&A practitioners, and government policy makers shedding new light on current developments and trends in the ever-changing M&As market. The market for corporate control and corporate restructuring strategies are constantly changing, reflecting the ongoing globalization of both product and capital markets, accelerating technological change, escalating industry consolidation, changing regulatory practices, and intensifying cross-border competition. While continuing to be relevant, empirical research covering the dynamics of the M&A markets of the 1970s, 1980s, and 1990s may be less germane in explaining current undercurrents and future trends.

 What's New in Chapters 1-10: Chapter 1 contains the latest empirical research pertaining to the success rates among M&As. Chapter 2 provides an update of prenotification filing requirements and other updates to antitrust and SEC reporting requirements as well as other major federal and state regulations impacting M&As. The chapter also discusses recent trends in how US antitrust law is applied. Chapter 3 provides the latest research on the increasing effectiveness of activist investors in promoting good governance, the emergence of the two-tiered poison pill, an expanded discussion of the role of management and the board of directors in promoting good corporate governance, and a more detailed analysis of toehold bidding strategies. This chapter also provides insight into the role of incentive systems and management contracts and their impact on corporate governance and firm value, as well as an updated discussion of dual class capital structures, leveraged recapitalizations, and the role of litigation as both a takeover tactic and defense. Chapter 4 includes an illustration of how to apply SWOT analysis to Facebook and how such an analysis could provide insight into why the firm acquired WhatsApp. Chapter 5 contains an updated listing of sources of both public and private company information. The chapter also includes an updated analysis of how potential acquirers make first contact with target firms, a more detailed discussion of how due diligence is performed and its role in the negotiation process, and the increasing role played by the "virtual data room." Chapter 6 discusses the challenges of integrating family or privately owned firms and the need to take these factors into consideration in developing the offer price for such targets. A number of the examples in Chapters 7 and 8 were updated using 2013 and where possible 2014 data. Estimates of firm size premiums and their applications have been updated in Chapter 7 along with a more detailed discussion of the "bottoms-up" approach to estimating firm betas. Chapter 8 also contains a discussion of when to use the various valuation methods discussed in this book. Chapter 9 has been completely rewritten to focus on the basics of applying financial modeling methods to firm valuation. The chapter emphasizes how financial modeling can be used to estimate the stand-alone value of a single firm, common financial model linkages, how such models balance, common data sources and how to align common data sources with model input requirements. Chapter 10 addresses the selection of the appropriate marginal tax rate when the acquirer is something other than a publicly traded firm.

 What's New in Chapters 11-18: Chapter 11 discusses the role of convertible securities to resolve acquirer and target concerns when both are lacking in critical information about the other. The chapter also discusses recent changes in Delaware law allowing for expedited backend mergers involving public companies and reducing the need for expensive and time consuming top-up options and dual track structures. The chapter also discusses recent court rulings clarifying when squeeze out mergers should be subject to the "business judgment rule" or the more rigorous "unified fairness standard." Chapter 12 contains an expanded discussion of the treatment of net operating losses in M&As and the increasing popularity of "tax inversions." The discussion of inversions addresses the implications of new U.S. Treasury rules introduced in late 2014. The chapter also addresses recent changes in how goodwill is calculated and how it is treated for private firms under GAAP. Chapter 13 includes an updated discussion of how M&As are financed and a more detailed discussion of LBOs as financing strategies and new coinvestment strategies employed by buyout firms. In Chapter 14, the focus is on the application of financial modeling to value and structure M&As in both stock and asset purchases, with a focus on their strengths and limitations. The chapter illustrates practical ways of assessing the impact on EPS and credit ratios of alternative deal and financing structures, how to calculate fully diluted shares when options and other convertible securities are present, and how to quantify revenue and cost-related synergy. Chapter 15 includes a discussion of how intangible assets contributed to JVs are valued and how they may impact the determination of equity contributions made by partners; and an updated discussion of the advantages and disadvantages of alternative alliance structures. Chapter 16 features a description of the typical IPO timeline and an updated discussion of how purchase premiums are determined. Chapter 17 analyzes how the strength of creditor rights affects a firm's financing strategies. Chapter 18 contains an updated and more detailed discussion of how to select the correct marginal tax rate in cross-border deals.

 Updated Ancillary Materials: Both student and instructor PowerPoint slide presentations have been updated to reflect...