Preface

When most people hear the term "mergers and acquisitions," the impression that comes to mind is a merciless corporate raider, who acquires a weakened corporate behemoth, strips the business of its assets, and fires thousands of innocent workers in the relentless pursuit of profit. This caricature is the gist for Hollywood films, but it holds true for only a minute fraction of transactions. The vast majority of M&A deals are friendly combinations between companies in the same, or a very similar, business.

The arranging, financing, and documenting of these combinations is a large industry in and of itself-employing a sizeable number of people in many vocations. The industry's attributes-and the process through which deals are conceived and closed-thus merit the close attention of a broad cross-section of individuals, such as:

• Investment bankers involved with mergers and acquisitions (M&A).
• Equity analysts at hedge funds, risk arbitrage, pension funds, commercial banks, endowments, insurance companies, mutual funds, and sovereign wealth funds, who invest in firms engaged in M&A.
• Private equity professionals at buyout funds, venture capital funds, and hedge funds, who routinely buy and sell companies.
• Corporate financial executives and business development professionals.
• Institutional loan officers working with M&A and buyout transactions.
• Business students at colleges and graduate business schools.
• Investor relations professionals at corporations and public relations firms.
• Business appraisers, including those at appraisal firms, accounting firms, and consultancies.
• Lawyers who work with corporate clients on M&A-related legal, financial, and tax matters.
• Independent public accounting firms that review M&A accounting.
• Government regulators at the Federal Trade Commission (FTC), Department of Justice, Internal Revenue Service (IRS), Securities and Exchange Commission (SEC), Federal Deposit and Insurance Corporation (FDIC), Public Accounting Oversight Board (PCAOB), Comptroller of the Currency, and Federal Reserve (and their international counterparts).
• Government elected officials who are interested in privatization or M&A related effects on economies.
• Bank trust and private wealth advisers.
• Sophisticated individual investors.
• Consultants that assist acquirers in the M&A due diligence process concerning the information technology, human resources, environmental records and nonfinancial facets of the seller.

Recent Trends

During the 16 years since the first edition was published, M&A activity has skyrocketed-increasing by a factor of four times-and the M&A community has expanded accordingly. Accompanying this growth were important changes to the business, including the following:

• Embracing of M&A by smaller firms. Previously the province of large companies, M&A is increasingly a sought-after growth option for mid-market enterprises.
• Private equity. The amount of capital provided to the private equity industry for leveraged buyouts has increased exponentially. Private equity is a more significant player in the M&A business than it was during the first edition's introduction.
• International. Like other facets of American business, M&A has gained international acceptance, particularly in the developed economies of Western Europe. In recent years, M&A activity in emerging markets, such as China and Brazil, has grown.
• Natural resources. To complement traditional exploration programs, natural resource companies have ramped up acquisitions as a means to gain additional reserves at a reasonable cost.
• Expansion of the Internet. The expanded use of the Internet has made the M&A process easier for buyers and sellers, and thus it has facilitated the rise in transactions.
• Increase in computing power, coupled with a decline in its cost. Information related to prospective deals, their pricing, and their financing structure can be sliced and diced in numerous ways. This allows industry participants to quickly size up likely scenarios.
• Rise in activist investors. After a long hiatus, activist investors are stimulating M&A activity among publicly traded companies, encouraging those considered "undervalued" to sell themselves or conduct spin-offs. Publicly traded companies represent a small subset of the deal universe, but they tend to involve the larger, more publicized transactions.

Overview of the Contents

The book starts with a bird's-eye view. We begin with the state of the global M&A markets and the motivations behind most acquisitions. I then synthesize the 10 principal motivations into the three financial tactics that govern the preponderance of deals. These topics represent Chapters 1-4.

After this high-level review, the book covers the age-old question: How does a buyer find an acquisition from the thousands of possible targets? The book outlines the methodical search process of successful acquirers and ends the discussion with the key attributes of "good" versus "bad" deals. This material is covered in Chapters 5-9.

Once the buyer has identified a few acquisition candidates, it assesses their financial histories and future prospects (Chapters 10-12). Then, it must consider the appropriate price to offer the owners. Chapters 13-17 provide a brief synopsis of corporate valuation techniques, the subject of many books including one of my own: Security Analysis and Business Valuation on Wall Street (John Wiley & Sons, second edition, 2010). The standard techniques for industrial and service firms represent the limit for most valuation books, but here I also cover special challenges, like natural resource companies, money-losing enterprises, cyclical businesses, and emerging markets firms. The special cases are important; few acquisition targets are U.S.-based, "vanilla" companies with a smooth upward trend of revenue and profit-that is, the kind you see in most textbooks.

If the buyer and seller are "close" on the seller's valuation, the buyer then has to gauge the impact of the prospective transaction on its balance sheet, income statement and future equity price. Chapter 18 reviews the basics of M&A financial accounting for the combined firms. From this initial financial analysis, the buyer completes a computer model of the transaction. As Chapter 18 explains, the model provides the basis through which other financial actors-lenders, equity investors, and rating agencies-assess the deal. If the seller accepts buyer securities or contingent consideration, it too will consider modeling the transaction. The book discusses debt and equity finance in Chapter 18.

Up through Chapter 18, I focus on the buyer's strategy tactics, valuation, accounting, and finance concerns, essentially descending from (a) the "big picture" viewpoint to (b) the day-to-day task of the buyer's deal analysis. Chapter 19 takes a diversion and it discusses the reasons why sellers sell and why a sale is often preferable to an initial public offering (IPO). Chapter 20 then proceeds to cover, in a step-by-step fashion, the process by which a sizeable business is sold.

Chapters 21 reviews the key legal documents encompassed in the sale process, as well as the common legal structures. A proper legal structure can save the buyer or seller significant monies, and it can offer either party substantial protection from unforeseen problems.

Chapter 22 examines several transaction categories, such as hostile takeovers, demergers, and reverse mergers, which fall into the mainstream from time to time. Such transactions gain popularity only to recede into obscurity, as economic or regulatory conditions change.

What's New in the Second Edition

The methodical process needed to produce a successful M&A deal has not changed fundamentally over the past 30 years. However, the transaction environment, valuation techniques, financial accounting, and legal structures have evolved over time. This second edition provides the necessary updates, additional insights, fresh examples, and current anecdotes. I have rewritten the majority of the book to provide a more concise treatment of M&A and to reflect my broader international experience. This edition takes advantage of the knowledge I have gained from closing more deals, conducting executive education, and lecturing on M&A around the world.

To facilitate the reader's understanding of the subject matter, the book is divided into five parts.

• Part One: The Big Picture
• Part Two: Finding a Deal
• Part Three: Target Financial Analysis
• Part Four: Acquisition Valuation
• Part Five: Combination, the Sale Process, Tax and Legal Structures, and Special Situations

Instructors may visit the Wiley Higher Education website for M&A, Second Edition for Q&A, PowerPoint Slides, Sample Exams, Cases and Exercises, and other classroom tools.

For convenience, the pronoun he has been used throughout this book to refer nonspecifically to capital markets participants. The material herein will be equally useful to both men and women who evaluate M&A transactions.

This book will help you consider corporate strategies, make optimal M&A transactions, close better private equity deals, obtain superior arbitrage investments, and assess...