Maximizing Corporate Value through Mergers and Acquisitions

Preface xiii CHAPTER 1 Merger Growth Strategy 1 Strategy and M&A 2 Introduction to M&A 4 Background and Terminology 5 Hostile Takeovers 5 Takeover Defense 8 Leveraged Transactions 10 Restructurings 12 Trends in Mergers 14 Notes 20 CHAPTER 2 Growth through Mergers and Acquisitions 21 Is Growth or Increased Return the More Appropriate Goal? The Case of Hewlett-Packard 21 M&A Must Fit the Strategy--Not the Other Way Around 24 Strategy Should Not Be Just M&A 25 Organic Growth or Growth through M&A 25 Acquisition and Development versus Research and Development 26 Can M&A Be Effectively Used to Buy Growth? 30 Success in Core Business Does Not Always Translate to Success with M&A Strategy: Focus onMicrosoft 31 Growth through Bolt-On Acquisitions 31 Knowing When to Exit a Business 35 From Growth through M&A to Growth through Organic Expansion 36 Controlling the Runaway Dealmaker CEO 38 Using M&A to Achieve Growth in a Slow-Growth Industry 40 Squeezing Out Growth in a Slow-Growth Industry Using Multiple Options 40 Dealing with a Slow-Growth Business and Industry 42 Geographical Expansion through M&A 46 International Growth and Cross-Border Acquisitions 47 Taking Advantage of Currency Fluctuations to Pursue High-Growth M&A 47 Finding Growth in High-Growth Markets 49 Cyclical Companies Achieving Growth in Recessed Markets 50 Notes 52 CHAPTER 3 Synergy 53 What Is Synergy in the Context of M&A? 53 Achievement of Synergy: A Probabilistic Event 55 Types of Synergy 58 Industries' Pursuit of Cost Economies 65 Research on Operating Economies in M&A 69 Economies of Scope 70 Scope Economies and the One-Stop Shop 72 Copycat Following of Another Firm's Foolish M&A Strategy 74 Cost Economies in Banking Mergers: United States versus Europe 75 Internationalization Theory of Synergy and Information-Based Assets 79 Notes 89 CHAPTER 4 Diversification 91 Diversifying M&A in the Conglomerate Era 91 Modern-Day U.S. Conglomerates 92 Portfolios of Companies 95 Theoretical Basis for Diversification 98 Applying Portfolio Theory to Conglomerates? 99 Diversification and the Acquisition of Leading Industry Positions 100 Achieving a Number One or Two Ranking Is Not a Panacea 102 Diversification to Enter More Profitable Industries 102 Empirical Evidence on Diversification 103 Empirical Evidence on the Acquisition Programs of the 1960s 103 How Likely Is It That Diversifying Acquisitions Will End Up Being Sold Off? 104 Is There a Diversification Discount? 105 Focus Hypothesis 106 Types of Focus Increases 106 Focus-Increasing Asset Sales Raise Value 107 Explanation for the Diversification Discount 107 Related versus Unrelated Diversification 108 Why Are Very Diversified Companies Allowed to Form? Beware of the Empire Builders 111 Do Managerial Agendas Drive M&A? 113 Notes 114 CHAPTER 5 Horizontal Integration and M&A 117 Advantages of Holding the One and Two Position in the Industry 117 Benefits of Size: Spotlight on the Mobile Telecommunications Industry 119 Motivation to Increase Size 122 Competitive Pressures of Competitors' M&A Program 122 Horizontal Deals: Acquisitions of Competitors and Their Competing Brands 124 Sprint-Nextel Horizontal Deal: One of the Worst in M&A History 125 Declining Industry Demand Necessitating Industry Consolidation 128 Synergistic Gains and Horizontal M&A 129 Net Benefits of Horizontal Deals = Synergistic Gains - (Easy to Measure Costs + Hard to Measure Costs) 133 Horizontal Merger Success, Target's Size, and Post-M&A Integration Costs 134 Mergers of Equals 136 Mergers of Equals and Challenges of Integration 137 Mergers-of-Equals Research: Acquirers versus Target Gains 139 Competitive Advantages of Horizontal Deals: Case Study--InBev and Anheuser-Busch 139 Regulatory Concerns on Merger Integration 141 Horizontal M&A and Market Power: An Economic Perspective 143 Empirical Evidence on Whether Firms Pursue M&A to Achieve Market Power 145 Countervailing Power, Industry Concentration, and M&A 147 Horizontal Integration, Consolidation, and Roll-Up Acquisition Programs 155 Notes 156 CHAPTER 6 Vertical Integration 159 Benefits of Vertical Integration 159 Risk and Vertical Integration 159 Vertical Integration as a Path to Global Growth 160 How Owning Your Own Supplier Can Be a Competitive Disadvantage 163 Vertical Integration as a Natural Outgrowth of a Business 165 Vertical Integration: A Growth Strategy? 168 Continually Reevaluating a Vertical Integration Strategy 173 Regulation of Vertical Integration 176 Copycat Vertical Integration 177 Note 178 CHAPTER 7 Growth through Emerging Market M&A 179 Economic Condition of Major Economies in the Postsubprime World 180 Low-GrowthMarkets' Diminishing Returns 181 Role of Demographics 182 The Next 11 183 M&A Is Not Always the Best Way of Accessing High-Growth Markets 184 High-Growth Regions and Countries 185 Risks of EmergingMarkets 208 Entering Large Slow-Growth Markets Instead of Fast-Growth Emerging Markets 210 Reducing Country M&A Risk: Investing in Local Companies That Engage in Substantial Emerging Market M&A 211 Finding Growth in High-Growth Markets 213 Emerging Market Acquirer 216 China and Its Emerging Market Acquirers 218 Notes 220 CHAPTER 8 Joint Ventures and Strategic Alliances as M&A Alternatives 221 Contracts versus Joint Ventures 222 Potential Problems with Joint Ventures and Strategic Alliances 222 Shareholder Wealth Effects of Joint Ventures 224 Shareholder Wealth Effects by Type of Venture 225 Relatedness and Size 226 Market's Assessment of Risk of Joint Ventures 227 Strategic Alliances 227 Strategic Alliance Process 228 Shareholder Wealth Effects of Strategic Alliances 229 Shareholder Wealth Effects by Type of Alliance 229 Notes 230 CHAPTER 9 Role of Corporate Governance in M&A 233 Agency Cost Problem 233 CEO Compensation and Agency Costs 235 Do Shareholders Get Value for the High Compensation Paid to U.S. CEOS? 237 Board Characteristics and CEO Compensation 238 Benchmarking and How Boards Determine CEO Compensation 239 Are the High Paid Superstar CEOs Simply Worth the Money? Not 240 Are CEOs Paid for Luck? 241 CEO Compensation and M&A Programs 241 Do Boards Pay CEOs for Doing M&A? 241 Do Boards Punish CEOs for Doing Bad M&As? Case of Rio Tinto 242 Golden Parachutes and M&A 243 CEO Severance Payments 243 Are CEOs Evaluating M&A by Thinking, "What's in It for Me?" 244 CEO Overconfidence and M&A 244 Are Overconfident CEOs Good for Anything? 245 Management Compensation and Post-Acquisition Performance 245 Role of the Board of Directors 246 CEO Tenure, Board Composition, and the Disciplinary Effects of Takeovers 257 Antitakeover Measures 257 Corporate Governance and the Divestiture Decision 259 Notes 259 CHAPTER 10 Downsizing: Reversing the Error 263 Analyzing the Strategic Fit of a Business Unit 266 Market Conditions 267 Regulatory Concerns 267 Divestiture Likelihood and Prior Acquisitions 267 Another Option: Equity Carve Out 268 Another Option: Spinoff 269 Spinoff or Equity Carve Out: Which Option Is Better? 270 Another Option: Split-Off 272 Tax Effects 272 Shareholder Wealth Effects of Selloffs 272 Round Trip Wealth Effects 274 Spinoffs as a Means of Increasing Focus 274 Differences in Types of Focus Increases 275 Shareholder Wealth Effects of Spinoffs: United States versus Europe 278 Corporate Governance and Selloffs 279 Managerial Ownership and Selloff Gains 280 Activists and Selloffs 280 Market Liquidity and the Decision to Sell a Unit 280 Involuntary Selloffs 281 Voluntary/Involuntary Selloffs 281 Voluntary Defensive Selloffs 282 Tracking Stocks 283 More Drastic Solutions: Voluntary Bust-Ups 285 RecentMajor Exceptions to Positive Shareholder Wealth Effects of Selloffs 286 Notes 289 CHAPTER 11 Valuation and Merger Strategy 291 Financial versus Nonfinancial Buyers 291 Target and Bidder Valuation Effects 293 What Types of Acquiring Firms Tend to Perform the Poorest? 295 Premiums 295 Historical Trends in Merger Premiums 296 Stock Market Activity and Merger Premiums 297 Stock Market-Driven Acquisitions 298 Determinants of Acquisition Premiums 298 Premiums from Strategic Mergers 298 Hubris and Merger Premiums 299 Early Research 300 Later Research 300 Winner's Curse Hypothesis of Takeovers 301 Campeau's Mega-Bust 302 Research on Winner's Curse of Takeover Contests 304 Market Performance, Valuation, and Takeover Probability 304 Deal Size and Shareholder Wealth 305 Valuation Analysis and Source of the Flaws in Bad Deals 306 Comments of the Residual Value 308 Free Cash Flows 308 Cost Cutting and Historical Free Cash Flows 309 Growth Rate for Projection 310 Capitalization Rates and the Exit Multiple 310 Discount Rate 311 Whose Capital Costs Are We Measuring? 313 Using the Build-Up Method 313 Short-Term Interest Rate Trends 315 Using Comparables 316 Public versus Private Acquirers 316 Public versus Private Sellers 318 Notes 321 About the Author 325 Index 327