Preface

Mark Twain barely contained his use of profanity, a problem his wife abhorred and sought to cure. One evening, he and she were dressing for a formal dinner when a button popped off his shirt. He launched a tirade against buttons, formal shirts, and evening wear. After a few minutes, the profanity subsided. Twain's wife decided to use the moment to remind her husband to govern his language. Calmly, and in a flat voice, she repeated, word for word, the entire tirade. Twain replied, "It would pain me to think that when I swear it sounds like that. You got the words right, Livy, but you don't know the tune."1

Thus it is in conversations about mergers and acquisitions (M&A) between scholars and practitioners. Each thinks the other has, at best, the words but not the tune. I wrote this book to blend both views. It all began when I needed written notes with which to teach MBA students and practitioners about the analysis and design of M&A deals. I had studied M&A for my entire career, producing a number of research articles and monographs, and numerous case studies. Over the years, so many students and practitioners had shared with me their struggles to learn M&A that I gained a clear sense of the development challenge. And early in my career, I worked briefly as an analyst for a large financial institution, assessing, implementing, and financing M&A deals. Based on this, I thought I had something to say. Plus, I cared enough to want to say it. Motivated by the astonishing M&A boom of the 1990s and the subsequent bust spangled with some prominent M&A-related corporate collapses, I wanted to help practitioners redefine best practice in the field of M&A and to highlight how one might actually apply it. I sought to remind the many critics of M&A that it is a vital instrument of industrial renewal and that we stifle the disruptions of M&A only at our peril. I aimed to caution the optimists in M&A to take very great care because M&A is no simple road to success. And I hoped that my writing might nudge my scholarly colleagues toward greater insights.

Therefore, I started to write and to use these notes in my teaching. I tried to blend the conceptual world of the scholar and the "how to do it" view of the practitioner. I gave greater attention to research where the issues were important and when I thought it had something important to say. The chapters present ideas refined in my work with practitioners and MBA students at Darden, INSEAD, and IESE. As the chapters developed, more questions appeared. The interdependent nature of M&A deals meant that a narrow focus would not be appropriate- simply to discuss valuation and value creation without covering the management processes and practices on which they rely would be to tell only part of the story. Thus, I became convinced that the subject had to be presented comprehensively or not at all. Also, I found that learning by doing was the best way to absorb the tools and concepts of best practice. Therefore, I determined to give the reader software in the form of Excel spreadsheet programs that would enable hands-on experimentation with the ideas and tools presented in the chapters. The CD-ROM, which may be purchased as a bundle with this book or separately at a later date for those who want that option, contains that software. Also, the CD-ROM has prepared questions and problems that can help cement ideas from the chapters for those who want the self-study challenge of answering them, and some M&A deal documentation and reading materials that should aid the learning by doing process. And, finally, the companion workbook contains summaries and more self-training questions and problems, a few of which will require the CD-ROM, for highly motivated students of M&A best practices. What started as a small project has now, thousands of manuscript pages later, become the item in front of you.

Through a focus on ideas and their application, this book aims to help the practitioner improve his or her practice of M&A. Thus, the idea-based approach preempts a number of attributes common to the professional literature. This is not a handbook in the sense of providing recipes, wiring diagrams, or assembly instructions. Wherever possible, I have tried to offer examples that can be carried over to other cases and some guidance on how to translate analysis to other situations. Exhibit P.1 gives a list of the actual mergers and acquisitions presented as case studies; these illustrate tools, concepts, and processes discussed in the book. "About the CD-ROM" on page 939 lists the template spreadsheet files on the CD-ROM-you can use these to start exercising your intuition and apply the ideas to your own deals. The field of M&A is too complicated to distill into a simple "to do" list. Rather, I hope to arm the thoughtful practitioner with a wide range of powerful tools and concepts (along with suitable warnings about their use and limitations) and trust that one will adapt them to the specifics of one's circumstances. This book outlines responses to the four classic questions:

1. How should I understand M&A activity? Broadly stated, what you see happening around you is the result of economic forces at work. But economics is only a necessary (but not sufficient) explanation for what you see. Psychology plays a significant role as well. This book will illustrate how psychology intervenes through conduct.
2. What drives success in M&A? Lucky structure of the environment combined with good conduct. The book will also offer details about how to measure success.
3. What do I need to know? The executive and M&A professional should have a competent foundation in all areas of M&A practice. This includes being able to assess the structure of the environment as well as the ability to shape the right conduct on your side (and anticipate the varieties of conduct on the other side).
4. What is best practice in M&A? Best practices enhance the probability that you will deliver successful outcomes. The book will highlight good approaches in each of the areas of structural analysis and conduct. Ultimately, the secret to best practice is the development of good processes. This book highlights process management considerations that might enhance the performance of your organization.

In answering these classic questions, this book insists that the reader should "get a view." On some issues, the research findings and conventional wisdom are in alignment-there, getting a view is not so hard. But on other issues they are in flux or wide disagreement and the reader will need to work to get a view. I'll sketch my own positions when doing so is instructive. But at the end of the day, you learn best that which you teach yourself.

EXHIBIT P. 1 Merger and Acquistion Cases Illustrating Practical Ideas in This Book

Chapter Case 2 Walt Disney Company (ethics of greenmail) 6, 9, 11, 24, 25 Daimler-Benz A.G. and Chrysler Corporation (strategic analysis, valuation, analysis of synergies, social issues, and deal process) 7, 29 Kestrel Ventures (acquisition search) 12 Westmoreland Energy (cross-border joint venture) 12 Continental Cablevision (cross-border joint venture) 13 MediMedia International (leveraged buyout) 13 Revco Drug Stores (leveraged buyout) 13 Koppers Company (leveraged recapitalization) 14 Lucent (spin-off, real options) 14 Agouron Pharmaceuticals (valuing a biotech firm with real options) 14 NCNB/First Republic (staged investing, real options) 14 EM.TV/SLEC (setting acquisition terms, real options) 15 Volvo/Renault (valuing liquidity and control) 17 "Automatic" Sprinkler (momentum acquiring) 17 Ling-Temco-Vought (conglomerate strategy, momentum acquiring) 17 U.S. Office Products (industry roll-up, momentum acquiring) 17 Tyco International (conglomerate strategy, momentum acquiring) 22 Lilly/Hybritech (contingent payment unit) 23 AT&T/MediaOne (collar) 23 Rhône-Poulenc/Rorer (contingent value right) 23 Genzyme/GelTex (staged investing) 24 First Union/Wachovia (social issues) 24 Hewlett-Packard/Compaq (social issues) 24 Fleet Bank/BankBoston (social...