Creating Value From Mergers and Acquisitions - ToC

'2ncTedition

Creating Value fromMergers and AcquisitionsThe Challenges

Sudi Sudarsanam

Financial TimesPrentice Hallis an imprint of

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Singapore • Hong KongTokyo • Seoul • Taipei • New Delhi • Cape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan

CONTENTS

Preface to the second editionPreface to the first editionAuthor's acknowledgementsPublisher's acknowledgements

1 IntroductionDo mergers and acquisitions add or

destroy shareholder value?The five-stage (5-S) modelStage 1: How good is the corporate

strategy development process?Stage 2: How well does the company

organize for acquisitions?Stage 3: What are the pitfalls in deal

structuring and negotiation?Stage 4: Don't count the chickens yet!

Post-acquisition integrationStage 5: How did the merger go? Post-

acquisition audit and organizationallearning

Objectives of the bookOutline of the bookNotes and references

PART ONEHISTORIC, CONCEPTUAL ANDPERFORMANCE OVERVIEW OF

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2 Historical overview of mergersand acquisitions activityObjectivesIntroductionThe wave pattern of takeovers in the USTakeover activity in the European UnionHistorical overview of takeover activity

in the UKMergers in emerging marketsOverview of the merger wavesWhy do merger waves happen?Rational economic models of merger wavesImpact of industry changes on M & A

activityBehavioural models of merger waves

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3339

It's not all 'high buys low'; 'low buyshigh' too 41

Strategic implications of industryclustering of M & A 41

Case Study: Pharmaceuticals suffer fromthe urge to merge 42

Overview and implications for practice 44Review questions • 44Further reading 45Notes and references 45

3 Alternative perspectives onmergers 49Objectives 49Introduction 49The economic perspective on mergers 50Industry analysis of competition 54Game theory and competitive moves 57Strategy perspective on mergers 62Dynamic capabilities and mergers 69Corporate and business strategies 71Finance theory perspective on mergers 72Managerial perspective on mergers 78Organizational perspective on mergers 79Summary of the multiple perspectives on

mergers , 80Case Study: 'The Best a Man or a Woman

Can Get' - P&G and Gillette bridge thegender gap in their brands! 81

Overview and implications for practice - 82Review questions 83Further reading 83Notes and references 83

4 Are acquisitions successful? 86Objectives 86Introduction 86Defining success of mergers and

acquisitions 87Measuring the impact of acquisitions on

shareholder returns 88Review of stock market assessment of

acquisition performance 91Results of empirical studies of merger

impact on stock returns 94

Contents

Assessing the operating performance ofacquirers 101

Overview of the operating performancestudies 107

Post-merger performance of alternativecorporate strategies 107

Mergers, managers and corporategovernance 108

Post-merger performance and M & Adeal characteristics 109

Overview and implications for practice 110Review questions 111Further reading 111Wofes and references 111Appendix 4.1: Abnormal returns

methodology to study the impact ofmergers on shareholder value 113

Appendix 4.2: Studies cited in Tables 4.1to 4.9 117

PART T W O ]^CORPORATE STRATEGY A N DORGANIZINGi FOR^jACjOJJ|SITIONS

5 Sources and limits of valuecreation in horizontal andrelated mergers 123Objectives 123Introduction 123Motivations for horizontal mergers in

mature industries " 124Revenue enhancement through mergers 126Cost savings as a source of value creation

in acquisitions 131New growth opportunities as a source

of value 140Resource-based view (RBV) of

acquisitions and value creation 141Evidence of lack of sustainable

competitive advantage 147Case Study: Heavy truckers trundle their

way to market dominance 149Overview and implications for practice 150Review questions 151Further reading 151Notes and references 151

6 Sources and limits of valuecreation in vertical mergers 156Objectives 156Introduction 156

Vertical integration 157Benefits and costs of buying in markets 159Benefits and costs of long-term contracts 160Benefits and costs of vertical integration 162Vertical mergers and value creation 165Empirical evidence on vertical mergers

and their value effects 166Vertical mergers that blur industry

boundaries 167Outsourcing through acquisitions 170Case Study: Hospital, heal thyself 172Overview and implications for practice 177Review questions 178Further reading 179Notes and references 179

7 Sources and limits of valuecreation in conglomerateacquisitions 180

Objectives 180Introduction 180Pattern of conglomeration in different

countries 181Why do firms diversify? 184Resource-based view of conglomerate

acquisition 187Finance theory of conglomerate

diversification 189Managerial perspective on conglomerate

diversification 192Organizational perspective on

conglomerate diversification 194Summary of alternative perspectives 195Review of empirical evidence on the

value of conglomerate diversification 196Valuation of conglomerates in other

countries 201Evidence on operating performance 202Is the internal capital market efficient? 203Case Study: Messier bets Vivendi on

his grand vision and pushes it towardsbankruptcy! 208

Overview and implications for practice 212Review questions 212Further reading 212Notes and references 213

8 Cross-border acquisitions 217Objectives 217Introduction 217Alternative overseas expansion strategies 218

Contents

Recent trends in cross-borderacquisitions

Factors influencing cross-border mergersWhy do corporations undertake cross-

border acquisitions?Barriers to cross-border takeoversValuation and financing of overseas

acquisitionsPost-acquisition integrationEmpirical and survey evidence on CBA

performanceCase Study: Cross-border acquisitions

bring power to companiesOverview and implications for practiceReview questionsFurther readingNotes and references

9 Strategic alliances as analternative to mergers andacquisitionsObjectivesIntroductionTypes of strategic allianceInternational joint venturesModel of a joint ventureStructuring a joint venturePerformance evaluation of joint

venturesCritical success factors in strategic

alliancesChoosing between an acquisition and

an allianceCase Study: General Motors (GM) and

Ford drive on different roads to sametown

Overview and implications for practiceReview questionsFurther readingNotes and references

10 Corporate divestitureObjectivesIntroductionRationale for corporate divestituresForms of corporate divestitureCorporate sell-offsCorporate spin-offsEquity carve-outsStock market arithmetically challenged in

pricing equity carve-outs?

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The downside of downsizing 296Tracking stock 296Overview of the divestiture methods 298Case Study: Marriott's bondholders taken

for a spin (or for a ride?) 299Overview and implications for practice 301Review questions 301Further reading 302Notes and references 302

11 Leveraged buyouts 306Objectives 306Introduction 306Leveraged buyout 307Organizational and legal structure of

the private equity firm 308Types of LBO 313Overview of the LBO markets in the US

and Europe 315Sources of LBO targets 319Exit from LBOs 320Characteristics of optimal LBO targets 323Organizing the buyout and role of the PE

sponsor 323LBOs in major European countries 332Managerial motivations for an MBO 335LBO as a superior business organization 336Value creation performance of LBOs 341Future of the LBO market in the US and

Europe 344Case Study: The tale of two stores:

Safeway and Kroger 345Overview and implications for practice 347Review questions 348Further reading 348Notes and references 348

12 Acquisition decision process:organizational, psychologicaland governance perspectives 351Objectives 351Introduction 351Acquisition decision-making process:

organizational perspective 352Acquisition decision process:

psychological perspective 355Narcissistic CEOs and acquisitions 359Imitative acquisitions: institutional theory

perspective 361Acquisition decision-making process:

compensation incentive perspective 362

Contents

Acquisition decision-making process:governance structure impact 366

Managing acquisition decision-making 372Survey evidence on the acquisition

process 376Case Study: Deutsche Boerse CEO and

Chairman pay with their jobs for lessonon shareholder activism!


13 Target selection for acquisition

ObjectivesIntroductionTarget selection processStrategic choices and acquisitionPlatform strategiesSerial acquisitionsDeal considerationsProfiling desirable targetsDue diligenceCase Study: How Beecham approached

its merger with SmithKline BeckmanOverview and implications for practiceReview questionsFurther readingNotes and references

PART THREEDEAL STRUCTURING ANDNEGOTIATION

14 Target valuation

ObjectivesIntroductionSources of value in acquisitionsValuation modelsEstimating target equity value using the

Rl modelEstimating target value using the PER

modelEnterprise value multipleAsset-based valuationValuation using other multiplesDiscounted cash flow modelImpact of tax on target valuation

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Real options framework for valuing targets 449Financial options and real options 450Case Study: 'They also lose who

only stand and wait' - whenoption value is eroded bycompetition 455

Overview and implications for practice 456Review questions 457Further reading 457Notes and references 457Appendix 14.1: Real options in mergers

and acquisitions 459

15 Accounting for mergers andacquisitions 466Objectives 466Introduction 466Consolidated accounts 467Types of business combination 467Accounting for business combinations 468Accounting for goodwill 473Overview and implications for practice 479Review questions 480Further reading 480Notes and references 480

16 Paying for the acquisition 482Objectives 482Introduction 482Methods of payment for acquisitions 483Tax aspects of acquisition financing 486Impact of bidder's financial strategy 490Earnings dilution in a share exchange 490Valuation risk and payment currency 496Equity derivatives and risk management

in equity offers 497Payment currency versus financing 502Leveraged cash financing 503Deferred consideration financing 509Factors determining financing method

choice 511Empirical evidence on the impact of

payment method on financialperformance 513

Case Study: Choosing the better acquirer:MCI faces a dilemma! 518


Contents

17 Antitrust regulation 528Objectives 528Introduction 528Economic rationale for antitrust regulation 530Assessing the effects of mergers on

competition 533Competitive constraints on merging firms 536Merger regulation in the European Union 537The UK merger control regime 545Merger regulation in the US 551Antitrust regulation in continental Europe 555Critique of merger control regimes 555Regulatory risk to M & A deals 557International Competition Network 559Stock market reaction to merger

references 560Case Study: William Hill takes a bet on

Stanley Leisure and swallows OFTremedy


18 Regulating takeover bidsObjectivesIntroductionRationale for takeover regulationTakeover regulation in the UKEuropean Union Takeover DirectiveRegulation of takeover bids in,continental

EuropeTakeover regulation in the USTakeover regulation and takeover activityCase Study: UK Takeover Panel doesn't

buy the Big MACOverview and implications for practiceReview questionsFurther readingNotes and references

19 Advisers in takeoversObjectivesIntroductionRole of advisers in acquisitionsRole of investment banksLawyersAccountantsOther advisersPublic and investor relations

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Case Study: What are investment banks'duties and to whom are they owed? 622


20 Bid strategies and tactics 627Objectives 627Introduction 627Bid strategies 628Bid tactics 636Developing a negotiation strategy 637Negotiating a friendly bid 641Post-acquisition integration and deal

negotiation 643Hostile bid tactics 646Institutional investors and bid

outcome 647Bid strategies and tactics in the US 651Empirical evidence on bid strategies and

value creation 655Bid strategies and tactics in continental

Europe: impact of the TakeoverDirective 657

Case Study: Mittal breaks Arcelor's steelydefence and becomes the Emperor ofSteel!


Defences against takeoversObjectivesIntroductionBid resistance motivesBid defence strategiesImpact of defensive strategiesTakeover defences outside the UKTakeover defences in continental

EuropeTakeover defences in the USCase Study: State anti-takeover

laws in the US and how they protecttargets


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Contents

PART FOUR POST-ACQUISITIONINTEGRATION ANDbRGANIZATIONAL LEARNING

22 Organizational and human aspectsof post-acquisition integration 695Objectives 695Introduction 695From strategy to integration 696A post-acquisition integration model 698Political and cultural perspectives on

integration 700Change management perspective on

post-acquisition integration 709Human resource management issues

during integration 711Problems in integration 716Stages in the integration process 722Project management approach to

integration 723What do managers think about acquisition

integration and performance? Surveyevidence 725

Survey evidence on acquisitions andthe human factor 726

Critical success factors 728Case Study: Spanish conquistador arrives

in England: Santander the new Armada? 731Overview and implications for practice 735Review questions 736Further reading 737Notes and references 737

23 Post-acquisition audit andorganizational learningObjectivesIntroductionDo acquirers assess acquisition

performance?What are the performance metrics?Organizational learning perspectivesExploitative and exploratory learning

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Acquisition-making as a core competence 758Case Study: Learning from past

acquisitions 760Overview and implications for practice 761Review questions 762Further reading 762Notes and references 762

24 Meeting the challenges ofmergers and acquisitions 765

Objectives 765Introduction 765Importance of the five-stage model 766Challenges in competitive strategy planning 769Challenges in organizing for acquisitions 771Challenges in deal structuring and

negotiation 772Challenges in post-acquisition integration 773Challenges in post-acquisition audit and

organizational learning 775Notes and references 776

Index 777

Creating Value From Mergers and Acquisitions - ToC

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