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 on Microsoft 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-Growth Markets’ 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 Emerging Markets 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
Recent Major 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
