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Mergers: What Can Go Wrong and How to Prevent It

ISBN: 978-0-471-72732-3
356 pages
May 2005
Mergers: What Can Go Wrong and How to Prevent It (0471727326) cover image
A powerful guide for seeking out the best acquisition and merger targets
As increasingly more companies look to mergers and acquisitions (M&As) as a source of new growth and revenue, there is an even greater chance that these M&As will go bad. This insightful guide focuses on one of the most often debated and key issues in mergers and acquisitions-why some deals fail miserably and why others prosper. It provides a complete road map for what potential buyers should look for when picking a target and what characteristics of sellers they should steer clear of, as well as pitfalls to avoid during the M&A process. Real-world examples are provided of high-profile failures-Quaker Oats, United Airlines, Sears, and Mattel-and high-profile successes-General Electric and Cisco.
Patrick A. Gaughan (New York, NY) is President of Economatrix Research Associates and a professor of Economics and Finance at the College of Business, Fairleigh Dickinson University. He is actively engaged in the practice of business valuations for mergers and acquisitions, as well as other related applications.
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Preface.

Chapter 1: Introduction to Mergers and Acquisitions.

Background and Terminology.

Merger Process.

Economic Classifications of Mergers and Acquisitions.

Regulatory Framework of Mergers and Acquisitions.

Antitrust Laws.

State Corporation Laws.

Hostile Takeovers.

Takeover Defense.

Leveraged Transactions.

Restructurings.

Reasoning for Mergers and Acquisitions.

Trends in Mergers.

Conclusion.

Case Study: Lessons from the Failures of the Fourth Merger Wave.

Chapter 2: Merger Strategy: Why Do Firms Merge?

Growth.

Examples of Growth as an Inappropriate Goal.

Using M&As to Achieve Growth.

M&As in a Slow-Growth Industry as a Way to Achieve Growth.

Synergy.

Merger Gains: Operating Synergy or Revenue Enhancements—Case of Banking Industry.

Industry Clustering.

Deregulation.

Improved Management Hypothesis.

Hubris Hypothesis of Takeovers.

Winner’s Curse and the Hubris Hypothesis.

Cross-Industry Deals and Hubris.

Diversification and CEO Compensation.

Diversification that Does Seem to Work Better: Related Diversification.

Merging to Achieve Greater Market Power.

Do Firms Really Merge to Achieve Market Power?

Merging to Achieve the Benefits of Vertical Integration.

Special Cases of Mergers Motivated by Specific Needs.

Conclusion.

Case Study: Vivendi.

Chapter 3: Merger Success Research.

Criteria for Defining Merger Success Using Research Studies.

Takeover Premiums and Control.

Initial Comment on Merger Research Studies.

Research Studies.

Mergers of Equals: Acquirers versus Target Gains.

Firm Size and Acquisition Gains.

Long-Term Research Studies.

Long- versus Short-Term Performance and Method of Payment.

Bidder Long-Term Effects: Methods of Payment.

Bidder’s Performance Over the Fifth Merger Wave.

Conclusion.

Case Study: Montana Power—Moving into Unfamiliar Areas.

Chapter 4: Valuation and Overpaying.

Valuation: Part Science and Part Art.

Valuation: Buyer versus Seller’s Perspective.

Synergy, Valuation, and the Discount Rate.

Financial Synergies and the Discount Rate.

Toe Holds and Bidding Contests.

Bidding Contest Protections.

Overpaying and Fraudulent Seller Financials.

Valuation and Hidden Costs.

Postmerger Integration Costs—Hard Costs to Measure.

Conclusion.

Case Study: AOL Time Warner.

Chapter 5: Corporate Governance: Part of the Solution.

Governance Failure.

Regulatory Changes.

Corporate Governance.

Managerial Compensation and Firm Size.

Managerial Compensation, Mergers, and Takeovers.

Disciplinary Takeovers, Company Performance, and CEOs and Boards.

Managerial and Director Voting Power and Takeovers.

Shareholder Wealth Effects of Mergers and Acquisitions and Corporation Acquisition Decisions.

Post-Acquisitions Performance and Executive Compensation.

Lessons from the Hewlett-Packard–Compaq Merger: Shareholders Lose, CEOs Gain.

CEO Power and Compensation.

Do Boards Reward CEOs for Initiating Acquisitions and Mergers?

Corporate Governance and Mergers of Equals.

Antitakeover Measures and Corporate Governance.

Conclusion.

Case Study: WorldCom.

Chapter 6: Reversing the Error: Sell-Offs and Other Restructurings.

Divestitures.

Decision: Retain or Sell Off.

Spin-Offs.

Involuntary Spin-Offs.

Defensive Spin-Offs.

Tax Benefits of Spin-Offs.

Shareholder Wealth Effects of Sell-Offs.

Rationale for a Positive Stock Price Reaction to Sell-Offs.

Wealth Effects of Voluntary Defensive Sell-Offs.

Wealth Effects of Involuntary Sell-Offs.

Financial Benefits for Buyers of Sold-Off Entities.

Shareholder Wealth Effects of Spin-Offs.

Corporate Focus and Spin-Offs.

Equity Carve-Outs.

Benefits of Equity Carve-Outs.

Equity Carve-Outs Are Different from Other Public Offerings.

Shareholder Wealth Effects of Equity Carve-Outs.

Under Which Situations Should a Company Do a Spin-Off versus an Equity Carve-Out?

Shareholder Wealth Effects of Tracking Stock Issuances.

Conclusion.

Case Study: DaimlerChrysler.

Chapter 7: Joint Ventures and Strategic Alliances: Alternatives to Mergers and Acquisitions.

Contractual Agreements.

Comparing Strategic Alliances and Joint Ventures with Mergers and Acquisitions.

Joint Ventures.

Motives for Joint Ventures.

Regulation and Joint Ventures.

Shareholder Wealth Effects of Joint Ventures.

Shareholder Wealth Effects by Type of Venture.

Restructuring and Joint Ventures.

Potential Problems with Joint Ventures.

Strategic Alliances.

Governance of Strategic Alliances.

Shareholder Wealth Effects of Strategic Alliances.

Shareholder Wealth Effects by Type of Alliance.

What Determines the Success of Strategic Alliances?

Potential for Conflicts with Joint Ventures and Strategic Alliances.

Cross Stock Holdings as Conflict Insurance.

Conclusion.

Case Study: AT&T.

Index.

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PATRICK GAUGHAN, PhD, is President of Economatrix Research Associates, Inc., and Professor of Economics and Finance at the College of Business, Fairleigh Dickinson University. He performs business valuations for mergers and corporate restructurings, and serves as a consultant for several Fortune 500 companies. He has authored numerous articles and books, including Mergers, Acquisitions, and Corporate Restructurings (published by Wiley), which was named the Association of American Publishers Best Book of the Year in Accounting for 1996.
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