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Maximizing Corporate Value through Mergers and Acquisitions: A Strategic Growth Guide


Discover a solid, strategic foundation for analyzing and evaluating mergers and acquisitions

Mergers and acquisitions (M&A) offer high returns, but at the cost of high risks that are often hidden until after the deal has closed. Understanding the wide range of growth options available—as well as which have worked best in the past, and which have failed—can help all those involved in M&A create outcomes with long-term, sustainable gains. Maximizing Corporate Value through Mergers and Acquisitions offers a comprehensive resource for analyzing the costs and benefits of any given deal.

This guide delves into the large (though often underutilized) body of research on successful and unsuccessful M&As to examine factors for both success and failure. Drilling down beyond superficial considerations, the coverage reveals the contradictions and buried time bombs in various deals that can easily slip by decision-makers, resulting in billion-dollar mistakes. Author Patrick Gaughan—a respected consultant to leading corporations—presents frank discussion of specific M&A flops with a critical look at the poor managerial planning and strategies that led to these failures, plus expert know-how to help your business dodge such bullets in the future, with discussion on:

  • Merger growth strategy
  • Valuation
  • Corporate governance
  • Vertical and horizontal growth
  • Emerging markets
  • Joint ventures and strategic alliances
  • Downsizing and divestment
  • Strategic alternatives to M&A
  • And more

Filled with detailed case studies, Maximizing Corporate Value through Mergers and Acquisitions provides a complete treatment of the risks, consequences, and benefits of various M&A deals.

Patrick A. Gaughan is President of Economatrix Research Associates, an economic and financial consulting firm with offices in New York City; Newark, New Jersey; and Miami, Florida. Gaughan holds a PhD in economics and is a graduate professor of economics and finance at the Silberman College of Business at Fairleigh Dickinson University in New Jersey. He is also the author and/or editor of eight other books.

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 FoolishM&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 DoingM&A? 241

Do Boards Punish CEOs for Doing BadM&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