Creating Value from Mergers and Acquisitions: The Challenges PDF
Preview Creating Value from Mergers and Acquisitions: The Challenges
Creating Value a “…the book is outstanding. it is extremely well set out and written. i particularly C like the way sudarsanam links together the economics, finance, organization nf and strategy approaches.” drr from mergers Colin Mayer, Dean and Peter Moores Professor of Management, Said Business School, T oe h University of Oxford. eama CC t and aCquisitions hqmi n Creating Value from Mergers and Acquisitions follows an evidence-based approach and is the first book a u to provide a comparative analysis of the M & A scene in Europe and the US. Now in its second edition it l eg l continues to develop an international and multidisciplinary perspective of M & A, and considers M & A i esr The Challenges as a process and not a mere transaction. The author draws upon economics, finance, strategy, law and n V organizational theories to formulate a five-stage model and emphasizes the need to understand the ig gt a interconnected nature of these stages. The book’s central focus in on the challenges to using M & A as e e an instrument to create shareholder value, how M & A risks can be mitigated and how odds of success in si l Second edition or acquisitions can be increased. u nss e e 5 sT g a Classic features: a g T e • Short illustrations in every chapter highlight standard practices and explain complex issues Second s 1 • User-friendly tables and figures make complex empirical data easier to comprehend • Most chapters contain a short case study to highlight important issues edition Post-acquisition Corporate •• CCahsaep tsetru odvieesr vaienwd sr eavti ethwe qsutaerstt ioofn esa ecnha cbhlea pfutertrh heirg dhilsigchuts tshioe nim apndlic sattuiodnys for M & A practice audit strategy • Provides a balanced treatment of M & A, drawing upon the conceptual, empirical, and s practitioner perspectives u • Emphasises critical examination and empirical validation of theoretical predictions d a Five stages rs in M & a 2 Creating Value from Mergers and Acquisitions is suitable for those studying advanced undergraduate and a s Post-acquisition Organizing for e MBA courses in industrial organizations, finance, business strategy, and corporate governance, as well as n T g tahsopseec tpsr eopf aMri n&g A fo mr pearonfse sthsaiotn raels eexaarcmhse.r sT haen dri gporarocutisti oinnteergsr awtiioll na losfo t fihned c othnisc ebpotouka le, xetmrepmireiclya lu, saenfdu lp. ractical am ag integration acquisitions Ta e s sMLBCCouuaoansdlmnidfiinao mosgernniuses ismdaas ni aSoeadrcnnns ht.daa,o n nVao atials .mfu ifitHnil niieiasvg t eh aeSran soes itEfn i hetmiohesrele d ir Fn Citve uAeilslsnuot itswPnrterg roai aftpfo, e torGsh sMseriote aiMroen cnoeaesfrg g Fiaeneinmnr msdae n&enPcr togAe Ble acaurnqnsydu doa.i s unCHittd oieRo r anipescsso qa erRulaasietrsoecsi t heaCioa amonrtcns ehtt hmar oCetb l t eNaehntreot CortSetfir, ana tCnhgntehfiaa aesU CmsldK lB a’USsruc ansCh iiUvnooeenmorsislvp sioete yfSrt s ictiithoyo,n o l, 4 s st r Tu Da c et gua r lie n g 3 sudi sudarsanam www.pearson-books.com CVR_SUDA5399_02_SE_CVR.indd 1 19/5/10 10:26:13 Creating Value from Mergers and Acquisitions The Challenges Visit the Creating Value from Mergers and Acquisitions, 2nd edition, Companion Website at www.pearsoned.co.uk/sudarsanam to find valuable student learning material including: l Chapter learning objectives to help you track your progress l Answers to some chapter review questions to check your understanding Reviews of the first edition ‘Simply a “must read” for all persons who require a broad understanding of the various issues involving planning and executing acquisitions and mergers.’ Tom Berglund, Professor of Finance, Swedish School of Economics and Business Administration, Helsinki, Finland ‘The book is extremely comprehensive and current. I think you really have done an excellent job summarizing so much of the literature. It is a very nice piece of work.’ Henri Servaes, Professor of Finance, London Business School ‘This weighty, well-written, well-researched and easy-to-read tome is set to become a standard work.’ The Times Higher Education Supplement ‘An excellent textbook...One of the many strengths of this book is that it truly takes an international perspective and does not just stick to the US viewpoint. An excellent overview of the empirical research findings...clarity of presentation makes this book a very attractive textbook on both undergraduate and MBA level.’ European Financial Management ‘This is a big book in more ways than one. It is the first that tries to provide encyclopaedic coverage of M & A for practitioners and students alike...an authoritative guide to the theory and practice of M & A.’ Professional Investor ‘If you apply the findings of a recent book, things may not be too awful. Within a comprehensive and very readable survey of the theory and practice of mergers and acquisitions,...reviews the transatlantic literature on whether M & A works.’ John Plender, Financial Times ‘As well as synthesising academic work on takeovers [the book] presents a common-sense approach to the consideration of M & A that might constitute a noisier conscience for over-optimistic boardrooms.’ Ed Warner, The Guardian 2nd edition Creating Value from Mergers and Acquisitions The Challenges Sudi Sudarsanam Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2003 Second edition published 2010 © Pearson Education Limited 2003, 2010 The right of P.S. Sudarsanam to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN: 978-0-273-71539-9 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Sudarsanam, P. S. Creating value from mergers and acquisitions : the challenges / Sudi Sudarsanam. -- 2nd ed. p. cm. ISBN 978-0-273-71539-9 (pbk.) 1. Consolidation and merger of corporations. 2. Corporations -- Valuation. I. Title. HD2746.5.S83 2010 658.1′62--dc22 2009052003 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 Typeset in 10/12pt Minion by 35 Printed by Ashford Colour Press Ltd., Gosport To Nandhini, the memory of Alfred Kenyon and the numerous scholars who have enriched my understanding of M & A I have stood upon many a tall scholarly shoulder To raise my gaze and see farthest Yet my vision is short and I am searching for shoulders taller still (adapted from Sir Isaac Newton) CONTENTS Preface to the second edition xiii It’s not all ‘high buys low’; ‘low buys Preface to the first edition xvi high’ too 41 Strategic implications of industry Author’s acknowledgements xix clustering of M & A 41 Publisher’s acknowledgements xxi Case Study: Pharmaceuticals suffer from the urge to merge 42 1 Introduction 1 Overview and implications for practice 44 Do mergers and acquisitions add or Review questions 44 destroy shareholder value? 2 Further reading 45 The five-stage (5-S) model 3 Notes and references 45 Stage 1: How good is the corporate strategy development process? 3 3 Alternative perspectives on Stage 2: How well does the company mergers 49 organize for acquisitions? 5 Objectives 49 Stage 3: What are the pitfalls in deal Introduction 49 structuring and negotiation? 6 The economic perspective on mergers 50 Stage 4: Don’t count the chickens yet! Industry analysis of competition 54 Post-acquisition integration 8 Game theory and competitive moves 57 Stage 5: How did the merger go? Post- Strategy perspective on mergers 62 acquisition audit and organizational Dynamic capabilities and mergers 69 learning 9 Corporate and business strategies 71 Objectives of the book 9 Finance theory perspective on mergers 72 Outline of the book 9 Managerial perspective on mergers 78 Notes and references 11 Organizational perspective on mergers 79 Summary of the multiple perspectives on PART ONE mergers 80 HISTORIC, CONCEPTUAL AND Case Study: ‘The Best a Man or a Woman PERFORMANCE OVERVIEW OF Can Get’ – P&G and Gillette bridge the MERGERS AND ACQUISITIONS gender gap in their brands! 81 Overview and implications for practice 82 2 Historical overview of mergers Review questions 83 and acquisitions activity 15 Further reading 83 Objectives 15 Notes and references 83 Introduction 15 4 Are acquisitions successful? 86 The wave pattern of takeovers in the US 16 Takeover activity in the European Union 22 Objectives 86 Historical overview of takeover activity Introduction 86 in the UK 26 Defining success of mergers and Mergers in emerging markets 30 acquisitions 87 Overview of the merger waves 31 Measuring the impact of acquisitions on Why do merger waves happen? 31 shareholder returns 88 Rational economic models of merger waves 32 Review of stock market assessment of Impact of industry changes on M & A acquisition performance 91 activity 33 Results of empirical studies of merger Behavioural models of merger waves 39 impact on stock returns 94 viii Contents Assessing the operating performance of Vertical integration 157 acquirers 101 Benefits and costs of buying in markets 159 Overview of the operating performance Benefits and costs of long-term contracts 160 studies 107 Benefits and costs of vertical integration 162 Post-merger performance of alternative Vertical mergers and value creation 165 corporate strategies 107 Empirical evidence on vertical mergers Mergers, managers and corporate and their value effects 166 governance 108 Vertical mergers that blur industry Post-merger performance and M & A boundaries 167 deal characteristics 109 Outsourcing through acquisitions 170 Overview and implications for practice 110 Case Study: Hospital, heal thyself 172 Review questions 111 Overview and implications for practice 177 Further reading 111 Review questions 178 Notes and references 111 Further reading 179 Appendix 4.1: Abnormal returns Notes and references 179 methodology to study the impact of mergers on shareholder value 113 7 Sources and limits of value Appendix 4.2: Studies cited in Tables 4.1 creation in conglomerate to 4.9 117 acquisitions 180 Objectives 180 PART TWO Introduction 180 Pattern of conglomeration in different CORPORATE STRATEGY AND countries 181 ORGANIZING FOR ACQUISITIONS Why do firms diversify? 184 5 Sources and limits of value Resource-based view of conglomerate creation in horizontal and acquisition 187 related mergers 123 Finance theory of conglomerate diversification 189 Objectives 123 Managerial perspective on conglomerate Introduction 123 diversification 192 Motivations for horizontal mergers in Organizational perspective on mature industries 124 conglomerate diversification 194 Revenue enhancement through mergers 126 Summary of alternative perspectives 195 Cost savings as a source of value creation Review of empirical evidence on the in acquisitions 131 value of conglomerate diversification 196 New growth opportunities as a source Valuation of conglomerates in other of value 140 countries 201 Resource-based view (RBV) of Evidence on operating performance 202 acquisitions and value creation 141 Is the internal capital market efficient? 203 Evidence of lack of sustainable Case Study: Messier bets Vivendi on competitive advantage 147 his grand vision and pushes it towards Case Study: Heavy truckers trundle their bankruptcy! 208 way to market dominance 149 Overview and implications for practice 212 Overview and implications for practice 150 Review questions 212 Review questions 151 Further reading 212 Further reading 151 Notes and references 213 Notes and references 151 6 Sources and limits of value 8 Cross-border acquisitions 217 creation in vertical mergers 156 Objectives 217 Objectives 156 Introduction 217 Introduction 156 Alternative overseas expansion strategies 218 Contents ix Recent trends in cross-border The downside of downsizing 296 acquisitions 218 Tracking stock 296 Factors influencing cross-border mergers 221 Overview of the divestiture methods 298 Why do corporations undertake cross- Case Study: Marriott’s bondholders taken border acquisitions? 224 for a spin (or for a ride?) 299 Barriers to cross-border takeovers 230 Overview and implications for practice 301 Valuation and financing of overseas Review questions 301 acquisitions 234 Further reading 302 Post-acquisition integration 234 Notes and references 302 Empirical and survey evidence on CBA performance 236 11 Leveraged buyouts 306 Case Study: Cross-border acquisitions Objectives 306 bring power to companies 240 Introduction 306 Overview and implications for practice 241 Leveraged buyout 307 Review questions 242 Organizational and legal structure of Further reading 242 the private equity firm 308 Notes and references 242 Types of LBO 313 Overview of the LBO markets in the US 9 Strategic alliances as an and Europe 315 alternative to mergers and Sources of LBO targets 319 acquisitions 245 Exit from LBOs 320 Objectives 245 Characteristics of optimal LBO targets 323 Introduction 245 Organizing the buyout and role of the PE Types of strategic alliance 247 sponsor 323 International joint ventures 250 LBOs in major European countries 332 Model of a joint venture 251 Managerial motivations for an MBO 335 Structuring a joint venture 256 LBO as a superior business organization 336 Performance evaluation of joint Value creation performance of LBOs 341 ventures 259 Future of the LBO market in the US and Critical success factors in strategic Europe 344 alliances 262 Case Study: The tale of two stores: Choosing between an acquisition and Safeway and Kroger 345 an alliance 263 Overview and implications for practice 347 Case Study: General Motors (GM) and Review questions 348 Ford drive on different roads to same Further reading 348 town 265 Notes and references 348 Overview and implications for practice 266 Review questions 266 12 Acquisition decision process: Further reading 267 organizational, psychological Notes and references 267 and governance perspectives 351 Objectives 351 10 Corporate divestiture 270 Introduction 351 Objectives 270 Acquisition decision-making process: Introduction 270 organizational perspective 352 Rationale for corporate divestitures 271 Acquisition decision process: Forms of corporate divestiture 274 psychological perspective 355 Corporate sell-offs 275 Narcissistic CEOs and acquisitions 359 Corporate spin-offs 282 Imitative acquisitions: institutional theory Equity carve-outs 292 perspective 361 Stock market arithmetically challenged in Acquisition decision-making process: pricing equity carve-outs? 295 compensation incentive perspective 362
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