Creating value from mergers and acquisitions : the challenges : an integrated and international perspective

615 Pages·2003·4.04 MB·English

by  P S Sudarsanam

Sudarsanam_ppr 26/03/2005 09:26 PM Page 1
Creating Value from Mergers and Acquisitions gives an integrated and Creating Value
a C
international perspective.
n
r
This new book builds on and extends the author’s highly successful title The Essence of Mergers and Acquisitions. e
This is the first book to provide a comparative analysis of the M & A scene in Europe and the US, the two most d from Mergers
active markets in the world. The book develops an international and multidisciplinary perspective of M & A, and a
considers M & A as a processand not a mere transaction. The author draws upon economics, finance, strategy, A t
law and organisational theories to formulate a five-stage model and emphasises the need to understand the inter-
i
connected nature of these stages. The book’s central focus is on the challenges to using M & A as an instrument c n and Acquisitions
to create shareholder value, how M & A risks can be mitigated and how odds of success in acquisitions can be
increased. q g
u
‘This is a humdinger of a book and will surely become the standard text on mergers, acquisitions and divestments.’ V
i
Alfred Kenyon, formerly Corporate Treasurer, Plessey plc
s a The Challenges
and co-author of award-winning Creating Value, Shaping Tomorrow’s Business
i l
‘The book is outstanding. It is extremely well set out and written. I particularly like the way you link together the t u
economics, finance, organization and strategy approaches to takeovers. That seems to be exactly what is required i
and I have no doubt that there will be a considerable demand for this from both students and lecturers.’ o e Sudi Sudarsanam
Colin Mayer, Peter Moores Professor of Management Studies,
n
Said Business School, University of Oxford, UK
f
s
‘Simply a "must read" for all persons who require a broad understanding of the various issues involved in planning r
and executing acquisitions and mergers.’ Tom Berglund, Professor of Finance, o
Swedish School of Economics and Business Administration, Helsinki, Finland
m
‘This revised text is an important contribution to a burgeoning M & A literature.’
T
Nikhil Varaiya, Professor of Finance, San Diego State University, USA
h
‘The book is great and will fill a real need in the market. Very valuable for both professional practitioners and MBA e M
students.’ Nick Rogerson, Head of Corporate M & A, Novartis International, Basel, Switzerland
C
e
‘The book is extremely comprehensive and current – I think you really have done an excellent job summarizing so h
much of the literature.’ Henri Servaes, Professor of Finance, London Business School, UK a r
ll g
e
Features: n e
• Each chapter contains numerous short illustrations • Each chapter provides a chapter overview and g r
to exemplify practice or to elucidate complex issues. implications for M & A practice. e s
• To increase reader friendliness, complex information, • The book emphasises critical examination and s

such as reviews of empirical studies and regulatory empirical validation of theoretical predictions and

rules, is presented in tables and figures. provides a balanced treatment of M & A, drawing
• A short case study is included in most chapters to upon the conceptual, empirical and practitioner
highlight the main issues in that chapter. perspectives. S
• Case study and review questions are provided for u
further class discussion.
d
a
Creating Value from Mergers and Acquisitionsis suitable for those studying advanced undergraduate and MBA
r
courses in industrial organisation, finance, business strategy, and corporate governance, as well as those preparing s
for exams set by professional bodies. The rigorous integration of the conceptual, empirical and practical aspects of a
M & A means that researchers and practitioners will also find this book extremely useful. n
a
Sudi Sudarsanamis Professor of Finance and Corporate Control at Cranfield School m
of Management, UK.
An imprint of
www.pearson-books.com
Pearson_Cover_pi-v 26/03/2005 09:08 PM Page i
Creating Value from
Mergers and Acquisitions
The Challenges
Pearson_Cover_pi-v 26/03/2005 09:08 PM Page ii
We work with leading authors to develop the strongest
educational materials in Business Administration,
bringing cutting-edge thinking and best learning practice
to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high quality print
and electronic publications which help readers to
understand and apply their content, whether studying or
at work.
To find out more about the complete range of our
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
Pearson_Cover_pi-v 26/03/2005 09:08 PM Page iii
Creating Value from
Mergers and Acquisitions
The Challenges
An Integrated and International Perspective
SUDI SUDARSANAM
Pearson_Cover_pi-v 26/03/2005 09:08 PM Page iv
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
© Prentice Hall International UK Limited 1995
© Pearson Education Limited 2003
The right of P. S. Sudarsanam to be identified as author of this work has been asserted
by the author 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, 90 Tottenham Court Road, London W1T 4LP.
ISBN 0201 72150 3
British Library Cataloguing-in-Publication Data
Acatalogue record for this book is available from the British Library
10 9 8 7 6 5 4 3 2
09 08 07 06 05
Typeset in 10/12.6 ptSabon by 69
Printed in Malaysia
The Publisher’s policy is to use paper manufactured from sustainable forests.
Pearson_Cover_pi-v 26/03/2005 09:08 PM Page v
To
“Padhma, my Lotus for her patience and support”.
■ Author’s acknowledgements
At Pearson Education,Catherine Newman encouraged me to embark on this enlarged ver-
sion of my Essence book. Justinia Seaman provided consistent support and showed much
understanding when I missed my deadlines.I wish to acknowledge her help in designing the
cover of the book. Karen Van Eden accommodated the last-minute changes to my manu-
script and proofs with patience.Helen Baxter’s proof-reading helped in keeping errors to the
minimum,I am thankful to all these people.
It has been a long arduous task to write this book and in the process I have received much
support from friends and colleagues which lightened the burden. The very favourable
response to my first title,The Essence of Mergers and Acquisitions,upon whose foundations
I have built the current title, encouraged me to embark on writing the latter. With Hilary
Browne’s hard work and unstinted cooperation I was able to gather the background material
and hundreds of journal articles. She also helped with the final preparation of the manu-
script and circulation of the manuscript for review prior to publication. I received further
data collection help from Lin Gao a research student and Lisa Liu,my research assistant both
at Cranfield School ofManagement.Binsheng Qian,my research student,was painstaking in
his efforts to read the manuscript and offer detailed comments and also in preparing the list
for obtaining permissions for the hundreds of citations in the book.I also wish to thank Dr
Sankara Naayanan who gave me, while I was in India, access to a computer and food and
Bharathi Shankar who lent me her computing skills and helped in the preparation of the
manuscript .
Professor Richard Taffler,Head of Finance & Accounting at Cranfield School of Manage-
ment was a constant source of support and encouragement.There were times in the course
ofmy writing when I felt overwhelmed and exhausted.During those times my spirits revived
and I persisted with the writing because of Richard’s words of understanding and apprecia-
tion.He also read large parts of the manuscript and when I got the manuscript back it was
littered with his habitually meticulous comments and helpful suggestions. Among my
colleagues at Cranfield,I wish to thank Lance Moir and Professor David Myddelton for their
comments on parts ofthe manuscript.
From my fellow academics I have received numerous and substantive comments that have
sharpened the intellectual rigour and focus ofthe book.Among these are:
Professor Colin Mayer ofthe Said Business School at Oxford University,
Professor Henri Servaes ofthe London Business School,
Professors Georges Selim and Mez Lasfer ofthe Cass Business School at City University London,
Professor Nick Travlos ofthe Athens Laboratory ofBusiness Administration (ALBA),
Professor Nikhil Varaiya ofthe San Diego State University,
Professor Tom Berglund ofthe Swedish School ofEconomics,Helsinki,
Professor Reazaul Kabir ofTilburgh University,
Professor Raghu Rau ofPurdue University,
Professor Jay Dahya ofBaruch College at City University,New York,
Professor Arie Melnik,Haifa University,Israel
Dr Dimitri Kyriazis ofthe University ofPiraeus ,Athens
Dr George Alexandrou ofEssex University in the UK and
Dr Paul Ryan,University College,Dublin,Ireland.
Pearson_Cover_pi-v 26/03/2005 09:08 PM Page vi
I owe special thanks to Professor Alfred Kenyon formerly of Cass Business School,
London.He read the manuscript with a great deal ofenthusiasm and zest and came forward
with very incisive comments. His combative but good-natured arguments about my
presentation ofthe material concerning corporate strategy models and their implications for
mergers and acquisitions not only made me think more critically about the issues he raised
but also renewed my faith in the book and its usefulness.As a former corporate treasurer of
Plessey plc, Alfred combines his practical insights with a robustly conceptual approach.
On the practical aspects of the M & A process,I have had the benefit of the most com-
prehensive and thoughtful comments from Alan Frost, formerly Director of Corporate
Development at Rank Group plc. He provided me with numerous ideas and illustrations
drawn from his rich and varied experience of M & A deal making.Nick Rogerson,Head of
M & A at Novartis offered very perceptive comments that improved the quality and rele-
vance of my presentation in several chapters. Howard Jones, Formerly Managing Director
at BNP Paribas, London was helpful with his comments on some of the chapters. Philip
Augar, formerly Chairman of Schroeder Securities, London provided encouragement and
support with his comments on various chapters.Peter Hall,Managing Director,Investment
Banking at Bear Stearns, London offered insights into leveraged buyouts and the role of
investment bankers.Bill Allen,partner at the law firm Linklaters the leading M & A adviser
in London updated me on some ofthe recent developments in antitrust regulation.

vi
Pearson_contents_pvii-xv 26/03/2005 09:07 PM Page vii
Contents
Preface xvi
Publisher’s acknowledgements xix
1 Introduction 1
Do mergers and acquisitions add or destroy shareholder value? 1
The five-stage (5-S) model 3
Stage 1: How good is the corporate strategy development process? 4
Stage 2: How well does the company organize for acquisitions? 5
Stage 3: What are the pitfalls in deal structuring and negotiation? 6
Stage 4: Don’t count your chickens yet! Post-acquisition integration 7
Stage 5: How did the merger go? Post-acquisition audit and
organizational learning 8
Objectives of the book 9
Outline of the book 9
Notes and references 10
Part 1 Historic, conceptual and performance overview of
mergers and acquisitions
2 Historical overview of mergers and acquisitions activity 13
Objectives 13
Introduction 13
The wave pattern of takeovers in the US 14
Takeover activity in the European Union 19
Historical ove rview of takeover activity in the UK 23
Environmental analysis of merger waves 27
Impact of industry changes on M & A activity 28
Strategic implications of industry clustering of M & A 31
Case Study: Takeover activity in the insurance industry 32
Overview and implications for practice 33
Review questions 34
Further reading 34
Notes and references 34
3 Alternative perspectives on mergers 37
Objectives 37
Introduction 37
The economic perspective on mergers 38
Industry analysis of competition 42
vii
Pearson_contents_pvii-xv 26/03/2005 09:07 PM Page viii
Contents
Game theory and competitive moves 43
Strategy perspective on mergers 47
Finance theory perspective on mergers 52
Managerial perspective on mergers 57
Organizational perspective on mergers 57
Summary of the multiple perspectives on mergers 58
Case Study: Increasing buyer power: Next time you go shopping buy
a supermarket 59
Overview and implications for practice 60
Review questions 60
Further reading 61
Notes and references 61
4 Are acquisitions successful? 63
Objectives 63
Introduction 63
Defining success of mergers and acquisitions 64
Measuring the impact of acquisitions on shareholder returns 65
Review of stock market assessment of acquisition performance 68
Results of empirical studies of merger impact on stock returns 71
Assessing the operating performance of acquirers 76
Comparative post-merger performance of alternative corporate strategies 83
Post-merger performance and M & A deal characteristics 84
Mergers and managers 84
Overview and implications for practice 86
Review questions 87
Further reading 88
Notes and references 88
Appendix 4.1: Abnormal returns methodology to study the impact of
mergers on shareholder value 90
Appendix 4.2: Studies cited in Tables 4.1 to 4.7 93
Part 2 Corporate strategy and organizing for acquisitions

5 Sources and limits of value creation in horizontal mergers 97
Objectives 97
Introduction 97
Motivations for horizontal mergers in mature industries 98
Revenue enhancement through mergers 100
Cost savings as a source of value creation in acquisitions 105
New growth opportunities as a source of value 112
Resource-based view (RBV) of acquisitions and value creation 114
Evidence of lack of sustainable competitive advantage 118
Case Study: A holiday romance that ends in a bikini war 119
Overview and implications for practice 120
Review questions 121
Further reading 121
Notes and references 121
viii
Pearson_contents_pvii-xv 26/03/2005 09:07 PM Page ix
Contents
6 Sources and limits of value creation in consolidating
fragmented industries 124
Objectives 124
Introduction 124
Characteristics of fragmented industries 125
Value creation logic of consolidation 127
Financial versus strategic buyers 130
Limits of value creation in consolidation plays 131
Performance of private equity firms 134
Case Study: K-III, the leveraged build-up 135
Overview and implications for practice 136
Review questions 137
Further reading 137
Notes and references 137
7 Sources and limits of value creation in vertical mergers 139
Objectives 139
Introduction 139
Vertical integration 140
Benefits and costs of buying in markets 142
Benefits and costs of long-term contracts 143
Benefits and costs of vertical integration 147
Vertical mergers and value creation 149
Downscoping and disintegration 150
Mergers that blur industry boundaries 152
Case Study: Hospital, heal thyself 156
Overview and implications for practice 161
Review questions 162
Further reading 163
Notes and references 163
8 Sources and limits of value creation in conglomerate
acquisitions 164

Objectives 164
Introduction 164
Pattern of conglomeration in different countries 165
Why do firms diversify? 168
Resource-based view of conglomerate acquisition 171
Finance theory on conglomerate diversification 173
Managerial perspective of conglomerate diversification 174
Organizational perspective of conglomerate diversification 175
Summary of alternative perspectives 176
Review of empirical evidence on the value of conglomerate diversification 177
Valuation of conglomerates in other countries 181
Evidence on operating performance 183
Is the internal capital market efficient? 184
Case Study:Sears, Roebuck & Co.–diversify and then divest 188
Overview and implications for practice 190
ix