Mergers and acquisitions Basics, Donald DePamphilis, 2011. PDF
Preview Mergers and acquisitions Basics, Donald DePamphilis, 2011.
Mergers and acquisitions Basics Mergers and acquisitions Basics All You Need To Know donald dePamphilis Amsterdam • Boston • Heidelberg • London New York • Oxford • Paris • San Diego San Francisco • Singapore • Sydney • Tokyo Academic Press is an imprint of Elsevier Academic Press is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Elsevier, The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1GB, UK Copyright © 2011 Elsevier Inc. All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. Library of Congress Cataloging-in-Publication Data DePamphilis, Donald M. Mergers and acquisitions basics: all you need to know/Donald DePamphilis. p. cm. Includes bibliographical references. ISBN 978-0-12-374948-2 1. Consolidation and merger of corporations—United States—Management. 2. Corporate reorganizations—United States—Management. 3. Organizational change— United States—Management. I. Title. HG4028.M4D47 2011 658. 1620973—dc22 2010023983 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. For information on all Academic Press publications visit our website at www.elsevierdirect.com Printed in The United States of America 10 11 12 13 9 8 7 6 5 4 3 2 1 PreFace Why We Need to UNderstaNd the role of Mergers aNd acqUisitioNs iN today’s World Mergers, acquisitions, business alliances, and corporate restructuring activi- ties are increasingly commonplace in both developed and emerging econ- omies. Given the frequency with which such activities occur, it is critical for business people and officials at all levels of government to have a basic understanding of why and how they take place and how they can affect economic growth. A lack of understanding of the role mergers and acqui- sitions (M&As) play in a modern economy can mean the failure to use such transactions as an effective means of implementing a business strat- egy. Moreover, ignorance can lead to overregulation of what are important means of disciplining incompetent managers and transferring ownership of operating assets to those who can utilize them most efficiently. This book seeks to bring clarity to what is a complex, sometimes frus- trating, and ultimately exciting subject. It presents an integrated way to think about the myriad activities involved in mergers and acquisitions. Although various types of business alliances and aspects of corporate restructuring are addressed in brief, the primary focus is on M&As. The Book’s Unique Features This book is unique among books of this type in several specific ways. First, it is aimed primarily at practitioners who need a quick overview of the sub- ject without getting bogged down in minutiae. Rather than provide inten- sive coverage of every aspect of mergers and acquisitions, as might be found in a comprehensive textbook, or “dumb down” the subject matter to provide only superficial—and perhaps inaccurate or misleading explanations—the text occupies a middle ground. No significant knowledge of finance, eco- nomics, or accounting is required, although a passing acquaintance with these disciplines is helpful. While reader-friendly, the text also draws on academic studies to substantiate key observations and conclusions that are empirically based. Details of these studies are often found in chapter footnotes. Each chapter concludes with a section called “A Case in Point” that illustrates the chapter material with a real-world example. These sections include thought-provoking questions that encourage you, the reader, to apply the concepts explored in the chapter. xiii xiv Preface Who Should read This Book This book is aimed at buyers and sellers of businesses, financial analysts, chief executive officers, chief financial officers, operating managers, invest- ment bankers, and portfolio managers. Others who may have an interest include bank lending officers, venture capitalists, government regulators, human resource mangers, entrepreneurs, and board members. In addition, the book may be used as a companion or supplemental text for under- graduate and graduate students in courses on mergers and acquisitions, corporate restructuring, business strategy, management, governance, and entrepreneurship. Supplemented with newspaper and magazine articles, the book could serve as the primary text in an introductory course on mergers and acquisitions. For a more rigorous and detailed discussion on mergers and acquisitions and other forms of corporate restructuring, the reader may wish to see the author’s textbook on the subject, Mergers, Acquisitions, and Other Restructuring Activities. The 5th edition (2009) is published by Academic Press. The reader also may be interested in the author’s Mergers and Acquisitions Basics: Negotiation and Deal Structuring, also published by Academic Press in 2010. Acknowledgments I would like to express my sincere appreciation for the many resources of Academic Press/Butterworth-Heinemann/Elsevier in general and for the ongoing support provided by Karen Maloney, Managing Editor, and J. Scott Bentley, Executive Editor, as well as Scott M. Cooper, who helped streamline this manuscript for its primary audience. Finally, I would like to thank Alan Cherry, Ross Bengel, Patricia Douglas, Jim Healy, Charles Higgins, Michael Lovelady, John Mellen, Jon Saxon, David Offenberg, Chris Manning, and Maria Quijada for their many constructive comments. xv 1 CHAPTER Introduction to Mergers and Acquisitions T�efirs��eca�eof��enewmillennium�eral�e�aneraof�lobalme�a� mer�ers.Like��emer�ersan�acquisi�ions(M&�s)frenzyof��e1��0s an�1��0s��severalfac�orsfuele�ac�ivi�y��rou��mi��200�:rea�ilyavail� ablecre�i����is�oricallylowin�eres�ra�es��risin�equi�ymarke�s���ec�no� lo�icalc�an�e���lobalcompe�i�ion��an�in�us�ryconsoli�a�ion.In�erms of�ollarvolume��M&��ransac�ionsreac�e�arecor�levelworl�wi�ein 200�.Bu�ex�en�e��urbulencein��e�lobalcre�i�marke�ssoonfollowe�. T�especula�ive�ousin�bubblein��eUni�e�S�a�esan�elsew�ere�� lar�elyfinance�by�eb���burs��urin���esecon��alfof��eyear.Banks�� concerne�abou���evalueofmanyof��eirownasse�s��becameexcee�in�ly selec�ivean�lar�elywi���rewfromfinancin���e�i��lylevera�e��ransac� �ions��a��a�becomecommonplace��epreviousyear.T�equali�yofasse�s �el�bybanks��rou��ou�European��siaalsobecamesuspec���reflec�in� ��e�lobalna�ureof��ecre�i�marke�s.�scre�i��rie�up��amalaisesprea� worl�wi�ein��emarke�for�i��lylevera�e�M&��ransac�ions. By200���acombina�ionofrecor��i��oilpricesan�are�uce�avail� abili�yofcre�i�sen�mos�of��eworl�’seconomiesin�orecession��re�uc� in��lobalM&�ac�ivi�ybymore��anone���ir�fromi�sprevious�i��. T�is�lobalrecession�eepene��urin���efirs��alfof200�—�espi�ea �rama�ic�ropinener�ypricesan��i��lys�imula�ivemone�aryan�fiscal policies—ex�en�in���eslumpinM&�ac�ivi�y. Inrecen�years���overnmen�sworl�wi�e�avein�ervene�a��ressively in�lobalcre�i�marke�s(aswellasinmanufac�urin�an�o��ersec�orsof ��eeconomy)inaneffor��ores�orebusinessan�consumerconfi�ence�� res�orecre�i�marke�func�ionin���an�offse��efla�ionarypressures.W�a� impac��avesuc�ac�ions�a�onmer�ersan�acquisi�ions?I�is�ooearly �o�ell��bu���eimplica�ionsmaybesi�nifican�. M&�sareanimpor�an�meansof�ransferrin�resources�ow�ere��ey aremos�nee�e�an�ofremovin�un�erperformin�mana�ers.Governmen� �ecisions�osavesomefirmsw�ileallowin�o��ers�ofailarelikely�o�is� rup���isprocess.Suc��ecisionsareof�enbase�on��eno�ion��a�some Mergers and Acquisitions Basics ©22001111ElsevierInc. ISBN:��������00��1122����������������22������������III:::10.1016/B����0�12��������2.00001�� ���llllllrrriii���������sssrrreeessseeerrrvvveee���... Mergers and Acquisitions Basics firmsaresimply�oobi��ofailbecauseof��eirpo�en�ialimpac�on��e economy—consi�er�IGin��eUni�e�S�a�es.���ersareclearlymo�i� va�e�bypoli�ics.Suc�ac�ions�isrup���esmoo��func�ionin�ofmarke�s�� w�ic�rewar�s�oo��ecisionsan�penalizespoorones.�llowin�abusiness �obelieve��a�i�canac�ieveasize“�oobi��ofail”maycrea�eperverse incen�ives.Plus����ereisveryli��le�is�oricalevi�ence��a��overnmen�sare be��er��anmarke�sa��eci�in�w�os�oul�failan�w�os�oul�survive. In��isc�ap�er��youwill�ainanun�ers�an�in�of��eun�erlyin� �ynamicsofM&�sin��econ�ex�ofanincreasin�lyin�erconnec�e�worl�. T�ec�ap�erbe�inswi��a�iscussionofM&�sasc�an�ea�en�sin��e con�ex�ofcorpora�eres�ruc�urin�.T�efocusisonM&�san�w�y��ey �appen��wi��briefconsi�era�ion�iven�oal�erna�ivewaysofincreasin� s�are�ol�ervalue.Youwillalsobein�ro�uce��oavarie�yofle�als�ruc� �uresan�s�ra�e�ies��a�areemploye��ores�ruc�urecorpora�ions. T�rou��ou���isbook��afirm��a�a��emp�s�oacquireormer�ewi�� ano��ercompanyiscalle�anacquiring company��acquirer��orbidder.T�e target companyortargetis��efirmbein�solici�e�by��eacquirin�com� pany.Takeoversorbuyoutsare�eneric�ermsforac�an�ein��econ�rol� lin�owners�ipin�eres�ofacorpora�ion. Wor�sinbold italicsare��eonesmos�impor�an�foryou�oun�er� s�an�fully;��eyareallinclu�e�ina�lossarya���een�of��ebook. Mergers and acquisitions as change agents Businessescomean��oinacon�inuin�c�urn��per�apsbes�illus�ra�e�by ��eever�c�an�in�composi�ionof��eso�calle�For�une500—��e500 lar�es�U.S.corpora�ions.�nly�0of��efirmson��eori�inal1�55lis�of 500areon�o�ay’slis���an�some2��000firms�aveappeare�on��elis�a� one�imeorano��er.Mos��ave�roppe�off��elis�ei��er��rou��mer�er�� acquisi�ion��bankrup�cy���ownsizin���orsomeo��erformofcorpora�e res�ruc�urin�.Consi�erafewexamples:C�rysler��Be��le�emS�eel��Sco�� Paper��Zeni����Rubbermai���WarnerLamber�.T�epopularme�ia�en�s�o use��e�ermcorporate restructuring�o�escribeac�ions�aken�oexpan� orcon�rac�afirm’sbasicopera�ionsorfun�amen�allyc�an�ei�sasse�or financials�ruc�ure.1 1T�ebroa�arrayofac�ivi�iesfallin�un�er��isca�c�all�ermruns��e�amu�fromreor�anizin� businessuni�s�o�akeoversan�join�ven�ures�o�ives�i�uresan�spin�offsan�equi�ycarve�ou�s. ��e�aile��iscussionof��eseal�erna�iveformsofres�ruc�urin�isbeyon���escopeof��isbook. Tolearnmore��seeMergers, Acquisitions, and other Restructuring Activitiesby�onal�M.�ePamp�ilis�� nowini�sfif��e�i�ionan�available��rou���ca�emicPress. Introduction to Mergers and Acquisitions Why Mergers and acquisitions happen T�eprevalenceofM&�san���eimpor�anceofvariousfac�ors��a��ive rise�oM&�ac�ivi�yvariesover�ime.Ex�ibi�1�1lis�ssomeof��emore prominen���eoriesabou�w�yM&�s�appen��eac�ofw�ic�is�iscusse� in�rea�er�e�ailin��efollowin�sec�ions. EXHIBIT 1-1 Common Theories of What Causes Mergers and Acquisitions Theory Motivation Operating Synergy Improve operating efficiency through Economies of Scale economies of scale or scope by acquiring Economies of Scope a customer, supplier, or competitor Financial Synergy Lower cost of capital Diversification Position the firm in higher growth products New Products/Current Markets or markets New Products/New Markets Current Products/New Markets Strategic Realignment Acquire capabilities to adapt more rapidly Technological Change to environmental changes than could Regulatory and Political be achieved if they were developed Change internally Hubris (Managerial Pride) Acquirers believe their valuation of target more accurate than the market’s, causing them to overpay by overestimating synergy Buying Undervalued Assets Acquire assets more cheaply when the (Q-Ratio) equity of existing companies is less than the cost of buying or building the assets Mismanagement (Agency Replace managers not acting in the best Problems) interests of the owners Managerialism Increase the size of a company to increase the power and pay of managers Tax Considerations Obtain unused net operating losses and tax credits, asset write-ups, and substitute capital gains for ordinary income Market Power Increase market share to improve ability to set prices above competitive levels Misvaluation Investor overvaluation of acquirer’s stock encourages M&As
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