Maximizing Corporate Value through Mergers and Acquisitions

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 xiiiChapter 1 Merger Growth Strategy 1Strategy and M&A 2Introduction to M&A 4Background and Terminology 5Hostile Takeovers 5Takeover Defense 8Leveraged Transactions 10Restructurings 12Trends in Mergers 14Notes 20Chapter 2 Growth through Mergers and Acquisitions 21Is Growth or Increased Return the More Appropriate Goal? The Case of Hewlett-Packard 21M&A Must Fit the Strategy—Not the Other Way Around 24Strategy Should Not Be Just M&A 25Organic Growth or Growth through M&A 25Acquisition and Development versus Research and Development 26Can M&A Be Effectively Used to Buy Growth? 30Success in Core Business Does Not Always Translate to Success with M&A Strategy: Focus on Microsoft 31Growth through Bolt-On Acquisitions 31Knowing When to Exit a Business 35From Growth through M&A to Growth through Organic Expansion 36Controlling the Runaway Dealmaker CEO 38Using M&A to Achieve Growth in a Slow-Growth Industry 40Squeezing Out Growth in a Slow-Growth Industry Using Multiple Options 40Dealing with a Slow-Growth Business and Industry 42Geographical Expansion through M&A 46International Growth and Cross-Border Acquisitions 47Taking Advantage of Currency Fluctuations to Pursue High-Growth M&A 47Finding Growth in High-Growth Markets 49Cyclical Companies Achieving Growth in Recessed Markets 50Notes 52Chapter 3 Synergy 53What Is Synergy in the Context of M&A? 53Achievement of Synergy: A Probabilistic Event 55Types of Synergy 58Industries’ Pursuit of Cost Economies 65Research on Operating Economies in M&A 69Economies of Scope 70Scope Economies and the One-Stop Shop 72Copycat Following of Another Firm’s Foolish M&A Strategy 74Cost Economies in Banking Mergers: United States versus Europe 75Internationalization Theory of Synergy and Information-Based Assets 79Notes 89Chapter 4 Diversification 91Diversifying M&A in the Conglomerate Era 91Modern-Day U.S. Conglomerates 92Portfolios of Companies 95Theoretical Basis for Diversification 98Applying Portfolio Theory to Conglomerates? 99Diversification and the Acquisition of Leading Industry Positions 100Achieving a Number One or Two Ranking Is Not a Panacea 102Diversification to Enter More Profitable Industries 102Empirical Evidence on Diversification 103Empirical Evidence on the Acquisition Programs of the 1960s 103How Likely Is It That Diversifying Acquisitions Will End Up Being Sold Off? 104Is There a Diversification Discount? 105Focus Hypothesis 106Types of Focus Increases 106Focus-Increasing Asset Sales Raise Value 107Explanation for the Diversification Discount 107Related versus Unrelated Diversification 108Why Are Very Diversified Companies Allowed to Form? Beware of the Empire Builders 111Do Managerial Agendas Drive M&A? 113Notes 114Chapter 5 Horizontal Integration and M&A 117Advantages of Holding the One and Two Position in the Industry 117Benefits of Size: Spotlight on the Mobile Telecommunications Industry 119Motivation to Increase Size 122Competitive Pressures of Competitors’ M&A Program 122Horizontal Deals: Acquisitions of Competitors and Their Competing Brands 124Sprint–Nextel Horizontal Deal: One of the Worst in M&A History 125Declining Industry Demand Necessitating Industry Consolidation 128Synergistic Gains and Horizontal M&A 129Net Benefits of Horizontal Deals = Synergistic Gains – (Easy to Measure Costs + Hard to Measure Costs) 133Horizontal Merger Success, Target’s Size, and Post-M&A Integration Costs 134Mergers of Equals 136Mergers of Equals and Challenges of Integration 137Mergers-of-Equals Research: Acquirers versus Target Gains 139Competitive Advantages of Horizontal Deals: Case Study—InBev and Anheuser-Busch 139Regulatory Concerns on Merger Integration 141Horizontal M&A and Market Power: An Economic Perspective 143Empirical Evidence on Whether Firms Pursue M&A to Achieve Market Power 145Countervailing Power, Industry Concentration, and M&A 147Horizontal Integration, Consolidation, and Roll-Up Acquisition Programs 155Notes 156Chapter 6 Vertical Integration 159Benefits of Vertical Integration 159Risk and Vertical Integration 159Vertical Integration as a Path to Global Growth 160How Owning Your Own Supplier Can Be a Competitive Disadvantage 163Vertical Integration as a Natural Outgrowth of a Business 165Vertical Integration: A Growth Strategy? 168Continually Reevaluating a Vertical Integration Strategy 173Regulation of Vertical Integration 176Copycat Vertical Integration 177Note 178Chapter 7 Growth through Emerging Market M&A 179Economic Condition of Major Economies in the Postsubprime World 180Low-Growth Markets’ Diminishing Returns 181Role of Demographics 182The Next 11 183M&A Is Not Always the Best Way of Accessing High-Growth Markets 184High-Growth Regions and Countries 185Risks of Emerging Markets 208Entering Large Slow-Growth Markets Instead of Fast-Growth Emerging Markets 210Reducing Country M&A Risk: Investing in Local Companies That Engage in Substantial Emerging Market M&A 211Finding Growth in High-Growth Markets 213Emerging Market Acquirer 216China and Its Emerging Market Acquirers 218Notes 220Chapter 8 Joint Ventures and Strategic Alliances as M&A Alternatives 221Contracts versus Joint Ventures 222Potential Problems with Joint Ventures and Strategic Alliances 222Shareholder Wealth Effects of Joint Ventures 224Shareholder Wealth Effects by Type of Venture 225Relatedness and Size 226Market’s Assessment of Risk of Joint Ventures 227Strategic Alliances 227Strategic Alliance Process 228Shareholder Wealth Effects of Strategic Alliances 229Shareholder Wealth Effects by Type of Alliance 229Notes 230Chapter 9 Role of Corporate Governance in M&A 233Agency Cost Problem 233CEO Compensation and Agency Costs 235Do Shareholders Get Value for the High Compensation Paid to U.s. Ceos? 237Board Characteristics and CEO Compensation 238Benchmarking and How Boards Determine CEO Compensation 239Are the High Paid Superstar CEOs Simply Worth the Money? Not 240Are CEOs Paid for Luck? 241CEO Compensation and M&A Programs 241Do Boards Pay CEOs for Doing M&A? 241Do Boards Punish CEOs for Doing Bad M&As? Case of Rio Tinto 242Golden Parachutes and M&A 243CEO Severance Payments 243Are CEOs Evaluating M&A by Thinking, “What’s in It for Me?” 244CEO Overconfidence and M&A 244Are Overconfident CEOs Good for Anything? 245Management Compensation and Post-Acquisition Performance 245Role of the Board of Directors 246CEO Tenure, Board Composition, and the Disciplinary Effects of Takeovers 257Antitakeover Measures 257Corporate Governance and the Divestiture Decision 259Notes 259Chapter 10 Downsizing: Reversing the Error 263Analyzing the Strategic Fit of a Business Unit 266Market Conditions 267Regulatory Concerns 267Divestiture Likelihood and Prior Acquisitions 267Another Option: Equity Carve Out 268Another Option: Spinoff 269Spinoff or Equity Carve Out: Which Option Is Better? 270Another Option: Split-Off 272Tax Effects 272Shareholder Wealth Effects of Selloffs 272Round Trip Wealth Effects 274Spinoffs as a Means of Increasing Focus 274Differences in Types of Focus Increases 275Shareholder Wealth Effects of Spinoffs: United States versus Europe 278Corporate Governance and Selloffs 279Managerial Ownership and Selloff Gains 280Activists and Selloffs 280Market Liquidity and the Decision to Sell a Unit 280Involuntary Selloffs 281Voluntary/Involuntary Selloffs 281Voluntary Defensive Selloffs 282Tracking Stocks 283More Drastic Solutions: Voluntary Bust-Ups 285Recent Major Exceptions to Positive Shareholder Wealth Effects of Selloffs 286Notes 289Chapter 11 Valuation and Merger Strategy 291Financial versus Nonfinancial Buyers 291Target and Bidder Valuation Effects 293What Types of Acquiring Firms Tend to Perform the Poorest? 295Premiums 295Historical Trends in Merger Premiums 296Stock Market Activity and Merger Premiums 297Stock Market–Driven Acquisitions 298Determinants of Acquisition Premiums 298Premiums from Strategic Mergers 298Hubris and Merger Premiums 299Early Research 300Later Research 300Winner’s Curse Hypothesis of Takeovers 301Campeau’s Mega-Bust 302Research on Winner’s Curse of Takeover Contests 304Market Performance, Valuation, and Takeover Probability 304Deal Size and Shareholder Wealth 305Valuation Analysis and Source of the Flaws in Bad Deals 306Comments of the Residual Value 308Free Cash Flows 308Cost Cutting and Historical Free Cash Flows 309Growth Rate for Projection 310Capitalization Rates and the Exit Multiple 310Discount Rate 311Whose Capital Costs Are We Measuring? 313Using the Build-Up Method 313Short-Term Interest Rate Trends 315Using Comparables 316Public versus Private Acquirers 316Public versus Private Sellers 318Notes 321About the Author 325Index 327