Creating Value from Mergers and Acquisitions: The Challenges

817 Pages·2010·7.595 MB·English

by  Sudarsanam, Sudi

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www.pearson-books.com
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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
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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