Table Of ContentMergers and
acquisitions
Basics
Mergers and
acquisitions
Basics
All You Need To Know
donald dePamphilis
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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
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Introduction to Mergers and Acquisitions
Why Mergers and acquisitions happen
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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
Description:Mergers and acquisitions basics: all you need to know/Donald DePamphilis. p. cm. Includes bibliographical references. ISBN 978-0-12-374948-2. 1.
