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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
The comprehensive M&A guide, updated to reflect the latest changes in the M&A environment M&A, Second Edition provides a practical primer on mergers and acquisitions for a broad base of individuals numbering in the hundreds of thousands: * Investment bankers involved with mergers and acquisitions (M&A). * Equity analysts at hedge funds, risk arbitrage funds, pension funds, and banks, who invest in firms engaged in M&A. * Private equity professionals at buyout funds, venture capital funds, and hedge funds, who routinely buy and sell companies. * Corporate executives and business development professionals. * Institutional loan officers working with M&A and buyout transactions. * Business students at colleges and graduate business schools. * Investor relations professionals at corporations and public relations firms. * Lawyers who work with corporate clients on M&A-related legal, financial, and tax matters. * Independent public accounting firms that review M&A accounting. * Government regulators * Sophisticated individual investors Its comprehensive approach covers each step in the process, from finding an opportunity, to analyzing the potential, to closing the deal, with new coverage of private equity funds and international transactions. This updated second edition also includes information on emerging markets, natural resource valuation, hostile takeovers, special deals, and more, plus new examples and anecdotes taken from more current events. Additional illustrations and charts help readers quickly grasp the complex information, providing a complete reference easily accessible by anyone involved in M&A. The mergers and acquisitions environment has changed in the thirteen years since M&A was initially published, creating a tremendous need for authoritative M&A guidance from a banker's perspective. This M&A update fills that need by providing the characteristic expert guidance in clear, concise language, complete with the most up-to-date information. * Discover where M&A fits into different corporate growth strategies, and the unique merits it confers * Delineate clear metrics for determining risk, valuation, and optimal size of potential acquisitions * Gain deeper insight into the fundamentals of negotiation, due diligence, and structuring * Understand the best time to sell, the best way to sell, and the process of the sale itself In the past decade, the dollar value of M&A deals has jumped ten-fold, and the number of individuals involved has expanded considerably. More and more executives, analysts, and bankers need to get up-to-date on the mechanics of M&A, without wading through volume after volume of dense, legalistic jargon. Finally, M&A is back - providing a complete reference to the current state of the M&A environment.
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M&A
A Practical Guide to Doing the Deal
Second Edition
JEFFREY C. HOOKE
Cover image: © iStock.com / Vladitto Cover design: Wiley
Copyright © 2015 by Jeffrey C. Hooke. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Hooke, Jeffrey C. M & A : a practical guide to doing the deal / Jeffrey C. Hooke. — [Second edition]. pages cm. — (Wiley finance series) Includes index. ISBN 978-1-118-81699-8 (hardback) — ISBN 978-1-118-81704-9 (ePDF) — ISBN 978-1-118-81701-8 (ePub) 1. Consolidation and merger of corporations—Finance. I. Title. II. Title: M and A. HG4028.M4H66 2015 658.1′62—dc23 2014024067
CONTENTS
Preface
Recent Trends
Overview of the Contents
What’s New in the Second Edition
Part One: The Big Picture
Chapter 1: The Global M&A Market: Current Status and Evolution
An Upward Trend, Interrupted by Booms and Busts
M&A Activity by Geography
Deal Categories
Large versus Small Transactions
M&A: No Guarantee of Success
Note
Chapter 2: U.S. M&A History, Trends, and Differences from Other Nations
U.S. M&A History
Advanced M&A Industry in the United States
M&A in Wealthy Nations Other Than the United States
Emerging Market M&A
Notes
Chapter 3: The Need for Growth Spurs Acquirers to Buy Other Companies
Ten Buyer Motivations
The Most Popular of the 10 Motivations
Summary
Notes
Chapter 4: The Three Financial Tactics That Dominate the M&A Business
Enterprise Value
Earnings per Share Dilution
EBITDA Considerations
Tactic #1: Cost Cuts/Revenue Gains
Tactic #3: Financial Arbitrage
Conveying the Three Tactics to Investors
Discounted Cash Flow Analysis Supplements the Tactics
Summary
Notes
Part Two: Finding a Deal
Chapter 5: The Buyer Must Have a Methodical Plan in Order to Find a Quality Transaction
An Active Approach
The Acquisition Plan
Internal Assessment
Summary
Chapter 6: To Begin an Acquisition Search, the Buyer First Sets the Likely Parameters of a Deal
Defining the Parameters
Case Study
Summary
Chapter 7: The Buyer Starts the Formal Acquisition Search by Alerting Intermediaries and Contacting Possible Sellers
Laying the Groundwork
Four Steps in Beginning a Search
Retaining an Intermediary to Assist in the Search
Summary
Note
Chapter 8: Finding a Deal: Likely Results of a Search
Due Diligence
Structure the Deal
Financing the Deal
Closing and Integration
Publicly Traded Companies
Summary
Notes
Chapter 9: The Four Principal Risks Facing a Buyer in the M&A Business
Overpayment Risk
Operating Risk
Debt Leverage Risk
Macroeconomic Risk
Downplaying M&A Risks
Summary
Notes
Part Three: Target Financial Analysis
Chapter 10: Sizing Up the M&A Target from a Financial Point of View
Starting the Historical Financial Analysis
Beginning the Historical Analysis
Normalizing Results
Absolute Amount Analysis
Percentage Changes
Common Size Analysis
Growth Ratios
Ratio Analysis
Industry-Specific Indicators
Comparable Company Performance
Review of P.F. Chang’s Financial Analysis
Notes
Chapter 11: To Facilitate Financial Projections, the Buyer Needs to Classify the Target as a Mature, Growth, or Cyclical Business
Company Classifications
The Mature Company
The Growth Company
The Cyclical Company
The Declining Company
The Turnaround
The Pioneer
Summary
Chapter 12: How Practitioners Forecast an M&A Target’s Sales and Earnings
Means of Forecasting
Critiquing P.F. Chang’s Projection
Preparing Projections
Three Scenarios
Summary
Notes
Part Four: Acquisition Valuation
Chapter 13: The M&A Industry Typically Uses Four Valuation Methodologies
Assessing Each Methodology
Applying Multiple Methodologies
Summary
Chapter 14: The Use of Discounted Cash Flow in M&A Valuation
Discounted Cash Flow versus Comparables
The Discounted Cash Flow Valuation Process
Choosing the Right Discount Rate in Valuing a Standalone Business
Summary
Note
Chapter 15: Valuing M&A Targets Using the Comparable Public Companies Approach
Real Estate Analogy
What’s the Right P/E Ratio?
A Word about Value Multiples
Summary
Chapter 16: Valuing an M&A Target by Considering Comparable Deals and Leveraged Buyouts
Control Premium Is Embedded in Comparable Acquisitions
Understanding Leveraged Buyouts
LBO Mechanics
Case Study: Crane Co.
Summary
Note
Chapter 17: Valuation Situations That Don’t Fit the Standard Models
Sum-of-the-Parts
The Cyclical Company
Speculative High-Tech Companies
Low-Tech, Money-Losing Companies
Turnaround Considerations
High-Leverage Company Considerations
Natural Resources
Emerging Market Acquisitions
Discounted Cash Flow (DCF)
Comparable Public Companies and Comparable Acquisitions in the Emerging Markets
Summary
Notes
Part Five: Combination, the Sale Process, Structures, and Special Situations
Chapter 18: Combining the Buyer’s and Seller’s Financial Results for the M&A Analysis
Combining the Buyer’s and Seller’s Projections
Reality Check
Financing Sources
Summary
Notes
Chapter 19: When Is the Best Time for an Owner to Sell a Business?
Seller Categories
Timing Considerations
Making the Decision
Confronting Reality
Selling the Business versus an Initial Public Offering
IPO versus Sale
Partial Sale/Leveraged Recapitalization
Summary
Notes
Chapter 20: The Sale Process from the Seller’s Vantage Point
Retaining a Financial Adviser
Setting the Stage for the Sale
The Buyer’s List
Approach Tactics
Confidentiality, Operational, and Personnel Issues
Due Diligence Visits
Coming Up with a Bid
Final Due Diligence and Legal Documentation
Summary
Chapter 21: A Review of Legal and Tax Structures Commonly Used in Transactions
Acquisition Legal Structures
Legal Considerations
Triangular Merger
Simplified Tax Structures
Legal Documents
Summary
Note
Chapter 22: Unusual Transaction Categories
Tax-Free Deal
DEMERGER
Reverse Merger
Special Purpose Acquisition Corporation (SPAC)
Hostile Takeover
Summary
Note
Chapter 23: Final Thoughts on Mergers and Acquisitions
About the Author
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1
Chapter 3
Table 3.1
Table 3.2
Chapter 4
Table 4.1
Table 4.2
Table 4.3
Table 4.4
Table 4.5
Table 4.6
Table 4.7
Table 4.8
Chapter 6
Table 6.1
Table 6.2
Chapter 9
Table 9.1
Table 9.2
Table 9.3
Table 9.4
Table 9.5
Table 9.6
Table 9.7
Table 9.8
Chapter 10
Table 10.1
Table 10.2
Table 10.3
Table 10.4
Table 10.5
Table 10.6
Table 10.7
Table 10.8
Table 10.9
Table 10.10
Table 10.11
Table 10.12
Chapter 11
Table 11.1
Table 11.2
Table 11.3
Table 11.4
Chapter 12
Table 12.1
Table 12.2
Table 12.3
Table 12.4
Table 12.5
Chapter 13
Table 13.1
Chapter 14
Table 14.1
Table 14.2
Table 14.3
Table 14.4
Table 14.5
Table 14.6
Chapter 15
Table 15.1
Table 15.2
Table 15.3
Table 15.4
Table 15.5
Table 15.6
Table 15.7
Table 15.8
Chapter 16
Table 16.1
Table 16.2
Table 16.3
Table 16.4
Table 16.5
Chapter 17
Table 17.1
Table 17.2
Table 17.3
Table 17.4
Table 17.5
Table 17.6
Table 17.7
Table 17.8
Table 17.9
Chapter 18
Table 18.1
Table 18.2
Table 18.3
Table 18.4
Chapter 20
Table 20.1
Table 20.2
Table 20.3
Table 20.4
Table 20.5
Chapter 21
Table 21.1
Chapter 22
Table 22.1
List of Illustrations
Chapter 1
Figure 1.1 M&A Activity, 1993–2013, by Value in the United States.
Figure 1.2 Vertical Industry Diagram: U.S. Electric Power
Chapter 3
Figure 3.1 Optimal Track Record for a Business
Figure 3.2 Vertical Chain
Figure 3.3 Oil Exploration Business: Drilling For versus Buying Reserves
Figure 3.4 Capital Structures of Buyouts versus Normal Companies
Chapter 4
Figure 4.1 EPS Accretion/Dilution First Year after a Deal Closing
Figure 4.2 Like-for-Like Deal, Higher Stock Price
Figure 4.3 Discounted Cash Dividend Valuation Approach, Constant Growth Model
Chapter 8
Figure 8.1 The Acquisition Search Funnel: 12-Month Process
Chapter 11
Figure 11.1 Cyclical Company Earnings Plotted against GDP
Chapter 14
Figure 14.1 Different Rates of Return: November 2013
Figure 14.2 Sample
k
Calculation, October 2014, U.S.-Based Company
Chapter 15
Figure 15.1 Three Sets of Numbers at August 15, 2014
Chapter 16
Figure 16.1 Leveraged Buyout Capitalization: Debt and Equity Market Value
Chapter 17
Figure 17.1 Holding Company Structure with Three Operating Divisions
Figure 17.2 Comparing Problem Companies (In millions)
Figure 17.3 Natural Resources Acquisition—Valuation Methodology
Figure 17.4 Emerging Markets US$ Sovereign Bond Yield/Spreads Against U.S. Treasury Bond
Chapter 21
Figure 21.1 Statutory Merger
Figure 21.2 Stock Purchase
Figure 21.3 Asset Purchase
Figure 21.4 Triangular Merger
Figure 21.5 Asset versus Stock Sale: Seller’s Point of View (in millions)
Guide
Cover
Table of Contents
Preface
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Preface
When most people hear the term “mergers and acquisitions,” the impression that comes to mind is a merciless corporate raider, who acquires a weakened corporate behemoth, strips the business of its assets, and fires thousands of innocent workers in the relentless pursuit of profit. This caricature is the gist for Hollywood films, but it holds true for only a minute fraction of transactions. The vast majority of M&A deals are friendly combinations between companies in the same, or a very similar, business.
The arranging, financing, and documenting of these combinations is a large industry in and of itself—employing a sizeable number of people in many vocations. The industry’s attributes—and the process through which deals are conceived and closed—thus merit the close attention of a broad cross-section of individuals, such as:
Investment bankers involved with mergers and acquisitions (M&A).
Equity analysts at hedge funds, risk arbitrage, pension funds, commercial banks, endowments, insurance companies, mutual funds, and sovereign wealth funds, who invest in firms engaged in M&A.
Private equity professionals at buyout funds, venture capital funds, and hedge funds, who routinely buy and sell companies.
Corporate financial executives and business development professionals.
Institutional loan officers working with M&A and buyout transactions.
Business students at colleges and graduate business schools.
Investor relations professionals at corporations and public relations firms.
Business appraisers, including those at appraisal firms, accounting firms, and consultancies.
Lawyers who work with corporate clients on M&A-related legal, financial, and tax matters.
Independent public accounting firms that review M&A accounting.
Government regulators at the Federal Trade Commission (FTC), Department of Justice, Internal Revenue Service (IRS), Securities and Exchange Commission (SEC), Federal Deposit and Insurance Corporation (FDIC), Public Accounting Oversight Board (PCAOB), Comptroller of the Currency, and Federal Reserve (and their international counterparts).
Government elected officials who are interested in privatization or M&A related effects on economies.
Bank trust and private wealth advisers.
Sophisticated individual investors.
Consultants that assist acquirers in the M&A due diligence process concerning the information technology, human resources, environmental records and nonfinancial facets of the seller.
Recent Trends
During the 16 years since the first edition was published, M&A activity has skyrocketed—increasing by a factor of four times—and the M&A community has expanded accordingly. Accompanying this growth were important changes to the business, including the following:
Embracing of M&A by smaller firms.
Previously the province of large companies, M&A is increasingly a sought-after growth option for mid-market enterprises.
Private equity.
The amount of capital provided to the private equity industry for leveraged buyouts has increased exponentially. Private equity is a more significant player in the M&A business than it was during the first edition’s introduction.
International.
Like other facets of American business, M&A has gained international acceptance, particularly in the developed economies of Western Europe. In recent years, M&A activity in emerging markets, such as China and Brazil, has grown.
Natural resources.
To complement traditional exploration programs, natural resource companies have ramped up acquisitions as a means to gain additional reserves at a reasonable cost.
Expansion of the Internet.
The expanded use of the Internet has made the M&A process easier for buyers and sellers, and thus it has facilitated the rise in transactions.
Increase in computing power, coupled with a decline in its cost.
Information related to prospective deals, their pricing, and their financing structure can be sliced and diced in numerous ways. This allows industry participants to quickly size up likely scenarios.
Rise in activist investors.
After a long hiatus, activist investors are stimulating M&A activity among publicly traded companies, encouraging those considered “undervalued” to sell themselves or conduct spin-offs. Publicly traded companies represent a small subset of the deal universe, but they tend to involve the larger, more publicized transactions.
Overview of the Contents
The book starts with a bird’s-eye view. We begin with the state of the global M&A markets and the motivations behind most acquisitions. I then synthesize the 10 principal motivations into the three financial tactics that govern the preponderance of deals. These topics represent Chapters 1–4.
After this high-level review, the book covers the age-old question: How does a buyer find an acquisition from the thousands of possible targets? The book outlines the methodical search process of successful acquirers and ends the discussion with the key attributes of “good” versus “bad” deals. This material is covered in Chapters 5–9.
Once the buyer has identified a few acquisition candidates, it assesses their financial histories and future prospects (Chapters 10–12). Then, it must consider the appropriate price to offer the owners. Chapters 13–17 provide a brief synopsis of corporate valuation techniques, the subject of many books including one of my own: Security Analysis and Business Valuation on Wall Street (John Wiley & Sons, second edition, 2010). The standard techniques for industrial and service firms represent the limit for most valuation books, but here I also cover special challenges, like natural resource companies, money-losing enterprises, cyclical businesses, and emerging markets firms. The special cases are important; few acquisition targets are U.S.-based, “vanilla” companies with a smooth upward trend of revenue and profit—that is, the kind you see in most textbooks.
If the buyer and seller are “close” on the seller’s valuation, the buyer then has to gauge the impact of the prospective transaction on its balance sheet, income statement and future equity price. Chapter 18 reviews the basics of M&A financial accounting for the combined firms. From this initial financial analysis, the buyer completes a computer model of the transaction. As Chapter 18 explains, the model provides the basis through which other financial actors—lenders, equity investors, and rating agencies—assess the deal. If the seller accepts buyer securities or contingent consideration, it too will consider modeling the transaction. The book discusses debt and equity finance in Chapter 18.
Up through Chapter 18, I focus on the buyer’s strategy tactics, valuation, accounting, and finance concerns, essentially descending from (a) the “big picture” viewpoint to (b) the day-to-day task of the buyer’s deal analysis. Chapter 19 takes a diversion and it discusses the reasons why sellers sell and why a sale is often preferable to an initial public offering (IPO). Chapter 20 then proceeds to cover, in a step-by-step fashion, the process by which a sizeable business is sold.
Chapters 21 reviews the key legal documents encompassed in the sale process, as well as the common legal structures. A proper legal structure can save the buyer or seller significant monies, and it can offer either party substantial protection from unforeseen problems.
Chapter 22 examines several transaction categories, such as hostile takeovers, demergers, and reverse mergers, which fall into the mainstream from time to time. Such transactions gain popularity only to recede into obscurity, as economic or regulatory conditions change.
What’s New in the Second Edition
The methodical process needed to produce a successful M&A deal has not changed fundamentally over the past 30 years. However, the transaction environment, valuation techniques, financial accounting, and legal structures have evolved over time. This second edition provides the necessary updates, additional insights, fresh examples, and current anecdotes. I have rewritten the majority of the book to provide a more concise treatment of M&A and to reflect my broader international experience. This edition takes advantage of the knowledge I have gained from closing more deals, conducting executive education, and lecturing on M&A around the world.
To facilitate the reader’s understanding of the subject matter, the book is divided into five parts.
Part One: The Big Picture
Part Two: Finding a Deal
Part Three: Target Financial Analysis
Part Four: Acquisition Valuation
Part Five: Combination, the Sale Process, Tax and Legal Structures, and Special Situations
Instructors may visit the Wiley Higher Education website for M&A, Second Edition for Q&A, PowerPoint Slides, Sample Exams, Cases and Exercises, and other classroom tools.
For convenience, the pronoun he has been used throughout this book to refer nonspecifically to capital markets participants. The material herein will be equally useful to both men and women who evaluate M&A transactions.
This book will help you consider corporate strategies, make optimal M&A transactions, close better private equity deals, obtain superior arbitrage investments, and assess relevant regulatory matters. M&A: A Practical Guide to Doing the Deal provides a practical, well-rounded view of the M&A business and enables you to make sound judgments and to confront M&A’s many challenges.
JEFFREY C. HOOKE Chevy Chase, MarylandAugust 2014
Part OneThe Big Picture
CHAPTER 1The Global M&A Market: Current Status and Evolution
This chapter reviews the global merger and acquisition (M&A) market and traces its expansion. Transactions are segmented into several categories, with most deals being medium-sized, private transactions. There is no guarantee of success in acquisitions.
An Upward Trend, Interrupted by Booms and Busts
M&A activity over the past 20 years has shown a marked growth trend, interrupted by peaks and valleys related to financial booms and busts. Volume spiked during the Internet bubble (1998–1999) and the private equity boom (2006–2007), only to drop significantly and then recover. Announced deals in the United States in 2013 totaled $1.1 trillion in volume, encompassing over 15,000 transactions. Figure 1.1 shows the trend line.
Figure 1.1 M&A Activity, 1993–2013, by Value in the United States.
Data Source: Bloomberg and Reuters
As the figure shows, the M&A market is a cyclical business. Activity is tied to several variables:
Stock market valuations
Availability of debt financing
Optimistic views on the economy
When equity values rise in the stock market, an acquirer can offer his inflated stock to a seller as currency for the transaction. Using high-priced stock in a deal makes the transaction’s mathematics more attractive for the buyer. Alternatively, if the seller doesn’t want the buyer’s stock, the buyer can complete an equity raise in the public (or private) markets, and provide the seller with the necessary cash. The end result is thus identical.
For buyers to complete deals that make sense for their shareholders, borrowed money usually is part of the financing package. M&A activity is thus dependent on lenders—such as banks, finance companies, and bond funds—being open for business and willing to sign-off on the aggressive assumptions that often drive transactions.
High-priced stock investors, liberal lenders, and motivated buyers are all reflective of positive views on the strength of the economy, and this optimism promotes deals. Once a recession hits and the psychology goes negative, transaction volume dries up.
M&A Activity by Geography
The United States and Canada represent a large share of M&A activity, and this continued to be the case in 2013. Typically, transactions are aggregated by four geographies. See Table 1.1.
Table 1.1 M&A Volume by Value, Year Ended December 31, 2013
Data Source: Bloomberg.
Region
%
United States and Canada
44
Western Europe
21
Japan/Australia
12
Emerging Markets
18
100
The United States and Canada have about 22 percent of global gross domestic product (GDP), but they account for almost double that percentage in deal volume. Emerging markets, which are defined as countries having annual GDP per capita of US$9,000 or less, make up about 35 percent of global GDP, yet their percentage of deals is much lower. We discuss these disparities in the next chapter.
Deal Categories
M&A is segmented into four broad categories:
Horizontal
Vertical
Strategic/Diversification/Conglomerate
Private Equity
A horizontal deal is when a company acquires (a) a competitor, (b) a firm doing the same business in a different geography, or (c) an enterprise engaged in a product line that is similar to that of the buyer. Recent horizontal mergers include: (a) El Paso/Kinder Morgan, two U.S. pipeline companies, $36 billion value; (b) Amgen (U.S.)/Onyx (U.S.), two drug firms, $10 billion; and (c) Valeant Pharmaceuticals (Canada)/Bausch & Lomb (U.S.), two health-care product firms, $9 billion. Horizontal is the most popular deal category because it presents the buyer with the fewest operating risks. The buyer knows the target’s product line, suppliers, and customers, and it can institute cost saving measures with little disruption to the seller’s operations. Furthermore, in the case where the seller is a direct competitor, the acquirer has the added benefit of potentially raising prices with minimal customer resistance. Perhaps three quarters of all M&A deals fit the horizontal category.
A vertical transaction occurs when a company buys a supplier, distributor, or customer. A coal-burning electric utility that acquires a coal miner is one illustration. Most industries have drifted away from vertical integration, with exceptions being the big oil companies, like Exxon and Chevron. So, vertical deals tend to be quite rare. See Figure 1.2.
Figure 1.2 Vertical Industry Diagram: U.S. Electric Power
Strategic, diversification, and conglomerate transactions take place when the buyer is engaged in a field that is unrelated to the seller. Sometimes, the buyer believes it has a set of strengths that can propel the seller’s business (or vice versa), and the transaction is thus part of a grand strategy to boost the buyer’s future. At other times, the buyer seeks to redeploy capital from its core business into another primary line, rather than disposing of the cash by paying higher dividends or repurchasing stock. Berkshire Hathaway, the insurance conglomerate, completed one of its many diversification deals when it purchased railroad Burlington Northern for $34 billion in 2010.
Strategic, diversification, and conglomerate deals represent about 10 percent of M&A activity.
Private equity participates in M&A principally through the leveraged buyout (LBO). An LBO is a transaction whereby a private equity fund (or a similar investor group) acquires a company and uses borrowed money to meet most of the cost of the deal. The private equity fund does not guarantee the loans, so the lenders look solely to the acquired company for repayment. Because an LBO is not a combination of similar businesses, the opportunities for an LBO to cut duplicate costs are minimal, and the investors rely on new management, new operating tactics, or a rising stock market to boost values.
Through the LBO, private equity funds control many large U.S. corporations, such as Hertz Rent-A-Car, Hilton Hotels, and Caesar’s Entertainment, and the funds have made substantial inroads into Western Europe. At the LBO peak in 2006, such debt-funded deals represented 30 percent of M&A activity, a figure that has since dropped to about 10 percent according to data generated by Capital IQ.
Large versus Small Transactions
Large transactions involving publicly traded companies garner most of the media attention, and they account for 60 percent of dollar volume, out of 30,000 to 40,000 global deals per year, based on my estimations and data services. Three quarters of transactions involve privately owned firms (or divisions of publicly traded companies) with annual revenue under US$100 million equivalent, and 97 percent of purchase prices are under US$100 million.1 One big $10 billion deal, therefore, equals the value of two hundred $50 million deals.
M&A: No Guarantee of Success
Despite all the hullaballoo surrounding M&A, numerous studies over the years have proven that over half of acquisitions do not increase the buyer’s per share equity value. However, most buyer executives, investment bankers and other practitioners fail to take such studies seriously, and they think that their deal will beat the odds. Such action is a calculated risk, and it reflects the corporate view that M&A is often the fastest means of growth. Why spend years developing new products and cultivating new customers, when you can acquire both in a few months with an M&A transaction? For many corporate managers, this logic is compelling and the opportunity for a big score outweighs the risk.
M&A’s acceptance by United States’ operating companies and financial markets is facilitated by the government’s light regulatory hand. Most deals involve competitors or similar businesses, yet U.S. authorities rarely challenge transactions on antitrust grounds. Compared to other jurisdictions, legal protections for those U.S. workers displaced by M&A cost-cutting are minimal; and, thus, acquirers can realize cost synergies with little government interference. For large public deals, federal and state regulations allow the buyer’s stockholders a minor role. Management dominates the process even if the acquisition price appears overly generous and thus injurious to the buyer’s stockholders. Finally, the U.S. government welcomes foreign corporations to buy into the United States.
The U.S. regulatory attributes are lacking, to one degree or another, in foreign markets, which explains their relative lack of activity. We cover the differences in the next chapter.
Note
1.
Bloomberg, “Global Financial Advisory—Mergers and Acquisition Rankings 2013.”
CHAPTER 2U.S. M&A History, Trends, and Differences from Other Nations
The U.S. M&A market is more advanced than those of other countries, and, as a result, the United States has a disproportionate share of transactions. The reasons behind the disparity are covered in this chapter.
In my travels, I have given M&A seminars on several continents. Inevitably, the attendees want to know how their local market stacks up against the United States, where the M&A business is highly advanced.
U.S. M&A History
To give the response some context, a review of the U.S. market’s 120-year evolution is helpful. Historians and M&A experts identify six merger waves.
First Wave: 1895–1907
The first wave saw a horizontal M&A boom, as larger enterprises gobbled up their smaller competitors. Monopolistic firms, such as U.S. Steel and Standard Oil, became dominant, with a number later broken up by newly empowered antitrust authorities. The wave ceased with the financial panic of 1907.
Second Wave: 1920–1929
Vertical mergers gained popularity, as firms integrated backward by buying supply sources or forward by acquiring distributors. Holding companies assembled many individual electric utilities into vast corporations. A decade of economic prosperity saw new technologies, such as commercial radio broadcasting, and higher stock prices propelling M&A volume. The wave ended with the 1929 stock market crash.
Third Wave: 1960–1970
With the introduction of modern portfolio theory in the 1950s, big corporations attempted to minimize risk and to enhance equity value by becoming diversified conglomerates through acquisition. This notion coincided with an economic boom that pushed equity prices higher and contributed to increased M&A activity. A 1970 stock market collapse terminated this wave.
Fourth Wave: 1982–1989
The fourth wave was marked by Corporate America’s broad acceptance of M&A as a means to foster revenue and earnings growth. Previously, blue chip corporate executives had an anti-M&A bias, viewing an acquisition as the buyer’s admission that its core business was weak. Stimulating activity was a huge rise in corporate restructurings and hostile takeovers. The latter was funded often by junk bond financing, a new financial tool that enabled corporate raiders and companies with low credit ratings to launch bids for established firms. The wave was damaged by 1987’s Black Monday crash, when the U.S. stock market fell by 22 percent, and it ended on October 13, 1989, when a $7 billion LBO deal for United Airlines collapsed. This event caused a sizeable stock market drop and augured the coming 1990–1991 recession.
Fifth Wave: 1992–2000
From 1992 to 2000, the stock market and the economy experienced an expansionary period, precipitated in part by the Internet boom. Lofty high-tech stock prices spurred many stock-for-stock mergers, as dot-com buyers took advantage of high equity valuations. The frenzy declined with the bear market’s start in late 2000, and the S&P 500 index lost 50 percent of its value by October 2002. Investors and lenders pulled back, and wave-related activity dropped accordingly.
Sixth Wave: 2004–2007
As the 2000–2002 crash faded into memory, corporations, equity investors, and lenders plunged into M&A once again. This wave featured a much higher percentage of cash deals, and LBOs played a larger role than in prior waves. The 2007/2008 global financial crisis, stock market crash, and economic recession caused a 60 percent drop in deal volume, from which the M&A industry slowly recovered.
