Robert F. Bruner - Applied Mergers and Acquisitions

6 Observance of the letter and spirit of ethical norms and laws. You can gain financial, organizational, and strategic objectives in M&A, but in ways that violate norms such as equity, duty, honesty, and lawful observance. After the corporate scandals of recent years, any assessment of outcomes would be incomplete without consideration of laws ( Chapters 25through 29) and ethics ( Chapter 2).

7 Improved process. The process orientation of this book emphasizes the importance of learning from each deal. As illustrated in Chapter 37, good practitioners try to capture the lessons of each deal in an effort to accumulate an improvement of practice for the next time around. This is the way a firm turns mere skills into truly strategic capabilities.

Exhibit 1.2summarizes the success framework for M&A. It suggests that one must first assess the structure of the business environment and deal opportunity. The structure will suggest the outlines of a deal design. Next, the thoughtful practitioner must tailor a deal development process and conduct the process in ways that achieve an attractive outcome. In other words, Exhibit 1.2summarizes a way for practitioners to organize and execute good deal development. Think of Exhibit 1.2as a bull’s-eye target, useful for practicing your aim at various points in the merger process. The balance of this book adds the details.

This book advises business practitioners and students about the best ways to analyze, design, and implement mergers and acquisitions. The “best,” of course, are always moving targets. Therefore, students of best practices can never rest. In the marketplace for ideas, the tried-and-true notions are constantly being elbowed aside by disruptive new ideas that reshape the landscape. This book sketches that jockeying: It aims to synthesize the enduring and upstart ideas into a comprehensive perspective on best practice in M&A. While many of these ideas originated in academia, the book emphasizes their practical application—hence, the name Applied Mergers and Acquisitions . This book heralds seven important ideas that have received scant attention in M&A practice. Yet they yield valuable insights. I highlight them because they have the capacity to disrupt conventional practice.

EXHIBIT 1.2 Drivers of Success in M&A

1 A deal is a system. This presentation discusses the systemic nature of M&A transactions. In this, it draws on basic concepts from systems engineering to illuminate the trade-offs that occur within the design of a deal. Chapter 18outlines several important implications for the practitioner, including the following:Internal consistency. If a deal is a system, then the parts need to fit together in a sensible way. One must negotiate the pieces of the deal with a view toward an integrated whole.Unanticipated side effects. The systems view gives a wide-angle perspective. It encourages the deal designer to look out for the cumulative effect of tinkering. Just as a balloon squeezed in the middle will bulge at the ends, it is likely that hard bargaining on one point will lead to stress somewhere else.What “best” means. A systems view admits the possibility that there may be many great deal structures that satisfy the objectives of all parties and set Newco 4 up to succeed. If there are many good deals, then it is probably true that there is no single right solution to a deal design problem—but there may be many wrong ones. One’s aim should be to avoid the wrong and find the attractive right.This systems view of deal design may disrupt M&A practice by granting the practitioners of this view greater creativity in negotiation and deal design. The ways in which this might occur are explored in Chapters 18, 25, and 30.

2 Optionality. Options are pervasive in the M&A environment. The theory of option pricing that debuted in 1973 has had immense influence on virtually all areas of business. Recent research on real options develops important new insights that can improve decision making. But the optionality present in M&A transactions remains largely to be explored. Options thinking is a fertile guide for best practice. Chapters 10, 14, 15, 23, 29, and 33survey the presence of options in M&A and their effect on valuation and behavior. Optionality is a disruptive idea in M&A practice because it can afford practitioners greater analytic power and creativity, leading to more insights about the drivers of value creation and to new bargaining strategies and innovations in deal design.

3 Critical thinking about market integration and efficiency. Tools of finance now in use presuppose that securities markets function well enough for decision makers to refer to market prices for clues to success. This assumption is a reasonable point of departure for one’s analysis, but it deserves thoughtful reexamination in many M&A settings. The first obvious case is cross-border M&A. Chapters 5and 12suggest that differences between one’s home country and the country of the target firm may be large enough to warrant careful adjustment in the use of financial tools. The second obvious case is the world of very high leverage. Chapters 13, 20, and 34explore this world and suggest that it requires thoughtful judgment rather than blind application of tools. Finally, the third case is the world of the privately owned firm. Here, control and liquidity of the investment may differ materially from that of the publicly held large corporation. Chapter 15explores the impact of those differences on firm value. At issue in these three cases is the extent to which asset markets are integrated and efficient. An ability to think critically about integration and efficiency is potentially disruptive to conventional M&A practice because it arms the practitioner with tools to view markets more insightfully.

4 Good governance is valuable. Recent corporate scandals remind us of the importance of good systems of corporate oversight and control. Indeed, a growing body of research finds that good governance pays. Chapter 26considers the role for systems of governance in the world of M&A, giving particular attention to duties of the board of directors, laws and regulations, accounting, and takeover defense. Chapter 17on momentum acquisition explores the potential destruction of value when managers focus on the wrong aims. As this is being written, it seems that a revolution in corporate governance is merely beginning. Changes in governance will inevitably disrupt old practices in M&A.

5 Valuation and value creation through deal design. Financial economics teaches that prices should drive managerial decisions, which in turn affect shareholder wealth. Valuation is the practice by which we assess the actual fairness of prices. Numerous chapters in this book survey the state of the art in valuation and extend those tools to discrete new problems of particular importance to practitioners: valuation of synergies, valuation of real options, and valuation of assets across borders. This book also emphasizes the normative implications of managers’ duty to create shareholder wealth, and carefully details how deal design choices can create or destroy value. Better valuation practices will disrupt older M&A approaches by arming future deal designers with greater insight into the risks and economic potential in a deal.

6 Behavioral effects. We know from extensive anecdotal evidence and the emerging field of behavioral finance that decision makers can deviate from value-creating choices, owing to a variety of personal and group behavioral influences. Chapters 30through 33and 36discuss behavioral influences in M&A, especially as they appear in negotiations, auctions, competitive bidding, hostile takeovers, and process leadership.