Robert F. Bruner - Applied Mergers and Acquisitions

ISBN 0-471-39506-4 (cloth/CD-ROM) — ISBN 0-471-39505-6 (cloth) — 0-471-395064 (university)

1. Consolidation and merger of corporations. I. Title.

HD2746.5.B783 2004

658.1’62—dc22

2003020246

ToJonathan E. BrunerandAlexander W. Bruner

Bēowulf

Robert F. Bruneris Distinguished Professor of Business Administration and Executive Director of the Batten Institute at the Darden Graduate School of Business Administration, University of Virginia. He teaches the course “Mergers and Acquisition” in Darden’s MBA program, and is the faculty director of Darden’s executive education program, “Mergers and Acquistions.” He has received numerous awards for teaching and casewriting in the United States and Europe. BusinessWeek magazine cited him as one of the “masters of the MBA classroom.” He is the author or co-author of over 400 case studies and notes, and of Case Studies in Finance: Managing for Corporate Value Creation, now in its fourth edition. His research has been published in journals such as Financial Management , Journal of Accounting and Economics , Journal of Applied Corporate Finance , Journal of Financial Economics , Journal of Financial and Quantitative Analysis , and Journal of Money, Credit, and Banking . Industrial corporations, financial institutions, and government agencies have retained him for counsel and training. He has served the Darden School, professional groups, and community organizations in various positions of leadership. Copies of his papers and essays may be obtained via his web site, http://faculty.darden.edu/brunerb/. He may be reached by e-mail at brunerr@virginia.edu.

1 Joseph R. PerellaChairman of Institutional Securities GroupMorgan Stanley

The Chinese expression for crisis— wei ji —combines the character “risk” with the character “opportunity.” Mergers and acquisitions (M&A) transactions are opportunities that bear some considerable risk. For more than 30 years as an M&A professional, I have encountered many opportunities and risks; but I am still as excited about my work as when I started in this business in 1972. Nonetheless, things have changed since then.

The M&A environment has always been a fast-paced, highly complex world where transactions can be arranged in a matter of days and where the values involved often exceed billions of dollars. For more than two decades, M&A activities have captured the general attention of the public and motivated many young, intelligent, and ambitious people to pursue careers as M&A professionals at investment banks, consulting companies, and law firms across the world. In fact, the flow of M&A business reached unprecedented levels in the late 1990s. In 2000, the dollar volume of worldwide M&A activities reached approximately $3.2 trillion through over 3,000 transactions. Of these, approximately half involved U.S. parties and seven transactions had values of $10 billion or more, including the Time Warner/America Online transaction valued at $182 billion. Two years later, the dollar volume of worldwide M&A activity was one-third of the 2000 peak, at approximately $1.0 trillion. 1 It is uncertain if we will revisit the levels attained in 2000 again, but no one doubts that M&A activity is an integral part of corporate strategy.

It is important to realize that popular images are often mistaken. The M&A world is not full of Gordon Gecko types expounding that “greed is good.” The real M&A world is built upon hard analysis and research, continuous dialogue among corporate officers, board members, and in many cases external advisers. It is also a world of excitement and innovation, based on transforming transactions that have a major impact on both domestic and global economies.

I prefer to take a more holistic view of molding two organizations together. In many respects, a merger is like a marriage between two companies. It cannot be a surrender followed by constant surveillance; but rather it must result in gains for both sides. Companies unite to forge strengths without necessarily losing individuality, while creating a new and better organization. A merger always involves imperfections, but these imperfections are offset by the potential that the new organization can achieve. Even though we tend to focus on the decision to merge and its prerequisite analysis, it is often the integration and execution processes afterward that matter the most. A successful merger is not the result of the contracts and documents binding organizations together; rather, it is a function of the implicit agreements governing the conduct of all individuals involved and the effects the new organization will have on these individuals. And never fear a tough transaction or a difficult negotiation. To prevail in an M&A negotiation is to see the future value of the possibilities created, not the immediate price paid or initial valuation.

That is what excites me most about such a well written and comprehensive journey into M&A. Applied Mergers and Acquisitions by Robert Bruner will surely become an essential reference for any M&A practitioner. Throughout the book, you will find a practical overview of the M&A world and a summary of the theoretical and academic work done on a variety of topics, as well as further questions not yet answered. But this isn’t just a book about great thoughts and process, but rather how to turn insight into deals, and deals into lasting value. Read it, absorb its concepts and ideas, question its conclusions, and develop your own way of thinking. Bruner has provided you with the framework and the freedom to forge your own point of view. As W. H. Auden more eloquently put it in “The Managers”:

1 The last word on how we may live or dieRests today with such quiet

2 Men, working too hard in rooms that are too big,Reducing to figures

3 What is the matter, what is to be done. 2

1 1. Thompson Financial. Includes announced transactions each with an aggregate value of US$100 MM or more. Includes transactions with estimated values. Excludes terminated transactions.

2 2. W. H. Auden, Collected Shorter Poems 1927–1957, New York: Random House, 1966, page 301.

Mark Twain barely contained his use of profanity, a problem his wife abhorred and sought to cure. One evening, he and she were dressing for a formal dinner when a button popped off his shirt. He launched a tirade against buttons, formal shirts, and evening wear. After a few minutes, the profanity subsided. Twain’s wife decided to use the moment to remind her husband to govern his language. Calmly, and in a flat voice, she repeated, word for word, the entire tirade. Twain replied, “It would pain me to think that when I swear it sounds like that. You got the words right, Livy, but you don’t know the tune.”1

Thus it is in conversations about mergers and acquisitions (M&A) between scholars and practitioners. Each thinks the other has, at best, the words but not the tune. I wrote this book to blend both views. It all began when I needed written notes with which to teach MBA students and practitioners about the analysis and design of M&A deals. I had studied M&A for my entire career, producing a number of research articles and monographs, and numerous case studies. Over the years, so many students and practitioners had shared with me their struggles to learn M&A that I gained a clear sense of the development challenge. And early in my career, I worked briefly as an analyst for a large financial institution, assessing, implementing, and financing M&A deals. Based on this, I thought I had something to say. Plus, I cared enough to want to say it. Motivated by the astonishing M&A boom of the 1990s and the subsequent bust spangled with some prominent M&A-related corporate collapses, I wanted to help practitioners redefine best practice in the field of M&A and to highlight how one might actually apply it. I sought to remind the many critics of M&A that it is a vital instrument of industrial renewal and that we stifle the disruptions of M&A only at our peril. I aimed to caution the optimists in M&A to take very great care because M&A is no simple road to success. And I hoped that my writing might nudge my scholarly colleagues toward greater insights.