Robert F. Bruner - Applied Mergers and Acquisitions

1 Cover

2 Title Page Applied Mergers and Acquisitions ROBERT F. BRUNER

3 Copyright Copyright © 2004 by Robert F. Bruner. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com . Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com . Library of Congress Cataloging-in-Publication Data: Bruner, Robert F, 1949– Applied mergers and acquisitions / Robert F. Bruner. p. cm. Includes index. 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

4 Dedication ToJonathan E. BrunerandAlexander W. Bruner 1221 Hafast þū gefēred, pæt ðē feor ond nēah Ealne wītde-ferhð weras ehtigað, Efne swā sīde swā sæ bebūgeð Wind-geard, weallas. Wes, þenden þū lifige, Æþeling, ēadig! Ic þē an tela Sinc-gestrēona. Bēo þū suna mīnum Dædum gedēfe, drēam-healdende! Hēr is æghwylc eorl ōþrum getrŷ we, mōdes milde, man-drihtne hold; 1841 þē þā word-cwydas wigtig Drihten On sefan sende; Bēowulf

5 About the Author About the Author Robert F. Bruner is 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 .

6 Foreword NOTES

7 Preface ACKNOWLEDGMENTS NOTES

8 PART One: Introduction and Key Themes CHAPTER 1: Introduction and Executive SummaryAN URGENT PROBLEM: HOW CAN MY TEAM DO BETTER THAN THE AVERAGES? OVERVIEW OF A FRAMEWORK FOR M&A SUCCESS SEVEN DISRUPTIVE IDEAS WORTHY OF BEST PRACTITIONERS CONCLUSION NOTES CHAPTER 2: Ethics in M&AINTRODUCTION WHY SHOULD ONE CARE? IN WHOSE INTERESTS ARE YOU WORKING? WHAT IS “GOOD”? CONSEQUENCES, DUTIES, VIRTUES PROMOTING ETHICAL BEHAVIOR MINI-CASE: GREENMAIL PAYMENT BY WALT DISNEY PRODUCTIONS, 1984 CONCLUSION NOTES CHAPTER 3: Does M&A Pay?INTRODUCTION MEASUREMENT OF M&A PROFITABILITY: BETTER THAN WHAT? FINDINGS BASED ON THE ANALYSIS OF MARKET-BASED RETURNS TO SHAREHOLDERS FINDINGS BASED ON THE ANALYSIS OF REPORTED FINANCIAL PERFORMANCE FINDINGS ABOUT THE DRIVERS OF PROFITABILITY FINDINGS FROM SURVEYS OF EXECUTIVES FINDINGS FROM CLINICAL STUDIES CONCLUSIONS OF REVIEWERS THROUGH TIME VIEWING THE WHOLE MOSAIC: SOME CONCLUSIONS SPECIAL NOTE NOTES

9 PART Two: Strategy and the Origination of Transaction Proposals CHAPTER 4: M&A ActivityINTRODUCTION M&A ACTIVITY APPEARS IN WAVES EXPLANATIONS OF M&A ACTIVITY “CREATIVE DESTRUCTION” AS THE DRIVER OF M&A ACTIVITY IMPLEMENTING THE “CREATIVE DESTRUCTION” VIEW: LISTEN TO MARKETS AND FIRMS CONCLUSION APPENDIX 4.1 How to Listen to Customers of Firms APPENDIX 4.2 How to Listen to Macroeconomic and Sector Conditions APPENDIX 4.3 Listening for Turbulence as Communicated through Capital Markets DEBT MARKETS EQUITY MARKETS DERIVATIVES MARKETS APPENDIX 4.4 Listening to Firms and Their Industries NOTES CHAPTER 5: Cross-Border M&AINTRODUCTION CROSS-BORDER M&A ACTIVITY M&A ACTIVITY WITHIN REGIONS AND TRADING BLOCS DRIVERS OF CROSS-BORDER M&A RETURNS FROM CROSS-BORDER M&A STRATEGIC ANALYSIS OF COUNTRIES: GETTING A VIEW SUMMARY AND IMPLICATIONS FOR THE PRACTITIONER NOTES CHAPTER 6: Strategy and the Uses of M&A to Grow or Restructure the FirmINTRODUCTION SETTING STRATEGY EXPANSION BY INORGANIC GROWTH RESTRUCTURING, REDEPLOYMENT, AND SALE FRAMEWORK FOR CHOOSING A PATH FOR INORGANIC GROWTH FRAMEWORK FOR CHOOSING A PATH FOR RESTRUCTURING DOES IT PAY TO DIVERSIFY OR FOCUS THE FIRM? CONCLUSIONS APPENDIX 6.1 A Critical Look at the Self-Sustainable Rate of Growth Concept and Formulas BEGINNINGS: A FOCUS ON VALUE THE POPULAR MODEL FOR ASSET GROWTH INSIGHTS TO BE GAINED FROM THE POPULAR ASSET GROWTH MODEL SOME CAVEATS ABOUT THE POPULAR SELF-SUSTAINABLE GROWTH MODEL OF ASSETS NOTES CHAPTER 7: Acquisition Search and Deal Origination: Some Guiding PrinciplesINTRODUCTION SOME PRINCIPLES OF ACQUISITION SEARCH CASE STUDY: KESTREL VENTURES LLC SUMMARY NOTES

10 PART Three: Diligence, Valuation, and Accounting CHAPTER 8: Due DiligenceINTRODUCTION THE CONCEPT OF DUE DILIGENCE DUE DILIGENCE PRINCIPLES AND STRATEGIES PROCESS: TIMING, TEAM, AND OUTPUTS TARGET’S VIEW: PRESSURE AND THE DATA ROOM WHAT TO LOOK FOR: FOCUS ON KNOWLEDGE SOURCING INFORMATION EXCELLENCE IN DUE DILIGENCE APPENDIX 8.1 Comprehensive Overview of Due Diligence: Knowledge, Information, Data LEGAL ISSUES ACCOUNTING ISSUES TAX ISSUES INFORMATION TECHNOLOGY ISSUES RISK MANAGEMENT ISSUES ENVIRONMENTAL ISSUES MARKET PRESENCE AND SALES ISSUES OPERATIONS ISSUES REAL AND PERSONAL PROPERTY ISSUES INTELLECTUAL AND INTANGIBLE ASSETS ISSUES FINANCE ISSUES CROSS-BORDER ISSUES ORGANIZATION AND HUMAN RESOURCES ISSUES CULTURE ISSUES Data ETHICS ISSUES NOTES CHAPTER 9: Valuing FirmsINTRODUCTION RULE #1: THINK LIKE AN INVESTOR RULE #2: INTRINSIC VALUE IS UNOBSERVABLE; WE CAN ONLY ESTIMATE IT RULE #3: AN OPPORTUNITY TO CREATE VALUE EXISTS WHERE PRICE AND INTRINSIC VALUE DIFFER RULE #4: SO MANY ESTIMATORS, SO LITTLE TIME— IT HELPS TO HAVE A VIEW RULE #5: EXERCISE ESTIMATORS OF INTRINSIC VALUE TO FIND KEY VALUE DRIVERS AND BETS RULE #6: THINK CRITICALLY; TRIANGULATE CAREFULLY RULE #7: FOCUS ON PROCESS, NOT PRODUCT RULE #8: WHEN IN DOUBT, SEE RULE #1 VALUATION CASE: CHRYSLER CORPORATION, MARCH 1998 APPENDIX 9.