Maximizing Corporate Value through Mergers and Acquisitions

A Strategic Growth Guide

Patrick A. Gaughan

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118237335
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Contabilidad gerencial

Solid guidance for selecting the correct strategic basis for mergers and acquisitions

Examining how M&A fits in corporate growth strategies, Maximizing Corporate Value through Mergers and Acquisitions covers the various strategic reasons for companies entering mergers and acquisitions (M&A), with a look at those that are based on sound strategy, and those that are not.

• Helps companies decide whether M&As should be used for growth and increased corporate value
• Explores why M&A deals often fail to deliver what their proponents have represented they would
• Explains which types of M&A work best and which to avoid

With insider guidance on what boards of directors should be aware of when evaluating proposed deals, Maximizing Corporate Value through Mergers and Acquisitions provides a sound foundation for understanding the risks involved in any mergers and acquisitions deal, before it's too late.

CHAPTER 1
Merger Growth Strategy

Mergers and acquisitions (M&A) can accelerate a company's growth probably more than most other means within its arsenal. This is particularly true of larger deals. However, as we discuss, the track record of M&A success is spotty at best. The key is determining a priori the deals that will be winners and the ones to avoid. The problem is further complicated by the fact that management may sometimes seek to pursue M&A for their own personal benefit, which may work against the interests of shareholders.

As we discuss at length in this book, there is a large body of research on the effectiveness of M&A and the impact that M&A has on shareholder wealth. In fact, M&A is one of the most researched topics in the field of finance. There is a large body of high quality pragmatic studies that scrutinize M&A decisions and the impact they have on the shareholders. These researchers, primarily academics, have devoted considerable time and effort to trying to determine the answers to questions such as “Do diversifying deals or M&A outside of a company's established expertise have positive or negative effects on the wealth of their shareholders?” This is one example of an important question that M&A decision makers could answer better if they were aware of the relevant research. However, one of the surprising facts of the field of M&A is that decisions makers, CEOs, and their boards of directors, generally have no awareness of this large body of quality research and make no effort to try to look into it further. As we discuss throughout this book, the answer sometimes lies in the fact that they have their own agenda and are not interested in uncovering facts and evidence that would not be supportive of that agenda.

We explore the different kinds of M&A with an eye toward determining which ones work better than others. The unfortunate part of M&A, though, is that so much of the strategy, ironically, does not appear to be very strategic. There is a troublesome volume of major M&A that make you want to scratch your head and wonder how could these deals really be based on a well-thought-out strategy. Unfortunately, it seems clear that many of them were based on motives other than the furtherance of shareholder wealth. Indeed, some of them, such as the Citigroup one-stop-shop financial supermarket that was formed in the years prior to 2000, clearly did not serve consumers or shareholders. In fact, it mainly served Citigroup's CEO Sandy Weill's ego and bank account.

STRATEGY AND M&A

As we reiterate in Chapter 2, companies need to develop a growth strategy. Historically, the bulk of the return on equities comes from capital gains not dividend income. For there to be capital gains, the earning power of the company needs to rise. In other words, there should be growth. Therefore, companies need to create a strategic plan for how they are going to achieve such growth. Only secondarily do we inquire if M&A can facilitate that strategy. Sometimes it will be clear that M&A will play an integral part in the path to growth. In other instances, it may play only a minor role or no role at all.

The problem with many M&A is that sometimes they clearly are not a part of a well-thought-out strategic plan. Some seem haphazard such as deals that come up when dealmakers, such as investment bankers, approach a company with a brilliant idea that will make the bankers money but may have questionable value for the buyer. While such non-strategic motivations may be responsible for many M&A failures, there is reason to believe that most M&A do have some kind of a strategic basis even though that basis may be questionable. As an example, we consider the highly questionable M&A history of American Express in the case study that follows.

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CASE STUDY: AMERICAN EXPRESS AND ITS STRANGE M&A HISTORY

We are all very familiar with American Express. It is the world-renowned credit card company that has enjoyed decades of success in the industry. In fact, the company can trace its roots back to the mid-1880s. However, like so many companies, it was unsatisfied with its great success in the business that it excelled at—credit cards—and aspired to broaden its reach into areas where it possessed no expertise at all. In 1981, American Express acquired the major brokerage firm Shearson Loeb Rhoades for $900 million ($3.3 billion in 2013 dollars). Shearson was the second-largest U.S. brokerage firm after Merrill Lynch and was crafted by CEO Sandy Weill through a series of 15 different M&A.

One has to wonder what could be the commonalities between credit cards and buying and selling shares of stock and bonds? Could it possibly be that when you call Shearson for a stock purchase you tell the broker “please charge it on my AmEx” and then perhaps you would get a discount for keeping it all in the family? Not really.

Undaunted at this absurd combination, American Express went out to create a financial supermarket—a one-stop company that markets a variety of financial services. In fact, that would not be the only major financial services company to try to create a financial supermarket that consumers did not want. Citigroup would outdo them years later.

In 1984, American Express acquired the investment bank Lehman Brothers for $360 million ($1.12 billion in 2013 dollars). Now, we have to wonder what these synergies could be? Perhaps someone who has a credit card with American Express could call up the Lehman Brothers unit and ask could they underwrite an offering of bonds and perhaps put that as well on his or her AmEx card? We can see there may be, and I mean may be, some synergies between the brokerage operation and the investment banking business. The reason why we say may be is that the tension between these two units would cause a great deal of consternation at Lehman years later where Lew Glucksman, from the rougher brokers' side of the business, forced out the investment banker Pete Peterson for the leadership of the firm. Peterson went on to be the very successful founder of the Blackstone Group while Lehman would eventually fall into bankruptcy under the leadership of Glucksman's protégé Dick Fuld.

Not a company to leave bad enough alone, in 1984, American Express went on to buy the Ameriprise financial planning business. Again, all the businesses involve money in some way so perhaps that would be the source of the synergy? It did not work out that way.

In 1988, the brokerage firm E.F. Hutton merged with Shearson Lehman, and the name was changed in 1990 to Shearson Lehman Hutton. This became the largest brokerage firm in the United States. In 1993, Shearson was sold to Primerica (Sandy Weill) for $1.15 billion. In 1994, American Express then spun off Lehman Brothers but not before it had to inject $1.1 billion to keep it viable. This is a business it acquired roughly a decade earlier for $360 million. Clearly American Express was great at running a credit card business but terrible at strategic planning and M&A.

The company would hold on to Ameriprise, a financial planning business that was a combination of different financial planning and asset management businesses, starting with its acquisition of IDS Financial Services from Alleghany Corporation in 1984. American Express owned this business for years, and actually added to it through other acquisitions, such as London-based Threadneedle Asset Management Holdings in 2003, even though it also offered no synergies. In 2005, American Express spun it off but not before it had to give Ameriprise a $1 billion infusion. While this is clearly terrible M&A planning, there have been even worse deals.

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INTRODUCTION TO M&A

The field of M&A has grown greatly over the past half century. At one time M&A was mainly a U.S. phenomenon but starting in the fifth merger wave of the 1990s, M&A volume in Europe rivaled that of the United States. When we say that the United States was for many years the leader in M&A, this should not be construed to be as a good thing necessarily. While some M&A deals are great, there are all too many that are outright terrible.

By the 2000s, M&A had become a commonly used corporate expansion strategy for companies worldwide. By the 2000s, Asia, including rapidly growing China and India, had joined the ranks of the major participants in M&A. They have also been joined by South and Central American as well as Australian companies. Indeed, M&A is truly a global phenomenon.

While we have been mentioning just M&A, it is corporate control deals in general that have grown dramatically across the globe. These include M&A but also restructurings, such as divestitures and spinoffs. Indeed, one company's divestiture may be another's acquisition. Joint ventures and strategic alliances have grown comparably as well.

In this book, we analyze how M&A can be used to facilitate a company's growth. We will also see that an M&A can be a double-edged sword, which sometimes bestows great benefits and other times yields high costs and few benefits. The trick, so to speak, is to find out in advance which deals can help companies facilitate growth and which ones should be passed on. As the large number of merger failures will attest to, this is no easy task. For this reason, we spend almost as much time examining the causes of M&A failures as we do on the benefits from successful deals. Many of the failures have some common elements that should have enabled the dealmakers to identify them in advance. There is also a large body of very pragmatic and useful research that could help M&A decision makers, but all too often, they are totally unaware of this valuable knowledge base.

Before we begin such discussions, it is useful to discuss some general background information and cover the basic terminology we use throughout.

BACKGROUND AND TERMINOLOGY

A merger is a combination of two corporations in which only one corporation survives. The merged corporation typically ceases to exist. The acquirer gets the assets of the target but it must also assume its liabilities. Sometimes we have a combination of two companies that are of similar sizes and where both of the companies cease to exist following the deal and an entirely new company is created. One of the classic examples of this occurred in 1986, when UNISYS was formed through the combination of Burroughs and Sperry. However, in most cases, we have one surviving corporate entity, and the other, a company we often refer to as the target, ceases to officially exist. For statistical purposes deals are recorded with the larger company being treated as the acquirer and the smaller one as the target—even when the two companies call it a merger.

Most M&A are friendly transactions in which two companies negotiate the terms of the deal. Depending on the size of the deal, this usually involves communications between senior management of the two companies, in which they try to work out the pricing and other terms of the deal. Along the way, the boards of each company track the progress of the negotiations. For public companies, once the terms have been agreed upon, they are presented to shareholders of the target company for their approval. Larger transactions may require the approval of the shareholders of both companies. Once shareholders approve the deal, the process moves forward to a closing. Public companies have to do public filings for major corporate events, and the sale of the company is obviously one such event that warrants a filing by the target.

HOSTILE TAKEOVERS

While most deals are friendly in nature, some are outright hostile takeovers. The hostile takeover started to become popular in the 1980s during the fourth merger wave—a period known for its colorful hostile deals and also for the many leveraged buyouts that took place. While we had hostile deals for many years in the United States prior to the fourth merger wave, it was during that time period that hostile takeovers of major companies became more common. In addition, it became acceptable for major companies as aggressors to embark upon such bids. Today, these types of transactions are common all over the world.

Hostile takeovers refer ...