3 Improved strategic position. Many M&A transactions are motivated by a strategic purpose that seeks to improve the firm’s competitive position, acquire new capabilities, improve agility, or obtain resources that are vital to future prosperity. Chapter 6 sketches these considerations. Also, many deals respond directly to turbulent forces in the firm’s environment—these are surveyed in Chapters 4 and 5.
4 Organizational strength. Knitting together two firms is especially challenging from an organizational perspective. Most CEOs would agree with the old slogan “People are our most important asset.” Chapters 36 and 37 survey what this might mean in practice. In essence, one could measure organizational strength in terms of depth of talent and leadership, effectiveness of business processes, and the transmission of culture and values.
5 Enhanced “brand.” The deal should improve the reputation of the acquirer and its deal architects. Usually, the realization of these other aims will do just that. But one can imagine deals that depend on acrimony, subterfuge, and win-lose mentality—in a world of repeated play, the executive must consider how these qualities might affect one’s M&A success in future deals.
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 25 through 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 1.2 summarizes 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 1.2 summarizes a way for practitioners to organize and execute good deal development. Think of Exhibit 1.2 as 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.
SEVEN DISRUPTIVE IDEAS WORTHY OF BEST PRACTITIONERS
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 18 outlines 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 Newco4 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 33 survey 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 5 and 12 suggest that differences between one’s home country and the country of the target firm may be large enough to warrant careful adjustment