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 26 considers 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 17 on 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 30 through 33 and 36 discuss behavioral influences in M&A, especially as they appear in negotiations, auctions, competitive bidding, hostile takeovers, and process leadership.
7 Integration among deal design, strategy, and implementation. The process orientation in this book reinforces a central theme: the need to integrate the M&A effort across disciplines. The failure of the right hand to let the left hand know what is going on is one of the oldest administrative problems in history. Yet the revolution of business process reengineering over the past 20 years lends new urgency and sophistication to the integration message—you cannot afford to neglect the effort to integrate across M&A specialties, because, in all probability, your competitors and counterparties are doing it already. Business excellence depends on it.
CONCLUSION
“What were you thinking?” is a favorite tag line of comedians. Best practitioners use it more seriously in reference to M&A deals. The following chapters give you the frameworks, tools, and processes with which to anticipate that question and/or critique the conclusions of others. Rigorous thinking about M&A is indispensable. This book highlights new ideas, the diffusion of which will shape best practice in coming years and raise our understanding about M&A success.
NOTES
1 1. The Oxford English Dictionary defines “merger” as the “consolidation or combination of one firm or trading company with another.” The French have a good word for it: fusion—this conveys the emergence of a new structure out of two old ones. An “acquisition,” on the other hand, is simply a purchase. Generally, the terms are used interchangeably. But where one is negotiating, drafting legal documents, managing tax exposure, or reporting financial results, it pays to mince words. More on this follows in later chapters.
2 2. Joseph Bain, a founder of the field of industrial organization economics, bequeathed the notion that the structure of an industry and conduct of competition within that industry drive investment returns.
3 3. How you behave can affect your position in the competitive arena.
4 4. “Newco” designates the new firm that emerges from a merger or acquisition.
CHAPTER 2 Ethics in M&A
INTRODUCTION
Ethics and economics were once tightly interwoven. The patriarch of economics, Adam Smith, was actually a scholar of moral philosophy. Though the linkage between the two fields may have worn thin in the twentieth century, they remain strong complements.1 Morality concerns norms and teachings. Ethics concerns the process of making morally good decisions, or as Andrew Wicks writes, “Ethics has to do with pursuing—and achieving—laudable ends.”2 The Oxford English Dictionary defines “moral” as “Of knowledge, opinions, judgments, etc.; Relating to the nature and application of the distinction between right and wrong.”3 “Ethics,” on the other hand, is defined as “The science of morals.”4
Ethical dilemmas pervade the field of mergers and acquisitions. For instance, consider these five cases:
1 The CEO of a firm sought to prepare the firm for sale. Part of this entailed the use of accounting policies to improve the financial track record of the firm. The practice of “prettying up” a target company for sale may be widespread—is this unethical?
2 A firm pursued an aggressive strategy of growth by acquisition that relied on creating the appearance of high growth, when in fact the companies acquired were mature and growing slowly. The appearance fueled expectations of prolonged growth, granting the firm a high share price, and therefore a strong acquisition currency with which to do more deals. Was this strategy of momentum acquiring unethical? Many companies aim to persuade investors of good growth prospects even when that growth is uncertain. Is such persuasion unethical?
3 The directors of a public corporation approved without much analysis or discussion a leveraged buyout proposal from the CEO at a relatively low price. A number of the directors were friends or affiliates of the CEO. Was the behavior of the directors unethical? Most directors develop a personal or social acquaintance with the CEOs they employ. Is this affiliation unethical?
4 A large investment bank refused to provide acquisition financing for a deal unless it was to be listed as the lead underwriter, ahead of its rival, another firm also in the underwriting syndicate. Is the use of bargaining power unethical?
5 In response to a hostile takeover attempt, a CEO considered paying “green-mail” to make the raider