Mergers: What Can Go Wrong and How to Prevent It

John Wiley & Sons, New York, 2005

A powerful guide for seeking out the best acquisition and merger targets.

As increasingly more companies look to mergers and acquisitions (M&As) as a source of new growth and revenue, there is an even greater chance that these M&As will go bad. This insightful guide focuses on one of the most often debated and key issues in mergers and acquisitions-why some deals fail miserably and why others prosper. It provides a complete road map for what potential buyers should look for when picking a target and what characteristics of sellers they should steer clear of, as well as pitfalls to avoid during the M&A process. Real-world examples are provided of high-profile failures-Quaker Oats, United Airlines, Sears, and Mattel-and high-profile successes-General Electric and Cisco.

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Chapter 1 Introduction to Mergers and Acquisitions

  • Background and Terminology
  • Merger Process
  • Economic Classifications of Mergers and Acquisitions
  • Regulatory Framework of Mergers and Acquisitions
  • Antitrust Laws
  • State Corporation Laws
  • Hostile Takeovers
  • Takeover Defense
  • Leveraged Transactions
  • Restructurings
  • Reasoning for Mergers and Acquisitions
  • Trends in Mergers
  • Conclusion
  • Case Study: Lessons from the Failures of the
  • Fourth Merger Wave

Chapter 2 Merger Strategy: Why Do Firms Merge?

  • Growth
  • Examples of Growth as an Inappropriate Goal
  • Using M&As to Achieve Growth
  • M&As in a Slow-Growth Industry as a Way to Achieve Growth
  • Synergy
  • Merger Gains: Operating Synergy or Revenue Enhancements—Case of Banking Industry
  • Industry Clustering
  • Deregulation
  • Improved Management Hypothesis
  • Hubris Hypothesis of Takeovers
  • Winner’s Curse and the Hubris Hypothesis
  • Cross-Industry Deals and Hubris
  • Diversification and CEO Compensation
  • Diversification That Does Seem to Work Better: Related Diversification
  • Merging to Achieve Greater Market Power
  • Do Firms Really Merge to Achieve Market Power?
  • Merging to Achieve the Benefits of Vertical Integration
  • Special Cases of Mergers Motivated by Specific Needs
  • Conclusion
  • Case Study: Vivendi

Chapter 3 Merger Success Research

  • Criteria for Defining Merger Success Using Research Studies
  • Takeover Premiums and Control
  • Initial Comment on Merger Research Studies
  • Research Studies
  • Mergers of Equals: Acquirers versus Target Gains
  • Long-Term Research Studies
  • Long- versus Short-Term Performance and Method of Payment
  • Bidder Long-Term Effects: Methods of Payment
  • Bidder’s Performance Over the Fifth Merger Wave
  • Conclusion
  • Case Study: Montana Power- Moving into Unfamiliar Area

Chapter 4 Valuation and Overpaying

  • Valuation: Part Science and Part Art
  • Valuation: Buyer versus Seller’s Perspective
  • Synergy, Valuation, and the Discount Rate
  • Financial Synergies and the Discount Rate
  • Toe Holds and Bidding Contests
  • Bidding Contest Protections
  • Overpaying and Fraudulent Seller Financials
  • Valuation and Hidden Costs
  • Post merger Integration Costs- Hard Costs to Measure
  • Conclusion
  • Case Study: AOL Time Warner

Chapter 5 Corporate Governance: Part of the Solution

  • Governance Failure
  • Regulatory Changes
  • Corporate Governance
  • Managerial Compensation and Firm Size
  • Managerial Compensation, Mergers, and Takeovers
  • Disciplinary Takeovers, Company Performance, and CEOs and Boards
  • Managerial and Director Voting Power and Takeovers
  • Shareholder Wealth Effects of Mergers and Acquisitions and Corporation Acquisition Decisions
  • Post-Acquisitions Performance and Executive Compensation
  • CEO Power and Compensation
  • Do Boards Reward CEOs for Initiating Acquisitions and Mergers?
  • Corporate Governance and Mergers of Equals
  • Antitakeover Measures and Corporate Governance
  • Conclusion
  • Case Study: WorldCom

Chapter 6 Reversing The Error: Sell-Offs and Other Restructurings

  • Divestitures
  • Decision: Retain or Sell Off
  • Spin-Offs
  • Involuntary Spin-Offs
  • Defensive Spin-Offs
  • Tax Benefits of Spin-Offs
  • Shareholder Wealth Effects of Sell-Offs
  • Rationale for a Positive Stock Price Reaction to Sell-Offs
  • Wealth Effects of Voluntary Defensive Sell-Offs
  • Wealth Effects of Involuntary Sell-Offs
  • Financial Benefits for Buyers of Sold-Off Entities
  • Shareholder Wealth Effects of Spin-Offs
  • Corporate Focus and Spin-Offs
  • Equity Carve-Outs
  • Benefits of Equity Carve-Outs
  • Equity Carve-Outs Are Different from Other Public Offerings
  • Shareholder Wealth Effects of Equity Carve-Outs
  • Under Which Situations Should a Company Do a Spin-Off versus an Equity Carve-Out?
  • Shareholder Wealth Effects of Tracking Stock Issuances
  • Conclusion
  • Case Study: Daimler Chrysler

Chapter 7 Joint Ventures and Strategic Alliances: Alternatives to Mergers and Acquisitions

  • Contractual Agreements
  • Comparing Strategic Alliances and Joint Ventures with Mergers and Acquisitions
  • Joint Ventures
  • Motives for Joint Ventures
  • Regulation and Joint Ventures
  • Shareholder Wealth Effects of Joint Ventures
  • Shareholder Wealth Effects by Type of Venture
  • Restructuring and Joint Ventures
  • Potential Problems with Joint Ventures
  • Strategic Alliances
  • Governance of Strategic Alliances
  • Shareholder Wealth Effects of Strategic Alliances
  • Shareholder Wealth Effects by Type of Alliance
  • What Determines the Success of Strategic Alliances?
  • Conclusion
  • Case Study: AT&T