Mergers and Acquisitions from A to Z
Author: Andrew J. Sherman
Pub Date: November 2010
Print Edition: $35.00
Print ISBN: 9780814413838
Page Count: 336
Edition: Third Edition
e-Book ISBN: 9780814413845
Buy the book:
Introduction to the Third Edition
‘‘It was the best of times, it was the worst of times.’’
When Dickens first shared this quote with the world, he was not referring
to the merger and acquisition (M&A) market from 2005 to 2009,
but he might as well have been. In the time between the publication of
the second edition of this book in 2005 and today, the overall financial
markets and the levels of M&A activity have experienced both polar
opposites and everything in between. From the seemingly insatiable appetite
for middle-market companies that private equity firms and other
buyers had in 2006 and 2007, thereby driving valuations through the
roof, to the fast ending to the party and the sobering effects of a virtual
halt in 2008 to 2009, sending valuations on a downward spiral, this was
not a good time if you prefer merry-go-rounds to roller-coaster rides at
the amusement park.
According to mergermarket, the total number of deals announced
worldwide in the first half of 2009 numbered 3,873, with a total value
of $709 billion. These figures represent the worst six months on record
since the end of 2003. While merger and acquisition activity in the
United States increased slightly in terms of the number of deals from
the first quarter of 2009 to the second quarter of 2009, the total deal
value fell from $183 billion to $171 billion, according to Bloomberg.
Mergers and acquisitions are a vital part of both healthy and weak
economies and are often the primary way in which companies are able
to provide returns to their owners and investors. Mergers and acquisi-
tions play a critical role in both sides of this cycle, enabling strong
companies to grow faster than their competition and providing entrepreneurs
with rewards for their efforts, and ensuring that weaker companies
are more quickly swallowed or, worse, made irrelevant through
exclusion and ongoing share erosion.
Mergers and acquisitions have played a variety of roles in corporate
history, ranging from the ‘‘greed is good’’ corporate raiders buying
companies in a hostile manner and breaking them apart, to today’s
trend of using mergers and acquisitions for external growth and industry
During the 1980s, nearly half of all U.S. companies were restructured,
more than 80,000 were acquired or merged, and over 700,000
sought bankruptcy protection in order to reorganize and continue operations.
The 1980s featured swashbucklers and the use of aggressive
tactics to gain control over targets. The 1990s were equally dynamic in
terms of companies evolving through upsizing and growth, downsizing,
rollups, divestitures, and consolidation, but focused on operational synergies,
scale efficiencies, increases in customer bases, strategic alliances,
market share, and access to new technologies. This period,
however, came to a crashing end with the bursting of the tech bubble
and the global recession that followed.
The wave of M&A activity seen from 2004 to 2007 was driven by
the more general macroeconomic recovery and several key trends. First,
many companies had exhausted cost cutting and operational efficiencies
as a means of increasing profitability and were looking to top-line
growth as a primary enabler of shareholder return. The increased pressure
to grow turned the spotlight on the opportunity to achieve growth
through acquisition. Second, the M&A market had been supported by
the return of corporate profits and, with them, improved stock price
valuation. The improved valuations enabled corporations to leverage
their internal currencies to acquire target companies that were willing
to swap their illiquid private stock for valuable public-company shares.
Third, interest rates were hovering at historical lows, enabling firms to
cost-effectively utilize debt to finance acquisition-based growth.
From 2008 to late 2009, the most recent wave of M&A activity was
driven by weak economic conditions around the globe. The strong,
cash-rich companies and firms began bargain shopping, picking off distressed
and downtrodden competitors at a fraction of their market value
compared to expectations just a short 12 to 18 months earlier. Large
and midsize companies began to refocus on their core business lines,
triggering divestitures and spin-offs of underperforming divisions or
subsidiaries. Private equity firms and even hedge funds, under pressure
to provide returns to their limited partners, turned stepchild investments
into small buckets of cash in order to hold off a tyranny or management
Yet, although so many dollars have been changing hands, the number
of readily available resources for business executives and professional
advisors to turn to for strategic and legal guidance on mergers
and acquisitions remains very limited. This book is intended to be such
There is no more complicated transaction than a merger or acquisition.
The various issues raised are broad and complex, from valuation
and deal structure to tax and securities laws. The industries affected by
this rapid activity are also diverse, from banking and computer software
companies to retailers and health-care organizations. It seems that virtually
every executive in every major industry faces a buy or sell decision
at some point during her tenure as leader of the company. In fact, it is
estimated that some executives spend as much as one-third of their time
considering merger and acquisition opportunities and other structural
business decisions. As we will see in the chapters to follow, the strategic
reasons for considering such transactions are also numerous, from
achieving economies of scale, to mitigating cash flow risk via diversification,
to satisfying shareholders’ hunger for steady growth and dividends.
The degree to which the federal government intervenes in these
transactions varies from administration to administration, depending
on the issues and concerns of the day. During the Reagan-Bush years,
the government took a passive role, generally allowing market forces to
determine whether a given transaction would have an anticompetitive
effect. During the Clinton years, regulatory bodies took a more proactive
approach, with more intervention by the U.S. Department of Justice
and the Federal Trade Commission, such as a refusal to provide the
necessary approval for the proposed merger of Staples and Office
Depot in mid-1997. The second Bush administration took a more
laissez-faire approach, only to have the European Union take a more
aggressive role in preventing potentially anticompetitive mergers. The
European Competition Commission’s landmark rejection of GE’s proposed
acquisition of Honeywell in 2001 signified a shift in the role that
the EU played in the global M&A marketplace. Under the Obama administration,
we are likely to see an increase in antitrust and regulatory
oversight, but also an anxiousness to facilitate transactions that will be
beneficial from an economic recovery perspective.
Recent years have also seen a significant increase in merger and
acquisition activity within industries that are growing rapidly and evolving
overall, such as health care, information technology, education,
infrastructure, and software development, as well as in traditional industries
such as manufacturing, consumer products, and food services.
Many of these developments reflect an increase in the number of strategic
buyers and a decrease in the amount of leverage used, implying that
these deals were being done because they made sense for both parties,
which is very different from the highly leveraged, financially driven deals
of the late 1980s.
The small- to middle-market transactions have clearly been the
focus of this book in each of its editions since the 1990s. Fortunately
for this audience, middle-market transactions continue to attract compelling
Companies in the small- to middle-market segment need to understand
the key drivers of valuation, since they are often able to focus
their operating goals in order to maximize the potential valuation range.
Therefore, it is important to know that the multiple a company achieves
for its business is directly correlated with the following seven characteristics:
1. Strong revenue growth
2. Significant market share or a strong niche position
3. A market with barriers to entry by competitors
4. A strong management team
5. Strong, stable cash flow
6. No significant concentration in customers, products, suppliers,
or geographic markets
7. Low risk of technological obsolescence or product substitution
Successful mergers and acquisitions are neither an art nor a science,
but a process. In fact, regression analysis demonstrates that the
number one determinant of deal multiples is the growth rate of the business.
The higher the growth rate, the higher the multiple of cash flow
that the business is worth.
A study of deals that close with both buyer and seller satisfied shows
that the deal followed a sequence, a pattern, a series of steps that have
been tried and tested. This book focuses on conveying this process to
the reader, as we seek to understand the objectives of both buyer and
seller in Chapters 2 and 3, move through the process of negotiations
and closing in Chapters 4 through 10, and focus on closing and beyond
in Chapters 11, 12, and 13.
For example, when a deal is improperly valued, one side wins big
while the other loses big. By definition, a transaction is a failure if it
does not create value for shareholders, and the easiest way to fail, therefore,
is to pay too high a price. To be successful, a transaction must be
fair and balanced, reflecting the economic needs of both buyer and
seller, and conveying real and durable value to the shareholders of both
companies. Achieving this involves a review and analysis of financial
statements; a genuine understanding of how the proposed transaction
meets the economic objectives of each party; and a recognition of the
tax, accounting, and legal implications of the deal.
A transaction as complex as a merger or acquisition is fraught with
potential problems and pitfalls. Many of these problems arise either in
the preliminary stages, such as forcing a deal that shouldn’t really be
done (i.e., some couples were just never meant to be married); as a
result of mistakes, errors, or omissions owing to inadequate, rushed, or
misleading due diligence; through not properly allocating risks during
the negotiation of the definitive documents; or because integrating the
companies after closing became a nightmare. These pitfalls can lead to
expensive and protracted litigation unless an alternative method of dispute
resolution is negotiated and included in the definitive documents.
This book is designed to share the pitfalls of such transactions, with the
hope that buyers and sellers and their advisors can avoid these problems
in their future transactions.
Finally, with merger and acquisition activity continuing to grow at
rapid rates, and entrepreneurs and venture capitalists continuing to
form new entities and pursue new market opportunities, it is critical to
have a firm grasp of the key drivers and inhibitors of any potential deal.
With so much money on the line, it is essential to understand how to
maximize price and valuation goals while ensuring that the transaction
is successfully consummated.
Andrew J. Sherman
Search the full text of this book
Search Full Text of
For single copy purchases of any AMACOM title, you can connect directly to the online retailer of your choice, from the list below, to buy the title you have selected. Most of our links will take you directly to that title on the site, making your shopping experience easier. You can also visit your local retailer, and if the book is not on their shelves they can special order it for you.
Retailers: Please contact us to change or add a listing.
Buying in Bulk?
We have very competitive discounts starting at 5 copies, as well as personal service, for bulk orders. Simply contact our Special Sales Department. Call 800-250-5308 or 212-903-8420 and ask for Special Sales. You can also email: SpecSlsWeb@amanet.org