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The subject of this chapter is growth by acquisition, and few other business transactions receive more
scrutiny in both the popular and the academic presses. There are several reasons for this. One is the
sweeping nature of the deals, which typically result in major upheaval and job losses up to the highest
levels of the organization. A second is the sheer magnitude of the deals—the merger in 2000 between
Time-Warner and America Online (AOL), worth more than $150 billion, exceeds the 2007 gross
domestic products (GDPs) of 80% of the world‟s nations! Third, the products involved are known to
billions of people around the world. Budweiser, M&M‟s, The Wall Street Journal, and Porsche are
just a few of the world-renowned brand names involved in recent mergers and acquisitions (M&A)
transactions. Finally, the personalities and plots in M&A deals are worthy of any novelist or
Hollywood scriptwriter. The 1988 leveraged buyout of RJR Nabisco—at that time the largest deal
ever at $25 billion—was the subject of a New York Times best seller and a popular film, both called
Barbarians at the Gate. In the ensuing two decades, there have been numerous other best-selling
books and movies based on real and fictional M&A deals.
In spite of this publicity and the huge amounts of money involved, it is important to remember that
M&A transactions are similar to any other corporate investment; that is, they involve uncertainty and
the fundamental trade-off between risk and return. To lose sight of this simple fact or to succumb to
the emotion and frenetic pace of M&A deal-making activities is a sure path to an unsuccessful result.
The goal of this chapter is to identify the potential pitfalls you may face and to create a road map for a
successful corporate M&A strategy. We review the historical evidence and discuss some of the
characteristics of both unsuccessful and successful deals. The importance of value creation is
highlighted, and we present simple analytical tools that can be used to evaluate the potential of any
merger or acquisition. Practical aspects of initiating and structuring M&A transactions are presented
and the issues critical to the successful implementation of a new acquisition are briefly described. It is
important to understand that there are many legal and financial intricacies involved in most M&A
transactions. Our objective here is not to explain each of these in detail, as there are professional
accountants, lawyers, and consultants available for that. Instead, we hope to provide valuable and
concise information for busy financial managers so that they can design and implement an effective
M&A strategy.
Definitions and Background
Before examining the historical evidence on acquisitions, we need to define some terminology. An
acquisition is one form of a takeover, which is loosely defined as the transfer of control of a firm from
one group of shareholders to another. In this context, control comes with the ability to elect a majority
of the board of directors. The firm seeking control is called the bidder and the one that surrenders
control the target. Other forms of takeovers include proxy contests and going private. We will briefly
discuss going-private transactions, which have increased with the recent surge in private equity deals,
but the focus of this chapter is takeover via acquisition.