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Home > Mergers and Acquisitions Best Practice

Mergers and Acquisitions Best Practice

Best Practice

Internationally renowned finance leaders, experts and educators distil and summarize the most important aspects of finance best practice. Each Best Practice essay has an Executive Summary for quick reference, outlining the main points. The Making It Happen feature illustrates practical applications, and where relevant authors have provided illustrative case studies and definitions.

  • Accounting for Business Combinations in Accordance with International Financial Reporting Standards (IFRS) Requirements
    by Shân Kennedy
    The accounting for business combinations under IFRS is governed by four key standards:IFRS 3, Business Combinations; IAS (International Accounting Standards) 27, Consolidated Financial Statements; IAS 36, Impairment of Assets; IAS 38, Intangible Assets.IFRS 3 sets out the requirements to be followed in accounting for a business combination. Its introduction in 2004 represented a substantial change from the standard it superseded, IAS 22. IFRS 3...
  • Acquisition Integration: How to Do It Successfully
    by David Sadtler
    Acquisitions of any size are a major undertaking for both the acquirer and the target. Substantial returns—in particular returns in excess of the cost of capital employed in the entire initiative—are required not only to create stockholder value, but also to justify the enormous investment of managerial time and effort that goes into a takeover. Many acquisitions succeed. Indeed, many corporate acquirers do a large number of deals and become...
  • Capital Structure: A Strategy that Makes Sense
    by John C. Groth
    Perfect capital markets enjoy an array of assumptions, including no cost to bankruptcy, infinitely divisible financial assets and liabilities, no transaction costs, etc. Pursuing a selected optimal capital structure would allow minute adjustments, the issuance or redemption of small amounts of capital, and other conveniences. We would simply strive for the optimal debt/equity ratio depicted in Figure 1. Indeed, in this unreal world one would...
  • Capital Structure: Implications
    by John C. Groth
    A tax environment that allows for the deduction of interest charges, but not the deduction of dividends, results in an optimal capital structure for a company. The optimal structure results in a lower weighted cost of capital (WCOC) for reasons examined in the article, Capital Structure: Perspectives. This article examines the implications of capital structure, and some of the key factors that influence capital structure.
  • Coping with Equity Market Reactions to M&A Transactions
    by Scott Moeller
    It would be nice if the markets were to react consistently in response to the announcement of M&A deals. But they don’t. At least not always. But you can depend on one thing: In the short run, shareholders of target companies benefit more than those of the acquiring company.It is important to know how to cope with the likely equity market reaction to the announcement of a deal. First of all, you need to understand what those likely reactions...
  • Cultural Alignment and Risk Management: Developing the Right Culture
    by R. Brayton Bowen
    The goal was to beat Microsoft at its own game. After rebuffing a takeover attempt by the giant corporation, Novell Nouveau went on an acquisition binge of its own. The strategy was to acquire a premier word-processing company that could rival Microsoft, and Microsoft’s “Microsoft Word” in particular. So, in 1994, Raymond Noorda, CEO for the then second-largest software company, acquired WordPerfect Corp. for US$1.4 billion in stock. Novell was...
  • Due Diligence Requirements in Financial Transactions
    by Scott Moeller
    This is not your father’s due diligence.Due diligence is one of the two most critical elements in the success of an Mergers and Acquisitions (M&A) transaction (the other being the proper execution of the integration process) according to a survey conducted in 2006 by the Economist Intelligence Unit (EIU) and Accenture. Due diligence was considered to be of greater importance than target selection, negotiation, pricing the deal, and the...
  • Going Private: Public-to-Private Leveraged Buyouts
    by Luc Renneboog
    When a listed company is acquired and subsequently delisted, the transaction is referred to as a public-to-private or going-private transaction. As most such transactions are financed by substantial borrowing, which is used to repurchase most of the outstanding equity, they are called leveraged buyouts (LBOs). An overview of the different types of LBO is given in Table 1. Four categories are generally recognized: management buyouts (MBOs),...
  • Grow Globally: The New Altitude of Cross-Border M&A
    by Mona Pearl
    Companies choose to undertake a merger or acquisition (M&A) for a variety of strategic reasons: to access new markets and expand their global footprint, obtain new technology, new brands, complementary products, access to experienced management, or to remove a competitor or potential competitor. Over the past decade, M&A activity has increased substantially as this route is a natural progression for businesses that are gaining experience and...
  • How to Set the Hurdle Rate for Capital Investments
    by Jon Tucker
    Chief financial officers are charged with the task of maximizing shareholder wealth. They do this by pursuing two key goals: Maximizing the stream of future cash flows, and minimizing the company’s cost of capital. Cognizant of the separation theorem, we tend to separate one goal from the other. However, both are of strategic importance—a healthy stream of cash flows can actually destroy value (and hence reduce shareholder wealth) if the company...
  • Identifying and Minimizing the Strategic Risks from M&A
    by Peter Howson
    M&A is extremely risky. Studies carried out over the last 30 years suggest that the failure rate is above 50% and probably close to 75%. However, by identifying and acting to minimize the strategic risks early on in the process, the rewards can be spectacular.There are four stages in the M&A process:acquisition strategy due diligence negotiation post-acquisition integration.Strategic risks are present in each.Acquisition StrategyM&A is...
  • In Search of Growth: Choosing Between Organic, M&A, and Strategic Alliance Strategies
    by Duncan Angwin
    Blockbuster movies are key to success in Hollywood. But in 2012 a single superhero film beat all others with US$1.5 billion global ticket sales, becoming the third-highest grossing title of all time. The Avengers, from Disney’s Marvel unit, stormed the box office, bringing Iron Man, The Incredible Hulk, and Thor together. The Avengers’ success largely overturned analysts’ criticisms of Disney’s 2009 US$4 billion acquisition of Marvel as...
  • Leveraged Buyouts and Recession
    by Louise Scholes, Mike Wright
    The buyout market in Europe involves management buyouts and buyins of firms with or without the assistance of private equity. A management buyout is the purchase of a business by its own management, whereas a management buyin involves the purchase of a business by an external management team. Buyouts are economically very important in terms of business regeneration and survival in Europe and the United States. In the United Kingdom, buyouts...
  • Leveraged Buyouts: What, Why, When, and How
    by Scott S. Johnson
    A leveraged buyout (LBO) is the acquisition of a company financed by debt. It is not unlike the typical purchase of a residence where the majority of financing is derived from a mortgage, and the balance from cash (equity) contributed by the buyer.Figure 1. Case study: Sample LBO vs all equity acquisition The use of debt in an LBO leverages the equity return, providing the equity holder with the possibility of higher returns at the cost of...
  • M&A Communication: It Doesn’t Start With the Announcement
    by Paul J. Siegenthaler
    For some, external communications may be perceived as a self-gratifying justification for spending vast sums of money which distract from a focus on the core business. Internal communications can also be judged harshly, sometimes derided as the “touchy-feely” of a human resources department that’s trying to raise its profile in the company, but ultimately disseminating messages that are either irrelevant, lacking in credibility, or clichés with...
  • Maximize the Selling Price of Your Business
    by Frederick Lipman
    Many business owners make the mistake of thinking that it is simple to sell their business at a good price. The reality is that selling a business is a complicated process that requires advance planning many years prior to the sale target date in order to maximize the sale price. The advance planning steps are covered in detail in the author’s book entitled Valuing Your Business: Strategies to Maximize the Sale Price (Wiley, 2005).The purpose of...
  • Maximizing a New Strategic Alliance
    by Peter Killing
    More than 60,000 strategic alliances were formed in the 1990s. About half of these were joint ventures. The other 50% were nonequity arrangements such as technology licensing agreements, joint marketing arrangements, and joint research or development projects. Most of these alliances were international, so it’s no surprise to learn that the world’s largest multinationals are heavy alliance users: IBM (254 alliances), General Motors (138),...
  • Maximizing Value when Selling a Business
    by John Gilligan
    All corporations seem complex to those looking in from the outside. The cocktail of relationships, contracts, and assets coming together to generate value is different in every company, and the process of realizing the value embedded in that cocktail requires planning, foresight, and pragmatic judgment. Failure to sell a business that has been publicly put up for sale can destroy huge amounts of value. Each situation is unique and no text can...
  • MBOs: A High-Octane and Life-Changing Mode of Business
    by Andy Nash
    MBOs—shorthand for MBIs, BIMBOs, IBOs and the like, as well as management buy-outs—make or lose fortunes for the risk-takers because of the leverage involved. Leverage is the fulcrum on which these deals seesaw between success and failure. Every venture capitalist’s portfolio has a range of leveraged companies, and average returns to their investors are determined by the balance between their star investments and those which stagnate or go bust....
  • Merger Integration and Transition Management: A New Slant for Finance Executives
    by Price Pritchett
    Merger success—defined as value creation—depends heavily on how well conceived the deal was to begin with. But a good outcome is even more dependent on having a well-designed and carefully implemented integration strategy. To put it simply, no deal is a good deal if management can’t make it work. Studies over the past several decades prove, however, that far too often companies lack the ability to design and execute a viable integration plan....
  • Mergers and Acquisitions: Patterns, Motives, and Strategic Fit
    by Siri Terjesen
    Mergers and acquisitions are two broad types of restructuring through which managers seek economies of scale, enhanced market visibility, and other efficiencies. A merger occurs when two companies decide to combine their assets and liabilities into one entity, or when one company purchases another. The term is often used to describe a merger of equals, such as that of Daimler-Benz and Chrysler, which was renamed DaimlerChrysler (see case study)....
  • Mergers and Acquisitions: Today’s Catalyst Is Working Capital
    by James S. Sagner
    Merger and acquisition (M&A) activities in developed countries once focused on strategic transactions for diversification or for vertical or horizontal integration. While that continues to be the situation in the developing economies, the M&A game in the United States, Western Europe, and Japan is often either to gain balance sheet assets, particularly hoards of underperforming cash, or to improve the acquired company’s working capital...
  • The Art Of Acquiring In Emerging Markets
    by Satu Teerikangas
    The first merger and acquisition (M&A) deals were recorded in the late 19th century in the United States. At present, more than a century later, spurred by economic and legislative advances and the liberalization of trade, acquiring firms are expanding their interest toward new opportunities in emerging markets and the developing world. “Moving east” is not entirely new, though.A similar move toward the “east” was witnessed in the early 1990s,...
  • The Missing Metrics: Managing the Cost of Complexity
    by John L. Mariotti
    Accounting systems have come a long way in the past decades. Activity-based costing revealed where costs were being incurred and what was driving them. The blizzard of regulations following the debacles involving Enron, WorldCom, and others led to the passage of the Sarbanes–Oxley Act (in the United States) and many other new regulations. Although these are burdensome, they impose much-needed disciplines on finance and accounting.In spite of...
  • Valuing Start-Ups
    by Aswath Damodaran
    Although the fundamentals of valuation are straightforward, the challenges in valuing companies shift as they move through their life cycle: from the initial idea and start-up business, often privately owned, to young growth companies, either public or on the verge of going public, to mature companies with diverse products and serving different markets, and finally to companies in decline, marking time until they disappear. At each stage we may...
  • Why Mergers Fail and How to Prevent It
    by Susan Cartwright
    The incidence of M&A has continued to increase significantly during the last decade, both domestically and internationally. The sectors most affected by M&A activity have been service- and knowledge-based industries such as banking, insurance, pharmaceuticals, and leisure. Although M&A is a popular means of increasing or protecting market share, the strategy does not always deliver what is expected in terms of increased profitability or...

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