present an economic lens through which to assess the design of transactions.
Strategy. The recognition of a strategic threat or opportunity in the firm’s competitive arena motivates most deals. The industry positions of the buyer and target are important determinants of the attractiveness of a deal. The firm may want to engage in M&A activity to acquire special capabilities and to improve its strategic position. Strategy is not only a direct driver of deal success, but also a driver of the economics, organization, and reputational structure of the deal. Successful acquirers are critical analysts of the strategic positions of the buyer and the target. Chapters 4 through 7 explore the strategic perspective and present several tools with which to assess the position of a firm and the strategic attractiveness of a deal.
Organization. The buyer and the target come to the deal with organizations that are unique in terms of their structure, leadership, and culture. The ability of two organizations to mesh has a huge influence on the ability of the new firm to realize merger synergies and strategic benefits. Failure to integrate well can torpedo a deal that, on paper, looked like a winner. Thus, best practice acquirers devote serious attention to the organizational profiles of the two firms, and to the postmerger integration challenge. Chapters 24, 36, and 37 assess the influence of social issues and the challenges of postmerger integration.
“Brand.” The reputation and influence of the buyer and target go largely unrecognized in conventional assessments of M&A, yet practitioners consider these to be a key influence on the conduct of the M&A effort. Economists think of the brand in terms of “signaling,” the ability of a firm to distinguish itself from other firms. Signals can have a large influence on prices and even the ability to close a deal. But for them to have much effect, they must be costly or difficult, and unambiguous. Brand names are signals of quality or other special attributes. Brands and signals have special influence where interaction with customers or counterparties is repeated over time. Best practitioners seek to create and preserve brand value, and to understand the sources of the counterparty’s brand. Worth noting is that in M&A personal brand is also important: The aura of a CEO, financial adviser, or operating manager has been known to advance or stall a deal. Chapters 30 through 33 explore some of the implications of reputation in M&A.
Law. The matrix of laws and regulations in the business environment constrain the actions of the buyer and target firms and of specific players such as CEOs, directors, accountants, analysts, and insiders. The businessperson must ask, “What is our legal exposure in this situation and how can we manage it?” Chapters 26 through 29 explore the structural influence of laws and regulations in M&A.
Ethics. In the professional literature on M&A, very little has been written about ethical dilemmas. Yet practitioners struggle through these virtually daily. Chapter 2 argues that the best practitioners consciously address the ethical dimension in deal development and assiduously avoid taint that might accrue from an ethical lapse.
To focus only on structure is to be a determinist: “If X is the condition, Y is the outcome.” Yet to be a determinist is to settle for a limited view of the world. Causality might be more complicated than initially believed, as the followers of Karl Marx and Sigmund Freud discovered. Human behavior is uncertain. This uncertainty muddies the causal effects of structure. For instance, a machine can hit a tennis ball over the net with great predictability. Humans, on the other hand, are less predictable—differences in skill, strength, and strategy can force opponents to make bets about the behavior of each other. Such is also the case in M&A, a game in which one’s conduct has a large influence on outcomes. Conduct intervenes in the pursuit of good outcomes anytime one must make a strategic choice or adopt tactics for behavior. In short, best practice requires that we augment the deterministic focus on structure with a probabilistic focus on conduct, in areas such as the following:
Search for partners. Chapter 6 argues that the search for acquisition targets is one part structured research and another part serendipity: In the modern jargon, good discovery relies on networking, which itself relies on social skills that are not readily given to deterministic description.
Due diligence. This is the structured search for risk. Here again, we have a discovery process that depends on both organized inquiry and agile thinking. Chapter 8 argues that due diligence is least successful when reduced to rote fact checking. Instead, the right way to discover hidden risks is to research curious details, anomalies, inconsistencies, and discontinuities—all under tight time pressure and efforts by the seller to put a gloss on things. Here, the uncertainty of conduct arises from the investigator’s stamina, care, and capacity for critical thinking.
Negotiation and bidding. The probabilistic influence of psychology and self-discipline appear most vividly in settings where M&A parties grapple with one another. Chapter 30 reviews research that shows that attitudes, appetites, and negotiation tactics have a large influence on deal prices and terms. Chapter 31 shows that auctions and deal frenzy can prompt a bidder to make an offer beyond the rational maximum—this results in the “winner’s curse.” Chapters 32 and 33 emphasize that hostile takeovers are games in which psychology and beliefs about competitors have huge influences on the step-by-step movements of the competitors.
Dealing with laws, regulations, and the judicial system. Laws and regulations may seem like constraints on actions, though to the artful practitioner they may raise new opportunities and/or mitigate threats. Lobbying regulators and legislators and appealing to the courts for relief are means by which the practitioner might actually shape the structure of the M&A situation. Chapters 26 through 29, 32, and 33 survey the dimensions in which laws, regulations, and the courts may affect M&A conduct.
Deal design. Chapters 18 and 25 frame the deal design effort as a search for trade-offs that can accumulate to a winning outcome for both buyer and target, the so-called win-win deal. This search is yet another discovery process, more like a dance than an engineering problem. And as dancers know, it takes skill and coordination to come to an end with graceful bow and applause rather than stumbles and embarrassed gasps.
Postmerger integration. William Blake once said, “Execution is the chariot of genius.” No matter how good the deal design, implementing the merger integration is where the hypothesized deal benefits are won or lost. Choosing the right integration strategy is a matter of judgment; implementing it well is a matter of managerial skill.
