In this, it draws on basic concepts from systems engineering to illuminate the trade-offs that occur within the design of a deal. Chapter 18 outlines several important implications for the practitioner, including the following:Internal consistency. If a deal is a system, then the parts need to fit together in a sensible way. One must negotiate the pieces of the deal with a view toward an integrated whole.Unanticipated side effects. The systems view gives a wide-angle perspective. It encourages the deal designer to look out for the cumulative effect of tinkering. Just as a balloon squeezed in the middle will bulge at the ends, it is likely that hard bargaining on one point will lead to stress somewhere else.What “best” means. A systems view admits the possibility that there may be many great deal structures that satisfy the objectives of all parties and set Newco4 up to succeed. If there are many good deals, then it is probably true that there is no single right solution to a deal design problem—but there may be many wrong ones. One’s aim should be to avoid the wrong and find the attractive right.This systems view of deal design may disrupt M&A practice by granting the practitioners of this view greater creativity in negotiation and deal design. The ways in which this might occur are explored in Chapters 18, 25, and 30.2 Optionality. Options are pervasive in the M&A environment. The theory of option pricing that debuted in 1973 has had immense influence on virtually all areas of business. Recent research on real options develops important new insights that can improve decision making. But the optionality present in M&A transactions remains largely to be explored. Options thinking is a fertile guide for best practice. Chapters 10, 14, 15, 23, 29, and 33 survey the presence of options in M&A and their effect on valuation and behavior. Optionality is a disruptive idea in M&A practice because it can afford practitioners greater analytic power and creativity, leading to more insights about the drivers of value creation and to new bargaining strategies and innovations in deal design.
3 Critical thinking about market integration and efficiency. Tools of finance now in use presuppose that securities markets function well enough for decision makers to refer to market prices for clues to success. This assumption is a reasonable point of departure for one’s analysis, but it deserves thoughtful reexamination in many M&A settings. The first obvious case is cross-border M&A. Chapters 5 and 12 suggest that differences between one’s home country and the country of the target firm may be large enough to warrant careful adjustment in the use of financial tools. The second obvious case is the world of very high leverage. Chapters 13, 20, and 34 explore this world and suggest that it requires thoughtful judgment rather than blind application of tools. Finally, the third case is the world of the privately owned firm. Here, control and liquidity of the investment may differ materially from that of the publicly held large corporation. Chapter 15 explores the impact of those differences on firm value. At issue in these three cases is the extent to which asset markets are integrated and efficient. An ability to think critically about integration and efficiency is potentially disruptive to conventional M&A practice because it arms the practitioner with tools to view markets more insightfully.
4 Good governance is valuable. Recent corporate scandals remind us of the importance of good systems of corporate oversight and control. Indeed, a growing body of research finds that good governance pays. Chapter 26 considers the role for systems of governance in the world of M&A, giving particular attention to duties of the board of directors, laws and regulations, accounting, and takeover defense. Chapter 17 on momentum acquisition explores the potential destruction of value when managers focus on the wrong aims. As this is being written, it seems that a revolution in corporate governance is merely beginning. Changes in governance will inevitably disrupt old practices in M&A.
5 Valuation and value creation through deal design. Financial economics teaches that prices should drive managerial decisions, which in turn affect shareholder wealth. Valuation is the practice by which we assess the actual fairness of prices. Numerous chapters in this book survey the state of the art in valuation and extend those tools to discrete new problems of particular importance to practitioners: valuation of synergies, valuation of real options, and valuation of assets across borders. This book also emphasizes the normative implications of managers’ duty to create shareholder wealth, and carefully details how deal design choices can create or destroy value. Better valuation practices will disrupt older M&A approaches by arming future deal designers with greater insight into the risks and economic potential in a deal.
6 Behavioral effects. We know from extensive anecdotal evidence and the emerging field of behavioral finance that decision makers can deviate from value-creating choices, owing to a variety of personal and group behavioral influences. Chapters 30 through 33 and 36 discuss behavioral influences in M&A, especially as they appear in negotiations, auctions, competitive bidding, hostile takeovers, and process leadership.
7 Integration among deal design, strategy, and implementation. The process orientation in this book reinforces a central theme: the need to integrate the M&A effort across disciplines. The failure of the right hand to let the left hand know what is going on is one of the oldest administrative problems in history. Yet the revolution of business process reengineering over the past 20 years lends new urgency and sophistication to the integration message—you cannot afford to neglect the effort to integrate across M&A specialties, because, in all probability, your competitors and counterparties are doing it already. Business excellence depends on it.
CONCLUSION
“What were you thinking?” is a favorite tag line of comedians. Best practitioners use it more seriously in reference to M&A deals. The following chapters give you the frameworks, tools, and processes with which to anticipate that question and/or critique the conclusions of others. Rigorous thinking about M&A is indispensable. This book highlights new ideas, the diffusion of which will shape best practice in coming years and raise our understanding about M&A success.
NOTES
1 1. The Oxford English Dictionary defines “merger” as the “consolidation or combination of one firm or trading company with another.” The French have a good word for it: fusion—this conveys the emergence of a new structure out of two old ones. An “acquisition,” on the other hand, is simply a purchase. Generally, the terms are used interchangeably. But where one is negotiating, drafting legal documents, managing tax exposure, or reporting financial results, it pays to mince words. More on this follows in later chapters.
