conflict arising from affiliation with the CEO. On its face, the sweetheart deal for the CEO would have adverse consequences for the public shareholders. And one could be concerned about the corrupting effect of the conflict of interest on the CEO and directors. The court judged the directors to be personally liable for the shareholders’ opportunity cost in the Trans Union case.4 Bargaining power. As an end in itself, the exercise of power would be condemned by many ethicists. But power is rarely exercised in a vacuum. Many companies cultivate and exercise power consistently with duty toward shareholders, customers, or other stakeholders, and conscious of the consequences imposed on other parties. In 1988, Salomon Brothers, the leading bond-trading house in the world, refused to provide acquisition financing for the takeover of RJR Nabisco unless it was to be listed as the lead underwriter, ahead of its rival, Drexel Burnham Lambert. This killed a proposal that would have united warring parties in the deal. More details on this case are given in Chapter 31. In this instance, the warring parties were all powerful players, and the banker-client relationship was unclear and shifting rapidly; the effect on duties is ambiguous. And the effect on RJR Nabisco’s public shareholders was positive: They received a much higher payment for their shares.
5 Greenmail. On the surface, paying greenmail seems to give in to coercive power, and possibly to serve the interests of management of the target firm, rather than its shareholders. But the discussion of Walt Disney’s case suggests that doing so preserved and increased value for Disney’s shareholders, employees, customers, and suppliers.
These and other ethical themes will appear throughout M&A. The thoughtful practitioner is counseled to reflect carefully and do what is right.
NOTES
1 1. Sen (1987) and Werhane (1999) have argued that Smith’s masterpiece, Wealth of Nations, is incorrectly construed as a justification for self-interest, and that it speaks more broadly about virtues such as prudence, fairness, and cooperation.
3 3. Oxford English Dictionary (1989), Vol. IX, page 1068.
4 4. Ibid., Vol. V, page 421.
5 5. Wicks (2003), page 11.
6 6. Quoted in K. V. Salwen, “SEC Chief’s Criticism of Ex-managers of Salomon Suggests Civil Action Is Likely,” Wall Street Journal, November 20, 1991, page A10.
7 7. Paine (1999), pages 194–195.
8 8. Bhide and Stevenson (1990), pages 127–128.
9 9. The utilitarian philosophers, Jeremy Bentham (1748–1832), James Mill (1773–1836), and John Stuart Mill (1806–1873), argued that the utility (or usefulness) of ideas, actions, and institutions could be measured in terms of their consequences.
10 10. The philosopher Immanuel Kant (1724–1804) sought a foundation for ethics in the purity of one’s motives.
12 12. This view originates in ancient Greek philosophy, starting from Socrates, Plato, and Aristotle.
13 13. Russ Banham, “The Warren Buffett School,” Chief Executive, December 2002, downloaded from www.robertpmiles.com/BuffettSchool.htm, May 19, 2003.
14 14. See New York Central v. United States, 212 US 481.
15 15. Murphy (1997) compiles 80 exemplary ethics statements.
16 16. The seven steps include:Tailor ethics standards to be appropriate to a company’s particular business and demands.Appoint “high-level personnel” to monitor compliance with the standards.Take care not to delegate “substantial discretionary authority” to anyone with a tendency toward illegal conduct.Communicate the ethics standards to all employees.Take reasonable steps to achieve compliance with the ethics standards, including a system by which employees might report the misconduct of others.Consistly enforce the ethics program through “appropriate disciplinary mechanisms.”Respond to the infractions appropriately and in a way to prevent similar offenses.
17 17. Thomas A. Bowman, “An Open Letter to Leaders of the Investment Community,” Wall Street Journal, January 23, 2003, page C3.
18 18. Melinda Ligos, “Boot Camps on Ethics Ask the ‘What Ifs,’ ” New York Times, January 8, 2003, page 12 BU.
19 19. Johnson (1993), page 202.
20 20. Werhane (1997), page 4.
21 21. Ron Grover, The Disney Touch, Homewood, IL: Business One Irwin, 1991, page 23.
CHAPTER 3 Does M&A Pay?
INTRODUCTION
Having a view on the profitability of M&A is a foundation for effective practice. This view should shape one’s expectations and approach. Researchers have generated a small mountain of studies on the profitability of M&A activity over the past 30 years. With each passing decade, more scientific evidence emerges, permitting us to sharpen our conclusions. It is appropriate to consider the latest findings along with earlier studies to synthesize some insights from the literature. Reviews of the scientific evidence were published in 1979, 1983, 1987, 1989, and 1992. In the wake of the largest merger wave in history, spanning the years 1992 to 2000, a fresh review of the findings is appropriate. The 14 informal surveys and 120 scientific studies surveyed here include a blend of the classic most-cited research, and some of the newer and notable work.
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