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What separates the companies that have succeeded in making value happen from others that have tried with less success? We have observed the following factors for success:
• Visible top management commitment is needed so that employees realize that this is not just the latest fad, but an effort to change fundamental attitudes and behaviors.
• Extensive participation by business unit managers, particularly in value driver analysis, is critical, both to capture their insights and to ensure that they have a feeling of ownership.
• Links to existing processes are essential to ensure that the efforts to make value happen can have impact on the strategic planning, capital allocation, and promotion and compensation decisions of the company. Ideally, an assessment of shareholder value impact is included in all major management decisions.
• A pragmatic, action-oriented approach ensures that making value happen is inspiring, rather than paper-generating and bureaucratic.
While all public companies must face the challenge of creating shareholder value, each company will have to choose its own path, based on its starting position and its unique aspirations. In this chapter we have outlined the aspects of finance, strategy, and organization that we have found most important in making value happen. By addressing these areas, companies can create lasting improvement in performance.
Mergers, Acquisitions, and Joint Ventures
Most senior executives will be involved in at least one major strategic transaction during their careers, and perhaps many. Even if they never complete a transaction, they can expect at a minimum to receive an overture from another company, bid on a business offered for sale by a persuasive investment banker, or debate with business colleagues the merits of a deal.
Mergers, acquisitions, divestitures, joint ventures, and the like have long been features of the corporate landscape. They became notorious in the late 1800s in the United States with the activity of the ''robber barons" and the consolidating activities of J.P. Morgan and others in the early 1900s. Since then, there have been several waves of activity in the United States—first in the booming economy of the late 1960s, then in the controversial restructuring wave of the 1980s, and most recently with the mega-deals at the close of the 1990s. Europe is also experiencing drastically increased merger and acquisition activity driven by the introduction of the Euro, overcapacity in many industries, and steps (albeit halting) to make its capital markets shareholder-friendly.
European acquirers have also been active in international transactions. Asian markets have seen less mergers and acquisitions for a variety of reasons; Japan, however, is likely to witness increasing activity as it begins to recover from a decade-long economic slump.
Mergers and acquisitions (M&A) have become an increasingly important means of reallocating resources in the global economy and for executing corporate strategies. For some firms, such as private equity shops and publicly traded industry consolidators like Starwood, pursuing acquisitions and divestitures is the corporate strategy. A large—and seemingly insatiable—infrastructure has grown up to facilitate such transactions, including investment bankers, lawyers, consultants, public relations firms, accountants, deal magazines, private investors and private investigators. Considering that most
investment banks did not even have M&A departments in the late 1970s, the transformation is remarkable.
In this chapter we focus mainly on the buy side—mergers and acquisitions—because an understanding of how to buy a company provides a foundation for the related activities of divesting and arranging joint ventures. We attempt to provide a general perspective and share our thoughts about some of the lessons we have learned.
Winners and Losers
Whether M&A activity benefits the economy is often debated by economists, politicians, journalists, and people in the street. The reality is that there are as many answers as there are deals and vantage points from which to argue. A merger may be good for shareholders of both the acquiring and acquired companies but bad for the economy if it creates a monopoly position detrimental to consumers. An individual who loses his or her job or a town that loses its main plant to merger cutbacks are not immediately (and may never be) better off than they were. Conversely, real improvements in efficiency can lead to higher quality and less costly products. The economy overall is likely to be more vibrant, opportunity-rich, and create more jobs if resources are continuously moved out of lower value uses into more profitable ones.
That said, our main concern is creation of value for shareholders. Anyone considering an acquisition needs to understand the basic fact that many corporate acquisitions fail to increase shareholder value. The market for corporate control is fairly efficient: easy, good deals are hard to come by, if they exist at all. Most successful deals result from highly disciplined deal making—and sometimes just good luck.