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Takeovers, Restructuring, and Corporate Governance 4th ed

For individual firms, the economic role of mergers and acquisitions (M&As) is to assist in achieving or maintaining their competitive advantage by anticipating and adjusting to change. M&As include mergers, acquisitions, divestitures, alliances, joint ventures, restructuring, minority investments, licensing, and franchising, as well as international activities. For economies, M&As help move resources from lower-value uses to higher-value uses. Yet a high number of M&A investments fail to earn their cost of capital. The materials in this book seek to improve the success rate of M&A activities. Powerful, long-term change forces have been driving M&A activity in recent decades. Foremost is technological change, impacting every industry. Changes in transportation and communications produced the internationalization of markets. The globalization of competition and its increased intensity produced deregulation in airlines, financial services, telecommunications, and even the traditional electrical and other public utilities industries. But the massive change forces also have impacted the pharmaceutical, chemical, auto, tire, and petroleum industries. Ways of doing business will continue to change. The forms of competition will continue to multiply, and the intensity of competition will continue to increase. Relations with suppliers, workers, consumers, and other stakeholders will continue to evolve. These forces are not likely to diminish in the years ahead. Other developments have become superimposed on the longer-term trends. An economic downturn began in early 2000. Chain reactions set in. Slowing economies always impact the durable goods industries the most adversely. Strong new growth sectors were severely stunted. The promising Internet industries came to a virtual standstill. The world telecommunications industry was battered by overinvestment and overcapacity, resulting in a collapse of profit margins. Stock market values were shattered. Large stock price declines took place in industry leaders such as Intel, Cisco, Oracle, Sun Microsystems, IBM, and even Microsoft. These problems were aggravated by geopolitical developments. International terrorism was signaled by the September 11, 2001, tragedy. Political tensions in the Middle East, India-Pakistan, Russia-Chechnya, and so on continued. Another adverse development was the collapse of several individual companies. Some were accompanied by disclosures of fraud. Among these were Enron, WorldCom, Tyco, and ImClone. Fortune in its September 2, 2002, issue calculated that executives at 25 companies whose stock price declined 75% from their peak in the period January 1999 through May 2002 sold out before the bad news and "walked away" with $66 billion. These developments shattered confidence in the integrity of the financial markets. As a consequence, the Sarbanes-Oxley Act was signed into law on July 30, 2002. By requiring that senior corporate officials be more responsible for the preparation of their companies' financial reports, it was hoped that investors' confidence would be restored. The dollar value of mergers in 2001, adjusted for price level changes, was down 48% from 2000. For 2002, the dollar volume again declined about 50% from the previous year. The outlook for 2003 appears to be about the same level as for 2002. The slow rate of economic recovery has impacted all forms of investment activity negatively, including M&As. However, the role of M&As is to assist firms and economies in adjusting to opportunities and change. It follows, therefore, that M&A activity has a bigger job to do because of the new and stronger shocks that have occurred. Cash purchases of divisions of distressed companies are underway. An example is the purchase of Houghton-Mifflin from Vivendi Universal by Thomas Lee Partners and Bain Capital underway in November 2002. Deal activity in October 2002 was active and rising in the computer software, supply and services, brokerage, medical supplies, broadcasting, and retail industries. Industry consolidations to reduce excess capacity are occurring. In general, with the strong new shocks, many adjustments will be required. Hence, increased M&A activities are likely as economies and financial markets recover.

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