Financial Management

31Analysis of Mergers and Acquisitions

There probably is no other business decision that can create or destroy value more than mergers and acquisitions (M&A). Managers and boards pursue acquisitions for many reasons. Understanding the rationale for an acquisition is a key element of evaluating a potential deal, assessing the likelihood of success, and determining the reasonableness of the deal price. Successful acquirers have a clear acquisition strategy that flows out of a well-defined business strategy. In addition, they typically have competencies in evaluating and valuing potential acquisitions, discipline in pricing deals, and managers with experience in integrating acquisitions. We will focus on the analysis and economics of mergers and acquisitions in this chapter. Building a successful M&A program was covered in Chapter 9, “The Role of Finance in Supporting Growth.”

THE ACQUISITION CHALLENGE

Many managers, academics, and advisers believe that it is difficult to create value through acquisitions. Research studies over the years consistently report a low percentage of acquisitions that are ultimately successful in creating value for the shareholders of the acquiring firm. The cards are stacked against acquirers since they typically have to pay a premium to close the transaction and assume all risk of integration and execution. In addition, many common mistakes lead to problems in valuing, negotiating, and integrating acquisitions, and are discussed later in ...