Material Adverse Change

CHAPTER 1Why Bad Deals Happen

This really is a merger of equals. I wouldn't have come back to work for anything less than this fantastic opportunity. This lets me combine my two great loves—technology and biscuits.

—Lou Gerstner, former chairman and CEO, IBM, commenting on Cisco's proposed acquisition of Nabisco from Kraft Foods

A PRACTICAL APPROACH TO MERGERS AND ACQUISITIONS

What do you look for when deciding on a bank to deposit your money? Given the recent large bank failures, the financial strength of the bank is certainly one main consideration. You may also be interested in the bank's customer service, checking account options, hours of operation, and so on. More financially experienced individuals will try to find the bank with the highest interest rates paid on customer deposits. For the most part, choosing a bank is a purely fact-based, rational decision.

Now assume that you are the CEO of a global company and are trying to decide what company to buy. Criteria will include the company strategy, quality of personnel, and of course the rate of return and profit you can earn. So it should be easy. Rank the companies for sale by their level of return and pick the highest one. For those of you who took business in college, remember the concept of net present value? You calculate the expected cash flows of the company and discount them by your firm's weighted average cost of capital. The project with the highest internal rate of return¹ (IRR) is the one you choose. ...