APPENDIX I.1On the Success and Failure of Major Deals

“Shareholder value” appears throughout this book, and especially in Part I, as a way to measure deal success and failure. This appendix defines this metric, outlines the basis for it, and summarizes some of the key findings from the analysis of major deals.

THEORY AND LIMITATIONS

In theory, an acquisition is an investment like any other. An investment can be defined as “successful” if the net present value (NPV) of the all the relevant cash flows relating to the invested capital, the expenses, and the returns exceeds zero. Ideally, such calculations use free cash flow (FCF) so that noncash accounting numbers such as depreciation are ignored and the effects on taxes are taken into account. ...

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