Due Diligence for Global Deal Making: The Definitive Guide to Cross-Border Mergers and Acquisitions,

Due Diligence for Global Deal Making: The Definitive Guide to Cross-Border Mergers and Acquistions, Joint Ventures, Financings and Strategic Alliances.
Table of contents

Naturally, negotiations start at the beginning of the process e. The critical stage during the negotiation process is felt right after the due diligence, when the information gathered during it is added to and factored in the valuation model. A higher premium must be paid if the value predicted for the target company is lower than it was previously thought, fact that could lead to the renegotiation of transaction terms. Closing the deal means signing the Sales and Purchase Agreement "SPA" , and it can be compared to saying "yes" in a wedding ceremony; there is no way back after the deal is closed and the merger is complete.

Then, it is time to celebrate and start the integration and consolidation process. Integration regards the transition period, when the merged entity is designed and set. Often, a lot of effort and planning is demanded to accomplish a smooth integration, which involves people, assets, customers, suppliers, technologies, infrastructure and operations Epstein, Consolidation follows the integration process; it is the process when the new entity is already set to work and accomplish the plan, which was the basis for the merger rationale.

The current study follows an exploratory qualitative research design. According to Chizzotti , exploratory studies often clarify situations in order to raise the awareness about them. Such information result in rich and substantial descriptions of the herein studied phenomenon Vieira, Merger talks collapse due to a number of objective and subjective reasons. This type of information is often confidential and treated with a lot of discretion. The qualitative approach was chosen, because the reasons for a failure are not often disclosed.

According to Neves , this approach comprises a set of different interpretative techniques that aim at describing and decoding the components of a complex system of meanings. The statement by Malhotra about the sampling technique, which was developed for qualitative research purposes and to select the participants to be considered, addresses it as a non-probabilistic technique, since it relies on personal judgments about the researcher rather than on the possibility of selecting sample elements.

Moreover, data were collected between March and June through 16 in-depth interviews with deal makers from different backgrounds, including corporate and private equity professionals, advisors and investment bankers. Sixteen 16 interviewees were intentionally chosen depending on their experience and on the role they played in the transaction processes; their availability and interview accessibility were taken into account.

The aim was to investigate the entire deal flow and to understand the correlation between different dialogs, as well as between different viewpoints. The sample was firstly divided in five categories of professionals in order to make it easier to each participant to contribute to the research Fig. Strategy and Business Development "BD" professionals are often brought in before the deal takes shape and put in direct contact with the top management, either if the deal is considered to be made or not. Strategy and Business Development professionals often participate in the process before, during and, sometimes, after the deal is made.

They are often responsible for the target or investor approach, for liaising with the valuation teams and attorneys in charge of drafting the SPA, during the due diligence. Integration professionals are consultants hired to conduct the Post Deal Integration work. These professionals are often brought in during the due diligence phase. Sample categorization results can be seen in Table 1 , which presents the following information: The names of the participants were omitted for confidentiality reasons, to give them neutral identification column identification.

Overall, the interviewer was aware of the interviewees' general willingness to cooperate, mainly because of the way the interviews were conducted. It seems that the ideal interview recommended by Lodi was accomplished, i. Some favorable reasons included altruism, and the pursuit of emotional and intellectual satisfaction. The questions, which were relatively open, were placed according to the interviewee's profile, personal experience and willingness to share.

Based on your personal experience, what are the factors leading to the abandonment of a transaction? Think about an emblematic transaction you have participated in, but that was actually not completed. What were the contributing factors leading one or both parts away from the deal? Is there a price to be paid for walking away from a deal?

What were the consequences of it? A content analysis was conducted in order to treat the collected information. According to Gill , there is no single perspective on content analysis, but a number of different analysis types. The narratives were transcribed in the pre-analysis stage and, subsequently, assessed and organized according to factors that have led to the abandonment of the transaction process.

At the end, based on the collected information, data were interpreted in order to find the link between elements in the narrative and the simultaneous presence of two or more elements in a testimony. Although the very nature of the exploratory design does not allow formulating hypotheses a priori Vergara, , there is consensus that it is possible generating new assumptions by analyzing the collected testimonies.

Such assumptions may be useful to future research and studies on the topic, as well as to help developing knowledge on business management, mainly in the Merger and Acquisition field. The gathered information mostly consisted of recollecting and interpreting the interviewees, who are a group of active professionals who have valuable insights, as well as vast experience on- and knowledge about deal making.

It is important mentioning that these professionals could have introduced biases and subjective elements from their personal involvement with the studied subject, the so-called "No-deal" phenomenon. Additionally, a diversified sample may cover important trends and findings if the study is performed according to a particular subset of participants. The current section presents the analysis applied to the performed interviews, as well as the collected information, the key findings and interpretations.

Data interpretation focused on factors that have contributed to merger talk collapses. Interviewees were very collaborative, and the data collected during the interviews were filtered, so that only information relevant to the present study was used. It was done in order not to disturb reader's understanding. Data were presented according to the logical order of the conversations: The interview results corroborated the belief that the roles played during transactions have close link to the part professionals are playing e.

The main actors within the deal-making process are a the "Buyer" or "Investor", who is the one paying for the stake in a business by acquiring shares or assets from other company; and b the "Seller" or "Target", who is the part selling a stake in a business by divesting shares or assets to another company. The buyer and seller characters in a so-called merge of equals may not be very clear or easy to identify. Buyers and Sellers can be grouped according to their nature; they can be of corporate or private equity nature and include public listed companies and private companies.

On the other hand, private equity parts are often composed of investment companies dedicated to invest in operating companies. These equity companies make their living by acquiring, fixing and selling business. Finally, depending on the origin of the capital, Buyers and Sellers can be classified as domestic Brazilian and foreign companies.

Interviewees also approached companies based on the type of capital: It is worth emphasizing that governments and state-owned companies can make acquisitions in the market. According to the interviewees, the reason for governments and state-owned companies to engage in business deals demands a reasonable level of political interest. Advisors support buyers and sellers in searching for-, assessing and managing a deal.

They often work side by side with executives in mixed teams or in functions supporting decision makers. Depending on the size and complexity of the transaction, the number of advisors can be larger. The action perimeter of advisors can vary, but the scope of their typical work can be set according to the stages of the deal. Buyers and sellers evaluate the opportunities to invest in a certain market or divest a business during the pre-deal phase. At this point, it is not rare to have CEOs, CFOs and Boards searching for an external opinion to develop or validate the strategy formulation process.

It starts by identifying acquisition targets or potential investors to invest in a company. Buyers and sellers can use advisory support to manage the deal, because these advisors are negotiation and project management experts. The deal manager coordinates other advisors and internal teams in charge of closing the best deal possible. The due diligence, as well as valuation and the drafting of key deal documents, including understanding memos, offer letters and SPAs, are activities performed during the dealing process.

Consultancy focused on planning and accomplishing a smooth integration process by preparing the merging companies from Day 1 on. The consultants also calculate and validate synergies, besides integrating teams; a number of consulting works can be used to support the newly merged entity during the post deal phase. Interviewees confirmed the deal flow previously discussed in the literature review.

They explained that, some of the phases tend to run concomitantly; therefore, in practical terms, there is some degree of flexibility in the way things are done. They also corroborated the assumption that merger talks tend to collapse when companies start to get to know each other in detail. The more you know the other one, the more susceptible you are to see beyond the first impression. The following deal flow was based on contribution from the literature and on the interview program Fig. According to the business jargon, the so-called "Deal breaker" consists of unresolved issues that come up during the negotiation process and that may cause one or more parts to walk away from the deal.

According to the interviews, merger talks often collapse between the deal validation and structuring stages, mainly during or right after the due diligence. Sometimes, the risks are so high that they surpass the price to be paid by the target, thus destroying the deal ". A3, Advisor, Deal management. This is particularly valid for tax, labor and legal risks.

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Advisors bring their market experience to design mechanisms to mitigate the risks, without eliminating them, but by bringing a better level of comfort to the involved parts. Sometime the transaction falls apart because of lack of flexibility between the parts. Obviously, it all involves the cash to be paid or received and the respective timing of cashing it.

It is possible classifying deal breakers in two categories — qualitative and quantitative — by analyzing the interview program results. Qualitative issues are difficult to be expressed in numbers, but they can represent a real threat to the deal, to the acquirer or to the newly merged entity. As it can be seen in Table 2 , although a number of issues were reported, priority was given to the six main topics, namely: According to the interviewees, it is not rare that many target companies make questionable adjustments to the financial statements and management reports during the preparation of a sales process in order to draw the most optimistic picture possible to potential buyers.

Such reports and statements can jeopardize credibility and eventually lead the merger talks to collapse. Different expectations concerning the value of the business about to be sold or merged were the second most common issues reported by interviewees. The more sophisticated the seller, less dissonance will be seen in the negotiation. For example, I have seen cases wherein sellers do not have a clear idea of what a discount cash flow is and about what they have in mind in a multiple thrown in the air by some amateur advisor.

It creates a lot of confusion and at the end, we have to try educating the seller on how to proper value a business. The problem is that when the seller has a number in mind it is difficult to override it. The taxation environment in Brazil is complex, it is often changing and the burden is one of the highest in the world.

M&A activity involving Chinese companies

According to the interviewees, it is not rare to see Brazilian companies, particularly family-owned business and mid-sized companies, trying to reduce the burden. Different interpretations of complex rules, and the fact that there is no tax clearance, increase the level of uncertainty in negotiations.

There was this particular transaction where the information was so scarce that we had to hire an accounting firm to reconstruct the target company accounting and to gather information for us, so we could analyze and evaluate the business opportunity. Sellers were managing the business on a cash basis and had very little structured financial information to share. This transaction was painful. We tried very hard because it was an interesting asset in a geography that was key for us to expand into… but after months digging the scarce information available we decided to walk away. Failure to get to an agreement on the adjustments proposed for the due diligence.

At the end of the due diligence period, buyer and seller get together to discuss the key due diligence issues and the respective impacts of it on the negotiation and valuation of the acquisition target company, as well as to discuss the mechanisms to mitigate risks identified throughout the process. On the income statements side, we investigate the quality of earnings, non-recurring items impacting EBTIDA, related part transactions, provisions, allocations, capitalization of expenses and cut-off issues. The due diligence report includes a summary of all identified adjustments that will feed the valuation model and price negotiations.

Obviously, there are cases where seller's risk perception is very different than that of the buyers and it creates an impasse, sometimes, difficult to reconcile… and the deal collapses. General lack of governance, informalities and questionable corporate practices. According to the interviewees, questionable practices, informality and lack of governance were some of the main factors contributing to merger talk collapses. A seasoned due diligence advisor has well-summarized the feelings shared by most interviewees:.

Still, this decision depends on the type of investor and on the objectives of the transaction. Institutional investors PE's, Investment Funds and the like are more reluctant to treat such issues as listed above. The price drop is also related to the type of investor. Funds and PEs may present the gains at short and medium terms that could be assessed, given that the potential of the target company was not acquired.

Strategic buyers may face a future major competitor, or fail to acquire certain knowledge or technology that could lead to increased revenue levels, EBITDA and market share. In general, the most visible consequences at first are issues involving litigation and contingencies materialized and not materialized that arise from tax, and tax and labor issues. However, concerning frauds, acts and conducts contrary to the law also become possible future problems. Having said that, I perceive a clear distinction between Brazilians and foreign investors: The transaction was completed, the buyer worked to adjust the internal practices of the acquired company and managed all contingencies and risks identified during the due diligence.

Sales price, form of payment and the terms of the acquisition were also adjusted during the closing, so that the buyer could mitigate some risks and get some protections against possible future risks. That included getting the formal commitment of former owners to respond to any risks and exposures including the payment of fines, debts, costs and court and attorney's fees when applicable. Sophisticated buyers, particularly international firms, have difficulties to live with and manage that kind of risk, particularly if they originated from questionable corporate practices.

Brazilian companies are becoming increasingly aware of recent anti-corruption and anti-bribery laws in Brazil. A number of small and mid-sized companies will soon need to adapt because they still make use of non-orthodox practices to avoid bureaucracy and reduce tax burden. Nowadays, these companies rarely engage top reputable accounting firms to audit their financial statements. The collapse of a merger talk can trigger frustration feelings in the involved parts, particularly in those emotionally connected to the deal.

However, when the due diligence unveils a high degree of uncertainty, risks beyond the acceptable levels or a purchase price that is difficult to achieve in the future, the best decision to make is to walk away. A4, Advisor, Deal Management. However, walking away from a deal is not that obvious, Gole and Hilger explain that acquisition transactions take on a life of their own, individuals and organizations become committed to them, and such commitment is expressed through dangerous enthusiastic support, optimistic expectations and broad-based company involvement.

As suggested by Bing , investors' enthusiasm with the business can be so great it clouds their sight. He goes further and makes a distinction between the time the business has been coveted for- and if this time represents a key component in a strategic plan. Therefore, great irrational enthusiasm impairs objectiveness. Consequences can be disastrous. I was working for this client [buyer] for two years trying to crack a deal with this promising business.

The target had a very optimistic view about the future of the business. It was in — and the potential of Pre-Salt discoveries were blinding everybody involved in the deal. Aside from the problems to validate the forecast assumptions, sellers were not very sophisticated and it took almost one year to complete the due diligence. No proper financial reporting was in place and, despite its size, the company was managed on a cash basis.

It was no deal for amateurs. There were all possible complications including ex-wife, broken relationships with sons of the first marriage, and three advisors trying to manage the deal on behalf of the founder of the business and selling part! It is interesting to observe the different risk perceptions between sellers and buyers.

The following case illustrates the case of a seller who, in his view, believed that there was "excess of caution" from the buying side. The potential acquirer here was a foreign investor:. On the buying-side, there was a foreign investor and we were the private equity fund working with the sellers, a Brazilian company. The buying-side due diligence advisors informed their client about potential tax risks. They took the opinion of the advisors in a very strict way, differently from what we are used to see in Brazil.

In practice, the tax risk was very low or almost nonexistent. Particularly because the sellers offered the ability to adjust the "risk" through a deposit in an escrow account, an attitude totally "pro deal"! The advisors certainly had a decisive influence on the deal to be abandoned. In my view, the attitude of advisor was the worst possible, clearly, he wanted to get rid of the problem. The advisor simply preferred to say that the risk was high and the buyer dropped the deal.

What a shame for the investor because a few months after the negotiation the risk actually never materialized and a great opportunity was lost. The company has been delivering a result above the forecasted business plan. The interviewees did not see cultural aspects as important risks for deal making, except when cultural issues were manifested in questionable corporate practices.

I have been working in Brazil for two years now and I haven't seen cultural issues being taken into consideration for closing a deal. It is only analyzed after the transaction is closed and the companies have to integrate their operations. In Brazil, people are much more worried about numbers, synergies, operations and the infrastructure to support the business. I think it is part of the stage we are in. Haspeslagh and Jemison analyzed the cultural aspects of deal making and stated that managers may not always have information to judge how different cultures and subcultures in both organizations are, before they experience those differences themselves.

They suggest an early focus on the strategic capabilities that need to be preserved, on to what extent they depend on keeping a cultural difference and can be held in a sub-part of the organizational focus. In other words, value creation, in its various forms size, customers, markets, synergies, competences , may be directly linked to cultural aspects. Losing these skills may potentially have a reasonable impact on the ability to find the potential value to be created by the merger. Therefore, the cultural issues should not be underestimated, but should be factored into the decision-making process, along with other quantitative or qualitative issues.

According to the interview program, foreign investors trying to enter Brazil seem to be willing to pay a higher price when they are compared to domestic players:. As a valuation professional, I have to accept the fact that these buyers are seeing something more than just the numbers we present to them. Sometimes they accept a ridiculous price. Price equity tend to try paying less than the fair price. They are clever investors and their focus lies on the short-term.

Strategic investors tend to think in the long-term. Their decision-making process is based on the next ten to twenty years, not on the next five years. The acquisition was just a platform for further consolidation. McSweeney and Happonen state that commitment, secrecy and intense concentration, as well as pressure from outside advisors can create a situation where the acquisition team may feel unable to stop the process or to slow its tempo , thus making the No-deal phenomenon unlikely to manifest. The idea that the transaction momentum is hard to resist to is also supported by Cullinan, Le Roux, and Weddinger , who corroborate such statement by exemplifying the case of the Dominicks' acquisition by Safeway a leading American grocery chain in The deal was closed in a hurry, within five weeks, which was approximately a third of the mean closing time for large transactions.

This swift transaction was based on Safeway CEO's confidence on his own capacity to increase Dominick's operating margin from 7. On the strategic side, the deal proved to be unfitting. According to Cullinan et al. Dominick's strong unions resisted Safeway's aggressive cost-cutting plans. Because Dominick's customers were unwilling to accept Safeway's private label goods, Dominick's was soon losing share to its archrival, Jewel.

Therefore, Safeway was not able to sell Dominick for even one fifth of the original purchase price. The company would have possibly been able to detect potential dangers and to quantify some of the problems manifested after the deal was closed. In other words, the proper due diligence would have given elements for Safeway to walk away from the deal.

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If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders.

The shareholders of the target company are only taxed when they sell their new shares. When the deal is closed, investors usually receive a new stock in their portfolios — the acquiring company's expanded stock. The merger or acquisition deal process can be intimidating and this is where the merger and acquisition firms step in, to facilitate the process by taking on the responsibility for a fee. These firms guide their clients companies through these transformative, multifaceted corporate decisions.

The various types of merger and acquisition firms are discussed below. The role of each type of firm is to successful seal a deal for its clients, but each does differ in its approach and duties. Investment banks perform a variety of specialized roles.

Mergers and Acquisitions - M&A

They carry out transactions involving huge amounts, in areas such as underwriting. They also facilitate corporate reorganizations including mergers and acquisitions. The finance division of investment banks manages the merger and acquisition work, right from the negotiation stage until the deal's closure. The work related to the legal and accounting issues is outsourced to affiliate companies or impaneled experts.

The role of an investment bank in the procedure typically involves vital market intelligence in addition to preparing a list of prospective targets. Then once the client is sure of the targeted deal, an assessment of the current valuation is done to know the price expectations. All the documentation, management meetings, negotiation terms and closing documents are handled by the representatives of the investment bank. In cases where the investment bank is handling the selling side, an auction process is conducted with several rounds of bids to determine the buyer.

C , Credit Suisse Group. Corporate law firms are popular among companies looking to expand externally through a merger or acquisition, especially companies with international borders. Such deals are more complex as they involve different laws governed by different jurisdictions thus requiring very specialized legal handling. The international law firms are best suited for this job with their expertise on multi-jurisdiction matters.

These companies also handle merger and acquisitions deals with obvious specialization in auditing, accounting, and taxation. These companies are experts in evaluating assets, conducting audits and advising on taxation aspects. In cases where cross-border merger or acquisition is involved, the understanding of the taxation part becomes critical and such companies fit well in such situations. In addition to audit and account expects these companies have other experts on the panel to manage any aspect of the deal well.

The leading management consulting and advisory firms guide clients through all stages of a merger or acquisition process — cross-industry or cross-border deals. These firms have a team of experts who work towards the success of the deal right from the initial phase to the successful closure of the deal. The bigger companies in this business have a global footprint which helps in identifying targets based on suitability in all aspects.

The firms work on the acquisition strategy followed by screening to due diligence and advising on price valuations making sure that the clients are not overpaying and so on. Some of the well-known names in the business are: The larger the potential target, the bigger the risk to the acquirer. A company may be able to withstand the failure of a small-sized acquisition, but the failure of a huge purchase may severely jeopardize its long-term success.

But as many companies seldom have the cash hoard available to make full payment for a target firm in cash, all-cash deals are often financed through debt. For an acquirer to use its stock as currency for an acquisition, its shares must often be premium-priced to begin with, else making purchases would be needlessly dilutive. There are situations in which the target company may trade below the announced offer price. Perhaps market participants think that the price tag for the purchase is too steep.

Or the deal is perceived as not being accretive to EPS earnings per share. Or perhaps investors believe that the acquirer is taking on too much debt to finance the acquisition. But such rejection of an unsolicited offer can sometimes backfire, as demonstrated by the famous Yahoo-Microsoft case. Historically, mergers tend to result in job losses, as operations and departments become redundant. The most consistently threatened jobs are the target company's CEO and other senior management, who often are offered a severance package.

But it can also signal risk for all the target company's employees, especially since those who had hired them are likely no longer making critical labor decisions. In some circumstances, the employees of the newly created entity receive new stock options such as an employee stock ownership plan or other benefits as a reward and incentive.

Studies show that companies in countries whose currencies have appreciated substantially are more likely to target acquisitions in countries whose currencies have not appreciated as much. Since the acquiring company has a stronger currency relative to the country of the acquisition, the transaction is more affordable on a relative basis. This transaction can have an impact on the relative exchange rates between the two countries for large deals. These currency movements are most pronounced in the days after the announcement of the deals. The larger the cash portion of the deal, the greater the impact on the currency exchange rates between the countries.

In recent decades, the late s were a high point for mergers and acquisitions. In the 21st century, activity slowed at first, but has gradually increased: Some of the biggest deals over the last few years in the United States in no specific order have been:. Verizon Wireless which was founded in as a joint venture of Verizon Communications and Vodafone, is after the deal now wholly owned by Verizon Communications Inc. Verizon Wireless is the largest and most profitable wireless company serving Warner-Lambert's cholesterol drug Lipitor is said to be the point of focus for the merger as the drug was jointly marketed by Warner-Lambert and Pfizer since its launch in At the time of the deal, Exxon and Mobil were the largest and second-largest oil producers in the U.

The company is now a multinational giant headquartered in Irving, Texas, United States. MO approved the spin-off of Philip Morris International Inc, a wholly owned subsidiary of Altria with a vision of making it the most profitable publicly traded tobacco company and to build long-term shareholder value. C , one of the biggest companies in the financial services space. While they seem to constantly grow in size and scope, mergers and acquisitions don't always happen — or, if they do happen, the results are not happy ones.

For every deal that goes through, there are plenty that fail to launch, or fail to thrive. The three main reasons for a merger or acquisition deal to fail are a lack of funding by the acquirer to close the deal, the difference in valuation estimates by the two parties and government intervention due to regulations. Adequate funding is necessary for a successful merger. A Saturday night special is a sudden attempt by one company to take over another by making a public tender offer.

The name comes from the fact that these maneuvers used to be done over the weekends. This too has been restricted by the Williams Act in the U. If a company doesn't want to be taken over, there are many strategies that management can use. Almost all of these strategies are aimed at affecting the value of the target's stock in some way. A golden parachute measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their jobs if their company is taken over by another firm.

Benefits written into the executives' contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money, therefore becoming a strong deterrent to proceeding with their takeover bid. A spin-off of the term "blackmail," greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a "bon voyage bonus" or a "goodbye kiss.

In this tactic, the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. It's called a macaroni defense the redemption price of the bonds expands, like macaroni in a pot of boiling water. It's a highly useful strategy but the target company must be careful it doesn't issue so much debt that it cannot make the interest payments. Takeover-target companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.

Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation. With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills.

The 'flip-in' poison pill allows existing shareholders except the bidding company to buy more shares at a discount. This type of poison pill is usually written into the company's shareholder-rights plan. The goal of the flip-in poison pill is to dilute the shares held by the bidder and make the takeover bid more difficult and expensive. The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a discounted price in the event of a merger. If investors fail to take part in the poison pill by purchasing stock at the discounted price, the outstanding shares will not be diluted enough to ward off a takeover.

An extreme version of the poison pill is the "suicide pill" whereby the takeover-target company may take action that may lead to its ultimate destruction. With the sandbag tactic the target company stalls with the hope that another, more favorable company like "a white knight" will make a takeover attempt. If management sandbags too long, however, they may be getting distracted from their responsibilities of running the company. A white knight is a company the "good guy" that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party a "black knight".

The white knight offers the target firm a way out; although it will still be acquired, it will be on more favorable terms — or at least, terms more to its liking. It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium.

It can sound so simple: Different systems and processes, dilution of a company's brand, overestimation of synergies and lack of understanding of the target firm's business can all occur, destroying shareholder value and decreasing the company's stock price after the transaction.

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For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: A merger may often have more to do with glory-seeking than business strategy.

Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers.

Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. Even if the rationale for a merger or acquisition is sound, executives face major stumbling blocks after the deal is consummated. Potential operational difficulties may seem trivial to managers caught up in the thrill of the big deal; but in many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory. The chances for success are further hampered if the corporate cultures of the companies are very different.

When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code.

These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. Cultural clashes between the two entities often mean that employees do not execute post-integration plans well. And since the merger of two workforces often creates redundant functions, which in turn often result in layoffs, scared employees will act to protect their own jobs, as opposed to helping their employers realize synergies.

And sometimes, the expected advantages of acquiring a rival don't prove worth the price paid. Once it has acquired company B, the best-case scenario that A had anticipated doesn't materialize: A key drug being developed by B may turn out to have unexpectedly severe side-effects, significantly curtailing its market potential. More insight into the failure of mergers is found in a highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer.

Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. Historical trends show that roughly two-thirds of big mergers will disappoint on their own terms, which means the combined new company, or the acquiring company, will lose value on the stock market. Here are a few examples of deals that ended up being disasters.

In , the New York Central and Pennsylvania railroads merged to form Penn Central, which became the sixth largest corporation in America. But just two years later, the company shocked Wall Street by filing for bankruptcy protection, making it the largest corporate bankruptcy in American history at the time. The railroads, which were bitter industry rivals, both traced their roots back to the early- to mid-nineteenth century.

Management pushed for a merger in a somewhat desperate attempt to adjust to disadvantageous trends in the industry. Railroads operating outside of the northeastern U. Local railroads catered to daily commuters, longer-distance passengers, express freight service and bulk freight service. These offerings provided transportation at shorter distances and resulted in less predictable, higher-risk cash flow for the Northeast-based railroads.

Short-distance transportation also involved more personnel hours thus incurring higher labor costs , and strict government regulation restricted railroad companies' ability to adjust rates charged to shippers and passengers, making cost-cutting seemingly the only way to positively impact the bottom line. Furthermore, an increasing number of consumers and businesses began to favor newly constructed wide-lane highways. The Penn Central case presents a classic case of post-merger cost-cutting as "the only way out" in a constrained industry, but this was not the only factor contributing to Penn Central's demise.

Other problems included poor foresight and long-term planning on behalf of both companies' management and boards, overly optimistic expectations for positive changes after the combination, culture clash, territorialism and poor execution of plans to integrate the companies' differing processes and systems. In addition to overpaying, management broke a fundamental law in mergers and acquisitions: Quaker Oats' management thought it could leverage its relationships with supermarkets and large retailers; however, about half of Snapple's sales came from smaller channels, such as convenience stores, gas stations and related independent distributors.

The acquiring management also fumbled on Snapple's advertising campaign, and the differing cultures translated into a disastrous marketing campaign for Snapple that was championed by managers not attuned to its branding sensitivities. Snapple's previously popular advertisements became diluted with inappropriate marketing signals to customers. PEP launched a barrage of competing new products that ate away at Snapple's positioning in the beverage market.

Read about the importance of memorable advertising in Advertising, Crocodiles And Moats. Oddly, there is a positive aspect to this flopped deal as in most flopped deals: This still left a huge chunk of destroyed equity value, however. Respected executives at both companies sought to capitalize on the convergence of mass media and the Internet.

Shortly after the megamerger, however, the dot-com bubble burst, which caused a significant reduction in the value of the company's AOL division. Around this time, the race to capture revenue from Internet search-based advertising was heating up. AOL missed out on these and other opportunities, such as the emergence of higher-bandwidth connections due to financial constraints within the company.

At the time, AOL was the leader in dial-up Internet access; thus, the company pursued Time Warner for its cable division as high-speed broadband connection became the wave of the future. With their consolidated channels and business units, the combined company also did not execute on the converged content of mass media and the Internet. Additionally, AOL executives realized that their know-how in the Internet sector did not translate to capabilities in running a media conglomerate with 90, employees.

And finally, the politicized and turf-protecting culture of Time Warner made realizing anticipated synergies that much more difficult. In , amidst internal animosity and external embarrassment, the company dropped "AOL" from its name and simply became known as Time Warner. Prior to the merger, Sprint catered to the traditional consumer market, providing long-distance and local phone connections and wireless offerings.

Nextel had a strong following from businesses, infrastructure employees and the transportation and logistics markets, primarily due to the press-and-talk features of its phones. By gaining access to each other's customer bases, both companies hoped to grow by cross-selling their product and service offerings.

Soon after the merger, multitudes of Nextel executives and mid-level managers left the company, citing cultural differences and incompatibility. Sprint was bureaucratic; Nextel was more entrepreneurial. Nextel was attuned to customer concerns; Sprint had a horrendous reputation in customer service, experiencing the highest churn rate in the industry.

In such a commoditized business, the company did not deliver on this critical success factor and lost market share. Further, a macroeconomic downturn led customers to expect more from their dollars. Cultural concerns exacerbated integration problems between the various business functions. Nextel employees often had to seek approval from Sprint's higher-ups in implementing corrective actions, and the lack of trust and rapport meant many such measures were not approved or executed properly.

Early in the merger, the two companies maintained separate headquarters, making coordination more difficult between executives at both camps. S managers and employees diverted attention and resources toward attempts at making the combination work at a time of operational and competitive challenges. Technological dynamics of the wireless and Internet connections required smooth integration between the two businesses and excellent execution amid fast change. Nextel was simply too big and too different for a successful combination with Sprint.

AAPL wildly popular iPhone. With the decline of cash from operations and with high capital-expenditure requirements, the company undertook cost-cutting measures and laid off employees. The idea of getting smaller might seem counterintuitive. But corporate break-ups, or de-mergers , can be very attractive options for companies and their shareholders.