This book primarily deals with corporate restructuring through mergers and acquisitions (M&As). It critically examines all functions that must be performed in completing an M&A transaction. Domestic and cross-border M&A’s are very similar in many respects even though differences between them also exist. To include discussions of the issues that arise in cross-border M&A transactions, the book also discusses topics such as international finance and multinational financial management.
Given the increasing importance of China as the second largest economy in the world and Chinese companies’ growing merger and acquisition (M&A) activities globally, we devote the last two chapters of the book to China’s outward foreign direct investment and cross-border M&A activities. The case studies regarding Chinese foreign direct investments, both in Greenfield and acquisition forms, give additional insights into challenging tasks of due diligence and post-merger cultural integration that foreign investors face.
Throughout these discussions, we will emphasize methods, analytical tools, and concepts that have great applicability in M&As. This means that we would deliberately avoid broad theoretical discussions that do not have immediate relevancy for practical applications, even though knowing them might provide great theoretical insights into all sundry aspects of merging or acquiring another company or being acquired by another enterprise. It should not be construed from this emphasis on practical applications that theory is insignificant. On the contrary, we greatly value theory. This approach is based on our belief that business education should emphasize practical relevancy for the conduct of business and managerial decision making.
Based on this philosophy, we selected those topics because the knowledge of them absolutely imperative in M&A decision making. Naturally, a corporate executive cannot implement all tasks that are required to develop a strategy for merger or acquisition, to find a target, to conduct due diligence, to value the target company, to conduct negotiations and structure the deal, and, finally, satisfactorily meet the most challenging phase of an M&A transaction; that is, to integrate the acquiring and acquired companies. Accomplishing those tasks requires a great deal of resources and expertise: consulting companies, law firms that specialize in M&As, and investment banks should be consulted to accomplish the tasks. However, the decision maker should have an understanding and a clear overview of all aspects of the processes that a typical merger or acquisition initiative must go through. This book is written as a concise guideline for those readers who are interested in gaining a clear understanding of what a merger or acquisition entails.
Reviewing the M&A literature, one comes across a fragmented field of inquiry. One can clearly recognize different patterns in the development of the M&A literature according to the disciplines of the researchers. The research interests in M&A and corporate restructuring literature are primarily concerned with the following questions. Why do companies merge? Are M&As successful in achieving the goals of acquisition and combinations? Why do so many companies fail to create shareholder value or capture the synergies they inspired to gain? How to best value the target firm? What role does postmerger integration play in postmerger performance of the acquiring and acquired companies? What role corporate and societal cultures play in the success or failure of M&As? These are among many other questions the literature on M&A deals with.
The fragmentary nature of the literature emerges from the discipline-based approach researchers take in answering the questions. One finds articles with emphasis on economics of M&A (economies of scale, market power, and shortcut to obtaining costly technology) written by economists; articles written by strategic management scholars focusing on motives for acquisition and postmerger performance according to the motives of consolidations; articles written by scholars in corporate finance, concentrating on postmerger performance based on stock market indicators. Studies by researchers on organization theory project attention on postmerger integration and conflicts arising during the integration processes and, finally, experts on human resources have focused on effective communications, cultural differences, and sociopsychological issues that might have an impact on the success or failure of the combined entities. Based on this, it is common knowledge among the scholars of M&As that the discipline-based approach used for answering any of these questions leads to answers that tend to differ and in some cases even contradict each other (Larsson and Finkelstein 1999).
In this book, we review the literature of M&A from different angles and bring together important, practical insights from this vast literature in a short, but cohesive form that hopefully has great managerial relevance.
Structure of the Book
Cross-border M&As are international activities. To gain a better understanding of the depth and breadth of international business and economic transactions, Chapter 1 deals with globalization or internationalization of economies. In Chapter 2, we define some M&A terminologies, briefly review the motives for M&As, discuss different types of mergers, and differentiate between domestic and cross-border M&As. Chapter 3 gives an overview of M&A processes and reviews problems that often arise during acquisition processes. In Chapter 4, we develop strategies for M&As, define organizational culture, enumerate a set of strategic objectives for M&As, identify the corporate development office as the responsible body in many M&As by several companies, and elaborate on the role of the lead adviser in implementing mergers or acquisitions. Chapter 5 encompasses selecting a potential target for acquisition, enumerate target screening criteria, and defines as well as lists different types of due diligence.
Chapter 6 discusses accounting for M&As and, by means of examples, illustrates how valuation of the target firm will affect the income statement and balance sheet of the combined company. Chapter 7 deals with alternative approaches to valuation of the target firm by illustrative examples of comparable companies approach, the discount cash flow approach, the capital budgeting method, and free cash flow calculations under different assumptions about the growth of cash flows. Chapter 8 examines the important role the cost of capital plays in valuation methods. Chapter 9 considers real option analysis as a versatile method for valuing target companies in general; Chapter 10 closely examines how the Black–Scholes model is used in valuing target companies under different scenarios.
In Chapter 11, we turn our attention to valuing target companies in cross-border M&As, by discussing issues related to international finance. We examine the purchasing power parity theorem and real exchange rate, exchange rate fluctuations, and forward as well as swap currency transactions in the chapter. Moreover, we discuss the effect of currency fluctuations on the discounted cash flows of multinational companies in Chapter 11 too.
Chapter 12 handles the negotiation and deal structuring part of the acquisition process. It focuses on developing a strategy to secure approval from the target firm, refining valuation of the target, and developing a plan for financing the deal. Chapter 13 examines the important topic of postmerger integration and reorganization. Furthermore, the chapter focuses on different types of integration, approaches to integration, establishing a new organization, integration of functional departments of corporations; and instructs how to form a new corporate culture.
Part II of the book involves discussions of outbound M&A activities of China’s enterprises, which until the last few years only involved state-owned enterprises. In Chapter 14, after a discussion of outward FDI by Chinese companies, we review factors that have contributed to outward M&A investment by China. Furthermore, the chapter examines the role of the Chinese government in promotion and regulation of outbound M&A activities of Chinese enterprises. Moreover, the chapter reviews the accounting method of business combinations in China. Finally, Chapter 15 examines major issues in Chinese cross-border M&A activities, including postmerger experiences of Chinese firms, rules for overseas acquisitions by Chinese firms, perceptions of Chinese executives in acquiring firms in developed countries, policies of host countries toward Chinese firms acquiring businesses in their countries, and experiences of Chinese firms in outward investment and acquisitions.
We thank Mr. Scott Isenberg, the Executive Acquisitions Editor, Business Expert Press for his leadership in development of this project and for encouraging us to write the book.