562 Making Key Strategic Decisions
We review the historical evidence and discuss some of the characteristics of
both unsuccessful and successful deals. The importance of value creation is
highlighted, and we present simple analytical tools that can be used to evaluate
the potential of any merger or acquisition. Practical aspects of initiating and
structuring M&A transactions are presented and the issues critical to the suc-
cessful implementation of a new acquisition are brief ly described. It is impor-
tant to understand that there are many legal and financial intricacies involved
in most M&A transactions. Our objective here is not to explain each of these in
detail, since there are professional accountants, lawyers, and consultants avail-
able for that. Instead, we hope to provide valuable and concise information for
busy financial managers so that they can design and implement an effective
M&A strategy.
DEFINITIONS AND BACKGROUND
Before examining the historical evidence on acquisitions, we need to define
some terminology. An acquisitionis one form of a takeover,which is loosely de-
fined as the transfer of control of a firm from one group of shareholders to an-
other. In this context, control comes with the ability to elect a majority of the
board of directors. The firm seeking control is called the bidderand the one
that surrenders control the target.Other forms of takeovers include proxy con-
tests and going private,but the focus of this chapter is takeover via acquisition.
As we can see, acquisitions may occur in several ways. In a merger,the
target is absorbed by the bidder and the target’s original shareholders receive
shares of the bidder. In a consolidation,the firms involved become parts of an
entirely new firm, with the bidder usually retaining control of the new entity.
All original shareholders hold shares in the new firm after the deal. The two
transactions have different implications for shareholders, as the following ex-
amples make clear.
Example 1 There has recently been a wave of takeover activity in the
stuffed animal industry. Griffin’s Giraffes Inc. (GGI) has agreed to merge
TakeoverAcquisitionProxy contestGoing privateMerger or consolidationStock acquisitionAsset acquisition