586 Making Key Strategic Decisions
plan or to divest certain assets. These concessions can have important implica-
tions for margins and ultimately cash f low and shareholder value. For example,
in approving the recent megamerger between AOL and Time Warner, the U.S.
Federal Trade Commission (FTC) imposed strict provisions on the new com-
pany with respect to network access by competing internet service providers.
The goal of this is to increase competition, which will ultimately reduce
AOL / Time Warner ’s margins and future cash f lows.
The basis for antitrust laws in the U.S. is found in the Sherman Act of
1890, the Clayton Act of 1914, and the Hart-Scott-Rodino Act of 1976. Regu-
lators assess market share concentration within the context of the economics of
the industry. Factors such as ease of entry for competitors and the potential for
collusion on pricing and production levels are also considered. In the end, an-
titrust enforcement is an inexact science that can have a major impact on M&A
activity. When assessing potential acquisition candidates, the potential for reg-
ulatory challenges—and an estimate of the valuation impact of likely reme-
dies—must be considered in the screening and ranking process.
Cross-Border Deals
In 1999, for the first time in history, there were more acquisitions of foreign
companies (10,413) than U.S. companies (7,243). The U.S. deals were larger
on average, totaling $1.2 trillion versus $980 billion for the foreign transac-
tions.^17 By any measure, the level of international M&A activity is increasing
as the globalization of product and financial markets continues. All of the is-
sues discussed in this chapter apply to cross-border deals, in some cases with
significant added complexities, which are discussed brief ly next.
Each country has its own legal, accounting, and economic systems. This
means that tax and antitrust rules may vary greatly from U.S. standards. While
there is a move to standardized financial reporting via generally accepted ac-
counting principles (GAAP) or international accounting standards (IAS), there
is still great variability in the frequency and reliability of accounting data
around the world. The problem is that developing nations, which offer some of
the best acquisition opportunities, have the most problems.
Doing M&A transactions across borders brings additional risks that have
not been previously discussed. These include currency exchange risk, political
risk, and the additional risk of national cultural differences. If a company is
going to execute an effective international M&A strategy, all of these must be
identified and quantified, because they can have a significant impact on syner-
gies and the implementation timetable. It is critical for a bidder to get capable
financial and legal advisors in each country it is considering acquisitions.
SUCCESSFUL POSTMERGER IMPLEMENTATION
The section on mergers and acquisitions makes it clear that most acquisitions
fail to meet the expectations of corporate managers and shareholders. This