ROBERT F. BRUNER is the Distinguished Professor of business Administration at the Darden School of the University of Virginia and Executive Director of the Batten Institute. He directs the Darden School's executive education course on mergers and acquisitions, and teaches the popular MBA elective on that topic. He is the author of over 250 case studies and a casebook, case Studies in Finance: Managing for Corporate Value Creation, which has been adopted for use at over 200 schools. Bruner's articles have been published in the Journal of Financial Economics, the Journal of Accounting and Economics, the Journal of Financial and Quantitative Analysis, the Journal of Money, Credit, and Banking, and Financial Management. He has served as a consultant to over twenty corporations as well as to the U.S. Government, and prior to his academic career, worked as a commercial banker and venture capitalist, Bruner holds a BA from Yale University, and an MBA and DBA from Harvard University.

Foreword xv

Preface xvii

Part One

Introduction and Key Themes 1

Chapter 1

Introduction and Executive Summary 3

"How Can My Team Do Better Than the Averages?" A Framework for M&A Success. Seven New Big Ideas Worthy of the Best Practitioners.

Chapter 2

Ethics in M&A 13

Why Should One Care? In Whose Interests? What Is Good?- Consequences, Duties, Virtues. Promoting Ethical Behavior.

Greenmail Case: Walt Disney, 1984.

Chapter 3

Does M&A Pay? 30

The Measurement of M&A Profitability: Better Than What? Findings Based on the Analysis of Returns to Shareholders. Findings Based on the Analysis of Reported Financial Performance. Findings about the Drivers of Profitability. Findings from Surveys of Executives. Findings from Clinical Studies.

Part Two

Strategy and the Origination of Transaction Proposals 67

Chapter 4

M&A Activity 69

M&A Activity Appears in Waves. Explanations of M&A Activity. "Creative Destruction" as the Driver of M&A Activity. The Many Forms of Economic Turbulence, and Where to Look for It. Turbulence Drives M&A Activities and Opportunities.

Chapter 5

Cross-Border M&A 98

Cross-Border M&A Activity. M&A within Regions and Trading Blocs. Drivers of and Returns from Cross-Border M&A. Strategic Analysis of Countries: Getting a "View."

Chapter 6

Strategy and the Uses of M&A to Grow or Restructure the Firm 123

Setting Strategy. Expansion by Inorganic Growth. Restructuring, Redeployment, and Sale. Choosing a Path. Does It Pay to Diversify or Focus the Firm?

Chapter 7

Acquisition Search and Deal Origination: Some Guiding Principles 183

Eight Principles of Acquisition Search. Case Study: Kestrel Ventures LLC.

Part Three

Diligence, Valuation, and Accounting 205

Chapter 8

Due Diligence 207

The Concept of Due Diligence. Principles and Strategies. Timing, Team, and Outputs. The Target's View: The Data Room and Its Pressures. Focus on Knowledge. Excellence in Due Diligence.

Chapter 9

Valuing Firms 247

Rule #1: Think Like an Investor. Rule #2: Intrinsic Value Is Unobservable; We Can Only Estimate It. Rule #3: An Opportunity to Create Value Exists Where Price and Intrinsic Value Differ. Rule #4: So Many Estimators, So Little Time-It Helps to "Have a View." Rule #5: Exercise Estimators of Intrinsic Value to Find Key Value Drivers and Bets. Rule #6: Think Critically; Triangulate Carefully. Rule #7: Focus on Process, Not Product. Rule #8: When in Doubt, see Rule #1. Valuation Case: Chrysler Corporation, March 1998.

Chapter 10

Valuing Options 296

Option Basics. Option Theory. Option Applications. A Practical Guide to Financial Option Valuation, with Some Important Caveats.

Chapter 11

Valuing Synergies 325

The Concept of Synergy. Synergy Estimates Must Be a Central Focus of M&A Analysis. A Framework for Synergy Analysis. Estimating Synergy Value, with Examples. Synergies in the Daimler/Chrysler Merger. Rules of Thumb.

Chapter 12

Valuing the Firm across Borders 348

How Borders Affect M&A Valuation. Strategy for DCF Approach: Home versus Foreign Valuation. Adjusting Cash Flows. Estimating the Discount Rate. Recapitulation: Valuation Process with Adjusted CAPM. Valuation Cases across Borders.

Chapter 13

Valuing the Highly Levered Firm, Assessing the Highly Levered Transaction 393

The World of Highly Levered Firms. The Effect of Leverage on Firm Value. The "Whole Deal" Approach. A Case in Leveraged Recapitalization: Koppers Company. LBO Case: MediMedia International, Ltd. LBO Case #2: Revco Drug Stores.

Chapter 14

Real Options and Their Impact on M&A 424

Types of Real Options. Where Real Options Appear in M&A. Why Not Value Everything as an Option? How to Assess the Impact of Real Options. Four Mini-Cases in the Analysis of Real Options.

Chapter 15

Valuing Liquidity and Control 455

Adjusting Values for Discounts and Premiums. Where Do Illiquidity Discounts Come From? Where Do Control Premiums Come From? Interaction of Liquidity and Control. Case Study: Volvo/Renault, 1993.

Chapter 16

Financial Accounting for Mergers and Acquisitions 478

Overview of Purchase Accounting. How to Interpret Reported Financial Results from a Business Combination. Linkage among Accounting Choices, Form of Payment, Financing, and Price. Dangers of Earnings Management.

Chapter 17

Momentum Acquisition Strategies: An Illustration of Why Value Creation Is the Best Financial Criterion 511

Four Cautionary Tales. Momentum Acquisition Strategies. The Arguments for and against Momentum Acquiring. Value Creation Is the Best Criterion for Evaluating Acquisition Strategies. Momentum versus Value Strategies.

Part Four

Design of Detailed Transaction Terms 529

Chapter 18

An Introduction to Deal Design in M & A 531

Deal Structures Are Solutions to Economic Problems. Possible Desirables in Designing a Deal. Design Leads to Results. Each Deal Is a System: The "Whole Deal" Perspective. Some Implications for the Deal Designer.

Chapter 19

Choosing the Form of Acquisitive Reorganization 547

Five Key Concerns for the Deal Designer. Deals That Are Immediately Taxable to the Selling Shareholders. Deals That Defer Tax to the Selling Shareholders.

Chapter 20

Choosing the Form of Payment and Financing 564

Patterns and Trends in Form of Payment. Does Form of Payment Matter? Considerations in Selecting the Form of Payment. Assessing the Financing Aspects of a Deal.

Chapter 21

Framework for Structuring the Terms of Exchange: Finding the "Win-Win" Deal 589

A Model for Critically Assessing Exchange Ratios. Uses and Illustration of the Model. Extension to Cash-for-Stock Deals. Choosing Exchange Ratio Targets in the "Win-Win" Zone.

Chapter 22

Structuring and Valuing Contingent Payments in M&A 609

Contingent Payments in M&A. Earnouts Can Be Useful; But If So, Why Aren't They Ubiquitous? Earnouts Are Options on Future Performance. Structuring an Earnout. Tax and Accounting Considerations. A Generic Approach to Valuing Earnout Instruments. The Eli Lilly Case. Proposing and Negotiating an Earnout and Other Contingent Payments.

Chapter 23

Risk Management in M&A 636

Value at Risk When a Deal Fails. Transaction Risk: Types and Sources. Types of Risk Management. Collars and Their Analysis. Contingent Value Rights Case. Staged Acquiring Case. Where and When to Manage Risk.

Chapter 24

Social Issues 668

The Importance of Social Issues in M&A. Survey of Social Issues. Impact of Social Issues on Attractiveness of the Deal. Case Studies in the Role of Social Issues.

Part Five

Rules of the Road: Governance, Laws, and Regulations 683

Chapter 25

How a Negotiated Deal Takes Place 685

The Deal Shaping Process. Risks: How the Process Can Get Derailed. Transaction Planning and Preparation. Initiating Discussions. First-Round Documents. The Definitive Agreement. Disclosures to Investors and Regulators. Gaining Approval. Case Study: Daimler-Benz and Chrysler.

Chapter 26

Governance in M&A: The Board of Directors and Shareholder Voting 703

Governing Well Is Hard to Do. Good Governance Pays. How Shareholders Rule. Fiduciary Duties of Target Directors in Considering M&A. Preparing for the Board's Review of a Deal. How Can Firms Be Governed Better?

Chapter 27

Rules of the Road: Securities Law, Issuance Process, Disclosure, and Insider Trading 725

Overview of Key Securities Laws and Rules. International Law Comparison. Disclosures. Insider Trading. Observance of Deal Process.

Chapter 28

Rules of the Road: Antitrust Law 742

Antitrust Law: History and Motives. How Antitrust Regulators and Laws Affect M&A. U.S. Antitrust Merger Guidelines. Premerger Review Process in the United States. Antitrust Regulation of M&A in the European Union. Critical Perspectives on Antitrust Policy.

Chapter 29

Documenting the M&A Deal 766

First-Round Documents. Definitive Agreement. Merger Proxy Statement and Prospectus.

Part Six

Competition, Hostility, and Behavioral Effects in M&A 771

Chapter 30

Negotiating the Deal 773

The Relevance of Negotiation Process. Behavioral Finance. Influencing Bargaining Outcomes: An Overview of the Challenge. How to Prepare for a Negotiation. Managing the Negotiation Process Proactively.

Chapter 31

Auctions in M&A 790

Auction Structures and Motives. Advantages and Disadvantages of Auctions. Auctions in Practice: The Case of RJR Nabisco. The "Winner's Curse" in M&A: Is It Real? Some Practical Advice to Sellers in Auctions.

Chapter 32

Hostile Takeovers: Preparing a Bid in Light of Competition and Arbitrage 804

Takeovers Are Games. A Profile of Hostile Takeovers. Beware of the Players, Both on the Field and Off. The Arb Is the Consummate Economic Actor. Interpreting Arbitrage Spreads. The Arb Assesses...