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Saurabh Sharma

Mergers and Acquisitions A Guide to Create Value for Stakeholders By Hitt, Harrison and Ireland Publishers: Oxford University Press Pirce: Rs 495

The book traces research of over 50 years to frame a set of issues and processes that any CEO or manager can follow when seeking a merger or acquisition. Recently, Citicorp and Travellers Group merged at an estimated value of $77 billion, AT&T and TCI merger was valued at $43 billion and Chrysler Daimler Benz went in for a $45.4 billion merger.

In India too, we see a beginning. HLL grew rapidly through its acquisitions of Lakme and Brooke Bond. In 1999 alone, $2.3 trillion worth or mergers and acquisitions were announced. The book is a well-researched handbook for the practising manager, the CEO, an investment banker and the keen student of business. It offers a comprehensive discussion on the subject. If one wishes to study the subject, it offers a very good framework and overview of the topic. If one is considering a merger or an acquisition the book will provide value added insights and more importantly a road map with milestones for the journey.

The book takes the reader through the vision for merger, search for the right company for a merger or acquisition, due diligence, financing the deal, planning the post acquisition integration of the companies, signing the deal, execution of the post-merger integration, creating synergy between the two companies and learning from acquisitions for the next acquisition. Cross border acquisitions get a separate chapter and acquisitions to buy innovation or to diversify are discussed in great detail.

The issue of ethics in the entire process gets special mention by the way of a separate chapter and the role of board of directors, chairman, managers and CEO's is discussed minutely. The book begins rather ominously suggesting that a majority of mergers and acquisitions do not create wealth for the acquiring companies' shareholders. Thus, to have a successful merger and acquisition considerable foresight, planning and execution skill is involved. The first step in an acquisition would be due diligence where hundreds of items are involved including the balance sheet, cultural fit, future management structure, business fit, integration process, HR policies among others.

In the due diligence process the role of auditors, managers and other vested interests has to be monitored very closely. It is here that the board of directors can play a very effective role, which they should. Companies could resort to creative accounting prior to a merger to get a better price. Investment bankers work on contingent fee basis and thus would like the merger to be valued very highly.

Once an acquisition is agreed upon the authors discuss how to go about financing the deal. Most all stock deals tend to favour the acquired company. Most debt financed deals or stock cum debt deals have better chances of surviving. Pooling of interest method (just add the balance sheets, even if a higher purchase price than the book value is paid) is now banned in US. This is because this way goodwill charge is sought to be avoided.

The authors suggest that the most likely successful acquisition is one where the two companies are friendly and interested in the merger. Through various examples of the infamous junk bond era they show how most unfriendly acquisitions and raids resulted in failures. If two companies realise it is in their mutual interest, half the battle is won.

The integration process has to be planned and executed carefully. For an acquisition to be a success, the post-merger scenario requires that the acquiring company does not behave like a conqueror. Where economies of scale are involved, layoffs are inevitable and they have to be handled as humanely as possible.

On cross border acquisitions the authors note that extra care is required in the due diligence process with regard to tax laws, political stability, repatriation of dividends, company law, cultural fit, post merger management structure among other things. Cross border acquisitions like some done recently in India are used to gain entry into a market. In conclusion the authors state that it is not one factor alone that makes a merger work. Due diligence may be excellent but if the post merger integration is handled poorly, returns to shareholders falter. If due diligence is poor and too high a price is paid, successful post merger operations cannot give the expected returns to the shareholders. Mergers and acquisitions is a high-risk flight where many factors have to work successfully in tandem to ensure a safe and accurate landing at the destination.

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