According to Thomson Financial, global M&A activity surged 38% to $3.8 trillion last year. That momentum is continuing into 2007, with more than $332 billion in deals so far. Myriad forces are driving this megatrend: stable global economic growth, tons of cash, the rise of private equity, and low interest rates. All of these factors have definitely been good news for top investment banks such as Goldman Sachs
But history shows that M&A booms end in busts, so it's probably a good idea for dealmakers and investors to get a better idea of the process before they jump into it. Robert Bruner's book, Deals From Hell: M&A Lessons that Rise Above the Ashes, is a good start.
Bruner is the dean and a professor at the Darden Graduate School of Business Administration, part of the University of Virginia. In addition to teaching a course on mergers & acquisitions (M&A), he also provides consulting services to top companies. Don't worry, though -- his book is not a complex soup of academic mumbo-jumbo. Instead, he blends key research findings with case studies of classic M&A transactions.
To help shed light on the concept of "disaster," Bruner looks beyond the business pages and analyzes cases like Chernobyl, Bhopal, and the failed 1996 Mount Everest climb. Some of the breakdowns involved in these incidents include overly optimistic outlooks, little margin for error, fatigue, and loss of team cohesion. "No single factor is destructive," writes Bruner. "But in unison they are lethal."
Bruner has 10 major case studies, including well-known deals like the AOL-Time Warner
In December 1986, for example, Revco Drug Stores struck a deal to go private. Within 19 months of the transaction, the company went bust. It was felled by a multitude of unfavorable factors: a rapidly changing industry landscape amid the emergence of major discounters, a slowing economy, managerial errors, and a nosebleed valuation. (Getting the deal done required a whopping nine layers of financing.)
Bruner also examines Quaker Oats' notorious $1.7 billion purchase of Snapple in late 1994. Ominously, Quaker's stock price plunged 9.9% on the announcement; research shows that Wall Street's initial judgment is often on target. Quaker Oats erroneously thought it could change Snapple's distribution approach, which aggravated the juice company's independent distributors. Worse yet, the new marketing campaign it devised for Snapple was terrible, and management underestimated competitive pressure from Coca-Cola
The upshot? Twenty-nine months later, Quaker Oats sold Snapple for a measly $300 million. Ouch.
M&A is not evil
Bruner is actually a believer in M&A. For every case study, he analyzes a deal in which the same kind of strategy worked, providing a 360-degree view of deal dynamics.
Based on his studies, he thinks that M&A is just like any other type of corporate investment. According to Bruner: "M&A failures amount to a small percentage of the total volume of M&A activity ... The mass of research suggests that on average, buyers earn a reasonable return relative to their risks."
Bruner believes that M&A should aim to create "true economic value," not just an incremental change in earnings per share (EPS). Bruner shows several examples of good deals that weren't accretive to EPS, such as IBM's
Nonetheless, some firms will push the envelope. Bad deals tend to happen in hot markets -- exactly where M&A appears to be right now. Over the next few years, there's a good bet that Bruner will have a couple more examples to add to his disaster list.
For related Foolishness:
- Media M&A: Partying Like It Was 2000
- Goldman: Into the Private Equity Stratosphere
- Golden Days for Goldman Sachs