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.16.Care must be taken not only to negotiate solid contract representations, but also to analyze what entity is standing behind these representations.Buyers should demand acreditworthy party that can guarantee the promises made.17.Material adverse change clauses allow the buyer to walk away from a transaction if certain unusual andunforeseen events occur.The hot deal market in theearly 2000s has put pressure on buyers’ ability to exercise these rights.18.Sarbanes-Oxley, enacted into law in 2002, puts heavy emphasis on an adequate internal control system attargets purchased.The due diligence team must takeextra care to ensure that adequate controls are in place at the target before the deal is closed.A material weak-ness in internal controls can have a dramatic effect on the target company and the buyer after the closing.19.The Financial Accounting Standards Board in the United States tightened up the accounting surrounding M&A by issuing FAS 141 and FAS 142 in 2001.Under the new rules, goodwill is recorded as the differencebetween the amount paid and the carrying amount ofthe target at the time of purchase.Goodwill remains on the balance sheet but must be reviewed at least annually to determine that the fair market value of the target continues to exceed the carrying amount of theassets plus goodwill.If it does not, goodwill isimpaired and a writedown must be taken.20.In reality, a buyer is purchasing the rights to the cash flows that are expected to be produced by the sellerpostclose.However, because of difficulty in calculating152CHAPTER 9this data, most deals are based on the accounting book value of the property being purchased.The GAAP balance sheet provides an independent and standardizedrecord of value that facilitates these negotiations.NOTES1.PricewaterhouseCoopers, The Implication of Sarbanes Oxley on M&A, Corporate Development Roundtable, Spring 2004.2.Eddy Hsiao,“In with the New: Accounting for Goodwill and Other Intangible Assets under FAS 142,” SRC Insights, second quarter 2002, pp.2–12.C H A P T E R 10The Importanceof IntegrationIn Chapter 4 we described due diligence as the most critical factor in deciding whether to pursue a transaction.Integration is the most vital, and often overlooked, step in making a deal work once it has closed.The common mistake that most acquirers make is considering integration as a separate, distinct part of the deal process.However, to be successful, the integration effort must start on the first day and continue throughout the deal process.The integration team can be successful only if it can get a complete understanding of the target’s operations, knowing its management team well and having a feel for all issues that arose during the due diligence process.This chapter will outline the major elements of a successful integration and point out common pitfalls that acquirers fall into.See Exhibit 10-1 for a list of common reasons that acquisitions fail.1.WHY IS INTEGRATION IMPORTANT?Businesspeople rarely spoke of integration 25 years ago.Not until the many very public M&A failures in the mid-1980s did management start to realize that there were determinants of a deal’s success other than simply paying the right price under the right terms.Many deals are predicated on the amount of revenue and cost synergies that can be generated when two businesses are put together.However, it is difficult, if not impossible, to achieve any of these synergies without a sound plan for addressing the integration process.153Copyright © 2007 by The McGraw-Hill Companies, Inc.Click here for terms of use.154CHAPTER 10E X H I B I T 10-1Why Acquisitions FailThe amount of integration needed depends on the type of deal and the type of buyer.“Financial buyers” are nonstrategic buyers such as private equity funds and hedge funds.In many cases, these firms buy companies to enter new markets or industries.The deals are not dependent on achieving synergies with existing businesses; as a result, integration periods can be shorter.Alternatively, “strategic buyers” are normally already in the target’s industry.They are attracted to the target because it gives them new markets, areas, or products that can be combined with their existing portfolio.The integration period is normally longer in these transactions to ensure that the synergies that were forecast are actually achieved.2.IMPACT OF CURRENT INDUSTRYTRENDS ON INTEGRATIONA confluence of forces have come together to make integration much more imperative for purchasers than it was even just a few years ago.1.More scrutiny of deals.The proliferation of information over the Internet, more educated investors, and greater regulatory oversight are all directing more attention to deals and highlighting mistakes made by management.2.More conservative projections.Buyers have learned from their past mistakes and are starting to take a more critical look at the often overly optimistic forecasts of sellers.They realize that the integration process can make the difference between achieving these forecasts and not achieving them.Too many deals have failed because a detailed plan toachieve results postclose was never developed.The Importance of Integration1553.Fear of making mistakes.High-visibility M&A failures such as AOL/Time Warner and those at Conseco and TycoCorporation have cost CEOs and top management teamstheir jobs.This has started to make acquirers more conscious of the potential pitfalls for their companies and their own careers from pursuing bad deals.4.Difficulty in achieving synergies.In most cases, the postmerger entity never achieves the revenue and cost synergies forecast in the purchase accounting model [ Pobierz całość w formacie PDF ]