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Christian Montgomery Johns Hopkins University- Carey Business School Business Communication- 120.601(86) 5.8.2012

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Table of Contents I. Executive SummaryPage 3 II. Historical AnalysisPage 4 III. Common Pitfalls of M&A...Page 5 IV. Success for Our Customers.Page 7 V. Success for Our Employees..Page 7 VI. Success in Buyer M&A; a new school of thought..Page 8 VII. Validation of new approach through past failure..Page 9 VIII. Conclusion...Page 10 IX. References...Page 11

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Mergers & Acquisitions; what factors in to our potential success or failure?

Executive Summary: Every year there are thousands of mergers and acquisitions in the United States and thousands more from all over the world. They involve companies merging or acquiring in similar industries and they also involve two companies coming together with no related business activities. Some involve purchasing the controlling interest in the form of stock, others in the form of equity. Some involve retaining key personnel from the acquired company and others involve installing a new management team. Each deal is unique in the intricacies that lead up to the point that the deal is signed and unique in the varying outcomes after the deal closes and they are unique for both the seller and the buyer. The point of this is to illustrate that the world of mergers & acquisitions, or M&A, is extremely vast with each deal having its own uniqueness and confidential information that leads each party to come to their mutual agreement to move forward. Since we have established that the world of M&A is extremely complicated and confidential, we can also now assume that there is not one success formula to ensure sustained and long-term profits after the deal closes because of too many differentiating variables. In fact, despite their popularity, most mergers and acquisitions are financial failures and produce undesirable consequences for the people and companies involved. (Marks, Mirvis, 2011) The goal here is not to provide the reader with an analysis of one or two specific examples of M&A success or failure. Instead, the goal is to use the knowledge and analyses of many scholarly sources to come to a blended conclusion of trends that parallel examples of M&A success, microeconomic

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variables that seem to lead to an increase in M&A activity and then combine some ideas for best practices and recommendations to follow. Historical Analysis: When analyzing general trends of mergers and acquisitions, it is tough to separate out and dissect any one trend or a mathematical equation or function that leads to success. Because the arena is so segmented and each industry has their own deal intricacies that are inclusive and vital to the future success of their combined entity, one has to look in a more general way to find common themes amongst successful M&A deals. As a frame of reference, we have singled out two industries that seem to have a high volume of M&A activity in their arena every year; healthcare and technology. Specific to the healthcare industry is a rapid and seemingly ever changing regulatory environment. The healthcare sector is poised to undergo radical changes due to new regulatory regimes, political, and economic pressures. To withstand these powerful forces and operate in this highly competitive environment, entities have recognized a need to achieve greater economies of scale. As senior executives contemplate various growth scenarios, one avenue that continues to be of significant interest is mergers and acquisitions. Not since the mid- 1990s has the healthcare sector experienced such a significant number of consolidations. (Healthcare Financial Management, 2011) Along with the every changing regulatory environment, which are squeezing profits and forcing healthcare executives to analyze their revenue streams and economies of scale, accounting changes have also had a profound effect on these companies strategic maneuvers. In April 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 164, Not-for-Profit Entities: Mergers and Acquisitions (ASU 2010-17), which fundamentally changed the accounting not only for mergers

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and acquisitions but also for goodwill, intangible assets, and noncontrolling interests (NCIs). (Healthcare Financial Management, 2011) Before this accounting change, mergers or combinations in this sector were defined by if consideration was present. Meaning, if a hospital purchased a long-term care facility for $1MM, consideration was exchanged but if two hospitals simply merged to form a larger hospital, there was no consideration present. The accounting of no consideration was handled by the pooling-of-interest method which means all assets, liabilities and shareholders equity would be combined and going forward, assumed to be one. Today, the new GAAP requires these types of mergers to be classified as acquisitions and require the acquirer to determine the fair market value of all assets and liabilities of the acquired. This can be a very expensive and time consuming process for assets such as buildings, land, patents, etc. Applying the acquisition method will present unique challenges to not-for-prof its, and due to the many valuation issues associated with the guidance, it may require skill sets not currently possessed by internal resources. (Healthcare Financial Management, 2011) The technology sector is also a very active and vibrant M&A arena. As the restrictions on cross (industry) ownership and service provision were removed by deregulation and technological progress, the technology, media and telecommunications (TMT) industry embarked on the most fundamental change in its history and a massive wave of mergers and acquisitions followed. (Jope, Schiereck, & Zeidler, 2010) Similar to the healthcare industry, the deregulation of the technology sector and the economic developments lead to a hot bed of M&A activity. Common Pitfalls of M&A: For the use of this report, we will focus on typical ways deals fail for the buyer since that is the position our company is in. According to a survey that we conducted, we have found the normal catalysts for a destruction of value after a deal closes to be broken down into the what,

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where, who, how and the why of M&A failure. The what centers on the fact that M&A is not a losers game but also is not necessarily a winners game. Returns to buyers have a large standard deviation around the average indicating that this industry is like we have already stated, highly segmented and highly individualized. This is why it is important for our management team to be extremely diligent in our analysis and work in a worst-case scenario to forecast our economic gains before moving forward. The where describes the already present notion that hitting a grand slam may not be plausible so we must remain centered on returning the average to our investors. Our research shows a few typical ways buyers are more likely to fail in M&A; the buyer enters a fundamentally unprofitable industry or refuses to exit from one, the economic benefits of the deal are improbable or not marginal to the deal, the buyer does not structure the deal to the individual situation, and the buyer has poor systems of governance and incentives. The who is meant to describe the profiles of failure and success. We state that the buyer is more likely to fail when they acquire out of weakness and when the acquisition market is slow or cooled. (Bruner, 2005) This value destruction might be justified through necessary strategic positioning, however, since rival companies are also documented to suffer negative abnormal returns around announcement of such transactions. (Jope et al. 2010). The How of M&A failure may be one of the most robust and complicated components to our analysis. Business complexity makes it tough for managers to understand what is going on with the merger, those managers have limited or no flexibility, flaws in the operational team hamper responses to customer issues and the merger identified, structured and managed in a top-down manner.

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We have articulated some common problems or pitfalls of typical M&A failure but it is also important to talk about the people and resources it can affect and how we can develop alternative solutions to remain successful. Success for Our Customers: When a brand that a customer has been loyal to for many years ceases to exist, there are sometimes serious feelings involved which can lead to negative customer retention for the acquiring company. Customers may believe their personal freedom of choice has been restricted and consequently react negatively to the merged brand. When informed about an acquirerdominant M&A, customers of the acquired brand will develop greater intentions to switch. Efficient and strategic competitors will try and capitalize on these customers reduced loyalty by marketing to the acquiring companys weakness. That is why it is crucial that customers need to perceive a sense of choice in their future business with this new corporate entity (Dahln, Thorbjrnsen, 2011). Success for Our Employees: There are four areas of concern for employees as their company goes through a merger or acquisition; loss of identity (where do I fit in the new organization?), lack of information, obsession of survival (maintain their status, prestige and power), and lost talent (employees voluntary exit from the company) (Maden, 2011). All of these areas have a psychological effect on the employees which is why it is important to target that area of the mind through a merger preview where management lets their employees know whats going on and ensures them of their future job status. It is also important to combine the two organizations into integrated teams early so relationships can begin to be built before legal day one (Marks, Mirvis, 2011). Maden continues on to suggest that the HR decisions made following a merger or acquisition may go as

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far as to challenge individuals job motivation and career paths (Maden, 2011). But it is generally agreed upon that the sharing of information early and often with your employees is vital to the future success of the organization after the deal closes. Success in Buyer M&A; a new school of thought: Shareholders of target firms benefit the most in business combination transactions based upon the high control premiums they receive (Francoeur, Rakoto, & Walid, 2012). For our purposes, we want to know what happens to the buyer. Historically, acquiring or purchasing firms shareholders get a flat or even negative return, particularly for stock-financed M&A deals (Francoeur et al. 2012). Research needs to focus on what the purchasing firm can control to try and mitigate what history tells us inevitably going to be a loss situation. This starts with breaking the tradition of how past M&A deals were identified and structured and who was in control of them. We need to adapt a team oriented approach to identify and lead the organizations merger and acquisition department. Many companies are now focusing on this method to ensure they have clear aspirations, an acquisition strategy, uncovering more deal opportunities by relying on outside sources (ie- investment banks), performing due diligence, having an integration strategy and maximizing growth potential (Parry, 2011). Research done for this article suggests similar variations of this same team-based, strategic mission style. Previous to this, most M&A deals were structured over a business lunch or on the golf course. One CEO would agree upon a purchase price with the other CEO before talking through any due diligence because the focus was on getting the deal done. Most of the research indicates that the more ego that is removed from a potential deal, the higher the odds of success. It is crucial to involve not only the legal and

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financial people but also the human resources, the IT, and the marketing people (Marks, Mirvis, 2011). Validation of new approach through past failure: Bruner examined ten M&A deals ranging from 1968 (merger of the Pennsylvania and New York Central Railroads) to January 2002 (acquisition program of Tyco International) that crossed industries, decades, management styles and countries. We feel as though this type of research supports what we have been describing throughout this paper which is M&A is vast, complex and highly local. By local we mean a deal done in New York in one industry can be completely different in California, even in the same industry. Our company needs to be aware of this as we attempt to grow outside of our current footprint. We are not concerned with the lack of recent deal research missing from here because most of the principles Bruner describes transcend years. Bruner explains, Every one of the 10 deals from hell featured major turbulence, including from technology (AT&T/NCR), capital markets (AOL/Time Warner, Dynegy/Enron, Revco), industry overcapacity (Renault/Volvo), rising costs (Sony/Columbia), competitor entry (Quacker/Snapple), or government action (Tyco, Penn Central) (Bruner, 2005). This speaks to the How M&A deal fail in regards to business is not as usual and there may be trouble in one or multiple parts of the acquired company management is not aware of. Mergers and acquisitions fail because of the convergence of forces, a perfect storm of poor choices, poor execution, cognitive biases, and bad external conditions (Bruner, 2005). This covers the Why and begs the question, Why would we focus on this type of strategy? As we have seen, M&A is not a winners game and it is not a losers game. It is a complicated algorithm of elements that are within managements control and outside of managements control. Our research suggest that as a Company we focus on the process of picking M&A opportunities

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rather than on perceived outcomes as our belief is that how you do business has a big influence on the results. Bruner states we should expect:
Ethical behavior of corporations and their advisors. Where there is no trust, corporations forfeit their support from the public. Systems of governance that are loyal to the interests of stakeholders and careful in the sense of keen attention to the details of M&A proposals. Deal design with enough slack in their transactions to allow for adequate variance from business as usual. Systems of merger integration that employ best practices in planning, information and implementation. Teams of executives to work together in ways that permit dissent and foster high reliability. Suspension of hubris and other cognitive biases at the door of each M&A transaction. (Bruner, 2005)

These six points will not ensure we will not stumble in our M&A pursuits but the adoption of practices like these will lower our odds of failure. Managing the odds, rather than eliminating them, is what we should aim to do. (Bruner, 2005) Conclusion: Integrating two firms either through a mutual merger or a friendly or hostile acquisition involves many moving and complicated parts. It is important for us to focus on a new way of managing our M&A activity. We need to form a task force across finance, human resources, capital projects, infrastructure, community outreach and marketing who are knowledgeable experts in their divisions. We need to stay true to our roots and only analyze deals that support our business model and footprint and not our egos. In going through a merger or acquisition, tt is vital to communicate often with our work force to keep them feeling informed and engaged and it is vital to communicate to the customer base about the transition and what may or may not be changing. The world of M&A is filled with pitfalls that lead to potential failure. But if we can change our M&A culture, as we have outlined here, we will be better armed to lead this company through the M&A battlefield while maintaining customer satisfaction, employee morale and great economic payoffs.

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REFERENCES: Francoeur, C., Rakoto, P., & Walid, B. A. (2012). Ownership structure, earnings management and acquiring firm post-merger market performance. International Journal of Managerial Finance, 8(2), 100-119. Dahln, M., & Thorbjrnsen, H. (2011). Customer reactions to acquirer-dominant mergers and acquisitions. International Journal of Research in Marketing, 28(4), 332. Hsieh, J., Lyandres, E., & Zhdanov, A. (2011). A theory of merger-driven IPOs. Journal of Financial and Quantitative Analysis, 46(5), 1367. Maden, C. (2011). Dark side of mergers & acquisitions: Organizational interventions and survival strategies. Journal of American Academy of Business, Cambridge, 17(1), 188-195. Marks, M. L., & Mirvis, P. H. (2011). Merge ahead: A research agenda to increase merger and acquisition success. Journal of Business and Psychology, 26(2), 161-168. Parry, R. (2011). A better way to merge companies? Business Strategy Review, 22(4), 46-49. Ismail, A., & Krause, A. (2010). Determinants of the method of payment in mergers and acquisitions. Quarterly Review of Economics and Finance, 50(4), 471. Mergers and Acquisitions: What Has Changed. (2011). hfm (Healthcare Financial Management), 65(1), 105-108. Jope, F., Schiereck, D., & Zeidler, F. (2010). Value generation of mergers and acquisitions in the technology, media. Journal Of Telecommunications Management, 2(4), 369-386. Bruner, R. F. (2005). Deals from hell: M & A lessons that rise above the ashes. Hoboken, N.J.: Wiley.