Table of Contents Cover Title Page Introduction: The Risks and Opportunities of Doing a Deal NOTES CHAPTER 1: Why Bad Deals Happen A PRACTICAL APPROACH TO MERGERS AND ACQUISITIONS A CASE STUDY: RBS BUYS ABN AMRO MOTIVATIONS FOR DEALS A CASE STUDY: BANK OF AMERICA BUYS MERRILL LYNCH USING M&A TO DIVERT ATTENTION USING M&A TO GROW QUICKLY USING M&A TO SOLVE PROBLEMS HORIZONTAL AND VERTICAL MERGERS CONCLUSION NOTES CHAPTER 2: Buy or Build? A CASE STUDY: COMMERCE BANK A CASE STUDY: METRO BANK IS THERE ANYTHING IN BETWEEN? A CASE STUDY: DOW CORNING JOINT VENTURE A CASE STUDY: BUCKNELL INDUSTRIES CONCLUSION NOTES CHAPTER 3: Let the Buyer Beware WACHOVIA BUYS GOLDEN WEST AOL TIME WARNER MERGER WELLS FARGO BUYS WACHOVIA NOTES CHAPTER 4: The Opportunities and Risks of Expanding Your Business Globally TELENOR INDIA JOINT VENTURE TELENOR'S GLOBAL STRATEGY OVER TIME TELENOR EXPANDS INTO EASTERN EUROPE TELENOR PUSHES INTO ASIA THE TELENOR UNITECH JOINT VENTURE POSTMORTEM ON THE TELENOR UNITECH JOINT VENTURE LESSONS LEARNED TRENDS FOR THE FUTURE NOTES CHAPTER 5: Culture Is Critical A CASE STUDY FROM CHINA A CASE STUDY FROM JAPAN A SUMMARY OF OTHER BEST PRACTICES CHAPTER 6: Who Is Behind the Curtain? A CASE STUDY: LLOYDS HBOS A CASE STUDY: KRAFT BUYS CADBURY NOTES CHAPTER 7: Is It Too Late to Back Out? CASE STUDY ONE: BANK OF AMERICA PURCHASES MERRILL LYNCH CASE STUDY TWO: AT&T/T MOBILE CASE STUDY THREE: VERIZON BIDS FOR YAHOO CONCLUSION NOTES CHAPTER 8: How to Negotiate a Better Deal TEN BEST PRACTICES FOR EFFECTIVE NEGOTIATION CHAPTER 9: Making It Right BACKGROUND BE STRATEGIC MAINTAIN A RATIONAL ORGANIZATIONAL STRUCTURE STRUCTURE THE DEAL PROPERLY RECOGNIZE THE IMPORTANCE OF BRAND EFFICIENT DISTRIBUTION BEWARE OF CULTURE HAVE FINANCING LINED UP IN ADVANCE ESTABLISH AN APPROPRIATE M&A APPROVAL PROCESS INTEGRATE EARLY AND OFTEN CLEAR LEGAL AND REGULATORY PROCESS DON'T OVERPAY CONTINUOUS LEARNING A CASE STUDY: J.P MORGAN BUYS BEAR STEARNS CONCLUSION NOTES CHAPTER 10: Where Do We Go from Here? HOW FAST WE FORGET NOTES APPENDIX A: Trinity International/American Public Media Group NOTE APPENDIX B: Bank of America/Merrill NOTE About the Author Index End User License Agreement Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more For a list of available titles, visit our Web site at www.WileyFinance.com Material Adverse Change Lessons from Failed M&As ROBERT V STEFANOWSKI Copyright © 2018 by Robert V Stefanowski All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation Y ou should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762–2974, outside the United States at (317) 572–3993, or fax (317) 572– 4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data Names: Stefanowski, Robert, author Title: Material adverse change : lessons from failed M&As / by Robert V Stefanowski Description: Hoboken, New Jersey : John Wiley & Sons, Inc., [2018] | Includes index | Identifiers: LCCN 2017049041 (print) | LCCN 2017050859 (ebook) | ISBN 9781118222430 (pdf) | ISBN 9781118236383 (epub) | ISBN 9781118066898 (cloth) Subjects: LCSH: Consolidation and merger of corporations—United States Classification: LCC HD2746.55.U5 (ebook) | LCC HD2746.55.U5 S74 2018 (print) | DDC 658.1/620973—dc23 LC record available at https://lccn.loc.gov/2017049041 Cover Design: Wiley Cover Image: © peeterv/Getty Images For my mom, I miss you Introduction: The Risks and Opportunities of Doing a Deal Did any board member suggest that Bank of America should go ahead and invoke the MAC? No, not at that point…most people thought the severity of the reaction meant that they (i.e., U.S Federal Reserve and Treasury) firmly believed it was systemic risk —Ken Lewis, former chairman and CEO of Bank of America during U.S Attorney Deposition on Executive Compensation February 26, 20091 On October 8, 2002, Fred Goodwin, then CEO of Royal Bank of Scotland (RBS), outbid Bob Diamond, the head of Barclays Capital, to conclude his long quest to purchase ABN AMRO Bank for $96.5 billion Goodwin had built RBS from a small regional bank to a global powerhouse that was one of the largest banks in the world For his efforts, Goodwin was voted “Businessman of the Year” by Forbes magazine in 2002 He had earned the name “Fred the Shred” for his ability to ruthlessly take out people while reducing the cost of operating the companies he acquired Forbes proclaimed, “In a tough era for lenders, Fred Goodwin has built his bank into the world's fifth largest with a market cap of $70 billion.”2 Goodwin had a pragmatic approach to acquisitions, leveraging his instinct and experience running businesses to buy and transform companies Five years later, this jewel of an acquisition did not live up to expectations Credit losses in the ABN loan book, key employee departures, an inability to integrate the complex ABN AMRO computer systems, and an overall downturn in the economy drove RBS's stock price from a high of over £7.00 per share ($4.2 per share) to a low of less than 50 pence per share (31 cents per share) Material adverse events in the company proved that a purchase price of close to $100 billion was more than ABN AMRO was truly worth With the continued deterioration of the economy and the rising of a Great Recession, the issues surrounding this deal became more and more apparent Indeed, by the time of the depths of the recession in December 2007, for the same $100 billion that RBS used to buy ABN AMRO, an investor could have purchased 100 percent of Goldman Sachs, RBS, General Motors, Citibank, Deutsche Bank, and Merrill Lynch all together.3 What Can You Get for $100 Billion? General Motors $ billion Deutsche Bank $25 billion Goldman Sachs $36 billion Citibank $ 8 billion RBS $12 billion Total $82 billion Despite his best intentions and a desire to enhance the value to RBS shareholders by purchasing an exciting new business, this unfortunate acquisition cost Fred Goodwin his job Thousands of shareholders who had invested in RBS stock lost all of their value Goodwin was summarily dismissed from RBS, villainized by the press, and received threats on his personal safety He was forced to leave his home and retreat to a friend's Majorcan Villa to avoid the press and an angry public It was not until May 2016, over eight years after the fateful acquisition, that Goodwin was finally cleared of all criminal charges relative to the RBS deal This book is not intended to cast blame on CEOs, investment bankers, or other advisors unfortunate enough to be involved in failed transactions I have found these constituencies to be hardworking and largely interested in the success of the companies they work for Rather, it is to probe why deals don't work and the risks implicit in major transactions such as RBS paying close to $100 billion to purchase ABN AMRO Through a review of past failures and the reasons behind these failures, we can better anticipate the potential pitfalls of future deals and avoid the disruption to a company and destruction of wealth to shareholders when deals don't work In the mergers and acquisitions (M&A) profession, due diligence is defined as the work accountants, lawyers, human resources, risk departments, senior executives, and other key personnel of the buyer complete prior to agreeing to purchase a company Take the analogy of a newly married couple who wish to buy their first house; we will call them the “Wilsons.” The Wilsons typically look through the real estate listings, talk to a realtor, visit several properties, and narrow the search down to one house At this point they will a more detailed review of the property, looking for areas that may be damaged and in need of repair or replacement, or areas that the seller should correct before he sells the house The Wilsons will likely hire outside experts such as an inspector to examine the house, an appraiser to verify the home's market value, a lawyer to help negotiate terms, and so forth In essence, the Wilsons will want to be more than comfortable with the home before they commit money to purchase it Similarly, in successful acquisitions, a corporate or financial buyer of a company will analyze the financial position of the target, meet with key management, review the operations, update the company's financial projections, and investigate legal liabilities, all to determine if the company is worth the price being paid Deal teams will hire consultants, lawyers, and accountants to help them with this process Once complete, the buyer will sign a contract to purchase the company at a specified price over a certain time period In larger M&A deals, there is normally a time period between actual agreement to purchase (signing) and the completion of the transaction (closing) This time is used to satisfy contingencies such as government approval for the deal to happen, shareholder consents, employee union agreements, or agreements from other parties who need to consent to the transaction Once all of these have been satisfied, the buyer and seller will move toward final closing of the transaction It can take months to close a deal after contracts have been signed This time between signing and closing is one of the most ... more For a list of available titles, visit our Web site at www.WileyFinance.com Material Adverse Change Lessons from Failed M&As ROBERT V STEFANOWSKI Copyright © 2018 by Robert V Stefanowski All... Congress Cataloging-in-Publication Data Names: Stefanowski, Robert, author Title: Material adverse change : lessons from failed M&As / by Robert V Stefanowski Description: Hoboken, New Jersey : John... referred to as a material adverse change (MAC) has been crafted by attorneys to protect the buyer during this period between signing and closing An MAC allows the buyer to walk away from the deal