Material Adverse Change

Boost M&A outcomes with less risk by learning from mistakes of the past

Material Adverse Change will help you close more successful mergers and acquisitions by analyzing the common root causes of deal failures from before the Great Recession to today. The time between signing and closing a deal is a particularly risky period where the buyer has committed to purchase the company, but the seller continues to operate it while waiting for regulatory approval or funding to close out the deal. A Material Adverse Change clause allows the buyer to back out of the transaction if certain adverse events occur during this period. By designing this safety net into the contract, you’re free to take the time to examine records, meet with employees, and fully understand the legal issues at hand. If the target loses value during that time, in certain cases, you’re free to walk away. This book explores the full power of the Material Adverse Change clause, and today’s M&A in general. You’ll dig into the real causes of M&A failure, and discover the traits and practices that lead to poor results as you learn how to avoid these common mistakes and drive more successful deals. Recent case studies highlight common mistakes made—and propagated—by otherwise intelligent people, so you can identify and eliminate these practices within your own organization.

A large acquisition is already a delicate balancing act. Why complicate it with the exponential risk by not doing your homework? This book shows you how to apply best practices to increase your chances of successful deals and avoid potentially career ending mistakes.

• Explore the true root causes of M&A failures of the past
• Analyze the personality traits that drive suboptimal outcomes
• Implement new practices to avoid mistakes and close successful deals

• Learn why common-sense errors are repeated over and over again

The M&A market has grown to become a major factor in the global economy, yet many buyers do less investigation than consumers making everyday purchases. Material Adverse Change shows you how to slash risk and improve your chances of completing better deals.

Introduction: The Risks and Opportunities of Doing a Deal xi

Chapter 1 Why Bad Deals Happen 1

A Practical Approach to Mergers and Acquisitions 3

A Case Study: RBS Buys ABN AMRO 4

Motivations for Deals 5

A Case Study: Bank of America Buys Merrill Lynch 5

Using M&A to Divert Attention 12

Using M&A to Grow Quickly 12

Using M&A to Solve Problems 13

Horizontal and Vertical Mergers 14

Conclusion 16

Chapter 2 Buy or Build? 19

A Case Study: Commerce Bank 21

A Case Study: Metro Bank 26

Is There Anything in Between? 29

A Case Study: Dow Corning Joint Venture 31

A Case Study: Bucknell Industries 32

Conclusion 34

Chapter 3 Let the Buyer Beware 37

Wachovia Buys Golden West 40

AOL Time Warner Merger 46

Wells Fargo Buys Wachovia 48

Chapter 4 The Opportunities and Risks of Expanding Your Business Globally 51

Telenor India Joint Venture 54

Telenor’s Global Strategy over Time 56

Telenor Expands into Eastern Europe 57

Telenor Pushes into Asia 59

The Telenor Unitech Joint Venture 61

Postmortem on the Telenor Unitech Joint Venture 63

Lessons Learned 64

Trends for the Future 67

Chapter 5 Culture Is Critical 69

A Case Study from China 71

A Case Study from Japan 74

A Summary of Other Best Practices 76

Chapter 6 Who Is Behind the Curtain? 85

A Case Study: Lloyds HBOS 87

A Case Study: Kraft Buys Cadbury 96

Chapter 7 Is It Too Late to Back Out? 103

Case Study One: Bank of America Purchases Merrill Lynch 106

Case Study Two: AT&T/T Mobile 110

Case Study Three: Verizon Bids for Yahoo 115

Conclusion 116

Chapter 8 How to Negotiate a Better Deal 119

Ten Best Practices for Effective Negotiation 124

Chapter 9 Making It Right 135

Background 137

Be Strategic 138

Maintain a Rational Organizational Structure 140

Structure the Deal Properly 141

Recognize the Importance of Brand 142

Efficient Distribution 143

Beware of Culture 144

Have Financing Lined Up in Advance 145

Establish an Appropriate M&A Approval Process 145

Integrate Early and Often 146

Clear Legal and Regulatory Process 146

Don’t Overpay 147

Continuous Learning 148

A Case Study: J.P. Morgan Buys Bear Stearns 148

Conclusion 152

Chapter 10 Where Do We Go from Here? 155

How Fast We Forget 157

Appendix A

Trinity International/American Public Media Group: Material Adverse Change Clause 169

Appendix B

Bank of America/Merrill: Material Adverse Change Clause 171

About the Author 175

Index 177

ROBERT V. STEFANOWSKI is an independent consultant on business strategy, leadership, finance, and M&A throughout North America, Europe, and Asia. A current member of the McKinsey & Company Mergers & Acquisitions Advisory Board, he's also been President and CEO of numerous business units at General Electric Company and CFO of UBS Investment Bank. A Visiting Professor of Management Practice at Oxford University, he is the author of Making M&A Deals Happen.

Mergers and acquisitions (M&A) are big business on a global scale. In cases when M&As happen with industry giants—like Bank of America and Merrill Lynch, Royal Bank of Scotland and ABN AMRO, and AOL and Time Warner—there's a lot at stake throughout every step of a complex process. Even with hundreds of billions of dollars on the line, it is surprising how little time many buyers spend investigating the massive commitment they are making for their companies, their shareholders and their own careers. Material Adverse Change takes you behind the headlines of some of the most highly visible M&As in recent history in order to highlight where these deals fell apart and the lessons learned to prevent failures from happening again.

The collection of failed, landmark M&A deals examined inside is designed to address the most common pitfalls of these negotiations, and it's shocking to learn many of these failures occurred because of such commonsense errors as a failure to consider cultural differences, poor negotiating strategies or simply not enough investigation by the buyer before they committed billions of dollars to the deal. So, it's odd that these problems are so widespread at the highest levels of the industry. The influence of the global economy has changed M&A in significant ways, and will continue to do so, which is why the old playbooks are obsolete and today's executives, attorneys, and everyone else involved in M&A deals need an updated approach to the M&A strategy.

THE SECRET TO REDUCING RISK AND OPTIMIZING VALUE IN M&A DEALS

Material Adverse Change improves your merger and acquisition (M&A) skillset by showcasing the prevalent causes of failed deals through real world examinations into an illuminating collection of the biggest failures around the world.

Written by an industry influencer with more than two decades of experience at the highest levels of practice and academia, this game-changing guide takes you inside the real causes of M&A breakdowns so you can master the soft skills and techniques driving today's most successful deals. This single authoritative resource shows you:

• The ins and outs of the material adverse change (MAC) clause and why this underused part of the contract is critical to reducing risk and arriving at better outcomes.
• A behind-the-scenes look at how forward-thinking organizations are positively growing from an increasing trend in cross-border M&A deals.
• Exactly what you need to do to drive M&A excellence, including how to be more sensitive to the impact of different cultures on deals, and suggestions on how to improve your negotiating skills to drive better outcomes.

The due diligence for your next M&A deal starts with Material Adverse Change. This step-by-step guide shows you how to:

• Optimize the time between signing and closing in a continuing era of MAC clauses becoming more restrictive and harder to enforce
• Strategically anticipate the impact that culture, due diligence and the regulatory framework play in your M&A negotiations in order to both save the deal and avoid paying costly fees
• Take negotiations beyond the legal contract to find pragmatic solutions to problems encountered that can prevent good deals from falling apart

A signed contract doesn't make a done deal, and with Material Adverse Change, you can fine tune your negotiations to ensure positive outcomes.