Material Adverse Change Lessons from Failed M&As
, by Stefanowski, Robert V.
- ISBN: 9781118066898 | 1118066898
- Cover: Hardcover
- Copyright: 4/24/2018
In the 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 target. In multi-billion dollar 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 obtain government approval for the deal to happen, shareholder consents, employee union agreement or agreement from other parties who need to consent to the transaction. During this time, the target continues to function prior to completion of the merger and is subject to the external risks of the business, the economy and other acts beyond its control. Therefore, a buyer is at risk as they have agreed to purchase the company at signing, but the existing management team continues to run the company on a daily basis, hopefully well, for the buyer. A material adverse change (Mac) clause protects the buyer of the company as it enables the buyer to walk away from the deal if the target does not continue to run the company effectively or incurs material changes that make the company less valuable. The combination of due diligence and a material adverse change provision sounds perfect. In theory, the buyer gets to spend as much time as they want reviewing the corporate records, meeting with key employees, understanding the legal, environmental and risk issues, and gaining an overall comfort with the target operations before agreeing to the purchase. Further, the Mac clause allows the buyer to walk away if material unusual events occur after they have agreed to buy in concept, but before they make final payment. However, most CEOs of major corporations don't exercise these rights as buyers, in many cases doing less investigation than any normal consumer making an everyday purchase at a fraction of the cost. Time after time, well paid CEOs and management teams are willing to pay billions of dollars with less investigation than a consumer would complete prior to buying a $20,000 car. Whether it is Fred Goodwin agreeing to spend $100 billion to buy ABN Amro on limited due diligence or Ken Lewis agreeing to proceed with the $50 billion purchase of Merrill Lynch after discovering that the loan portfolio had lost billions of dollars, these events continue to occur regardless of the state of the global economy. This book seeks to answer some of these questions. What are the factors motivating CEOs to put their careers on the line to acquire? Why does this continue to happen despite highly publicized acquisition failures and the severe impact on the individuals involved? Why aren't successful companies satisfied with where they are, pursuing a logical and orderly method of organic growth to improve their company's performance? This book provides some guidance to help CEOs and their management team from making the same mistakes. Recent M&A case studies, such as BofA's purchase of Merrill Lynch or Kraft's purchase of Cadbury will be used to answer these questions and provide hard data as to why these errors that defy common sense continue to be committed by well established, successful, and highly intelligent business people.
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