The stages of mergers and acquisitions
The melodrama that consists of the off-again on-again acquisition of Guidant by Johnson & Johnson is a good illustration of the complications of deciding when a deal is done, short of the day when the corporate stationery gets replaced and the layoffs begin in earnest.
We try to be careful to warn that most announced deals are subject to all kinds of obstacles before they are final, but we have been fooled often enough. The business press can be very misleading on this subject, since a series of disclaimers, the ones contained in the press release, makes for a boring news story. We are always worried about when in the deal process we will start considering the implications of any merger or acquisition.
To get it clear in our mind, we've come up with a list of all the possible stages in a merger or acquisition, all of which can produce the headline "Company A to buy Company B."
1. Company A makes an unsolicited public bid for Company B.
This may be a hostile bid or simply an unexpected one. Usually, it is an attempt to build support among stockholders of Company B that will put pressure on its executives and board. In some cases, this results in no deal as the offer is too low or the board of Company B resists the buyout, or it just starts a bidding war.
2. Company B announces it plans to sell off a division.
The point here is to open the bidding and sometimes to make shareholders happy. In some cases, Company B overvalues the assets and no acceptable bid comes in. It leads to a spin-off or a sale to equity firms.
3. A deal is rumored between Company A and Company B.
This may be a trial balloon, loose lips, or a signal by Company B that it wants a rescuer to step forward. Frankly, most companies are frequently talking to other companies about such deals on some level.
4. The executives of Company A and Company B announce a deal.
This is the first real step, and often the first big headline. It does have an immediate impact on stocks. But in many cases the boards, especially that of Company B, haven't yet approved. It's also an announcement for rival bidders what the opening bid is.
5. The board of Company A and Company B accepts the deal.
While this almost always a formality, there are exceptions. The board may get feedback from major stockholders that forces them to quash the deal. That's especially true because of the secretiveness of the negotiations. In some cases, it may be a vote of no confidence in the CEO.
6. A bidding war breaks out.
Most of the deals to this point are still conditional. There's often room for a better bid, and there are often companies willing to offer more. That may force a counteroffer from Company A or they may drop out of the bidding. Also, not all dollars or euros bid are equal, especially when, as often happens, they are in the form of shares or involve payments over time and have tax angles involved.
7. The stockholders aprove or disapprove of the deal.
While few stockholder votes go against the wishes of the board, it is possible. Usually stockholders who feel cheated stop the deal before this stage. That's what happened at VNU. The stockholders announced they would vote against the acquisition of IMS Health, the CEO was forced to resign.
8. Company B is found, on inspection, not to be what it was cracked up to be.
Perhaps an audit finds that the books are cooked or there is some unrevealed liability. Perhaps (as in the Guidant case) there are significant product-based legal issues. Company A wants to get out of the deal or to reduce significantly what it is paying.
9. The deal fails the antitrust gantlet.
In many cases, there are several antitrust processes to pass, in the US, Europe, and perhaps in China. In addition, there may be national laws to pass involving sale of certain businesses to foreigners. It is possible that the whole deal can fail one of these reviews. More likely these days, some elements of the acquired company may have to be sold or spun off. In some cases, that negates the reason for the deal in the first place, and the whole thing may be called off.
So the process has all kinds of points where a breakdown can occur. It's remarkable how many deals do go through with no more than minor problems. But it's understandable how many deals can get sidetracked after the public announcement has been made
