M&A Lessons thatRise Above the AshesM&A Lessons thatRise Above the AshesM&A Lessons thatRise Above the Ashes

Deals from Hell

ROBERT F. BRUNERForeword by Arthur Levitt Jr.

“Whether you are an investor or dealmaker, corporate executive or aspiring MBA looking for a career on Wall Street, you are sure to fi nd this book both troublesome and inspiring . . . it cannot be otherwise when you carefully examine a series of M&A ‘train wrecks’ through the same lens as Prof. Bruner, a creative teacher in the fi eld of M&A, who has been able to extract the hard, instructive lessons from these disasters.”

—From the Foreword by Arthur Levitt Jr., former chairman of the Securities and Exchange Commission

and author of Take On the Street: What Wall Street and Corporate America Don’t Want You to Know

“Deals from Hell is a fresh and interesting look at the M&A game written by Prof. Robert Bruner, a leading authority on the topic. He studies failures and from this unique perspective, teaches us the pitfalls to avoid as well as the positive actions for success. The case histories illuminated herein are worthy instruction for all CEOs and their top management team.”

—Tom Copeland, Managing Director of Corporate Finance, Monitor Group

“There is a very fi ne line between M&A heaven and hell—and it is no surprise that the devil is in the details. Contrary to conventional wisdom, mergers work, on average, as Bob Bruner documents—and the reasons why are often worthy of more careful study than what appears beneath the headlines of the popular press. Bruner drills down on disasters and successes like no one else—and leaves investors and M&A dealmakers with a truly balanced scorecard of important lessons to ponder.”

—Charles D. Ellis, author of Winning the Loser’s Game and Capital: The Story of Long-Term

Investment Excellence

“While the average return to M&A acquirers is a matter of some controversy, it is beyond question that many acquisitions work well and many work badly. This landmark book is the fi nest available for separating the likely successes from the likely failures.”

—Bruce C. N. Greenwald, Robert Heilbrunn Professor of Finance and Asset Management, Columbia

Business School, and coauthor of Value Investing: From Graham to Buffett and Beyond

ROBERT F. BRUNER is the Dean of the Darden Graduate School of Business Administration and Charles C. Abbott Professor of Business Administration at the University of Virginia. He is the author or coauthor of more than 400 case studies and notes, as well as the author of two other Wiley titles, Applied Mergers and Acquisitions and The Panic of 1907. Bruner has served as a consultant to over twenty corporations and the U.S. government, and prior to his academic career worked as a commercial banker and venture capitalist. He holds a BA from Yale University, and an MBA and DBA from Harvard University.

PRAISE FOR Deals from Hell Finance

Cover Design: Michael J. Freeland Cover Images: © Jupiterimages $16.95 USA / $19.95 CAN

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HELLD E A L S F R O M

HELL

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HELLD E A L S F R O M

HELLM&A Lessons That Rise Above the Ashes

Robert F. Bruner

John Wiley & Sons, Inc.

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Copyright © 2005 by Robert F. Bruner.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, 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

http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty:While the publisher and the 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.You

should consult with a professional where appropriate. Neither the publisher nor the 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 about our other products and services, please contact our

Customer Care Department within the United States at 800-762-2974, outside the

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Wiley also publishes its books in a variety of electronic formats. Some content that appears

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products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Bruner, Robert F.

Deals from hell : M & A lessons that rise above the ashes / Robert F. Bruner.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-471-39595-9 (cloth)

ISBN 978-0-470-45259-2 (paper)

1. Consolidation and merger of corporations. 2. Business failures. I. Title.

HG4028.M4B78 2005

658.1'62—dc22

2004029114

Printed in the United States of America.

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A writer doesn’t so much choose a story as a story chooses him. Iknow lots of stories, but for some reason only a few grab hold ofme. They catch me and worry me and stick with me and raisequestions . . .

—Robert Penn Warren

To my students:

May these stories grab hold of you, worry you,and continue to raise questions.

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Contents

Foreword by Arthur Levitt, Jr. ix

Acknowledgments xi

1. Introduction 1

I. The Foundations of M&A Failure

2. Where M&A Pays and Where It Strays:A Survey of Research 13

3. Profiling the Outlying M&A Deals 55

4. Real Disasters and M&A Failure 65

II. Case Studies of M&A Failure

5. February 1968: Merger of the Pennsylvania and New York Central Railroads 95

6. December 1986: The Leveraged Buyout of Revco Drug Stores 127

7. September 1989: The Acquisition of Columbia Pictures by Sony Corporation 148

8. September 1991: The Acquisition of NCR Corporation by AT&T Corporation 175

9. December 1993: Renault’s Proposed Merger with Volvo 200

10. December 1994: The Acquisition of Snapple by Quaker Oats 228

11. May 1999: Mattel’s Acquisition of The Learning Company 246

12. January 2001: Merger of AOL and Time Warner 265

13. December 2001: Dynegy’s Proposed Merger with Enron 292

14. January 2002: Acquisition Program of Tyco International 314

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III. Avoiding the Deal from Hell

15. Conclusions and Implications 341

16. Memo to the CEO:A Coda on Growth 363

References 368

About the Author 407

Index 409

v i i i C O N T E N T S

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Foreword

Students sometimes ask the most amazing and perplexing questions, andoftentimes their innocence and point-blank questioning in the class-room aren’t wasted and can prompt a very important reply. If posed to

the right professor, the answers can also prove equally delightful and insight-ful—particularly when a good professor has thought long and hard about thequestion for more than a dozen years. Such is the case with this book.

I am delighted to introduce you to Professor Robert Bruner of TheDarden School. His book with the Dilbertian or apocalyptic title (depend-ing on your point of view) Deals from Hell will serve great purpose inbringing more discipline and sharper thinking to the art and science ofM&A, and to financial markets.

Whether you are investor or dealmaker, corporate executive or aspiringMBA looking for a career on Wall Street, you are sure to find this book bothtroublesome and inspiring. Great instruction always is. It cannot be other-wise when you carefully examine a series of M&A “train wrecks” throughthe same lens as Professor Bruner, a creative teacher in the field of M&A,who has been able to extract the hard, instructive lessons from these disas-ters.That knowledge, in this book, comes through artful contrasting of fail-ures with other deals where greater discipline and care led to different results.

From my vantage point, this particular trip through M&A hell is veryreminiscent of what happened soon after the space shuttle Challenger and itscrew were destroyed as a result of a catastrophic explosion on January 28,1986. No one likes to remember that episode, but none of us can forget it.And it was only with great reluctance that the great scientist Richard Feyn-man accepted a key role as part of the NASA-appointed Rogers Commis-sion to investigate that particular disaster. Little did Feynman know at thetime that he would be the one to discover and eloquently explain the directcauses of this disaster, and how it might be avoided in the future.

In the case of Feynman, to show just what a risky business flying a

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space shuttle truly is, his estimate of the chance of failure was actuallycloser to 1 in 100, not the 1 in 100,000 calculation used by NASA offi-cials. He also learned that rubber used to seal the solid rocket boosterjoints using O-rings failed to expand when the temperature was at or be-low 32 degrees Fahrenheit (0°C), the exact temperature at the time of theChallenger liftoff. He simulated and explained this failure to the world bydropping a piece of O-ring material, squeezed with a C-clamp to simulatethe actual conditions of the shuttle, into a glass of ice water. As Feynmanexplained, because the O-rings cannot expand in 32-degree weather, thegas finds gaps in the joints, which led to the explosion of the booster andthe loss of the shuttle itself.

Feynman was always a fabulous communicator, and so is Bruner. Tofind out what causes M&A failure and success, he has dug deep with thepeople and sources who have built something that failed, and probed foranswers. He offers us conclusions (painful as they sometimes are) thatpromise greater success in the future, not failure.

As Bruner points out, great financial risk in M&A—as with space ex-ploration—is part of the cost of doing business. Either we can stop at po-tentially greater expense to society, or we can learn how to do it the rightway and bat a higher success percentage.

As this book demonstrates, bad deals have led to some titanic failuresfor shareholders. But success is always there for those who learn how tosucceed by understanding failure.There will always be huge winners andlosers when it comes to M&A—and knowledge combined with disciplinecan lead to superior results. From 1982 to 2003, in fact,Warren Buffett’sBerkshire Hathaway has acquired companies worth $45 billion, a fact thatmany investors don’t think about. Is he a great investor, or an even greaterM&A specialist? In September 2004, the firm’s share price was $86,650 fora 27 percent annual compound growth rate.

We simply need greater care and thinking when future M&A deals areon the launch pad.This will lead to even greater wealth for society and in-vestors. It is time we all read on, and let Professor Bruner lead by instruction.

ARTHUR LEVITT, JR.

Westport, ConnecticutFebruary 18, 2005

x F O R E W O R D

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Acknowledgments

A student’s question seeded the research that became this book.“What are the worst mergers?” struck me as superficial whenposed more than a dozen years ago. But the question would not

let go: It morphed from “what?” into “why?” and “how?” I came to con-clude that stories of failure in mergers and acquisitions (M&A) werehugely instructive.And interesting cases never ceased boiling to the surfaceto offer new lessons. Finally, watching the agony of these deals promptedme to bring these lessons to the public. I believe these stories will changethe way you think about M&A and help you to understand—and betteryet, to anticipate—such failures to come.

I owe a very great debt of thanks to colleagues, friends, assistants, andstudents who have contributed to the manuscript over time. Each chapteracknowledges research assistants and colleagues; among these I especiallyrecognize Anna Buchanan, Sean Carr, and Jessica Chan.Research co-authorscontributed to work that appears directly or in summary form here:Samuel Bodily, Kenneth Eades, and Robert Spekman. I have benefitedenormously from comments by Michael Schill, Don Chew, Saras Saras-vathy, and seminar participants at Virginia (Darden), Harvard, and Indianauniversities.Also, the staff at Darden gave helpful support—I especially rec-ognize Frank Wilmot, Stephen Smith (Darden’s nonpareil editor), SherryAlston, and my administrative assistant, Betty Sprouse.The patience, care,and dedication of these people are richly appreciated.This project wouldnot have been possible without the encouragement of Dean Robert S.Harris and the financial support of the University of Virginia DardenSchool Foundation, the Batten Institute, and Columbia Business School.

I must also acknowledge the support given by my editors at John Wi-ley & Sons: Bill Falloon, senior editor; Karen Ludke, editorial programassistant; Robin Factor, production manager; and Todd Tedesco, seniorproduction editor. Pamela Van Giessen, executive editor, Joan O’Neil,

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publisher, and Will Pesce, president, were decisive in my commitment toembark on this project.

Lewis O’Brien checked the manuscript, offered editorial advice,and ferreted out some elusive permissions to quote the material ofother authors.

Friends and mentors encouraged me at important moments in thedevelopment of this work. Mac and Elsie Thompson urged me into thisproject during an animated dinner conversation a decade ago. John H.McArthur and David W. Mullins, Jr. ignited my interest in M&A.

In terms of absolute sacrifice, none have contributed more than mywife, Barbara McTigue Bruner, and two sons, Jonathan and Alexander.Thisbook is significantly a product of their faith, hope, and charity. I will re-main, forever, in their loving debt.

All these acknowledgments notwithstanding, responsibility for the fi-nal product is mine, alone.

ROBERT F. BRUNER

Charlottesville,VirginiaOctober 31, 2004

x i i A C K N O W L E D G M E N T S

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1

Introduction

Merger” is the consolidation of two firms that creates a new entityin the eyes of the law.The French have a good word for it: fu-sion—conveying the emergence of a new structure out of two

old ones.An “acquisition” on the other hand, is simply a purchase.The dis-tinction is important to lawyers, accountants, and tax specialists, but less soin terms of its economic impact. Businesspeople use the terms inter-changeably.The acronym,“M&A,” stands for it all.

M&A enters and leaves the public mind with waves of activity, such asthose depicted in Figure 1.1.These waves roughly synchronize with eq-uity market conditions and thus carry with them the cachet of excess,hype, and passion that swirl in the booms. Over time, M&A activity radi-cally transforms industries, typically shrinking the number of players, in-flating the size of those who remain, and kindling anxieties about thepower of corporations in society. Every M&A boom has a bust, typicallyspangled with a few spectacular collapses of merged firms.These failuressignificantly shape the public mind, and especially business strategies andpublic policy.We should study M&A failure not merely as a form of en-tertainment, but as a foundation for sensible policies and practices in fu-ture M&A waves.

Failure pervades business, and most firms fail eventually.Venture capi-talists typically reject 90–95 percent of proposals they see. Up to 90 per-cent1 of new businesses fail not long after founding. Even maturebusinesses pass on: Of the 501 firms listed on the New York Stock Ex-change in 1925, only 13 percent existed in their independent corporate

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