Why do some mergers fail miserably while others prosper? Is there a common denominator for the...

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Why do some mergers fail miserably while others prosper? Is there a common denominator for the failures? What role do CEOs play in the success/failure equation? These are three of the most important research questions in the field of academic study on mergers and acquisitions. Choose one well known example of merger failure and analyse: i) The extent of the failure using financial results and share price analysis; ii) The reasons for the failure, including where appropriate actions both before and after the acquisition; and iii) The role, if any, that the CEO played in bringing about the failure.

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Task 1 “The private equity world is in its golden era right now …the stars are aligned.” -Henry Kravis, Banking Conference, May 2007 That provocative quote from the head of Kohlberg, Kravis & Roberts, one of the world’s largest private equity firms, smacks of hubris. Yet, given the astonishing growth of private equity funds in recent years, Mr. Kravis’ zeal is perhaps justified. Private equity has been around for a long time and has undergone booms before, from the leveraged buyouts (LBOs) of the 1980s to the dot.com venture capital frenzy in the late 1990s. But nothing has matched the remarkable growth of the private equity market in the past five years, with some $1.2 trillion under management globally at the end of 2006. The fastest growing sector of private equity has been buyout funds, which comprised $710 billion of that total, up two and a half times from 2000. [Note: Above is taken from Phillips, Hager and North Investment Management Ltd. (2008), available at [http://www.rbcgam.com/_assets-custom/pdf/private-equity-overview.pdf]. The document was accessed on 11th January 2013.] Required: Citing relevant literature, discuss the key drivers in the expansion of private equity firms since 2000. Explain why might some private equity groups consider going public? Discuss how is this done. (1150 words) Task 2 Why do some mergers fail miserably while others prosper? Is there a common denominator for the failures? What role do CEOs play in the success/failure equation? These are three of the most important research questions in the field of academic study on mergers and acquisitions. Choose one well known example of merger failure and analyse: The extent of the failure using financial results and share price analysis; The reasons for the failure, including where appropriate actions both before and after the acquisition; and The role, if any, that the CEO played in bringing about the failure. 1500 words for task 2 For task 2: please provide broad...

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David · Accepted Answer

The Surge of Private Equity Firms
When equity capital is invested in private companies, it is referred to as private equity (PE).  
These deals are generally structured such that an investor buys stake in private company, with 
the expectation of increase in the value of that stake.
The private equity companies function by taking advantage of the valuation dynamics in the 
market. They initially target companies which are undervalued in the public markets or have 
been underperforming in comparison with their peers. These companies usually invest with a 
three to five year horizon and therefore are said to look for short-term gains. This strategy 
allows private equity companies to engage in root-and-branch, long-term corporate 
restructuring. With the addition of debt in the balance sheet of an acquired company, the 
managers are forced to meet up strict financial targets. And the returns are boosted as a result 
of extra leverage.
For the period between 1992 and 2000, the private equity industry experienced a significant 
boom. 1n 1992, it started to increase in size, and raised approximately $20.8 billion of 
investor commitments. This valued reached $305.7 billion in 2000. The rate of growth simply 
outpaced every other asset class’ growth. When the PE industry entered the 2003-2007 phase, 
it saw a five year resurgence that eventually resulted in the completion of 13 of the 15 largest 
leveraged buyout (LBO) transactions.
The boom in the private equity sector was triggered by various factors that acted in tandem. 
These include a lowering of interest rates, relative easing out of lending standards and 
favourable regulatory changes for publicly traded companies, for instance, the Sarbanes 
Oxley legislation, Investor Protection Act and the Public Company Accounting Reform 
which were also a product of the corporate scandals such as that of Enron.  Besides, large 
inflows of institutional capital from investors such as endowments and pension funds, as well 
as from the petrodollar investors caused the surge in private equity.
As leverage is a key component of private equity value proposition, lowering the level of 
interest rates will lead to opportunities for arbitrage. This is what the PE firms use.  They take 
advantage of the strong corporate profits and balance sheets. Debt funding is cheaper, and 
additionally, equity financing became even more expensive after the tech bust. Pressure 
related to improving performance not only in profit generation, but also in corporate 
governance as a whole. Sarbanes-Oxley has been lamented because of its focus on short-term 
performance rather than long term value creation. In addition, the managers do not favour the 
extra cost incurred and the bureaucracy associated with its compliance. During this time, 
many large companies started seeing ownership of private equity as potentially more 
attractive than remaining public.
Though there was a tremendous boom in the private equity sector which made it grow at a 
phenomenal rate, the overall contribution of this sector in the debt market was fairly low. As 
per the McKinsey estimates, for the year 2006,

Why do some mergers fail miserably while others prosper? Is there a common denominator for the failures? What role do CEOs play in the success/failure equation? These are three of the most important...

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