Principles of Corporate Finance_ 12th Edition

814 Part Ten Mergers, Corporate Control, and Governance

bre44380_ch31_813-842.indd 814 10/09/15 09:33 PM

◗ FIGURE 31.1

The number of mergers

in the United States,

1962–2013.

Source: Mergerstat,

http://www.mergerstat.com.

196219651968197119741977198019831986198919921995199820012004200720102013

Number of deals

0

2000

4000

6000

8000

10000

12000

14000

We proceed as follows.

•    Motives. Sources of value added.



•    Dubious motives. Don’t be tempted.



•    Benefits and costs. It’s important to estimate them

consistently.

•    Mechanics. Legal, tax, and accounting issues.



•    Takeover battles and tactics. We look at merger tactics and

show some of the economic forces driving merger activity.

•    Mergers and the economy. How can we explain merger

waves? Who gains and who loses as a result of mergers?

Mergers are partly about economies from combining two

firms, but they are also about who gets to run the company.

Pick a merger, and you’ll almost always find that one firm is

the protagonist and the other is the target. The top manage-

ment of the target firm usually departs after the merger.

Financial economists now view mergers as part of a

broader market for corporate control. The activity in this

market goes far beyond ordinary mergers. It includes lever-

aged buyouts (LBOs), spin-offs and divestitures, and also

nationalizations and privatizations where the government

acquires or sells a business. These are the subject of the

next chapter.

Mergers can be horizontal, vertical, or conglomerate. A horizontal merger is one that takes

place between two firms in the same line of business. All of the mergers listed in Table 31.1

are horizontal.

A vertical merger involves companies at different stages of production. The buyer

expands back toward the source of raw materials or forward in the direction of the ultimate

consumer. Google’s acquisition of Motorola Mobility in 2011 is an example. The acquisition

gave Google control over a major user of its Android operating system for smartphones.

A conglomerate merger involves companies in unrelated lines of businesses. For exam-

ple, the Indian Tata Group is a huge, widely diversified company. In recent years, its acquisi-

tions have been as diverse as Eight O’Clock Coffee, Corus Steel, Jaguar Land Rover, the Ritz

Carlton (Boston), and British Salt. No U.S. company is as diversified as Tata, but in the 1960s

and 1970s it was common in the United States for unrelated businesses to merge. Much of the

31-1 Sensible Motives for Mergers

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