Principles of Corporate Finance_ 12th Edition

838 Part Ten Mergers, Corporate Control, and Governance

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Here are three general works on mergers:

R. Bruner, Applied Mergers and Acquisitions (Hoboken, NJ: John Wiley & Sons, 2004).

J. F. Weston, M. L. Mitchell, and J. H. Mulherin, Takeovers, Restructuring and Corporate Governance,

4th ed. (Upper Saddle River, NJ: Prentice-Hall 2000).

S. Betton, B. E. Eckbo, and K. S. Thorburn, “Corporate Takeovers,” in B. E. Eckbo (ed.), Handbook of

Empirical Corporate Finance (Amsterdam: Elsevier/North-Holland, 2007), chapter 15.

Historical information about mergers is reviewed in:

G. Andrade, M. Mitchell, and E. Stafford, “New Evidence and Perspectives on Mergers,” Journal of

Economic Perspectives 15 (Spring 2001), pp. 103–120.

S. J. Everett, “The Cross-Border Mergers and Acquisitions Wave of the Late 1990s,” in R. E. Baldwin

and L. A. Winters (eds.), Challenges to Globalization (Chicago: University of Chicago Press, 2004).

J. Harford, “What Drives Merger Waves?” Journal of Financial Economics 77 (September 2005),

pp. 529–560.

B. Holmstrom and S. N. Kaplan, “Corporate Governance and Merger Activity in the U.S.: Making

Sense of the 1980s and 1990s,” Journal of Economic Perspectives 15 (Spring 2001), pp. 121–144.

Finally, here are some informative case studies:

S. N. Kaplan (ed.), Mergers and Productivity (Chicago: University of Chicago Press, 2000). This is a

collection of case studies.

R. Bruner, “An Analysis of Value Destruction and Recovery in the Alliance and Proposed Merger of

Volvo and Renault,” Journal of Financial Economics 51 (1999), pp. 125–166.

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FURTHER

READING

When payment is in the form of shares, the cost naturally depends on what those shares are worth

after the merger is complete. If the merger is a success, B’s stockholders will share the merger gains.

The mechanics of buying a firm are much more complex than those of buying a machine. First,

you have to make sure that the purchase does not fall afoul of the antitrust laws. Second, you have

a choice of procedures: You can merge all the assets and liabilities of the seller into those of your

own company; you can buy the stock of the seller rather than the company itself; or you can buy

the individual assets of the seller. Third, you have to worry about the tax status of the merger.

Mergers are often amicably negotiated between the management and directors of the two com-

panies; but if the seller is reluctant, the would-be buyer can decide to make a tender offer. We

sketched some of the offensive and defensive tactics used in takeover battles. We also observed that

when the target firm loses, its shareholders typically win: selling shareholders earn large abnormal

returns, while the bidding firm’s shareholders roughly break even. The typical merger appears to

generate positive net benefits for investors, but competition among bidders, plus active defense by

target management, pushes most of the gains toward the selling shareholders.

Mergers come and go in waves. Merger activity thrives in periods of economic expansion and

buoyant stock prices. Mergers are most frequent in industries that are coping with change, for

example, changes in technology or regulation. The wave of mergers in banking and telecoms, for

instance, can be traced to deregulation of these industries in the 1990s.

Select problems are available in McGraw-Hill’s Connect.

Please see the preface for more information.

BASIC

1. Merger types Are the following hypothetical mergers horizontal, vertical, or conglomerate?
   a. IBM acquires Dell Computer.
   b. Dell Computer acquires Walmart.

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PROBLEM

SETS