Introduction to Corporate Finance

what companies do

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MERGERS, ACQUISITIONS AND

CORPORATE CONTROL

21-1 Merger waves and international acquisition activity

21-2 Why do companies make acquisitions?

21-3 Do mergers create value?

21-4 Merger and acquisition transaction details

21-5 Accounting treatment of mergers and acquisitions

21-6 Regulation of mergers and acquisitions

21-7 Corporate governance

THE DEAL THAT MIGHT HAVE BEEN – BHP BILLITON’S BID FOR RIO TINTO

COLLAPSES

Had the deal been successfully completed,

Australia’s BHP Billiton Ltd’s $140-billion hostile

takeover bid for fellow mining company, Britain’s

Rio Tinto, launched in November 2007, would have

been the third-largest takeover in history. Instead,

the bid’s failure and withdrawal at the end of 2008

resulted in the largest failed takeover attempt

ever, and left the shareholders of both companies

feeling bruised. The merger seemed to make sense

when launched at the peak of the mining industry’s

global business cycle. But by 2008 it had fallen

victim to plunging share and commodity prices,

worldwide economic contraction, opposition from

powerful national and business interests intent on

scuttling a merger between the world’s first- and

third-largest mining companies, and the desire of

Rio Tinto’s board and management team to remain

independent.

When BHP Billiton approached Rio Tinto’s board

of directors on 7 November 2007 with an offer to

exchange three BHP shares for each Rio Tinto share,

this represented a 14% premium over Rio Tinto’s

share price the day before. Rio’s board immediately

rejected the offer as inadequate. Undeterred, BHP

followed up with an identical tender offer targeted

directly at Rio Tinto’s shareholders. It announced that

it had lined up a high-powered set of investment

and commercial banks to advise BHP on its takeover

strategy and to provide financing for a proposed

$30-billion buyback of shares in the combined

company, to be executed if and when the merger

was completed. BHP also described how it would

integrate the two companies, and predicted that it

would be able to generate synergies – cost savings,

increased sales and more productive investment

spending – of $3.7 billion per year.

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