Introduction to Corporate Finance

21: Mergers, Acquisitions and Corporate Control

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1 We thank Anil Shivdasani, Ben Ee, Amanda Gonzales, Ray Groth and Ged Johnson for their help and insights.

describe the most important forms

of corporate control transactions and

distinguish between transactions that

integrate two businesses and those that

split up an existing single business

discuss the differences between

horizontal, vertical and conglomerate

mergers

explain the different methods of payment

acquirers use to execute mergers and

acquisitions, and discuss how returns to

target and bidder company shareholders

differ between cash and share mergers

contrast the motivations of managers who

implement value-maximising mergers and

acquisitions to those who execute non-

value-maximising combinations

describe the most important regulations

that govern corporate control activities,

and explain why international corporate

control regulations have become much

more important recently.

LO21.1

LO21.2

LO21.3

LO21.4

LO21.5

As its name implies, corporate control refers to

the monitoring, supervision and direction of a

corporation or other business organisation. The

most common change in corporate control results

from the combination of two or more business

entities into a single organisation, as happens in

a merger or acquisition. A change in corporate

control also occurs with the consolidation of voting

power within a small group of investors, as found

in going-private transactions such as leveraged

buyouts (LBOs) and management buyouts (MBOs).

Transfer of ownership of a business unit with a

divestiture and the creation of a new corporation

through a spin-off are other ways to bring about

such a change.

Unfortunately for BHP, several large mineral-
consuming nations and businesses concluded that
the proposed synergies would actually result from
price increases for iron ore and other key products,
and they challenged the proposed merger on
antitrust grounds. These opponents pointed out that
a merged BHP–Rio Tinto would control almost 40%
of the world’s supply of iron ore, and would leave the
industry highly concentrated with just two companies
controlling almost 80% of market share. The Chinese
state-owned company Chinalco went so far as to
pay $14.1 billion in February 2008 to buy Rio Tinto’s
UK-listed subsidiary, to ensure that Chinese interests
would be represented in a combined BHP–Rio Tinto.
The European Union’s Competition Commission also
opened a formal investigation of the merger and
signalled its plans to oppose the deal in court.

Meanwhile, the market capitalisations of both

BHP and Rio Tinto fell by more than a third during

2008, as the global financial crisis pummelled share

prices and slowing growth sharply cut worldwide

demand for minerals. In December 2008, BHP was

forced to withdraw its offer in order to focus on

cutting costs in its own operations. The takeover

saga, the bid’s ultimate collapse and the recession

left Rio Tinto so badly weakened that the company

was forced to cut its 2009 capital investment

spending plans from $9 billion to $4 billion, and to

search for ways of trimming its $37 billion in debt

• which in February 2009 actually exceeded its $36
  billion share market capitalisation. The year 2008
  saw a record number and value of failed takeover
  bids, and the BHP–Rio Tinto deal that got away
  was the largest of them all.^1