ONLINE CHAPTERSThe forces effecting changes in corporate
control and the resulting impact on the business
community present some of the most interesting
and hotly contested debates in the field of finance.
For example, the corporate control contest for RJR
Nabisco captivated corporate America in late 1988,
spawned a book and a movie about the takeover,^2
and remains a source of debate for academicsand politicians concerned about the social benefit
of corporate control activities. We address the
causes and consequences of changes in corporate
control in this chapter, as well as provide real-
world examples of the merger/acquisition process
and the technical aspects a corporate manager
must consider before making decisions regarding
corporate control changes.In this chapter, we study corporate control events, which are related to the monitoring, supervision and
direction of a business organisation. The most common change in corporate control is the combination of
two or more business entities into a single organisation, as happens in mergers and acquisitions (M&A),
which are the main focus of this chapter. 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. The chapter concludes with a brief look at corporate governance; that is, the laws, practices and
institutions that determine how – and in whose interests – companies are operated.
Before examining mergers and acquisitions in detail, we start by defining some basic terms. A takeover
is any transaction in which the control of one entity is taken over by another. A takeover can be a friendly
merger negotiated between the boards of directors of two independent corporations, or it can be an
aggressive and unwanted offer by one company to buy another. An acquisition is the purchase of resources
by a business enterprise. These resources may be new assets purchased from the producer, assets (such
as a plant or a machine) currently owned by another company, or another company that is acquired in its
entirety (commonly known as a merger).
The term merger applies to a transaction in which two or more business organisations combine into
a single entity. Most often, the term merger is reserved for a transaction in which one corporation takes
over another upon the approval of both companies’ boards of directors and shareholders after terms are
negotiated in a definitive merger agreement. The company making the acquisition is often called the acquirer
or bidder, and the company being acquired is the target. A vertical merger combines two companies with
a current or potential buyer–seller relationship. In July 2010, Google announced plans to acquire ITA
Software, a company that produces the software behind many online travel sites. This is an example of an
upstream vertical merger, because Google purchased a company that provides a service that is necessary
before consumers can use travel sites to book flights (sites that they may find through Google’s search
engine). The very same month, First Solar, a manufacturer of thin film solar modules, acquired NextLight
Renewable Power, a company involved in the construction of large-scale solar power projects. Essentially,
NextLight was a potential customer for First Solar, so that acquisition is an example of a downstream vertical
merger. In contrast, a horizontal merger combines two companies in the same industry, such as the 2010corporate control
The monitoring, supervision
and direction of a corporation
or other business organisation
takeover
A transaction in which the
control of one entity is taken
over by another
acquisition
The purchase of resources,
assets or another company
merger
A transaction in which two or
more business organisations
combine into a single entity
vertical merger
Companies with current
or potential buyer–seller
relationships combine to
create a more integrated
company
horizontal merger
A combination of competitors
within the same industry
2 Both the book and film were entitled Barbarians at the Gate.