Introduction to Corporate Finance

21: Mergers, Acquisitions and Corporate Control

KEY TERMS

acquisition, 718

asset sale, 745

board of directors, 752

bust-up, 745

conglomerate merger, 719

consolidation, 741

corporate control, 718

corporate governance, 751

divestiture, 745

dual-class recapitalisation, 743

economies of scale, 727

economies of scope, 728

employee stock ownership plan
(ESOP), 743

enterprise value, 735

goodwill, 746

horizontal merger, 718

hostile takeover, 742

hubris hypothesis of corporate

takeovers, 732

leveraged recapitalisation, 743

management buyout (MBO), 743

merger, 718

merger of equals, 742

mixed offerings, 739

public-to-private transactions,

742

pure share exchange merger, 738

resource complementarities, 728

reverse LBO, 743

reverse triangle merger, 741

spin-off, 745

split-off, 745

split-up, 745

statutory merger, 741

subsidiary merger, 741

synergy, 727

takeover, 718

takeover defences, 744

tender offer, 741

vertical merger, 718

QUESTIONS

Q21-1 What is meant by a change in corporate
control? List and describe the various
ways in which a change of corporate
control may occur.

Q21-2 What is a tender offer, and how can it be
used as a mechanism to orchestrate a
merger?

Q21-3 Elaborate on the significance of the
mode of payment for the shareholders of
the target company and their continued
interest in the surviving company.
Specifically, which form of payment
retains the shareholders of the target
company as shareholders in the surviving
company? Which payment form receives
preferential tax treatment?

Q21-4 What is the signalling theory of
mergers? What is the relationship
between signalling and the mode of
payment used in acquisitions? Is there
a relationship between the mode of
payment used in acquisitions and the
level of insider shareholdings of acquiring
companies?

Q21-5 Empirically, what are the wealth effects
of corporate control activities? Who
wins and who loses in corporate control
contests? What explanations or theories

are offered for the differences in returns

of acquiring companies’ ordinary equity?

Why are higher takeover premiums

paid in cash transactions than in share

transactions? How do other security

holders fare in takeovers?

Q21-6 Describe several different motives for

mergers. Are each of these motives likely

to increase bidder value?

Q21-7 Define the types of synergy that may

result from mergers. What are the sources

of these synergies?

Q21-8 Explain how agency problems may lead

to non-value-maximising motives for

mergers. Discuss the various academic

theories offered as the rationale for

motives induced by the agency problem.

Q21-9 Why does the precedent transactions

valuation method typically yield higher

valuations?

Q21-10 Would a large technology company and

a large conglomerate (that operates in

many industries) be good comparable

companies for a multiples-based

valuation? Why or why not?

Q21-11 Describe the relationship between

conglomerate mergers and portfolio