Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VIII. Topics in Corporate

Finance

25. Mergers and
    Acquisitions

© The McGraw−Hill^869

Companies, 2002

3.Conglomerate acquisition.When the bidder and the target firm are not related to
each other, the merger is called a conglomerate acquisition. The acquisition of a
food products firm by a computer firm would be considered a conglomerate
acquisition.

A Note on Takeovers

Takeoveris a general and imprecise term referring to the transfer of control of a firm from
one group of shareholders to another. A takeover thus occurs whenever one group takes
control from another.^2 This can occur through any one of three means: acquisitions, proxy
contests, and going-private transactions. Thus, takeovers encompass a broader set of ac-
tivities than just acquisitions. These activities can be depicted as follows:

Merger or consolidation

Acquisition Acquisition of stock

Takeovers Proxy contest Acquisition of assets

Going private

As we have mentioned before, a takeover achieved by acquisition will occur by
merger, tender offer, or purchase of assets. In mergers and tender offers, the bidder buys
the voting common stock of the target firm.
Takeovers can also occur with proxy contests. Proxy contestsoccur when a group
attempts to gain controlling seats on the board of directors by voting in new directors. A
proxy is the right to cast someone else’s votes. In a proxy contest, proxies are solicited
by an unhappy group of shareholders from the rest of the shareholders.
In going-private transactions, all of the equity shares of a public firm are purchased
by a small group of investors. Usually, the group includes members of incumbent man-
agement and some outside investors. Such transactions have come to be known generi-
cally as leveraged buyouts (LBOs)because a large percentage of the money needed to
buy up the stock is usually borrowed. Such transactions are also termed management
buyouts (MBOs)when existing management is heavily involved. The shares of the firm
are delisted from stock exchanges and can no longer be purchased in the open market.
LBOs have become increasingly common, and some recent ones have been quite
large. For example, the largest cash acquisition in history (and possibly the single largest
private transaction ever of any kind) was the 1989 LBO of RJR Nabisco, the tobacco
and food products giant. The acquisition price in that buyout was an astonishing $30.6
billion. In that LBO, as with most of the large ones, much of the financing came from
junk bond sales (see Chapter 7 for a discussion of junk bonds).

CONCEPT QUESTIONS

25.1a What is a merger? How does a merger differ from other acquisition forms?

25.1bWhat is a takeover?

CHAPTER 25 Mergers and Acquisitions 845

proxy contest

An attempt to gain

control of a firm by

soliciting a sufficient

number of stockholder

votes to replace existing

management.

going-private

transactions

Transactions in which all

publicly owned stock in

a firm is replaced with

complete equity

ownership by a private

group.

leveraged buyouts

(LBOs)

Going-private

transactions in which a

large percentage of the

money used to buy the

stock is borrowed.

Oftentimes, incumbent

management is involved.

(^2) Having controlmay be defined as having a majority vote on the board of directors.