The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions

CHAPTER 1

Mergers, Acquisitions, and Corporate Restructuring: An Overview

H. KENT BAKER

University Professor of Finance and Kogod Research Professor, American University

HALIL KIYMAZ

Bank of America Chair and Professor of Finance, Rollins College

INTRODUCTION

An important question in finance is whether managerial actions create market value or shareholder wealth. Neoclassical economic theory assumes that corporate management acts to maximize shareholder wealth. Studies involving mergers and acquisitions (M&As) directly examine this issue. Such studies, which are relevant to shareholders, managers, regulators, and other stakeholders, show considerable variation in their results. Thus, debate continues about both the short-term and long-term performance of M&As. As markets become more integrated, M&As continue to be a hot topic in both academia and the business world. Given the frequency of these activities, businesspeople need to understand why and how such activities take place.

Although sometimes used interchangeably or synonymously, the terms merger and acquisition mean slightly different things. A merger is a combination of two or more companies in which one company survives and the merged company goes out of existence. Unlike a merger, a consolidation is a business combination in which two or more companies join to form an entirely new firm. With an acquisition, one company takes controlling ownership interest in another firm, typically buying the selected assets or shares ...