Mergers and Acquisitions and the Value of Control

We study how value affects the bargaining game in the market for corporate control. We focus on business groups and propose a novel approach in which we can directly quantify the difference in value between what the buyer gets and what the seller gives. If a firm helps to retain control of a group through a network of cross-ownership, another firm buying such firm does not necessarily acquire control of the group. This implies that if another firm buys such firm, the seller loses control of the group but the buyer does not necessarily acquire it. Therefore, the value of the firm for the buyer is lower than it is for the seller. In these conditions it is not likely that the deal will ever go though. We argue and show that the difference in the value for the buyer and that for the seller is always strongly negatively related to the target market and offer premia as well as to the probability of completion of the deal. The relative bargaining power of bidder and target also affects the probability of the deal being initiated: a greater bargaining power makes it more likely to bid for another one and less likely to be the target itself of a deal. Our results provide a new way of thinking about the value of control in the M&A bargaining game and more in general about the value of firms, showing a dimension that is not directly related to cash flows and that is linked to the pure value of control within groups.