M&As and the Value of Control

The authors propose a novel approach to study the value of corporate control (VoC) based on M&As of firms across business groups. Business groups often use some central firms to retain the control of others. When a central firm becomes an M&A target, the buyer may end up over-valuing the VoC that the target company guarantees to the seller and may not give to the buyer. Based on a new dataset of worldwide ownership of private and publicly listed firms, the authors show that the buyer typically pays an offer premium related to the VoC of the seller. The buyer overpays even if it is not be able to replicate the same VoC of the seller within its group. Indeed, M&As involving a high VoC exhibit worse both short-term and long-term performance, suggesting that the buyer pays a price to buy out the control of the seller but fails to derive the same benefit from the target.