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The Corporate Control Market

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The corporate control market is a market in which investor/management teams buy and sell corporations and compete for control of a company. Narrowly defined, the corporate control market is a corporate takeover market in which mergers, acquisitions, hostile takeovers, leveraged buyouts (LBOs), and management buyouts (MBOs) take place. A broader definition includes a variety of other organizational restructuring events that are related to attempts by one team or another to retain or get control of a company. These events include divestitures, spin-offs, and initial public offerings (IPOs).

Consider LeisurePark Enterprises. LeisurePark has two lines of business: It manufactures canoes, and it owns and operates a chain of motels. Over the years, the canoe business has been quite profitable and has generated considerable cash inflows. In contrast, the motel chain has consistently lost money and has needed cash injections from the canoe business in order to stay afloat. However, even though the motels themselves are money losers, the land on which they are located is quite valuable. In fact, a number of national food franchises have offered to buy the properties from LeisurePark. But LeisurePark managers have consistently declined to sell the motels.

Now, imagine how investors—especially small public investors—who own stock in LeisurePark feel about this situation. Not only are these investors not receiving the cash dividends that could be paid out of the canoe operations, but, even worse, management is reinvesting the cash in the money-losing motel chain. The result is a lousy stock price. Why not sell the motels, distribute the cash to the public shareholders, and institute cash dividend payments now that the cash flow from the canoe operations is no longer needed to cover the motel losses? It seems pretty simple, right? Well, not if LeisurePark management refuses to sell the motels because it thinks that the motel chain will become profitable in the future or because it believes that it can start its own fast food chain from scratch on the motel properties. So, what alternatives are left for the public shareholders?
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Document Type: Research Article

Publication date: February 25, 2003

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