M&A, Pyramidal Structure And Internal Capital Market In A Business Group

In recent years, a lot of business groups have been appeared in our securitiesmarket, and they have controlled more listed companies through mergers andacquisitions. This paper regards mergers and acquisitions as the point of contact andstudies the relations among M&A, control right structure and the internal capital marketin the affiliated enterprises.Firstly, the paper gives a systematic review of main research achievements onmerger and acquisition, control right structure and internal capital market, and analyzesthe prospect of these three research fields in theory. Then, taking China Resources(Holdings) Co.Ltd as a practical case, the paper begins with China Resources (Holdings)Co.Ltd enlarging industry fields by M&A and studies the control right structure in thegroup, the reason of using pyramid structure and the operating behavior of internalcapital market formed by pyramid structure. Lastly, the paper combines those threeaspects and summarizes the relations among M&A, Pyramid Structure and internalcapital allocation behavior to provide directions for following empirical study.The case study of this paper shows that:(1) In order to realize collectivizedoperation and diversified development, many enterprises choose M&A to expand theirown scale and mostly adopt pyramid structure to form internal capital market afterM&A;(2)Pyramid structure has obvious structural characteristics including number oflayers, Separation between control rights and cash-flow Rights, and quality of layers;(3)Ultimate Owners of business group directly control high quality enterprises by largerequity and indirectly control low quality enterprise by smaller equity to share theinterest realized by high quality enterprises as more as possible;(4)Internal capitalallocation is the result of controlling owner’s allocation. Internal capital market formedin the business group can relieve pressure of financing and cause the phenomenon thatControlling Shareholders and listed company mutually occupy funds. The threecharacteristics of pyramid structure affect listed company’s internal capital allocation tosome extent.Through the study of China Resources (Holdings) Co.Ltd’s growing course ofgrouping and diversification, control right structure and internal capital market, we findthat M&A, pyramid structure and internal capital market are closely related in currentcapital market environment. Because of the limitation of case study method in the paper, many problems have not been further studied. With more and more enterprises choosingmerger and acquisition as the way of diversified development, these phenomena will beobtained more attention and this study also will be perfected and enriched.