Merger A merger refers to the absorption of one firm by

another. The acquiring firm retains its name and identity, and acquires all the assets and liabilities of the acquired firm. After the merger, the acquired firm ceases to exist as a separate entity.

A consolidation is the same as a merger except that an entirely new firm is created. In a consolidation, both the acquiring firm and the acquired firm terminate their previous legal existence.

An advantage of using a merger to acquire a firm is that it is legally straightforward and does not cost as much as other forms of acquisition.

A disadvantage is that a merger must be approved by a vote of the shareholders of each firm.

Types of Mergers

Acquisition of Stock

A firm can acquire another firm by purchasing target firm’s voting stock in exchange for cash, shares of stock, or other securities.

A tender offer is a public offer to buy shares made by one firm directly to the shareholders of another firm. If the shareholders choose to accept the offer,

they tender their shares by exchanging them for cash or securities.

A tender offer is frequently contingent on the bidder’s obtaining some percentage of the total voting shares.

If not enough shares are tendered, then the offer might be withdrawn or reformulated.

ACQUISITION OF ASSETS

One firm can acquire another by buying all of its assets.

A formal vote of the shareholders of the selling firm is required.

Advantage of this approach: it avoids the potential problem of having minority shareholders that may occur in an acquisition of stock.

Disadvantage of this approach: it involves a costly legal process of transferring title.

Goal of Acquisitions and Mergers

• Increase size - easy!• Increase market value - much harder!

Mergers vs Acquisition

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