Merger Fundamentals
Merger Fundamentals
Firms sometimes use mergers to expand externally by acquiring control of another firm. The objective for a merger should be to improve the firm’s share value, a number of more immediate motivations such as diversification, tax considerations, and increasing owner liquidity frequently exist. Sometimes mergers are pursued to acquire specific assets owned by the target rather than by a desire to run the target as a going concern.
Mergers, Consolidations, and Holding Companies
• A merger occurs when two or more firms are combined and the resulting firm maintains the identity of one of the firms. Usually, the assets and liabilities of the smaller firm are merged into those of the larger firm.
• Consolidation involves the combination of two or more firms to form a completely new corporation. The new corporation normally absorbs the assets and liabilities of the companies from which it is formed.
• A holding company is a corporation that has voting control of one or more other corporations. Having control in large, widely held companies generally requires ownership of between 10% and 20% of the outstanding stock.
• Subsidiaries are the companies controlled by a holding company. Control of a subsidiary is typically obtained by purchasing a sufficient number of shares of its stock.
Acquiring versus Target Companies
• Acquiring company is the firm in a merger transaction that attempts to acquire another firm.
• Target Company is the firm that the acquiring company is pursuing.
Generally, the acquiring company identifies, evaluates, and negotiates with the management and/or shareholders of the target company. Occasionally, the management of a target company initiates its acquisition by seeking out potential acquirers.
Friendly versus Hostile Takeovers
Mergers can occur on either a friendly or a hostile basis. Typically, after identifying the target company, the acquirer initiates
Firms sometimes use mergers to expand externally by acquiring control of another firm. The objective for a merger should be to improve the firm’s share value, a number of more immediate motivations such as diversification, tax considerations, and increasing owner liquidity frequently exist. Sometimes mergers are pursued to acquire specific assets owned by the target rather than by a desire to run the target as a going concern.
Mergers, Consolidations, and Holding Companies
• A merger occurs when two or more firms are combined and the resulting firm maintains the identity of one of the firms. Usually, the assets and liabilities of the smaller firm are merged into those of the larger firm.
• Consolidation involves the combination of two or more firms to form a completely new corporation. The new corporation normally absorbs the assets and liabilities of the companies from which it is formed.
• A holding company is a corporation that has voting control of one or more other corporations. Having control in large, widely held companies generally requires ownership of between 10% and 20% of the outstanding stock.
• Subsidiaries are the companies controlled by a holding company. Control of a subsidiary is typically obtained by purchasing a sufficient number of shares of its stock.
Acquiring versus Target Companies
• Acquiring company is the firm in a merger transaction that attempts to acquire another firm.
• Target Company is the firm that the acquiring company is pursuing.
Generally, the acquiring company identifies, evaluates, and negotiates with the management and/or shareholders of the target company. Occasionally, the management of a target company initiates its acquisition by seeking out potential acquirers.
Friendly versus Hostile Takeovers
Mergers can occur on either a friendly or a hostile basis. Typically, after identifying the target company, the acquirer initiates