Acquisition of Stock

A second way to acquire another firm is to purchase the firm's voting stock in exchange for cash, shares of stock, or other securities. This may start as a private offer from the management of one firm to another. At some point the offer is taken directly to the selling firm's stockholders. This can be accomplished by use of a tender offer. A tender offer is a public offer to buy shares of a target firm. It is made by one firm directly to the shareholders of another firm.

xMergers between corporations require compliance with state laws. In virtually all states the shareholders of each corporation must give their assent.

Ross-Westerfield-Jaffe: VIII. Special Topics

Corporate Finance, Sixth

Edition

30. Mergers and Acquisitions

© The McGraw-Hill Companies, 2002

Part VIII Special Topics

The offer is communicated to the target firm's shareholders by public announcements such as newspaper advertisements. Sometimes a general mailing is used in a tender offer. However, a general mailing is very difficult because it requires the names and addresses of the stockholders of record, which are not usually available.

The following are factors involved in choosing between an acquisition of stock and a merger:

1. In an acquisition of stock, no shareholder meetings must be held and no vote is required. If the shareholders of the target firm do not like the offer, they are not required to accept it and they will not tender their shares.

2. In an acquisition of stock, the bidding firm can deal directly with the shareholders of a target firm by using a tender offer. The target firm's management and board of directors can be bypassed.

3. Acquisition of stock is often unfriendly. It is used in an effort to circumvent the target firm's management, which is usually actively resisting acquisition. Resistance by the target firm's management often makes the cost of acquisition by stock higher than the cost by merger.

4. Frequently a minority of shareholders will hold out in a tender offer, and thus the target firm cannot be completely absorbed.

5. Complete absorption of one firm by another requires a merger. Many acquisitions of stock end with a formal merger later.

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