Acquisition of Stock

A second way to acquire another firm is to simply purchase the firm's voting stock with an exchange of cash, shares of stock, or other securities. This process will often start as a private offer from the management of one firm to that of another.

Regardless of how it starts, at some point the offer is taken directly to the target firm's stockholders. This can be accomplished by a tender offer. A tender offer is a public offer to buy shares. It is made by one firm directly to the shareholders of another firm.

Those shareholders who choose to accept the offer tender their shares by exchanging them for cash or securities (or both), depending on the offer. 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 If not enough shares are tendered, then the offer might be withdrawn or reformulated.

The tender offer is communicated to the target firm's shareholders by public announcements such as those made in newspaper advertisements. Sometimes, a general merger

The complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity.

consolidation

A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to exist.

tender offer

A public offer by one firm to directly buy the shares of another firm.

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

25. Mergers and Acquisitions

PART EIGHT Topics in Corporate Finance

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mailing is used in a tender offer. This is not common, however, because a general mailing requires the names and addresses of the stockholders of record. Obtaining such a list without the target firm's cooperation is not easy.

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

1. In an acquisition by stock, no shareholder meetings have to be held and no vote is required. If the shareholders of the target firm don't like the offer, they are not required to accept it and need not tender their shares.

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

3. Acquisition is occasionally unfriendly. In such cases, a stock acquisition 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 of a merger.

4. Frequently, a significant minority of shareholders will hold out in a tender offer. The target firm cannot be completely absorbed when this happens, and this may delay realization of the merger benefits or may be costly in some other way. For example, if the bidder ends up with less than 80 percent of the target firm's shares, it must pay tax on 20 to 30 percent of any dividends paid by the target firm to the bidder.

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

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