Merger or Consolidation

A merger is the complete absorption of one firm by another. The acquiring firm retains its name and its identity, and it acquires all of the assets and liabilities of the acquired firm. After a merger, the acquired firm ceases to exist as a separate business 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 and become part of a new firm. For this reason, the distinction between the acquiring and the acquired firm is not as important in a consolidation as it is in a merger.

The rules for mergers and consolidations are basically the same. Acquisition by merger or consolidation results in a combination of the assets and liabilities of acquired and acquiring firms; the only difference lies in whether or not a new firm is created. We will henceforth use the term merger to refer generically to both mergers and consolidations.

There are some advantages and some disadvantages to using a merger to acquire a firm:

1. A primary advantage is that a merger is legally simple and does not cost as much as other forms of acquisition. The reason is that the firms simply agree to combine their entire operations. Thus, for example, there is no need to transfer title to individual assets of the acquired firm to the acquiring firm.

2. A primary disadvantage is that a merger must be approved by a vote of the stockholders of each firm.1 Typically, two-thirds (or even more) of the share votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult. Furthermore, as we discuss in greater detail a bit later, the cooperation of the target firm's existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained.

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