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Merger
the complete absorption of one company by anther, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity
The bidder
the acquiring firm
the target firm
the firm that is sought (and perhaps acquired)
the consideration
cash or securities offered to the target firm in the aquisition
Consolidation
a merger in which an entirely new firm is created and both the acquired firm and the acquiring firm cease to exist
Board and shareholder approval
the target and the acquiring board of directors must approve. the deal and put the question to a vote of the shareholders of the target
friendly takeover
when a target’s board of directors supports a merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote
Hostile takeover
A situtation in which an individual or organization purchases a large fraction of a target corporation’s stock and. In doing so get enough votes to replace the target’s board of directors/CEO, or management.
acquisition premium
paid by an acquirer in takeover, it is the percentage difference between the acquisition price and the pre-merger price of a target firm
Horizontal merger
target and acquirer are in the same industry
one risk is anti-trust regulation
Vertical merger
refers to a merger of two companies in the same industry that make products required at different stages of the production cycle
Conglomerate merger
target and acquirer operate in unrelated industries
Synergy
the positive incremental net gain associated with the combination of two firms through a merger or acquisition
Value of firm b to firm a = Vb* = change V + Vb
A bidder can use one of two methods to pay for a target
1) Cash: the bidder simply pays for the target, including any premium, in cash
2) Stock: bidder pays for the target by issuing new stock and giving it to the target’s shareholders
Purchase accounting
assets of acquired firm must be reported at fair market value
Goodwill is created
the difference between purchase price and estimated fair market value of net assets
