MGT 181 chapter 26

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