Write an analysis of the different methods of conducting mergers and acquisitions and the advantages or disadvantages to each method and when they may be best employed. Also, write about the approval process of mergers and acquisitions and who ultimately is required to approve the merger or acquisition.
Chapter 6
Merger and Acquisitions
Merger and Acquisitions
• Corporations can expand by acquiring other corporations.
• Corporations expand for several reasons:
➢ Increase the overall value of the corporation.
➢ Satisfy management’s desire to expand the corporation.
➢ A control group within the corporation seeks to increase its
position with the acquisition of another corporation.
• A corporation can acquire another corporation by:
➢ Mergers
➢ Sale of assets
➢ Tender offer
Merger and Acquisitions
Mergers
• Mergers are when two companies or corporations are
combined.
• Statutory mergers
➢ Occurs when Corporation A acquires Corporation B and
Corporation B is merged into Corporation A.
➢ Consolidations occur when Corporation A and Corporation
B merge into a new corporation, Corporation C.
Corporation A and Corporation B cease to exist as
individual corporations.
Merger and Acquisitions
Merger
A Inc.
Acquiring
Corp
B Inc.
Acquired
(targeted)
Corp
A Inc.
B Inc.
C Corp
(new
company)
Consolidation
A Inc.
Before the Merger
Continental Airlines Inc.
United Airline Inc.
After the Merge: United Airlines
• Continental Airlines
merged into United
Airlines.
• According to the merger
agreement the two
corporations agreed to
keep United Airlines
name and Continental
Airlines logo
Merger and Acquisitions
Different types of mergers
• Triangle mergers
➢ “The acquiring party (“A Inc.”) forms a wholly owned
subsidiary (As) and B Inc. merges into As. B Inc.
shareholders receive consideration in exchange for their B
shares. Shares of As owned by A Inc. are unaffected.
➢ The triangular merger is used when A Inc. wishes to keep the
business acquired from B Inc. in a separate corporation.
❖ One common reason to do this occurs when B Inc. is in he triangular
merger is used when A Inc. wishes to keep the business acquired
from B Inc. in a separate corporation.”
Merger and Acquisitions
Triangle Merger
B Inc.
Acquired
(targeted
Corp
A Inc.
Acquiring
Corp
Step1
step 2
AS Inc.
(Merger sub)
B Inc. merges with AS
Inc.
After completion of merge
B Inc. cease to exist
Merger and Acquisitions
Different types of mergers
• Reverse triangle mergers
➢ Corporation A acquires Corporation B. Corporation A is merged into
Corporation B with Corporation B as the surviving corporation.
➢ This type of merger occurs when the acquired corporation does not want
to disappear because the acquired company has something special to
offer.
• Short form merger
➢ “Statutes permit a parent corporation with a large controlling interest
(usually owning 90% or more of the shares of the subsidiary) to merge
the subsidiary out of existence without the formal requirements of a
board or shareholder vote by the shareholders of the subsidiary.”
Merger and Acquisitions
Reverse Triangle Merger
B Inc.
Acquired
(targeted
Corp
A Inc.
Acquiring
Corp
Step1
step 2
AS Inc.
(Merger sub)
AS Inc. merges with B
Inc.
After completion of merge
B Inc. cease to exist
Merger and Acquisitions
Short Form Merger
Parent Inc.
(owes 90% or
more of Sub
shares)
Subsidiary
Inc.
After short form merge Subsidiary cease to exist
Parent Inc.
Merger and Acquisitions
Sale of assets
• When two corporations merge, the distribution of assets can take
on different forms.
➢ Corporation A acquires all of the assets of Corporation B and
Corporation B will be paid for these assets:
❖ Corporation B will remain in existence (holding
company) with shareholders.
❖ Corporation B will be completely liquidated.
• Shareholders of the company being merged must approve of the
sale of the assets.
Merger and Acquisitions
Tender offer
• A tender offer is often referred to as a takeover bid.
➢ Corporation A makes a direct offer to Company B’s
shareholders.
➢ If Corporation A can buy over 51% of Corporation B’s
shares, Corporation A will take control of Corporation B.
➢ Corporation B will then become a subsidiary of Corporation
A.
➢ “This acquisition technique is the only one where the
corporate statutes do not require the approval of B’s board
and allows for an acquisition that they oppose.”
Merger and Acquisitions
Tender offer
➢ “The tender offer usually takes place when Corporation B is
a publicly traded corporation. If Corporation B were a
private corporation, the offer to buy Corporation B’s shares
would probably involve a privately negotiated sale.
➢ The tender offer requires A’s board approval.
➢ This acquisition technique is the only one where the
corporate statutes do not require the approval of B’s board
and allows for an acquisition that they oppose.”
Merger and Acquisitions
Other legal issues
• Acquisitions can incur other legal issues. For example:
➢ Taxation
➢ Labor law
➢ Antitrust
➢ Environmental law
➢ Pension law
➢ Contract law
• Fiduciary duties:
➢ “The directors must act in good faith and in an informed
manner in making the decision whether to sell the
corporation.”
Merger and Acquisitions
Appraisal remedy
• Historically, all mergers had to be approved unanimously by the
shareholders.
• Appraisal remedy gives shareholders the right to seek judicial
intervention if they do not approve of the changes in the merger.
• “Appraisal was an exit strategy designed to protect shareholders
by providing liquidity and an independent review of fair value.
• “It was also meant as a check or a monitoring device, to regulate
those in control and to offer the shareholders a fair deal.25”
Merger and Acquisitions
De facto mergers
• “An acquisition tries to preclude shareholder voting or appraisal
rights.”
• Occurs when shareholders of the acquiring corporation argue
that the acquisition was structured as an asset sale.
• If it is an asset sale, the shareholders of the selling corporation
do not have the right to valuation of shares.
• The shareholders of the selling company will argue that it was
not an asset sale, but a merger or de facto merger.
➢ The shareholders will then take it to the courts to decide.
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