One firm can acquire another in several different ways. The three legal forms of acquisition are merger and consolidation, acquisition of stock, and acquisition of assets. Mergers and consolidations are the least costly from a legal standpoint, but they require a vote of approval by the shareholders. Acquisition by stock does not require a shareholder vote and is usually done via a tender offer. However, it is difficult to obtain 100 percent control with a tender offer. Acquisition of assets is comparatively costly because it requires more difficult transfer of asset ownership.
The synergy from an acquisition is defined as the value of the combined firm (VAB) less the value of the two firms as separate entities (VA and VB):
Synergy = VAB – (VA + VB)
The shareholders of the acquiring firm will gain if the synergy from the merger is greater than the premium.
The possible benefits of an acquisition come from the following:
Revenue enhancement.
Cost reduction.
Lower taxes.
Reduced capital requirements.
Stockholders may not benefit from a merger that is done only to achieve diversification or earnings growth. And the reduction in risk from a merger may actually help bondholders and hurt stockholders.
A merger is said to be friendly when the managers of the target support it. A merger is said to be hostile when the target managers do not support it. Some of the most colorful language of finance stems from defensive tactics in hostile takeover battles. Poison pills, golden parachutes, crown jewels, and greenmail are terms that describe various antitakeover tactics.
The empirical research on mergers and acquisitions is extensive. On average, the shareholders of acquired firms fare very well. The effect of mergers on acquiring stockholders is less clear.
Mergers and acquisitions involve complicated tax and accounting rules. Mergers and acquisitions can be taxable or tax-free transactions. In a taxable transaction each selling shareholder must pay taxes on the stock's capital appreciation. Should the acquiring firm elect to write up the assets, additional tax implications arise. However, acquiring firms do not generally elect to write up the assets for tax purposes. The selling stockholders do not pay taxes at the time of a tax-free acquisition. The purchase method is used to account for mergers and acquisitions.
In a going-private transaction, a buyout group, usually including the firm's management, buys all the shares of the other stockholders. The stock is no longer publicly traded. A leveraged buyout is a going-private transaction financed by extensive leverage.
