Professional Documents
Culture Documents
PARAMJIT
1519512
What is a Merger?
In a MERGER, two (or more) corporations
come together to combine and share their
resources to achieve common objectives.
The shareholders of the combining firms
often remain as joint owners of the
combined entity.
A new entity may be formed subsuming
the merged firms
What is an Acquisition?
In an ACQUISITION, one firm purchases
the assets or shares of another.
The acquired firms shareholders cease to
be owners of that firm.
The acquired firm becomes the subsidiary
of the acquirer.
Acquisitions usually take the form of a
public tender offer.
Tender Offers
Bidders gain 4%
Targets gain 30%
(Jensen and Ruback, Journal of Financial Economics, 1985)
Diversification: Employees
Other stakeholders
They are forced to hold undiversified portfolios
of the stock of the bidder/target firm.
It is hard for them to diversify on their own
accounts.
Employees cannot diversify their human capital.
They may be willing to accept a lower salary and/or
have a larger commitment to the company if they
take less risk.
May ultimately benefit shareholders.
Diversification: Executives
Managers in small firms may be undiversified for
control purposes, and become too risk averse.
Hence, both inside and outside shareholders
may benefit through diversification.
A merger always changes control in at least one
of the firms.
Good or bad depending on who is losing out and why.
Fired: Bad if you are the one being dismissed.
Retired: Good if you are the one being bought out.
Takeover Defenses
Successful takeovers:
Target Stockholders gain 20-35% or more
Unsuccessful takeover:
Target stockholders gain little if not eventually
taken over.
Legal/Regulatory Defenses
State corporation/anti-takeover laws
impose rules that are similar to stringent
charter amendments for all corporations
chartered in that state.
Inter-firm litigation can be effective.