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Lecture 10

FINA601 Lecture Notes - Lecture 10: Tender Offer, Rjr Nabisco, Daniel S. Loeb


Department
FINA
Course Code
FINA601
Professor
Ivan
Lecture
10

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Week 10 Lecture 10 Chapter 29: Mergers, Acquisitions, and Divestitures
Varieties of Takeovers (29.1)
Takeovers: Transfer of control of a firm from one group of shareholders to another
Takeover is a general and imprecise term referring to the transfer of control of a firm
from one group of shareholders to another
A firm that has decided to take over another firm is usually referred to as the bidder
The bidder offers to pay cash or securities to obtain the stock or assets of another
company
If the offer is accepted, the target firm will give up control over its stock or assets to the
bidder in exchange for consideration (i.e., its stock, its debt, or cash)
If a takeover is achieved by acquisition, it will be by merger, tender offer for shares of stock,
or purchase of assets
In mergers and tender offers, the acquiring firm buys the voting common stock of the
acquired firm

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Proxy contests
Can result in takeovers as well. Proxy contests occur when a group of shareholders
attempts to gain seats on the board of directors. A proxy is written authorization for
one shareholder to vote the stock of another shareholder. In a proxy contest, an
insurgent group of shareholders solicits proxies from other shareholders
Going-private transactions
A small group of investors purchases all the equity shares of a public firm. The group
usually includes members of incumbent management and some outside investors.
The shares of the firm are delisted from stock exchanges and can no longer be
purchased in the open market

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The Basic Forms of Acquisitions (29.2)
There are three basic legal procedures that one firm can use to acquire another firm:
Merger or Consolidation
A merger refers to the absorption of one firm by another. The acquiring firm retains
its name and identity, and it acquires all of the assets and liabilities of the acquired
firm. After a merger, the acquired firm ceases to exist as a separate business entity
A consolidation is the same as a merger except that an entirely new firm is created.
In a consolidation, both the acquiring firm and the acquired firm terminate their
previous legal existence and become part of the new firm.
Example:
Merger Basics: Suppose Firm A acquires Firm B in a merger. Further, suppose Firm B’s
shareholders are given one share of Firm A’s stock in exchange for two shares of Firm B’s
stock. From a legal standpoint, Firm A’s shareholders are not directly affected by the merger.
However, Firm B’s shares cease to exist. In a consolidation, the shareholders of Firm A and
Firm B exchange their shares for shares of a new firm (e.g., Firm C).
Here are two important points about mergers and consolidations:
1. A merger is legally straightforward and does not cost as much as other forms of
acquisition. It avoids the necessity of transferring title of each individual asset of the
acquired firm to the acquiring firm.
2. The stockholders of each firm must approve a merger. Typically, two-thirds of share
owners must vote in favor for it to be approved. In addition, shareholders of the
acquired firm have appraisal rights. This means that they can demand that the
acquiring firm purchase their shares at a fair value. Often, the acquiring firm and the
dissenting shareholders of the acquired firm cannot agree on a fair value, which
results in expensive legal proceedings.
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