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.
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.