BACKGROUND ON ACQUISITIONS

When we talk about acquisitions or takeovers, we are talking about a

number of different types of
transactions. These transactions can range from one firm merging with
another firm to create a new
firm to managers of a firm acquiring the firm from their own stockholders
and creating a private firm.
This section begins by looking at the different forms taken by acquisitions,
continues by providing an
overview on the acquisition process, and concludes by examining the
history of the acquisitions in the
United States.
Classifying Acquisitions
There are several ways in which an acquisition can be structured. In a
merger, the boards of directors
of two firms agree to combine and seek stockholder approval for the
combination. In most cases, at
least 50 percent of the shareholders of the target and the bidding firm have
to agree to the merger. The
target firm ceases to exist and becomes part of the acquiring firm; Digital
Equipment Corporation was
absorbed by Compaq after it was acquired in 1997. In a consolidation, a
new firm is created after the
merger, and both the acquiring firm and target firm stockholders receive
stock in this firm; Citigroup,
for instance, was the firm created after the consolidation of Citicorp and
Travelers Group.
In a tender offer, one firm offers to buy the outstanding stock of the other
firm at a specific price and
communicates this offer in advertisements and mailings to stockholders.
By doing so, it bypasses the
incumbent management and board of directors of the target firm.
Consequently, tender offers are often
used to carry out hostile takeovers. The acquired firm will continue to exist
as long as there are
minority stockholders who refuse the tender. From a practical standpoint,
however, most tender offers
eventually become mergers if the acquiring firm is successful in gaining
control of the target firm.
In a purchase of assets, one firm acquires the assets of another, though a
formal vote by the
shareholders of the firm being acquired is still needed.
There is a one final category of acquisitions that does not fit into any of the
four described so far.
Here, a firm is acquired by its own management or by a group of investors,
usually with a tender
offer. After this transaction, the acquired firm can cease to exist as a
publicly traded firm and become
a private business. These acquisitions are called management buyouts if
managers are involved, and
leveraged buyouts if the funds for the tender offer come predominantly
from debt.