Agreeing to be acquired by another firm is one way that shareholders can remove existing
There are three basic legal procedures that one firm can use to acquire another firm:
1. Merger or consolidation.
2. Acquisition of stock.
3. Acquisition of assets.
Although these forms are different from a legal standpoint, the financial press frequently
does not distinguish between them. The term merger is often used regardless of the actual
form of the acquisition.
Merger or Consolidation
There are some advantages and some disadvantages to using a merger to acquire a firm:
A primary advantage is that a merger is legally simple and does not cost as
much as other forms of acquisition. The reason is that the firms simply agree
to combine their entire operations. Thus, for example, there is no need to
transfer title to individual assets of the acquired firm to the acquiring firm.
A primary disadvantage is that a merger must be approved by a vote of the
stockholders of each firm Typically, two-thirds (or even more) of the share
votes are required for approval. Obtaining the necessary votes can be time-
consuming and difficult. Furthermore, as we discuss in greater detail a bit
later the cooperation of the target firm’s existing management is almost a
necessity for a merger. This cooperation may not be easily or cheaply
Acquisition of Stock
A second way to acquire another firm is to simply purchase the firm’s voting stock with an
exchange of cash, shares of stock, or other securities. This process will often start as a
private offer from the management of one firm to that of another.
In an acquisition by stock, no shareholder meetings have to be held and no vote is required.
Resistance by the target firm’s management often makes the cost of acquisition by stock
higher than the cost of a merger.
Acquisition of Assets
A firm can effectively acquire another firm by buying most or all of its assets. This
accomplishes the same thing as buying the company. In this case, however, the target firm
will not necessarily cease to exist; it will have just sold off its assets. The “shell” will still
exist unless its stockholders choose to dissolve it. This type of acquisition requires a formal
vote of the shareholders of the selling firm.
This can occur through any one of three means: acquisitions, proxy contests, and going-
Taxes and Acquisitions
If one firm buys another firm, the transaction may be taxable or tax-free. ;. In a taxable
acquisition, the shareholders of the target firm are considered to have sold their shares, and
they will have capital gains or losses that will be taxed. In a tax-free acquisition, the
acquisition is considered an exchange instead of a sale, so no capital gain or loss occurs at
the time of the transaction.
In general, if the buying firm offers the selling firm cash for its equity, it will be a taxable
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