Typically after identifying the target company the

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Unformatted text preview: ur on either a friendly or a hostile basis. Typically, after identifying the target company, the acquirer initiates discussions. If the target management is receptive to the acquirer’s proposal, it may endorse the merger and recommend shareholder approval. If the stockholders approve the merger, the transaction is typically consummated either through a cash purchase of shares by the acquirer or through an exchange of the acquirer’s stock, bonds, or some combination for the target firm’s shares. This type of negotiated transaction is known as a friendly merger. If, on the other hand, the takeover target’s management does not support the proposed takeover, it can fight the acquirer’s actions. In this case, the acquirer can attempt to gain control of the firm by buying sufficient shares of the target firm in the marketplace. This is typically accomplished by using tender offers, which, as noted in Chapter 13, are formal offers to purchase a given number of shares at a specified price. This type of unfriendly transaction is commonly referred to as a hostile merger. Clearly, hostile mergers are more difficult to consummate because the target firm’s management acts to deter rather than facilitate the acquisition. Regardless, hostile takeovers are sometimes successful. Strategic versus Financial Mergers strategic merger A merger transaction undertaken to achieve economies of scale. financial merger A merger transaction undertaken with the goal of restructuring the acquired company to improve its cash flow and unlock its hidden value. Mergers are undertaken for either strategic or financial reasons. Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, improving raw material sourcing and finished product distribution, and so on.2 In these mergers, the operations of the acquiring and target firms are somehow combined to achieve economies and thereby cause the performance of the merged firm to exceed that of the premerged firms. The mergers of Daimler-Benz and Chrysler (both auto manufacturers) and Norwest and Wells Fargo (both banks) are examples of strategic mergers. An interesting variation of the strategic merger involves the purchase of specific product lines (rather than the whole company) for strategic reasons. Financial mergers, on the other hand, are based on the acquisition of companies that can be restructured to improve their cash flow. These mergers involve the acquisition of the target firm by an acquirer, which may be another company or a group of investors—often the firm’s existing management. The objective of the acquirer is to cut costs drastically and sell off certain unproductive or noncompatible assets in order to increase the firm’s cash flow. The increased cash flow is used to service the sizable debt that is typically incurred to finance these transactions. Financial mergers are based, not on the firm’s ability to achieve economies of scale, but on the acquirer’s b...
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