Holding company a corporation that has voting control

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: to form a completely new corporation. holding company A corporation that has voting control of one or more other corporations. subsidiaries The companies controlled by a holding company. acquiring company The firm in a merger transaction that attempts to acquire another firm. target company The firm in a merger transaction that the acquiring company is pursuing. In the broadest sense, activities involving expansion or contraction of a firm’s operations or changes in its asset or financial (ownership) structure are called corporate restructuring. The topics addressed in this chapter—mergers, LBOs, and divestitures—are some of the most common forms of corporate restructuring; there are many others, which are beyond the scope of this text.1 Here, we define some basic merger terminology; other terms are introduced and defined as needed in subsequent discussions. Mergers, Consolidations, and Holding Companies A merger occurs when two or more firms are combined and the resulting firm maintains the identity of one of the firms. Usually, the assets and liabilities of the smaller firm are merged into those of the larger firm. Consolidation, on the other hand, involves the combination of two or more firms to form a completely new corporation. The new corporation normally absorbs the assets and liabilities of the companies from which it is formed. Because of the similarity of mergers and consolidations, the term merger is used throughout this chapter to refer to both. A holding company is a corporation that has voting control of one or more other corporations. Having control in large, widely held companies generally requires ownership of between 10 and 20 percent of the outstanding stock. The companies controlled by a holding company are normally referred to as its subsidiaries. Control of a subsidiary is typically obtained by purchasing a sufficient number of shares of its stock. Acquiring versus Target Companies The firm in a merger transaction that attempts to acquire another firm is commonly called the acquiring company. The firm that the acquiring company is pursuing is referred to as the target company. Generally, the acquiring company identifies, evaluates, and negotiates with the management and/or shareholders of the target company. Occasionally, the management of a target company initiates its acquisition by seeking to be acquired. 1. For comprehensive coverage of the many aspects of corporate restructuring, see J. Fred Weston, Juan A. Siu, and Brian A. Johnson, Takeovers, Restructuring, and Corporate Governance, 3rd ed. (Upper Saddle River, NJ: PrenticeHall, 2001). CHAPTER 17 Mergers, LBOs, Divestitures, and Business Failure 713 Friendly versus Hostile Takeovers friendly merger A merger transaction endorsed by the target firm’s management, approved by its stockholders, and easily consummated. hostile merger A merger transaction that the target firm’s management does not support, forcing the acquiring company to try to gain control of the firm by buying shares in the marketplace. Mergers can occ...
View Full Document

Ask a homework question - tutors are online