Gourevitch and Shinn (3) state “Corporate control is about power, accountability and responsibility”. It shapes the efficiency of the firm and the stability of its operations. Ownership and control highly inclines towards the stockholders with the largest block of shares in the company. Changes in corporate control may take place through acquisition of assets. This is where a business enterprise purchases new assets, some assets from another company or an entire company (Hunt 202). Buying entire assets of a company usually occurs when a bigger company buys smaller ones.
A tender offer is a structured purchase of the target’s shares in which the acquirer announces a public offer to buy a minimum number of shares at a specific price (Megginson 568). This price is usually higher than the share price at that moment so as to tempt shareholders to sell their shares. The acquiring company, or purchaser since it might be an individual, becomes the dominant shareholder of the target company if the acquired shares surpass all others (Correia et al. 315).
A merger occurs when two firms combine their assets and liabilities to form a single independent firm, with a new name and management. The share price will usually go up due to the synergies pulled together from the involved parties. An involuntary merger takes place when a purchaser acquires majority of the shares from a target company. This arrangement is considered to be an unfriendly merger since there is no prior negotiation involving the shareholders, board of directors or any management. The transactions in a pre-meditated merger are much cheaper than of a tender offer.
A horizontal merger occurs when the purchaser and the target company deal in the same primary line of business. In this case the business concentration is low and the degree of overlapping business is high. The corporate focus is considered high since the company concentrates its efforts on the core business. On the other hand, a diverse firm is formed through a vertical merger of two companies to create a more integrated company (Marchildon 129). When a merger is initiated to provide an outlet for a product, it is a type of vertical merger called forward integration. Backward integration occurs when a product distributor acquires its manufacturer. The business concentration increases due to focus on the particular industrial category. Conglomerate mergers are where the two companies operate in totally unrelated businesses. The degree of overlapping business is low and the corporate focus is low because the company splits its resources for multiple businesses (Megginson and Smart 279).
Shim and Siegel (306) state that preferential treatment on tax is usually given to shares compared to salary. A take-over can attain preferential treatment by being tax-free through a reorganization arrangement. Reorganization will leave the target shareholders with the acquirer’s stock as substitute for the target’s stock. This occurs in a stock-for-stock transaction (Marchildon 99). Hunt (208) explains that this is determined by the ratio of the number of shares an acquirer will issue of its own stock for each share of the target, also known as exchange ratio. The ratio has to be attractive so as to maintain continuity-of-interest of the stockholders. The stock holders can now participate in a reorganization in which they receive a participatory interest in the acquiring company.
Reference List
Correia C., Flynn D., Uliana E. and Michael Wormald. Financial Management. 6th ed. Cape Town, South Africa: Juta & Co. 2007.
Gourevitch P. and James Shinn. Political Power & Corporate Control: The new global politics of corporate governance. New Jersey, USA: Princeton University Press. 2005.
Hunt, Peter. Structuring mergers & acquisitions: A guide to creating shareholder value. 2nd ed. USA: Aspen Publishers. 2004.
Marchildon, Gilbert. Mergers and acquisitions. England: Cambridge University Press.1991.
Megginson, William. Corporate Finance. London, Britain: Nelson Education. 2008.
Megginson W. and Scott Smart. Introduction to Corporate Finance. London, England: Cengage Learning Inc. 2009.
Shim K. and Joel Siegel. Schaum’s outline on Financial Management. 3rd ed. USA: McGraw-Hill Publishers. 2007.