MERGER & CONSOLIDATION: OVERVIEW [4282]

Merger: A contractual and statutory process by which one corporation (the surviving corporation)
acquires all of the assets and liabilities of another corporation (the merged corporation), causing the
merged corporation to become defunct.

As part of the merger process, the shareholders of the merged corporation receive

(i) payment for their shares and/or

(ii) shares in the surviving corporation.

Conceptually, it looks like this: A +B= A (where A is the surviving corporation and B was the merged
corporation.)

Consolidation: A contractual and statutory process by which

(1) two or more corporations jointly become a completely new corporation (the successor
corporation),

(2) the original corporations cease to exist and to do business, and

( 3) the successor corporation acquires all of the assets and liabilities of the original (now defunct)
corporations.

Conceptually, it looks like A + B = C (here, distinct companies A and B consolidate into a new
company, C)
MERGER & CONSOLIDATION: PROCEDURE

Any merger or consolidation is governed by the laws of one (or more) of the states, each of which
sets forth its own procedural requirements. However , in general:

(1) The boards of directors of each (original) corporation involved in the proposed transaction
must approve the merger or consolidation plan;

(2) The shareholders of each (original) corporation involved in the proposed transaction must,
thereafter, approve the merger or consolidation plan by vote at a called or scheduled shareholder's
meeting;

(3) The approved plan must be filed with the appropriate state official(s); and

(4) Once all state-law formalities have been satisfied, the state will issue, as appropriate, a certificate
of merger to the surviving corporation or a certificate of consolidation to the successor corporation.

While it sounds simple, this could take months to accomplish.

Short-Form Merger: A merger between a parent and a subsidiary (at least 90% owned by the parent)
which can be accomplished without shareholder approval. Why? In essence, the sub is already the
parent anyway due to the very high ownership percentage (at least 90%), so why cause any more
expense and hassle?

SHAREHOLDERS' RIGHTS
While the day-to-day operations of a corporation, and even the policies governing its ongoing
operations, are generally left to the corporation’s officers and directors, any "extra-ordinary" matter --
such as a merger or consolidation -- must be approved by the corporation's shareholders.

If the necessary majority of the corporation's shareholders approve a merger or consolidation, it will
go forward, and the shareholders will be compensated. However no shareholder who votes against
the transaction is required to accept shares in the surviving or successor corporation. Instead, he or
she may exercise appraisal rights.

Appraisal Right: The right, created by state law, of a dissenting shareholder who objects to an
extraordinary transaction (such as a merger or consolidation):

( i) to have his or her shares of the pre-merger or preconsolidation corporation appraised (valued),
and

(ii) to be paid the fair market value of his or her shares by the pre-merger or pre-consolidation
corporation.

You can imagine how this might mess things up!

ASSET PURCHASE

When a corporation acquires all or substantially all of the assets (as opposed to stock) of another
corporation by direct purchase, the purchasing (or acquiring) corporation simply extends its
ownership and control over the additional assets.

The acquiring corporation does NOT need shareholder approval unless the purchase is to be paid for
with stock and the acquiring corporation must issue additional shares to make the purchase, in which
case its shareholders must approve the additional shares.

Generally, the acquiring corporation only purchases the assets, not the liabilities, of the other
corporation. However, there are exceptions when:
(i) the acquiring corporation impliedly or expressly assumes the seller's liabilities;

(ii) the sale is a defacto (i.e., it amounts to what is in fact is a) merger or consolidation;

(iii) the acquiring corporation continues the seller's business and retains the same personnel; or

(iv) the sale is fraudulently executed in an effort to avoid liability.

If any of the above events occurs, the acquiring company is deemed (considered) to have acquired
both assets and liabilities of the company.

Many entities prefer to acquire “only the assets” for the liability issue, but this method also it allows
them to “write up” the assets so they can be depreciated at a higher value.

STOCK PURCHASE

Stock Purchase: The purchase of a sufficient number of voting shares of a corporation's stock,
enabling the acquiring corporation to exercise control over the target corporation.

A stock purchase is generally facilitated by a tender offer to the target corporation's shareholders.
The tender offer is publicly advertised, available to all shareholders, and offers to pay a higher-than-
market price (premium) for shares of the target corporation.

Exchange Tender Offer: An offer to give (exchange) shares in the acquiring corporation in exchange
for shares in the target corporation.

Cash Tender Offer: Duh! An offer to pay cash in exchange for shares of the target corporation.
A tender offer may be conditioned on receiving a specified number of outstanding shares in the target
corporation by a specified date.

The terms and duration of, and the circumstances underlying, a tender offer are strictly regulated by
federal securities laws. In addition, most states impose additional regulations on tender offers.

MERGER & CONSOLIDATION

Methodology/Defenses

Beachhead Acquisition: An initial block of shares of a takeover target sufficient to enable the
purchaser to launch a proxy fight.

Proxy Fight: An attempt by a purchaser to acquire sufficient shares and voting commitments to take
control of the takeover target. For example, the recent Compaq/HP duel.

Leveraged Buy-Out (LBO): The purchase of all publicly- held shares of a takeover target by its
management or some other "inside" group, usually through undertaking substantial debt (hence, the
"leverage") in order to take the company "private" and avoid a hostile takeover by an outsider.
Unfortunately, this usually hurts the company by the huge debt load and possibly poor quality of debt
(junk bonds, etc.)

Takeover Defenses include various measures included in a corporation's articles and/or by-laws that
automatically take effect in the event of a proxy fight or unfriendly takeover attempt in order to make
the corporation a substantially less attractive target for the purchaser (e.g., "golden parachutes,-
usually huge buyout costs on executives being ousted [notice its not for everyone, only the big fat
cats]" "poison pills”-usually allowing existing shareholders to buy company stock very cheap, which
vastly increases the number of shares outstanding, making the buyout much more expensive), as well
as conscious efforts of management in response to a particular situation (e.g., "crown jewels”, - where
the company sells its main assets to someone else) "white knights"- where they appeal to a more
friendly company to take them over). In general, these are very expensive or hassle filled events that
would cause a potential acquirer to think twice about continuing their efforts to acquire the company.
The text has many other examples.
TERMINATION OF CORPORATE “LIFE” [4286]

Dissolution: The formal disbanding of a corporation, also known as the legal death of a company,
which may occur by

(1) an act of the legislature in the state of incorporation,

( 2) voluntary approval by the corporation's shareholders upon recommendation by the directors,

(3) unanimous action by all shareholders (without director involvement),

(4) expiration of the time period set forth in the certificate of incorporation, or

(5) court order.

Liquidation: The process by which corporate assets are converted into cash and distributed among
creditors and shareholders according to specific rules of preference. For example, the “secured”
assets are sold and the secured creditor is paid first, etc.

5 Types of Company Mergers

mergers.jpg
There are five commonly-referred to types of business combinations known as
mergers: conglomerate merger, horizontal merger, market extension merger, vertical
merger and product extension merger. The term chosen to describe the merger
depends on the economic function, purpose of the business transaction and
relationship between the merging companies.

Conglomerate

A merger between firms that are involved in totally unrelated business activities.
There are two types of conglomerate mergers: pure and mixed. Pure conglomerate
mergers involve firms with nothing in common, while mixed conglomerate mergers
involve firms that are looking for product extensions or market extensions.

Example

A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting
company is faced with the same competition in each of its two markets after the
merger as the individual firms were before the merger. One example of a
conglomerate merger was the merger between the Walt Disney Company and the
American Broadcasting Company.

Benefits of a Merger or Acquisition

Horizontal Merger

A merger occurring between companies in the same industry. Horizontal merger is a

business consolidation that occurs between firms who operate in the same space, often
as competitors offering the same good or service. Horizontal mergers are common in
industries with fewer firms, as competition tends to be higher and the synergies and
potential gains in market share are much greater for merging firms in such an
industry.

Example

A merger between Coca-Cola and the Pepsi beverage division, for example, would be
horizontal in nature. The goal of a horizontal merger is to create a new, larger
organization with more market share. Because the merging companies' business
operations may be very similar, there may be opportunities to join certain operations,
such as manufacturing, and reduce costs.

Market Extension Mergers

A market extension merger takes place between two companies that deal in the same
products but in separate markets. The main purpose of the market extension merger is
to make sure that the merging companies can get access to a bigger market and that
ensures a bigger client base.

Example
A very good example of market extension merger is the acquisition of Eagle
Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta,
Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets
worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest
banks in the metropolitan Atlanta region as far as deposit market share is concerned.
One of the major benefits of this acquisition is that this acquisition enables the RBC
to go ahead with its growth operations in the North American market.

With the help of this acquisition RBC has got a chance to deal in the financial market
of Atlanta , which is among the leading upcoming financial markets in the USA. This
move would allow RBC to diversify its base of operations.

Product Extension Mergers

A product extension merger takes place between two business organizations that deal
in products that are related to each other and operate in the same market. The product
extension merger allows the merging companies to group together their products and
get access to a bigger set of consumers. This ensures that they earn higher profits.

Example

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of

product extension merger. Broadcom deals in the manufacturing Bluetooth personal
area network hardware systems and chips for IEEE 802.11b wireless LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant for
handsets that are equipped with the Global System for Mobile Communications
technology. It is also in the process of being certified to produce wireless networking
chips that have high speed and General Packet Radio Service technology. It is
expected that the products of Mobilink Telecom Inc. would be complementing the
wireless products of Broadcom.

Vertical Merger

A merger between two companies producing different goods or services for one
specific finished product. A vertical merger occurs when two or more firms, operating
at different levels within an industry's supply chain, merge operations. Most often the
logic behind the merger is to increase synergies created by merging firms that would
be more efficient operating as one.

Example

A vertical merger joins two companies that may not compete with each other, but
exist in the same supply chain. An automobile company joining with a parts supplier
would be an example of a vertical merger. Such a deal would allow the automobile
division to obtain better pricing on parts and have better control over the
manufacturing process. The parts division, in turn, would be guaranteed a steady
stream of business.
Synergy, the idea that the value and performance of two companies combined will be
greater than the sum of the separate individual parts is one of the reasons companies
merger.