Legal positivism" "meaning and scope of legal rules

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1. The Basic Forms of Acquisitions
 There are three basic legal procedures that one firm can use to acquire another firm:
 Merger or Consolidation Acquisition of Stock
 Acquisition of Assets
Merger vs consolidation: Merger

 One firm is acquired by another  Acquiring firm retains name and acquired firm ceases to exist  Advantage – legally simple  Disadvantage – must be approved bystockholders of both firmsConsolidationEntirely new firm is created from combination of existing firms

Acquisition: A firm can be acquired by another firm or individual(s)purchasing voting shares of the firm’s stock  Tender offer – public offer to buy shares  Stock acquisition:No stockholder vote required  Can deal directly with stockholders, even if management is unfriendly  May be delayed if some target shareholders hold out for more money – complete absorption requires a merger  Classifications:1. Horizontal – both firms are in the same industry 2.Vertical – firms are in different stages of the production process3.Conglomerate – firms are unrelated

synergy:  Most acquisitions fail to create value for the acquirer.  The main reason why they do not lies in failures to integrate two companies after a merger.  Intellectual capital often walks out the door when acquisitions are not handled carefully.  Traditionally, acquisitions deliver value when they allow for scale economies or market power, better products and services in the market, or learning from the new firms.

sources of synergy:  Revenue Enhancement  Cost ReductionReplacement of ineffective managersEconomy of scale or scope  Tax GainsNet operating lossesUnused debt capacity  Incremental new investment required in working capital and fixed assets

financial side effects of acqusitions:Earnings Growth:If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth (i.E., an accounting illusion). Diversification: Shareholders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover.

cost to stakeholders to reduce risk: The Base Case: If two all-equity firms merge, there is no transfer of synergies to bondholders, but if Both Firms Have Debt, The value of the levered shareholder’s call option falls.So,How Can Shareholders Reduce their Losses from the Coinsurance Effect?Retire debt pre-merger and/or increase post-merger debt usage.

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