Mergers and Acquisitions

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When we talk about acquisitions or takeovers, we are talking about a number of different transactions. These transactions can range from one firm merging with another firm to create a new firm to managers of a firm acquiring the firm from its stockholders and creating a private firm. We begin this section by looking at the different forms taken by takeovers.
1. TAKEOVER
A corporate action where an acquiring company makes a bid for an acquire. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
There are three types of takeovers:
1.1 Friendly takeovers
A "friendly takeover" is an acquisition which is approved by the management. Before a bidder makes an offer for another
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In a friendly acquisition, the managers of the target firm welcome the acquisition and, in some cases, seek it out. In a hostile acquisition, the target firm’s management does not want to be acquired. The acquiring firm offers a price higher than the target firm’s market price prior to the acquisition and invites stockholders in the target firm to tender their shares for the price.
The difference between the acquisition price and the market price prior to the acquisition is called the acquisition premium. The acquisition price is the one that will be paid by the acquiring firm for each of the target firm’s shares. This price is usually based upon negotiations between the acquiring firm and the target firm’s managers.
For instance, in 1991, AT&T initially offered to buy NCR for $ 80 per share, a premium of $ 25 over the stock price at the time of the offer. AT&T ultimately paid $ 110 per share to complete the acquisition. There is other comparison that can be made between the price paid on the acquisition and the accounting book value of the equity in the firm being acquired.
Depending upon how the acquisition is accounted for, this difference will be recorded as goodwill on the acquiring firm’s books or not be recorded at all.
Initially offered to buy: $80 per share Premium: $25 per share
Paid: $110 per share
6
There are four basic and not necessarily sequential steps, in acquiring

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