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As we can see, acquisitions may occur in several ways. In a merger, the target is absorbed by the
bidder and the target‟s original shareholders receive shares of the bidder. In a consolidation, the firms
involved become parts of an entirely new firm, with the bidder usually retaining control of the new
entity. All original shareholders hold shares in the new firm after the deal. The two transactions have
different implications for shareholders, as the following examples make clear.
Example 1 There has recently been a wave of takeover activity in the stuffed animal industry.
Griffin‟s Giraffes Inc. (GGI) has agreed to merge with Hayley‟s Hippos Inc. (HHI). GGI offers one of
its shares for three shares of HHI. When the transaction is completed, HHI shares will no longer exist.
The original HHI stockholders own GGI shares equal in number to one-third of their original HHI
holdings. GGI‟s original shareholders are unaffected by the transaction, except to have their
ownership stake diluted by the newly issued shares.
Example 2 Kristen‟s Kangaroos Inc. (KKI) wishes to take over the operations of Michael‟s
Manatees Inc. (MMI) and Brandon‟s Baboons Inc. (BBI). Rather than giving its shares to the owners
of MMI and BBI, KKI decides to establish a new firm, Safari Ventures Inc. (SVI). After this
consolidation, shareholders of the three original companies (KKI, MMI, and BBI) will hold shares in
the new firm (SVI), with KKI having the controlling interest. The three original firms cease to exist.
Another method of acquisition involves the direct purchase of shares, either with cash, shares of the
acquirer, or some combination of the two. These stock acquisitions may be negotiated with the
managers of the target firm or by appealing directly to its shareholders, often via a newspaper
advertisement. The latter transaction is called a tender offer, which typically occurs after negotiations
with the target firm‟s management have failed.
Exhibit 17.1 The Sirius/XM merger.
Source: Company filings, www.fundinguniverse.com. All data as of year-end 2006.