Profitable Growth by Acquisition 563with 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 is-
sued 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 acquisitionsmay be negotiated with the mangers 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 occur after nego-
tiations with the target firm’s management have failed. Finally, an acquisition
can be effected by the purchase of the target’s assets. Asset acquisitionsare
sometimes done to escape the liabilities (real or contingent) of the target firm
or to avoid having to negotiate with minority shareholders. The downside is
that the legal process of transferring assets may be expensive.
Acquisitions can be categorized based on the level of economic activity
involved according to the following:
- Horizontal: The target and bidder in a horizontal mergerare involved in
the same type of business activity and industry. These mergers typically
result in market consolidation, that is, more market share for the com-
bined firm. Because of this, they are subject to extra antitrust scrutiny.
The pending acquisition of USAir by United Airlines is an example of a
horizontal merger (see p. 564). Because the combined entity would be the
world’s largest airline and have a dominant market share in the United
States, the Justice Department has demanded that certain assets and
routes be divested before approval for the deal will be granted. - Ver tical: Aver tical mergerinvolves firms that are at different levels of
the supply chain in the same industry. For example, stand-alone Internet
service provider/portal AOL functions primarily as a distribution chan-
nel. Its pending merger with Time Warner will allow AOL to move up the
home entertainment industry supply chain and control content in the
form of Time Warner ’s music and video libraries. - Conglomerate: In a conglomerate merger,the target and bidder firms are
not related. These were popular in the 1960s and seventies but are rare