Mergers stock transfer
Back to Blog. Every year it seems like mergers and acquisitions occur at record pace and valuations. There have been deals worth tens of billions, and some years even trillions of dollars, as businesses constantly strive to gain or retain a competitive advantage by acquiring other entities. As with most business transactions, cash deals are highly preferred for fairly obvious reasons. Although the same thing essentially occurs regardless of whether the deal is completed with a cash payment or a purchase of a certain percentage of shares, there are often differences in the way in which the merger ultimately unfolds.
M&A 101: The difference between mergers and acquisitions
A stock-for-stock merger occurs when shares of one company are traded for another during an acquisition. When, and if, the transaction is approved, shareholders can trade the shares of the target company for shares in the acquiring firm's company. These transactions—typically executed as a combination of shares and cash—are cheaper and more efficient, as the acquiring company does not have to raise more capital for the transaction.
There are various ways the acquiring company can pay for the assets it will receive for a merger or acquisition. The acquirer can pay cash outright for all the equity shares of the target company and pay each shareholder a specified amount for each share.
Alternatively, the acquirer can provide its own shares to the target company's shareholders according to a specified conversion ratio, Thus, for each share of the target company owned by a shareholder, the shareholder will receive X number of shares of the acquiring company. Acquisitions can be made with a mixture of cash and stock or with all stock compensation , which is called a stock-for-stock merger.
As mentioned above, a stock-for-stock merger can take place during the merger or acquisition process. For example, Company A and Company E form an agreement to undergo a 1-for-2 stock merger. Company E's shareholders will receive one share of Company A for every two shares they currently own in the process.
Company E shares will stop trading, and the outstanding shares of Company A will increase after the merger is complete when the share price of Company A will depend on the market's assessment of the future earnings prospects for the newly merged entity. It is uncommon for a stock-for-stock merger takes place in full. Typically, a portion of the transaction can be completed through a stock-for-stock merger while the rest is completed through cash and other equivalents.
When the merger is stock-for-stock, the acquiring company proposes payment of a certain number of its equity shares to the target firm in exchange for all of the target company's shares. Provided the target company accepts the offer which includes a specified conversion ratio , the acquiring company issues certificates to the target firm's shareholders entitling them to trade in their current shares for rights to acquire a pro rata number of the acquiring firm's shares.
The acquiring firm issues new shares adding to its total number of shares outstanding to provide shares for all the target firm's shares that are being converted. This action, of course, causes the dilution of the current shareholders' equity , since there are now more total shares outstanding for the same company. However, at the same time, the acquiring company obtains all of the assets and liabilities of the target firm, thus effectively neutralizing the effects of the dilution.
Should the merger prove beneficial and provide sufficient synergy , the current shareholders will gain in the long run from the additional appreciation provided by the assets of the target company. A stock-for-stock merger is attractive for companies because it is efficient and less complex than a traditional cash-for-stock merger. Moreover, the costs associated with the merger are well below traditional mergers. Additionally, a stock-for-stock transaction does not impact the cash position of the acquiring company, so there is no need to go back to the market to raise more capital.
Taking over a company can be expensive—the acquirer may have to issue short-term notes or preferred shares if it does not have enough capital, and that can affect its bottom line. Going through a stock-for-stock merger prevents a company from having to take those steps, saving both time and money. Trading Basic Education. Your Money. Personal Finance. Your Practice. Popular Courses. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
Related Articles. Partner Links. Related Terms Swap Ratio A swap ratio is the ratio at which an acquiring company offers its own shares in exchange for the target company's shares during a merger or acquisition. Poison Pill Definition A poison pill is a defense tactic utilized by a target company to prevent, or discourage, attempts of a hostile takeover by an acquirer.
Hostile Takeover A hostile takeover is the acquisition of one company by another without approval from the target company's management. Escrowed Shares Definition Escrowed shares are shares held in an escrow account pending the completion of a corporate action or the elapse of a time period leading to an event.
Dilutive Acquisition A dilutive acquisition is a takeover transaction that decreases the acquirer's earnings per share. Takeover Bid A takeover bid is a corporate action in which an acquiring company makes an offer to the target company's shareholders to buy the target company's shares.
State laws may also require shareholder approval for mergers that have a material impact on either company in a merger. Stockholders may receive stock, cash. After the transfers, partnership is owned 11% by P, ⁄3% by S, and ⁄3% by X. ¶ Stock Transfer Following P's (or S's) Code §(a)(2)(E) Reverse.
A stock-for-stock merger occurs when shares of one company are traded for another during an acquisition. When, and if, the transaction is approved, shareholders can trade the shares of the target company for shares in the acquiring firm's company. These transactions—typically executed as a combination of shares and cash—are cheaper and more efficient, as the acquiring company does not have to raise more capital for the transaction.
A merger consolidates two companies that are distinct legal entities into a single legal entity that holds the combined assets and liabilities of the original companies. In a stock sale, the buyer simply purchases the outstanding stock of your company directly from each stockholder.
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This resource is periodically updated for necessary changes due to legal, market, or practice developments. Significant developments affecting this resource will be described below. Ask a question. Private mergers and acquisitions in the UK England and Wales : overview. Related Content. Corporate entities and acquisition methods 1.
Private mergers and acquisitions in the Isle of Man: overview
This resource is periodically updated for necessary changes due to legal, market, or practice developments. Significant developments affecting this resource will be described below. Ask a question. Private mergers and acquisitions in the Isle of Man: overview. Related Content. Corporate entities and acquisition methods 1. What are the main corporate entities commonly involved in private acquisitions? In private acquisitions, the buyer, seller and target are most commonly companies limited by shares. Are there any restrictions under corporate law on the transfer of shares in a private company?
Companies are increasingly paying for acquisitions with stock rather than cash.
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Stock or Cash?: The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions
From a legal point of view, a merger is a legal consolidation of two entities into one, whereas an acquisition occurs when one entity takes ownership of another entity's stock , equity interests or assets. From a commercial and economic point of view, both types of transactions generally result in the consolidation of assets and liabilities under one entity, and the distinction between a "merger" and an "acquisition" is less clear. A transaction legally structured as an acquisition may have the effect of placing one party's business under the indirect ownership of the other party's shareholders, while a transaction legally structured as a merger may give each party's shareholders partial ownership and control of the combined enterprise. A deal may be euphemistically called a merger of equals if both CEOs agree that joining together is in the best interest of both of their companies, while when the deal is unfriendly that is, when the management of the target company opposes the deal it may be regarded as an "acquisition". Specific acquisition targets can be identified through myriad avenues including market research, trade expos, sent up from internal business units, or supply chain analysis. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company also termed a target is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy. Whether a purchase is perceived as being a "friendly" one or "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiror secures endorsement of the transaction from the board of the acquiree company. This is known as a reverse takeover. Another type of acquisition is the reverse merger , a form of transaction that enables a private company to be publicly listed in a relatively short time frame.
Selling Your Company: Merger vs. Stock Sale vs. Asset Sale
The basic rule governing mergers or acquisitions of Indonesian companies is Law No. For public companies, there are additional specific regulations, including: i Law No. The general rules set by the Company Law apply to all companies. However, for specific sectors, such as banks, multi-finance, mining, insurance or public companies, additional rules and requirements apply. Not all business sectors are open for foreign participation.
