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The End of the World

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An acquisition usually refers to the purchase of the assets of a company. However, in the remainder of this course, the term will be used in a much broader sense to indicate the purchase of shares, assets, or companies in the merger process. Thus, the narrow, distinct meaning of the term will not be used.

An acquisition can take the form of a purchase of the stock or other equity interests of the target entity, or the acquisition of all or a substantial amount of its assets.

Share purchases - in a share purchase the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities.

Asset purchases - in an asset purchase the buyer buys the assets of the target company from the target company. In simplest form this leaves the target company as an empty shell, and the cash it receives from the acquisition is then paid back to its shareholders by dividend or through liquidation. However, one of the advantages of an asset purchase for the buyer is that it can "cherry-pick" the assets that it wants and leave the assets - and liabilities - that it does not.


In a merger, two separate companies combine and only one of them survives. In other words, the merged (acquired) company goes out of existence, leaving its assets and liabilities to the acquiring company. Usually when two companies of significantly different sizes merge, the smaller company will merge into the larger one, leaving the larger company intact.


A consolidation is a combination of two or more companies in which an entirely new corporation is formed and all merging companies cease to exist. Shares of the new company are exchanged for shares of the merging ones. Two similarly sized companies usually consolidate rather than merge. Although the distinction between merger and consolidation is important, the terms are often used interchangeably, with either used to refer generally to a joining of the assets and liabilities of two companies.

Leveraged Buyout

A leveraged buyout (LBO) is a type of acquisition that occurs when a group of investors, sometimes led by the management of a company (management buyout or MBO), borrows funds to purchase the company. The assets and future earnings of the company are used to secure the financing required to purchase the company. Sometimes employees are allowed to participate through an employee stock ownership plan, which may provide tax advantages and improve employee productivity by giving employees an equity stake in the company.

Holding Company

A holding company is a company that owns sufficient voting stock to have a controlling



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