Irrespective of the type of merger, there are at least two firms involved. One, the buying company that acquires the other company, and survives after merger. This firm is known as an acquiring firm or transferee company. The other is the company, which is merged and loses its identity in the process. This is called the acquired company, or transferor company or the target firm. There are various modes in which the acquiring firm can attempt a merger move and therefore, merger can also be classified on the basis of initiative style or the procedure adopted by the acquiring firm.
The most important merger approaches are as follows:
1. Negotiated Merger
It is also called friendly merger. In this case, the management/owners of both the firms sit together and negotiate for merger. The acquiring firm negotiates directly with the management of the target firm. So, the willingness of the management of the target firm is implied here. If the two firms reach an agreement, the proposal for merger may be placed before the shareholders of the two companies. However, if the parties do not reach at an agreement, the merger proposal stands terminated and dropped out. However, if the management of the target firm is not agreeable to the merger proposal, then the acquiring firm may go for other procedures i.e., tender offer or hostile take-over.
2. Tender Offer
A tender offer is a bid to acquire controlling interest in a target firm by the acquiring firm by purchasing shares of the target firm at a fixed price. The acquiring firm approaches the shareholders of the target firm directly to sell their shareholding to the acquiring firm at a fixed price. This offered price is generally, kept at a level higher than the current market price in order to induce the shareholders to disinvest their holding in favor of the acquiring firm. The Acquiring firm may also stipulate in the tender offer as to how many shares it is willing to buy or may purchase all the shares that are offered for sale.
In case of tender offer, the acquiring firm does not need the prior approval of the management of the target firm. The offer is kept open for a specific period within which the shares must be tendered for sale by the shareholders of the target firm. In India, in recent times, particularly after the announcement of new take-over code by SEBI, several companies have made tender offers to acquire the target firm.
3. Hostile Take-over Bid
The acquiring firm, without the knowledge and consent of the management of the target firm, may unilaterally pursue the efforts to gain a controlling interest in the target firm, by purchasing shares of the later firm at the stock exchanges. Such case of merger/acquisition is popularity known as ‘raid‘. The new take-over code, as announced by SEBI deals with the hostile bids.
Read More: Defenses Against Takeover Bids
4. Arranged Mergers
In India, the Board for Industrial and Financial Reconstruction (BIFR) has also been active for arranging mergers of financially sick companies with other companies under the package of rehabilitation. These merger schemes are framed in consultation with the lead bank, the target firm and the acquiring firm. These mergers are motivated and the lead bank takes the initiative and decides terms and conditions of merger.