Types of Corporate Combinations
Corporate combinations are a hallmark of capitalism. They represent pivotal events in the life cycle of two companies hoping to strengthen their market position by joining forces. Some classic forms of corporate combination include acquisitions, leveraged buyouts, mergers and consolidations.
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Acquisition
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The first type of corporate combination is an acquisition. This occurs when one company purchases the assets of another company. An acquisition can take the form of a share purchase or an asset purchase. In the former, the buyer acquires a controlling interest in the target's stock, assuming responsibility for all of the target's assets and liabilities. In the latter, the buyer purchases the assets of the target leaving the target company as an empty shell.
Leveraged Buyout
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A type of acquisition that became popular in the 1980s is the leveraged buyout, LBO. It involves the acquisition of a company by a group of investors using borrowed funds. When the buyout is led by the company's management, it is called a management buyout. To secure loans, investors pledge the assets and future earnings of the target company. Given the leveraged nature of the acquisition, investors favor companies with traditional business models and stable cash flows.
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Merger
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Another type of corporate combination is a merger, where two companies combine and only one survives. The acquired company is eliminated and transfers all of its assets and liabilities to the buyer. The larger company will normally absorb the assets of the smaller one. When companies of similar sizes enter into a merger, it is deemed a merger of equals.
Consolidation
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A consolidation is a corporate combination involving two or more companies forming a new entity. The shareholders of the consolidating companies receive shares in the new company and the old companies cease to exist. The distinction between mergers and consolidations is sometimes glossed over by practitioners who use the terms interchangeably.
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