Buy-Out or Merger?

My friend says Kmart merged with Sears; I say Kmart will/has bought out Sears. Who’s correct? And, while we’re at it…

What’s the difference between a “buy-out” and a “merger”? And, for the latter, how can two companies really merge, really? Does that mean two CEOs and CoBs make the decisions? I can’t picture a ship with two captains… :wink:

  • Jinx :confused:

You’re both correct. A merger is any transaction when two separately-owned companies (or, more likely, conglomerates) squish together such that when the dust clears there’s only one. (That’s an oversimplification, since very frequently the companies will spin off one or more subsidiaries into their own company to avoid a wasteful duplication.) The plan is that this particular merger is to be accomplished by K-Mart buying Sears with the consent of both companies.

Once the merger is completed, there will be one C.E.O. and one Bd. of Directors. Typically in friendly mergers, the companies will negotiate as to who the officers and directors will be (such as “I get six directors, you get three; I name the C.E.O but you name the C.F.O.,” etc.). Note that K-Mart is the buyer here, so I expect the merged entity to have more K-Mart directors and officers, but it could work out differently if the people doing the negotiating are really impressed with particular executive talent that Sears currently has.

In addition to having a single Bd., the new company will have a single stock on the market. Sometimes the buying company will issue its shares to stockholders of the acquired company as payment for the purchase, sometimes the buying company will just pay out cash to stockholders of the acquired company (which is what recently happened with the Cingular/AT&T Wireless merger). Other strategies can work as well.

–Cliffy

Cliffy gave a good overview of a merger, but in the media and public eye the following simple definitions seem to apply:

merger - two or more companies, which could remain viable independantly, mutually decide to combine into one company. This is usually done for competitive advantage and/or cost savings issues. The board and management can be decided any way that the comapnies agree to, see Cliffy’s examples. Elements of all companies involved usually survive the merger (ex. - both Sears and K-Mart stores will continue to exist, though both may change somewhat).

buy out - two companies get together and decide that one should purchase the other outright. This could be done because one of the companies is no longer competitive on its own or for the reasons stated in the merger definition. The transaction is mutually agreeable. The board and mangement is usually set by the purchasing company, though the purchased company may have negotiated a few board or management positions as terms of the sale. Generally, but not always, the purchased company ceases to exist and all operations are converted to those of the purchaser.

takeover - works like a buy out, except the board and management of the purchased company do not agree to the sale. The purchasing company buys enough stock directly from shareholders to gain control of the target company. The target company almost always ceases to exist and the board and management are set up by the purchasing company.

These are very general definitions (did you notice the copious use of “could be”, “generally”, “usually”, “often” and “can be”?). There are no really hard and fast rules and it’s often (there’s that word again!) difficult to tell whether a transaction is a merger or a buy out until a year or more after the deal is completed.

Doctor Jackson, those are excellent points. Just a technical matter to raise - prior to 2001, “merger” and “buyout/takeover” had profoundly different accounting implications. Essentially, in many cases it made more financial sense to characterize a transaction as a “pooling of interests” (read: merger) instead of a “purchase” (read: buyout/takeover). Doing so let the merged company avoid having to write off the value of certain intangible assets, known in the trade as “good will.” So some transactions ended up getting protrayed as mergers of equals even when they were really buyouts. That’s why the rules were changed in 2001, so now there’s only one way to account for these transactions.
I can feel your eyes glazing over, so if you’re interested, click here for a good explanation.

Of course, even setting aside financial incentives, there are plenty of ego and political reasons why companies will try to portray something as a merger even when it really isn’t. A good example is Daimler-Benz’s acquisition of Chrysler. Everyone looking at the economics knew that Daimler would end up in control, but for several years all parties went through the motions of pretending the two sides were equal - largely as a way of making Chrysler (and, by implication, Americans in general) feel better about the deal. The result was unfortunate: Chrysler’s management ended up completely adrift, and Daimler had to intervene anyway.

Damn, **Oxymoron ** beat me to it.

As I remember it, they set up some sort of power-sharing agreement between the American and German execs. Shortly after the merger, however, the American execs all quit, leaving the Germans in charge. Very suspicious. Lee Iacoca (the CEO who saved Chrysler from bankrupcy in the 80’s) sued Daimler-Chrysler because of this, claimed that the American shareholders had been deliberately mislead about the nature of the merger.

It’s a question of accounting. A question of liabilities and revaluation. Sears has the controlling interest, I believe.

If you ever watched Dragonball Z, it’s like when Cell absorbed Gohan, Cell gained all Gohans powers but was the controlling conscienceness. That’s a buyout. A merger like more like what Goku and Vegeta did: merging into a unique creature called Gogeta, combined powers and new personality.

Then again they may just be quibbling. The details haven’t been released yet, but I presume it was a friendly buyout.

ACQUISITION
The more general, or generic, term for taking over of one or more business entities by another.

CONSOLIDATION

  • The combining of two or more business entities into one, with the result that a new one is created.

JOINT VENTURE

  • A commercial undertaking on the part of two or more individual or enterprises for the purpose of disposing of a single lot of goods or the termination of a project. Partakes of the partnership form of organization.

LEVERAGED BUYOUT

  • Also known as "leverage acquisition, this involves the purchase of the assets or stock of a business enterprise under a financing arrangement involving a significant amount of debt and very little or no equity capital–primarily by using the assets of the acquired enterprise as collateral, and the acquired earnings stream to amortize (or retire) the debt.

MERGER

  • “The combining of two or more entities through the direct acquisition by one of the net assets of the other.” Differs from a consolidation in that no new entity results. [Rosenberg, Dictionary of Banking and Finance, 1982]
    In other words, K Mart merges with Sears: Sears been et.

LOL! An education like that you won’t get at Harvard Business school.

Actually, I got this backwards.
me am :wally