Frequently Asked Questions (FAQ’S)

In the situation of one company taking the complete assets and liabilities of another this is called a merger. The buying entity retains its identity whilst the acquired company no longer trades. This will normally occur when the shareholders agree in a majority vote. But a merger is just one type of acquisition, one firm may acquire another in various different manners, one of which is buying part or the complete assets or simply purchasing enough stock.

Most mergers and acquisitions take place with the intention of making a profit. To justify such a transaction the sum of two parts should be better than the individuals alone. There are many other benefits of such a transaction including:

  • Tax advantages
  • The two entities resources and manpower are complimentary
  • Economies of scale
  • The reduction of obsolete staff and departments
  • Gaining propriety rights to certain products and services
  • To gain market position by buying up competition
  • Involving new technology in the corporation
  • By purchasing opening up new areas and sectors
  • The possible supply of new superior management

Any merger or acquisition throws up inherent problems, one of which is the actual transaction, and sometimes the value of the whole transaction is hard to gauge, trying to bring together all the costs and benefits, and also to deal with any ensuing tax and legal matters.

In today’s increasingly worldwide commerce climate, businesses need to adapt and develop just to survive, one way to do this is by merger or acquisition, be it a small firm or a corporate entity.

When an entrepreneur decides to merge or sell his business to another larger firm, this is sometimes called “harvesting” the smaller firm. When this happens usually the point is to free any value left in the smaller company so its ownership and shareholders can enjoy the benefits. What drives management and owners of such smaller enterprises could be estate planning, or even diversification, or even that they can no longer fund growth themselves. Such entities sometimes the best way to stay alive and compete is to actually acquire firms of similar or smaller size to themselves.

Fundamentally, any acquisition or merger is a capital budgeting decision just like any other. Mergers do however have five differences to ordinary investments:

  • The acquisition or merger may be an ideal and strategic fit.
  • The tax, accounting and legal aspects of a merger can be highly complex.
  • Mergers sometimes are a measure of control to get rid of inefficient management.
  • Mergers affect both value and stock of the participants.
  • It is often the case that the joining of two companies is not welcomed by one of them.

Types of Acquisitions

There are three types of acquisitions:- horizontal, vertical and conglomerate.

  • Horizontal – this is an amalgamation of two companies that are in the same market. For example on car manufacturer buying another.
  • Vertical – this is where a company purchases another in the chain of distribution, either backwards to the source of materials or forwards towards the consumer. Perhaps a boat manufacturer buying a sail making company.
  • Conglomerate – two firms with no associated businesses joining together.

One more type of merger or acquisition is a consolidation, where a new entity is created and the two prior entities no longer exist, the financial statements are then classed as one. These are prepared by combining the two former entities balances after eliminating entries and adjustments are made.

A company may also be acquired by buying the voting stock, either by a tender offer or agreement by management. Where a tender offer is made an offer is made directly to shareholders without consulting management. This differs to a merger as it requires now shareholders having to vote. Any stockholders wanting to keep their stock may do so, but this could be risky as the stock left may be valueless, as the firm may no longer be trading.

One firm can easily take over another by buying all its assets, this can prove costly as legal transfer of title must be first approved by the stockholders of the selling entity. A takeover means that the transfer of control has passed from one party to another. Usually the buying company will make simply make a bid for another. Where there happens to be a proxy contest, a group of stockholders will try to get enough votes to oust the incumbent board of directors.

Taxable Versus Tax-Free Transactions

A merger or an acquisition may be both taxable or tax-free occasions. This complex situation can affect both parties. In the case of a taxable purchase, the assets of the selling company are written upwards and then the depreciation will rise (this is not the case in a tax-free purchase). However, the selling company is obliged to pay capital gains tax and will demand more for their stock as compensation. This has a name and is called the “capital gains effect.” These two factors often end up cancelling each other.

Occasionally certain transactions and transfer of stock are deemed as tax-free restructuring, which allows the buyer to exchange their share for stock of the purchased firm without having any tax liabilities. There are three basic types of this:

  • Type A – allows the purchaser to use voting or non-voting stock, in addition it can use more cash in the total bid since this is not stipulated by law. Law does stipulate at least 50% must be in stock. Also in a type A acquisition the buyer may choose not to take all the target’s assets.
    If at least 50% stock is utilized and cash, debt, or non-equity shares are also used the purchase may be partly taxable. Capital Gains come into play on those shares that were swapped for no equity.
  • Type B – specifies the buyer offers mostly its own voting stock as a means of acquiring the target’s stock. The cash element of the deal must not exceed more than 20% of the total offer, and a minimum of 80% of the purchase must be in voting stock of the buyer.
    The beneficiaries who receive shares of the purchasing company in exchange for their common stock are not taxed immediately. Taxes are liable only if this stock is sold. But if cash was used in the purchase then the cash element of the bid will act as a gain on the sale of stock.
  • Type C – the buying entity has to purchase a minimum of 80% of the fair current market value of the target’s assets. In this type of transaction, tax liability results when the buyer purchases the assets of the target using means other than stock in the acquiring company. The liability of tax is calculated by comparing the buying price of these assets once adjusted.

Hostile Acquisitions

A reason and often a case for improvement in a takeover is the ousting of poor management. Perhaps the incumbent management is not to keep abreast of the changing market either technologically or forward thinking, when this happens a hostile acquisition is often a positive step.

This type of acquisition normally happens in mature market where a firm is failing but the current board of directors do not want to sell. There are two avenues for a purchasing entity to follow, either a proxy fight or a hostile buy out. Concerning a proxy fight, the buyer courts the shareholders to obtain their right to vote, the buying entity hopes to secure enough votes to oust the current board and gain control.

Directors and senior management of companies being targeted for take-over will normally hold out for a better offer or to simply try to stop the deal going through.

There are other ways for the incumbent board to resist which include “poison pills” and dual class recapitalization. Poison Pills is when the existing shareholders are issued rights, which if a bidder acquires a certain percentage of shares then shareholders can buy additional shares at a discounted cost, quite often 50% less than the current market value.

Do Acquisitions Benefit Shareholders?

There is past history that shows that the stockholders of the targeted firms do benefit substantially from being bought. Gains have been estimated at approximately 20% in mergers and as much as 300% in tender offers above the market estimate.

It is hard to measure the actual gains for the buyer however, there are some suggestions in bidding companies that the stockholders do benefit. But losses in value when a takeover is announced are fairly common, this points to an over evaluation by the buyer.


In the U.S mergers and acquisition are typically cyclical, with transactions following the market peaks and troughs. There has been five remarkable periods of substantial activity:

  • The turn of the 20th Century
  • 1929
  • The late 1960’s
  • The early 1980’s
  • The late 90’s

The most recent peak, bringing the 20th Century to a close, was associated with uncommonly high levels of takeover business. This was bought on by an extremely ebullient stock market and mergers and acquisitions grew at an alarming rate. The calculated sum of the dollar volume of mergers grew throughout the 90’s, achieving new records year upon year from 1994 to 1999. Many of the takeovers concerned were for vast amounts and involving global corporates.

Disney acquired ABC Capital Cities for $19 billion, Bell Atlantic acquired Nynex for $22 billion, World com acquired MCI for $41.9 billion, SBC Communications acquired Ameritech for $56.6 billion, Traveler’s acquired Citicorp for $72.6 billion, Nation Bank acquired Bank of America for $61.6 billion, Daimler-Benz acquired Chrysler for $39.5 billion, and Exxon acquired Mobil for $77.2 billion.

Merger Guidelines

There have been many cases of challenges stating antitrust concerning mergers and acquisitions, when these have occurred they have been settled by consent order or decree. The USLCB have clarified how they analyze these transactions through the “merger guidelines” which was issued on the 5th May 1992 (4 Trade Reg. Rep [CCH] 13,104) These are not only guidelines they are actual law, however, the antitrust authorities will utilize them to analyze any proposed transaction.

The merger guidelines of 1992 state that horizontal mergers and acquisitions are good for a competitive market and therefore of benefit to the consumer. The guidelines where issued to avoid any problems with the large number of mergers that are either neutral or beneficial.

There are five issues listed to aid in pinpointing problems in expected horizontal mergers:

  • Will the takeover be beneficial to growth and aid the market?
  • Will the proposed deal be negative for the market?
  • Is there a possibility of anti-competitive behavior, can this be avoided?
  • Will the proposed merger add to efficiency and natural growth that would not have happened before?
  • Will there be a prospect of failure, will either company no longer exist?

The guidelines analyze if the market place will suffer as a consequence of any transaction, it poses the question “where could consumers go if prices increased?” and they also brings into play the Supreme Court merger decisions of the 1960s.

Regulation D: Selling Restricted Securities

When you have or bought controlled or restricted stock and fully intend to sell the stock on the market, then you must file for an exemption from the U.S Regulator’s registration regulations.

Regulation D lets you do this as long as certain criteria are met, the following guide informs exactly what requirements must be met if you intend to sell restricted securities and how to register for a restrictive legend.

What Are Restricted and Control Securities?

If any sale of securities is in an unregistered category or they are private sales of stock from either an issuer or their affiliate these are classed as Restricted. The normal way of receiving these types of securities is through private offerings usually for professional services, or in response for the allocation of set-up funding as start up capital.

What Are the Conditions of Regulation D

Selling controlled or restricted stock in the marketplace can be done by following the necessary rules in Regulation D. Regulation D is not the only way for trading controlled or restricted stock, but it does provide a safe harbor exemption to traders. Regulation D’s terms are listed underneath:

  • Holding Period – Before selling any restricted stock, you must have held them for the appropriate length of time. This holding period starts when the securities are paid for, this holding period only applies to restricted stock.
  • Adequate Current Information – Information that is current and valid must be shown about the issuer before any sale can be made. This is to normally ensure the issuer has been in compliance with the necessary reporting requirements.
  • Ordinary Brokerage Transactions – The sales and transactions must be in accordance with routine trading transactions, there must be no additional commissions paid.

Can the Securities Be Sold Publicly If the Conditions of Regulation D Have Been Met?

Keeping to the rules and regulations of Regulation D, the sales of Restricted Securities is still not permitted until the legend has been taken off the certificate. This may only be done by a designated transfer agent.

This can be a complicated procedure, and any party buying or selling restricted securities should employ an agent to do this process.

Aggressive Stock Promotions Target Unwary Investors

Warnings have been issued by the USLCB to be aware that unsolicited offers are being touted to investors, there have been several reports about aggressive phone promotions. These typically site very aggressive sales tactics and verbal promises of quick gains.

Any such high pressure tactics should be a warning signal to any investor, a really good investment opportunity needs proper investigation. There are Federal securities laws designed to stop this sort of tactics and to main fair and transparent capital markets. However, the criminal mind closely follow the laws and try and find ways around them to exploit naïve buyers.

One precedent of this is the “pump and dump” schemes that were in existence in the late 1990’s. These schemes were all about aggressive sales tactics to sell penny shares to potential investors at hiked up prices.

A false market was created for the securities, and left the same buyers with worthless stock. These “penny stock” dealers were adamant that selling issuers were free to ask any price for their stock in an open market – it is fully the investors own decision to pay what he wants to pay. Agreed that this is the true philosophy of a free market economy, these scam merchants were not upholding the spirit of the law. The USLCB decreed that these operators “were not acting in the public interest” and duly flung them out of business.

There were recent complaints to the Commission about the abuse of the “Accredited Investor” exemption.

In normal circumstances to sell stock in the market to the general public a prospectus must be issued, but there are exemptions to this. These exemptions allow the sale to “qualifying” investors without a prospectus.

There have been cases of fraudulent sales people selling shares to investors who do not qualify, and involve them in high-risk investments.

They sometimes persuade naïve investors by suggesting that the state unfairly allows the rich to take advantage of the best opportunities. But the exemption rule was devised to allow small firms to get capital, and provide a measure of protection to investors.

To protect your money:

Always know who you are talking to, ask for identification, especially over the internet and by phone. Check their credentials are true and the registration history of the person trying to sell to you, the USLCB is available to contact for verification.

Above all never sign any documentation you have not studied, or in some way falsify your own personal information. If a person asks you to do this then you must question their motives.

Investors Beware of Certain Stock Promotion Practices

The USLCB has been issuing warnings to anybody to be on their guard against certain dealers who try to persuade you to make false claims about your financial situation so investors may qualify in high risk type investments in exempt securities. There does seem an increasing level of this type of fraud being operated.

Typically, this is initiated by a phone call, from a salesman or promoter that is unfamiliar. You should always be wary of any advice offered by strangers particularly if the initiation was a cold call in person or over the internet. You may be pushed some securities that are only for accredited investors, but the salesperson knows a way around this. The advice this person is giving is asking you to commit an act of fraud.

Should such advice be proffered it should run up a red flag immediately to you, if your advisor is asking you to commit one misdeed then what assurances do you have that many more will also occur.

That rationale given to this exemption is if you qualify you can then afford professional advice and you are in a position to be looking at high risk investments. If you cannot satisfy the criteria then it is probably the case that you cannot afford to take such risks.

Very often the sales person will make dubious statements about great gains to be made, either that it will soon be traded publically or for some season the values of the securities is about to rocket in value. These statements both breach the Securities Act.

Pump and Dump and Stock Swap Scam

There is a two part scam that is very popular at the moment that the Liquidations and Compensation Board is giving warnings about. It concerns worthless stock, swaps, and fraudulent sales agents claiming to represent bonfide firms.

Stage One: The Pump and Dump

A classic “Pump & Dump” scam an investor is contacted by a salesman with a deal too good to be true, a once in a lifetime opportunity.

The securities being offered are more than not small company stock that is sold over the counter. Penny stocks.

The salesman representing the brokerage house, will be holding a large amount of the shares and promoting the securities so the price rises.

Once enough investors have bitten, and paid over the odds for the securities, the broker then stops supporting the market and the securities plummet in value.

The supposed brokerage house then ceases to exist, and investors have worthless stock on their hands, which apparently has no demand.

Stage Two: The Stock Swap

Now is time for the second swindle, the investor still holding his worthless stock is contacted again from a second company, the name will have no connection with the former. Sometimes the fraudster will buy a reputable name for more credibility.

The scam will go on that the salesman is representing a group of investors trying to acquire recently declined stock, for tax benefits. He will then propose that the stock is swapped for some blue chip stock held by his clients. Normally to make the scam credible the new stock will be at a higher price as the victim originally paid.

But since the blue chip stock is valued higher the victim has to pay the difference between the two. One case was cited that an investor submitted $15,000 to an international bank where the scam artist held an account. Of course there never was a second blue chip security.

Approach Mini-Tenders with Caution

The USLCB’s advice in such matters is that they are concerned investors might be releasing their securities at below market price based on false data, it reminds all investors to scrutinize any offers for securities. Individuals or companies who wish to purchase stock at low prices should first warn investors it is below market price and work out the final costing’s of the sale. In addition to this, they should remind investors of their right to withdraw the offer, known as a mini-tender.

How do mini-tenders work?

Stockholders receive an offer for their securities that is far below the current market valuation. The whole idea behind the mini-tender is that the total purchase will be less than 20% of the company, in this way no filing of documentation is required with the securities commission or communication needed with all the shareholders. The profit is made when the securities are then sold at a profit on the market.

Mini-tenders are not takeover bids, which involve a much higher amount of stock. The mini-tender deal is normally a lock-in once agreed, but a takeover this is not the case. Another real difference between the two is that the targeted firm does not need to inform shareholders about a mini-tender offer.

What are the Risks?

The real risks are confusion over the price offered and a misunderstanding that commits you to sell the securities at a much reduced price compared to the open market. Offers that play on such confusion may be violating the anti-fraud regulations of the federal securities laws. The person can terminate the offer at any time, delay payment and make alterations. They may even decide not to purchase at all. Mini-tenders are normally to the benefit of the person making the offer, not the investor.

Why would anybody participate in a mini-tender?

So the question arises, “why would anybody be involved in a mini-tender?” You may wish to sell securities this way to avoid commissions that can really be expensive especially in the case of small number of shares being sold. Or you might enter into such an agreement when the securities you hold are hard to sell. It is always advisable to take advice before entering a mini-tender.


  • Clarify that it is really a mini-tender offer and not a takeover bid.
  • Understand fully the implications of the offer.
  • Check current market prices for the securities, compare it with the offer.
  • Do all the necessary background checks.
  • Do not buckle to high pressure sales tactics.

Scams Involving High Return Investments

In order to get your trust so that you are more likely to invest, many fraudsters pull you into a woven web of confusion, warns the USLCB. Often huge profits are touted from investing offshore, they may even guarantee returns on investment to ease you mind. These people are fully aware of the huge tax you are obliged to pay and your frustration of low gains. They will pray on this frustration.

One example given to the Liquidations and Compensation Board was about American farmers. The farmers were asked to attend seminars about the benefits of offshore investments with returns guaranteed at a minimum of 15%. One investor was lied to saying that large banks place depositor’s savings in such schemes.

If any person offers guaranteed returns at a higher than normal rate, there is great risk attached, and can you afford to take such a risk? Watch out for these red flags and fully evaluate any offers.

Offshore Investment Opportunities

Investing and sending money overseas carries potential large risks, you are no longer protected by federal laws. Many con tricks, frauds and deceptions often are connected with offshore opportunities so that the traceability of any transactions is more or less lost. Once your funds are in the hands of an unknown third party the chances of getting them back are slight.

Unsubstantiated Guarantees

What makes a guarantee? It is only as good as the person underwriting it, their creditworthiness and their financial standing. If they can easily borrow funds then why are they asking you to invest?

High Return & Low Risk

Usually higher returns carry more risk, and if you are under the illusion that all guarantees will conver this risk then read the passage on Unsubstantial Guarantees.

To Protect Your Money

Always beware of greater than normal opportunities offering high returns and supposedly low risk. Protect yourself at all times, investigate and thoroughly check out any investment opportunity, the registration of the entities offering the opportunity. You can do this by contacting the Mergers and Acquisitions Regulatory Body.

Be Aware Of Boiler Room Tactics

Unsolicited contact by email, phone by persons you do not know should be treated highly suspiciously. The USLCB warns to watch out for entrapment and fraud. This could easily be a tactic used by Boiler Rooms. These crooks wear many masks and are once again becoming prevalent. These sham operators try to gain your confidence and will give you a false sense of security, dangling the carrot of high returns, but it is only the fraudsters that will benefit.

The scam artists may look like they have a downtown business address amongst the financial elite, but it may be nothing more than a short term rental above a restaurant. Boiler Rooms never operate for your benefit, why would a complete stranger offer you such an unbelievable deal of low risk and guaranteed returns, often if it sounds to be too good to be true then it is.

It is often all about sounding credible and gaining your trust, new scams are being invented all the time, and some of the really complicated ones sound very plausible. Perhaps some medical breakthrough
of a small pharmaceutical company that is just about to break onto the stock exchange. The fraudster might have done his homework on you and play on your sympathy, they may know you have a relative who needs this wonder drug. Or that you are a very busy person that has not the time to investigate the offer fully, these opportunities always offer high returns.

If the opportunity is real, then reputable brokers would keep the information for their most prestigious clients. It does not make sense they would possibly want to offer it to total strangers, alarm bells should be ringing. To stop being duped by boiler room predators, look out for:

  • Contact that you have not asked for, ask pertinent questions and don’t hold back.
  • If the person who contacts you puts you under sales pressure, terminate the contact.
  • Investigate the opportunity in full and the people offering it.
  • High risk investment opportunities are a bit like gambling, only do so if you can afford to lose.
  • Look out for set ups, the scam artist’s first contact may be to get your confidence.
  • Look out for anybody you do not know contacting you.
  • Check with the USLCB first and do not invest with unregistered salespersons.

The Pifalls of Ponzi Schemes

The USLCB has also issued warnings about Ponzi-Schemes, also concocted to part investors out of their money.

The main procrastinator of the scheme and the originator was Carl Ponzi himself. During 1920 in Boston, Ponzi hustled up nearly $10 million from over ten thousand duped investors, incredibly 75% of them were the Boston Police Force.

Ponzi did give some funds back to the investors around $7.8 million but kept the balance of his ill-gotten gains. The original investors who put money in first were happy with the dividend and then recommended the opportunity to colleagues and friends. The scam grew until the media became aware of it. The originator Ponzi was arrested and dealt with, but not until everybody lost money on the investment, those original investors were sued by a bankruptcy trustee so even they lost in the end.

The intriguing issue about the Ponzi scam was how he managed to get some many people to invest. The high gains carrot was the main reason with a fast time period of return. The scam worked by any dividends being paid out of new investor’s money and not by profits, and sometimes their own money. It was a sort of borrowing from Peter to pay Paul, and was the first pyramid scheme of its kind.

Ponzi Schemes today are more sophisticated and look like real investment opportunities. The scams work because:

  • Investors receive “interest” dividend payments (a case of getting their own money back) and then are happy to recommend the scheme to all and sundry.
  • People involved in such schemes get regular statements that show profits that are not true.
  • Investors in such scams rarely investigate sufficiently as they have been referred by a good friend or family member.

The crooks that run such scams often amazingly persuade investors to reinvest their profits or dividends back into the sting. And as time progresses they lose everything, but investors are confident because the opportunity came by word of mouth and be trusted confidents. It is natural greed that people flock to such crooked deals, hoping to gain big profits.

The whole scam falls over eventually when there are not enough new investors to keep pumping money at the bottom end, therefore dividends and profits stop being paid out even to the original investors. There is very little chance of getting any money back if you have fallen foul of a Ponzi scheme.

Ponzi type scams can be difficult to identify, but here are some tips to help you spot one:

  • Always be on guard against low risk – high gain investment opportunities.
  • Check the registration of the salesman and the investment company, many Ponzi operators are just fraudsters and will not be registered.

Is it Independent Research or Paid Promotion?

The USLCB asks the general public and investors to make the definition between marketing material and real investment advice. Normally marketing material is sent by fax or email by companies paid to do so. Always take such material with a pinch of salt and remember to do your research correctly.

Common Promotional Language

There are several hackneyed phrases used in marketing hyped material, such as “Once in a lifetime opportunity” or “Red Hot Deal”. These blockbuster headlines are meant to grab attention, and will purport to offer real information.

Study the material and see if it makes unsubstantiated statements and guarantees that are not real. And do not be fooled into rushing into a decision by lines like, “don’t miss out, and act now.”

What to Watch Out For

  • Uncorroborated material. And statements like “we hold no responsibility for the accuracy of this information”.
  • Unrelated securities research on topics that you have no interest or are not pertinent. If somebody does not know your investment portfolio, how can they possibly give you good advice?
  • Any investment opportunities that are with non-listed companies, they have less rules and regulations to follow and less disclosure requirements, this brings higher risk involved.
  • Any opportunities that cite current events such as terrorism or stock shortages, these are created to give a sense of urgency and make you act in haste.