Humming Inc is interested in acquiring BirdCo., a supplier of materials for Humm

Question

Humming Inc is interested in acquiring BirdCo., a supplier of materials for Humming's products, and feels that it could improve the management of BirdCo. Current management has been lax in monitoring product quality, which could lead to recalls or lawsuits. Management of BirdCo. is not supportive of a merger because they could lose their positions, whereas most of the shareholders support the acquisition as a method of obtaining new management. There is a very small minority of shareholders who don't want to be shareholders of Humming. BirdCo has assets of $5 million with a basis of $6 million. Its liabilities are $2 million. What would be the best solution for Humming in its acquisition of BirdCo? (remember the subject of this chapter-----Corporations Reorganization)

Explanation / Answer

As humming co depends on bird co for its rawmaterial supplies, merger with bird co decreases the cost of purchase of raw material .

management of bird co can be improved after merger which will reduce its lawsuits and also increase the quality and thereby outside sales by bird co will also be increased

only few number of shareholders are not willing to merge with humming co and therefore they can be settled privately .

value of bird co = $6million - S2million = $4million

on considering the advantages of merger , humming should acqire the bird co by paying its net worth i.e., $4million including private settlement to non agrreing shareholders.

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