What is absorbing a company?

When one company is taken over by another, the capital and assets of the first company are transferred to the second company. The absorbed company disappears as a company and forms part of the absorbing company.

The term "absorption of a company" must be differentiated from that of "company merger”. The merger occurs when both companies merge, disappear and form a new one. That new company then possesses the rights and obligations of the two that have disappeared.

Types of company takeovers

The takeover of a company can be done in two different ways:

  • Voluntary absorption. In this case, both companies reach an agreement. The absorbed company will receive an amount of money and will voluntarily allow itself to be absorbed by the stronger company. This type of absorption usually occurs when a company is going through an economic crisis and wants to avoid bankruptcy. The absorbing company may also offer the absorbed company some participation or some specific positions within the company.
  • Takeover using a hostile takeover bid. A company can make a takeover bid, that is, a takeover bid, in a hostile manner. In this case, the company that carries out the hostile takeover bid intends to buy the shares of the company to be acquired without any type of negotiations, that is, the future acquired company does not want to be absorbed. Thus, there is a confrontation between both companies and usually ends in a rise in the value of the offer to shareholders.

The takeover of companies has both advantages and disadvantages. An absorbing company can take advantage of the network of distribution, customers and all kinds of structures of the absorbed company to expand and increase its profitability. However, it may also be the case that the investment of money is not profitable and the established objectives are not achieved.

Thus, the strategic, economic and market plan must be analyzed well, and have clear objectives.

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