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addition to its operation. Perhaps the smaller company has a patent on an innovative technology or process, or perhaps the smaller company has a healthy market share in the business they operate in, or maybe the smaller company has a large database of clients which the larger company views as an untapped market. Or just perhaps the larger company would like to eliminate a competitor before it becomes larger.

During takeovers, the acquiring company usually assumes all assets and liabilities of the acquired company. Many times you hear that the acquiring company is assuming all stock and debt (read loans and bonds) of the acquired company. But in order for the takeover to become effective, the board, and ultimately the shareholders of the company, must approve such action. Of course the shareholders of the acquiring company must have already approved the takeover intent. In order for the shareholders of the target company to approve such a move, they would want a good tender offer. In other words, they would want the acquiring company to buy their shares at a good premium. Hence the jump in the stock price at the onset of the takeover.

The actual transaction may be carried out in several ways. Sometimes there is a stock swap, where the acquiring company issues and pays a certain number of its own shares in return for the outstanding shares of the to-be-acquired company, and sometimes the payment may be in the form of cash. Other times the transaction is a combination of cash and stock paid to the shareholders. Regardless of the transaction format, the shareholders are always looking for a satisfactory compensation before they agree to the takeover. Sometimes there may be more than one company interested in acquiring a target company. When several companies are serious about taking over another company, a bidding war may break out, where companies try to one-up each other in order to win over the shareholders. The target company's stock would probably see a much higher rise as a result of …