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 do not want to be shareholders of Humming. BirdCo has assets of $5 million with a basis of $6 million. Its liabilities are $2 million. Which of the following would be the best solution for Humming in its acquisition of BirdCo?

Question

Quizplus · Accepted Answer

A Type B reorganization, which involves Humming acquiring BirdCo's stock in exchange for its own voting stock, would likely be the best solution. This method allows Humming to gain control over BirdCo without needing to buy its assets directly and can be more appealing to BirdCo's shareholders who support the acquisition for the purpose of changing management, while also potentially addressing the concerns of those who do not wish to be part of Humming by offering them Humming's stock instead.