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Fidelity Bonds, Surety Bonds, and Criminal Insurance





Two important types of insurance available to companies are called fidelity bonds and surety bonds. While many people think only of natural perils in connection with insurance, other unplanned losses can be insured. One such type of loss is due to theft and other criminal behaviors of employees.

Employees who are placed in positions of trust—especially positions that require handling money, such as cashiers, accountants, bartenders, and loan collectors—can embezzle or steal large sums of money from the company. Fidelity bondsprotect employers against losses caused by dishonest and fraudulent acts of employees.

A second type of unplanned loss occurs when a company is unable to meet the perfor­mance terms of a contract. For example, a customer who asks a contractor to build a new warehouse may lose money if the warehouse is not completed by some specified date. In this case, the customer may ask the contractor to purchase a surety bond,a bond that provides monetary compensation if the bonded party fails to meet the performance terms of a contract. If the contractor fails to meet the completion deadline, the surety bond will compensate the customer for the face amount of the policy. Without the surety bond, the contractor might be obligated to compensate the customer directly.

A related type of insurance protects the company against the criminal acts of others. This is especially important in the case of burglary, robbery, and theft. Each of these perils requires a separate policy, because the risks differ and require different premiums. Burglary insurancecovers losses when the company's property is taken by forced entry. If a "cat burglar" breaks into the premises at night and steals expensive display items, burglary insurance will cover the loss. Robbery insurancecovers losses when the company's property is taken by force or threat of force, such as frequently happens during a holdup of a bank or convenience store. Theft insurance,which is general coverage, applies to all losses due to any act of stealing, including burglary and robbery. Note that employee theft may be covered by either fidelity bonds or theft insurance.



A very important group of insurance policies covers losses due to sickness, injuries, or deaths of employees. Partners may purchase life insurance policies that cover them for the unexpected death of one partner. In this section, however, we focus on insurance that provides benefits to employees and their survivors. This type of insurance, called employee benefitinsurance,is for the benefit of employees and is intended to protect them rather than the com­pany in the event of fortuitous loss. Employee benefit insurance includes health insurance, life insurance, and annuities.

Health Insurance.The rising costs of health care have caused great concern for many Americans and their elected officials, including the Clinton administration. Although medical research has led to cures and treatments for many serious illnesses, the costs of treatments may be excessive. In addition to the direct cost of treatment, employees may lose wages and other benefits while they are sick. Health insuranceis designed to cover losses suffered by employees due to illness or injury. These policies typically have a deductible amount which the employee pays when the loss occurs.

It is common for employers to provide group health insurance coverage for employees, in which employees pay part of the premium and the employer pays the other part. Health poli­cies typically cover hospital, surgical, and other common expenses. Major medical expenses, such as those for cancer treatment, are often covered by specific clauses in the policy. Many policies require coinsurancefor some medical expenses, meaning the insured employee must pay a certain percentage of eligible medical expenses, such as 20 percent. In addition, certain costly, experimental medical treatments, such as bone marrow transplants, may be excluded.



Life insuranceprovides for payment of a stipulated sum to a designated ben­eficiary upon death of the insured. Life insurance is one of the most important investments wage earners can make for their dependents. As long as the primary wage earner is alive, the well-being of his or her family is reasonably safe. If the primary wage earner dies, however, the family survivors may be hard pressed to find financial support. Life insurance, especial­ly for the primary wage earner, is one of the basic means by which survivors can be assured of a reasonably comfortable lifestyle.

Social insurance programs are provided by government agencies and regulations. Generally, these programs are financed entirely by mandatory contributions from employers and / or employees rather than by general (tax) revenues. The contributions are set aside for the social insurance

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Mergers and Acquisitions

There is no more dramatic or controversial activity in corporate finance than the acquisition of one firm by another or the merger of two firms. The acquisition of one firm by another is, of course, an investment made under uncertainty. The basic principle of valuation applies: A firm should be acquired if it generates a positive net present value (NPV) to the shareholders of the acquiring firm.

There are three basic legal procedures that one firm can use to acquire another firm: (1) merger or consolidation, (2) acquisition of stock, and (3) acquisition of assets.

A merger refers to the absorption of one firm by another. The acquiring firm retains its name and its identity, and it acquires all of the assets and liabilities of the acquired firm. After a merger, the acquired firm ceases to exist as a separate business entity. A consolidation is the same as a merger except that an entirely new firm is creat­ed. In a consolidation, both the acquiring firm and the acquired firm terminate their previous legal existence and become part of the new firm. In a consolidation, the dis­tinction between the acquiring and the acquired firm is not important. However, the rules for mergers and consolidations are basically the same. Acquisitions by merger and consolidation result in combinations of the assets and liabilities of acquired and acquiring firms.

There are some advantages and some disadvantages to using a merger to acquire a firm:

1. A merger is legally straightforward and does not cost as much as other forms of acquisition. It avoids the necessity of transferring title of each individual asset of the acquired firm to the acquiring firm.

2. A merger must be approved by a vote of the stockholders of each firm. Typically, two thirds of the shares are required for approval. In addition, shareholders of the acquired firm have appraisal rights. This means that they can demand that their shares be purchased at a fair value by the acquiring firm. Often the acquiring firm and the dissenting shareholders of the acquired firm cannot agree on a fair value, which results in expensive legal proceedings.



The second way to acquire another firm is to purchase the firm's voting stock in exchange for cash, shares of stock, or other securities. This may start as a private offer from the management of one firm to another. At some point the offer is taken directly to the selling firm's stockholders. This can be accomplished by use of a tender offer. A tender offer is a public offer to buy shares of a target firm. It is made by one firm directly to the shareholders of another firm. The offer is communicated to the target firm's shareholders by public announcements such as newspaper advertisement. Sometimes a general mailing is used in a tender offer. However, a general mailing is very difficult because it requires the names and addresses of the stockholder record, which are not usually available.

One firm can acquire another firm by buying all of its assets. A formal vote of the shareholders of the selling firm is required. This approach to acquisition will avoid the potential problem of having minority shareholders, which can occur in an acquisition of stock. Acquisition of assets involves transferring title to assets. The legal process of transferring assets can be costly.

Financial analysts have typically classified acquisitions into three types:

1. Horizontal Acquisition. This is an acquisition of a firm in the same industry as the acquiring firm. The firms compete with each other in their product market.

2. Vertical Acquisition. A vertical acquisition involves firms at different steps of the production process. The acquisition by an airline company of a travel agency would be a vertical acquisition.

3. Conglomerate Acquisition. The acquiring firm and the acquired firm are not related to each other. The acquisition of a food-products firm by a computer firm would be considered a conglomerate acquisition.

 








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