Absorbed

DEFINITION of 'Absorbed'

1. In a general business sense, when a cost is treated as an expense instead of being passed on to the customer in the form of higher prices.

2. In underwriting, when an issue has been completely sold to the public. However, the underwriter may absorb (purchase) any shares it is unable to sell in the IPO in order to support the company's share price.

3. In mergers, when an acquired firm is folded into the acquiring company. The acquired firm is said to have been "absorbed" and the acquiring firm is called the "absorbing firm." This type of merger is called an "absorption."

BREAKING DOWN 'Absorbed'

1. For example, if a peanut butter company's cost for peanuts increases from 50 cents per jar to $1.00 per jar but the company keeps the cost of one jar at $3 instead of raising it to $3.50, it has absorbed the increase in peanut prices.

2. There are several basic types of agreements underwriters can make to sell the issuing company's stock. In a best efforts agreement, the underwriter is not responsible for any unsold shares and they revert to the issuer. In a bought deal, the underwriter agrees to buy all the shares and must resell them to recoup its investment. In a standby agreement, the underwriter specifically agrees to absorb any unsold shares.

3. An alternative to absorption is the creation of a new company. These different choices have different tax implications for both the company and its shareholders.

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