In business, a merger describes the merging of two companies. In most cases there is a buyer and a seller. Large banks have specialized in accompanying such takeovers or mergers, the specialist departments for this are called Mergers and Acquisition, or M&A for short, in German Fusionen und Takeovers. There is a whole range of different variants within the field of mergers. The difference between a takeover and a merger is the legal independence of the acquired company. In the event of a merger, it loses this and merges with the investor’s company. In the event of a takeover, the company taken over remains as a subsidiary.
- A merger means that the assets and liabilities of the acquired company are taken over by the acquirer.
- There are the following types of merger: upstream merger, downstream merger and sidestep merger.
- A merger occurs for strategic, financial or personal reasons.
- In addition to antitrust law, civil law also plays a role in a merger.
The types of a merger
Defined by digopaul, a merger means that the assets and liabilities of the acquired company are taken over by the acquirer. A merger can mean that one company is merged into the other, but a merger can also lead to the establishment of a completely new company, which emerges from the two old companies. In addition to a merger of a target company with the investing company, there are also merger variants within a group.
The upstream merger
This refers to the merger of a subsidiary with the parent company, although this is retained.
The downstream merger
This rather rare procedure describes the takeover of the parent company by a subsidiary. The daughter remains, the mother is absorbed in the daughter.
The sidestep merger
The sidestep merger is the merger of two sister companies within a group.
Causes and Reasons for Mergers
The reasons for a merger can be of different nature, but always result from strategic, financial, but also personal motives. A strategic takeover reason can be, for example, that the end producer takes over its largest supplier. A horizontal merger occurs when one company buys another company in the same industry. The goal can either be to increase market share or simply the desire to take a competitor off the market in order to better position your own brand. A broader positioning on the market with additional divisions that do not belong to the core business can also be a strategic motive. This diversification leads to a reduction in risk.
A merger can achieve a size that opens up access to the capital market. As the company grows, attempts are made to reduce fixed costs. Tax motives also play a role in a merger. The costs of the merger can result in a loss carryforward that will reduce taxation on corporate profits in subsequent years.
Management motives often have no rational triggers for this, but are to be seen purely psychologically. The desire for growth on the one hand drives mergers. On the other hand, there is often the assumption that the company taking over is prepared to pay a purchase price that is above market value.
The legal issues in mergers
First and foremost in a merger is the question of antitrust law. A merger increases a company’s market power and threatens its competitors. For this reason, mergers are not only monitored by the national antitrust authorities, but also across borders, for example by the EU competition commissioner. In addition to antitrust law, civil law also plays a role in a merger. The basis for a merger is a purchase agreement. However, a company cannot be acquired as a whole, but in its individual components. This means that the machines, the tangible and intangible assets and the debts are sold. The company purchase agreement must also be notarized under certain aspects. This is the case when a GmbH changes hands, or land is part of the business assets of the company being sold. In the case of a stock corporation, on the other hand, the merger takes place by taking over the shares. This can either be the acquisition of a block of shares from a major shareholder or the purchase of the shares in free float.
The protection of creditors in mergers
On the one hand, the Transformation Act allows two companies with different legal forms to be merged. On the other hand, it also grants the target company’s creditors creditor protection. Personally liable partners are still liable for five years after the merger, provided that the company taking over acts as a corporation.