11 Nov Merger: definition, meaning and differentiation from acquisition

What is a merger?

The term “merger” is an English name for a fusion, meaning a business combination. A merger may relate to two or more companies and typically serves to expand market power. As a rule, the term occurs in connection with mergers and acquisitions (M&A). This is the name of the business of mergers and acquisitions. Particularly in investment banking, M&A play an important role. While a merger takes place under mostly equal parties, as a purchaser in an acquisition you take complete control over the acquired company.

The merger and its meaning

A merger is a kind of fusion

A merger is a fusion of previously legally independent and self-reliant companies to a new economic and legal entity. In Germany, such mergers are subject to certain conditions in connection with the Act against Restraints of Competition (Competition Act – GWB). The merger control is handled by the German “Bundeskartellamt”. In the case of cross-border mergers within the European Union, the control of the European Commission is in effect.

In the course of a merger, at least one participating company loses its legal independence. In the narrower sense, a merger means a fusion under the law of stock corporation. As such, the merger requires certain legal forms of the companies involved. Another requirement is a liquidation-free transfer of assets in the course of universal succession.

Basically, stock corporation law recognizes two forms of mergers or fusions:

• Merger by incorporation: this is about the transfer of the assets of a society to an existing society.
• Merger by new formation: In the course of a merger through new formation, the assets of the participating companies as a whole are transferred to a new company

Mergers and their balances

At mergers, you can distinguish between the closing balance and the balance-sheet: 

• The closing balance here denotes the track record on the part of the transferring company. It must be drawn up in accordance with the requirements of the annual balance sheet.
• The merger balance represents a special balance sheet that relates to new legal entities arising from the merger. Its goal is to show the newly created capital and wealth situation after the fusion. It is used to calculate the exchange ratio and the counterperformance and is a balance sheet with actual values, which also takes into account hidden reserves. Such a merger balance can be set up separately.

The annual balance following the fusion is the same as the merger balance.

In an acquisition, ownership rights are transferred

Demarcation: mergers and acquisitions

Mergers are understood as one of the opportunities in the Mergers and Acquisitions business. M&A refers to all transactions related to the transfer and encumbrance of property rights to companies. M&A may result in new corporate formation, fusion, restructuring or legal transformation. Acquisitions stands here for a takeover or asset deal.

A merger is a pooling of the respective corporate assets, while companies buy other business units or entire companies in an acquisition. In a majority acquisition, the assets available to the company to be purchased (target) are integrated into the buying company.

An acquisition is always based on a transfer of ownership of a business. As a buyer, you acquire both management and control rights, which are transferred to you witinh the purchase. With regard to this transfer of ownership, various deals are possible for acquisitions: the share deal and the asset deal. In the case of a share deal, the acquisition is made directly through the acquisition of voting rights. Asset deals provide for the purchase of the assets and liabilities of the target company. This acquisition takes place either in the form of cash (cash offer), shares and other securities (stock swap) or as a hybrid.

M&A for further transactions

Mergers and Acquisitions may also identify other transactions and actions. The term also stands for the financing of a company purchase, the assumption or creation of joint ventures. A special M&A procedure is the squeeze out. This is a method of transferring shares of minority shareholders for a cash payment.

Legal bases for mergers and acquisitions and corresponding transactions can be found in several legal texts. The numerous regulations are the subject of capital market law, in particular the Securities Trading Act, antitrust law, tax law and the Foreign Trade Act. Since 2002, in Germany, the German Securities Acquisition and Takeover Act  has also played an important role.

Scope of Mergers and Acquisitions

Hostile takeover often takes place on the stock exchange.

Mergers are particularly important in connection with the corporate finance business. This applies primarily to investment banks. Various professional groups are involved here, especially auditors, lawyers and consultants.

A distinction should be made in M​​&A transactions: the friendly and the hostile takeover. As part of a hostile takeover of shares, a prospective buyer acquires the target company on the stock market, for example, by acquiring a large share package. In this way, the buying company receives a majority share. A friendly takeover is based on an agreement with the management. In a subsequent step, confidentiality declarations and letters of intent are signed, which initiate the transaction.

Often Mergers and Acquisitions are major business events that are accompanied by high public and media interest. There are always business strategies behind M&A transactions. Often, these businesses are accompanied by structural changes. These include changes in the personnel structure and job losses on the part of the acquired company. As a result, acquisitions are often problematic for the acquired companies in the long term, but can avert insolvency in the short term. M&A transactions can also be beneficial to the company’s shareholders.

Reasons and motives for Mergers

Motives for mergers and acquisitions may relate to corporate strategy, financial or personal reasons. Strategically, for example, market motives are important because a merger can open up new sales markets or eliminate the competition. This increases the bargaining power.

An important financial motive relates to the capital market. For example, some companies only achieve a company size through a merger, which makes them capital marketable. Likewise, economies of scale are to be taken into account, which contribute to cost reduction and hence profit increase. Tax motives can also play a role. For example, deficit carried forward can reduce the overall corporate tax burden and thus the tax rate.