Mergers and acquisitions

The collective term Mergers & Acquisitions from the Anglo-Saxon-speaking world describes all transactions with which companies bring about a change in their entrepreneurial characteristics. In addition to the purchase and sale of company parts and subsidiaries, this also includes all types of conversion processes. In particular, the merger of two companies often occurring through mergers or the formation of corporations are common examples of mergers and acquisitions. But also the formation of strategic alliances, joint ventures or similar alliances fall under mergers & acquisitions. In many cases, a review of competition law is also required.

In the course of its business activities, a company sooner or later comes into a situation where management and shareholders are concerned about the future of the company. Often enough this is accompanied by economic crises. But also very often the optimization of your own business operations is in the foreground. For example, in certain situations the expansion of the business field by integrating a new structure may appear necessary. In others, however, the opposite may be the case. In short, we want to create the conditions for further economic growth. All transactions associated with these measures are summarized under the English-language term Mergers & Acquisitions.

The two-part term mergers & acquisitions comes from the field of business. In English, mergers refer to operations in which an association occurs, in this case an association of two or more undertakings. Acquisitions, on the other hand, stand for acquisitions of economic units, i.e. usually of companies or their shares.

So when we deal with Mergers & Acquisitions in this article, we first go into history with a review. In fact, the term mergers and acquisitions can be traced back to the late nineteenth century. At that time, there was a takeover wave (Great Merger Movement) in the USA, in which many smaller companies initially merged. Some of these still include successful companies, such as General Electric or Standard Oil Company (now mainly ExxonMobil). The resulting larger companies in turn bought up their smaller competitors. In this way, the market consolidated.

Actually, such and similar events occur again and again since then, sometimes speaking of a certain cyclicity. A good example can be seen in the car manufacturers, where the originally founded companies have emerged through constant expansions ever larger corporations. And the currently emerging smaller suppliers of electric vehicles are likely to soon become the subject of a wave of mergers and acquisitions. The same can be seen in other, still quite young industries, such as Internet services, where many smaller successful startups sooner or later become one of the top players.

Let us now come to a brief explanation of the various options in the area of mergers & acquisitions. In principle, three cases can be distinguished according to the type of result. On the one hand, mergers and acquisitions can lead to an increase in the number of companies at the end of the process. On the other hand, it is also possible that there is no change in the number of companies. But in most cases, mergers and acquisitions tend to mean a reduction in the number of companies initially involved.

When companies set up specialized areas in the course of their activities to support their business activities, sooner or later these areas are seen as separate parts. For example, a sales or research department can fulfill this circumstance. But sometimes such a part of the company can lose importance. Even if you continue to be successful in the respective sub-operation, this can lead to the desire for a separation from the main company. For this, you can consider a whole series of different mergers and acquisitions.

For example, you can start a new business as a subsidiary by spinning off an independent company. This can also be tax-advantageous if it is combined, for example, with royalties on transferred intangible assets. Or you sell the assets there by asset deal to an interested party. Also with the outsourcing of real estate you can use tax advantages. Another case could also be if a company wants to slim down before an IPO in order to create a higher attractiveness among future investors. And to give a concrete, well-known example, we refer to the separation of DaimlerChrysler, where completely different reasons were in the foreground. In all the cases mentioned, however, a part has been separated from an original company, which is now, at least for a certain time, independent.

In addition, several companies can set up a new joint venture. Thus, there are also mergers & acquisitions, which lead to an increase in the company, in which no separation from already existing structures is necessary.

Imagine two competitors offering the same services in two areas. For example, this could be electricity from solar and wind power. However, instead of competing in two areas, the two companies could also agree on a different strategy. Because if every company offers only one of the two products on the market, then you can expect a certain relief. So you can make an agreement here, which of the two companies in which area should be solely active in the future. By spinning off and transferring the respective part of the business left to the competition, the number of participating companies in the merger and acquisition can therefore remain the same.

However, partnerships are also conceivable in which no change takes place at company level. The partnerships can be strategically as well as operationally oriented. This can be achieved, for example, by joint ventures, consortia or other communities of interest.

On the other hand, however, it may also be the case that a company wants to part with a business that is unprofitable and has no prospect of successful restructuring. In this case, this would mean a closure of this part, in which, from the company's point of view, the divestment of the assets of this part can only be envisaged.

But mergers & acquisitions usually mean a merger of several companies, from which usually only one emerges. On the one hand, this can be done by merging two companies. Either one of the two companies can exist, while the other merges into it. Or you create a completely new one by merging two companies. Thus, in addition to the classic purchase of a company, the merger of the two companies is also possible. This can be done by consensus or via a hostile takeover.

The path leads in a completely different direction if a parent company, for example a holding company, wants to separate from an unprofitable subsidiary. On the one hand, the sale of the subsidiary is a choice. In most cases, this should be the most financially advantageous and thus the most attractive alternative. Or you liquidate the subsidiary.

Let’s take a look at the usual processes that can be observed at Mergers & Acquisitions. They can be divided into five successive steps.

First of all, there is always an initial starting point from which mergers & acquisitions begin. This starting point is always directly related to the purpose that Mergers & Acquisitions should fulfill. Is the reception of strong partners in the foreground? Do you want to forge strategic alliances? Or should only a strengthening of the position in the market strengthen a company? As much as the ideas on this point may differ from case to case, only the awareness of the need for such changes creates the prerequisite for the further procedure in the context of mergers and acquisitions.

So once you have taken this initial idea so that you are clear about the advantages you want to realize for the company through mergers & acquisitions, you automatically come to the next question: how? There are as many different answers as there are triggers.

If foreign companies come into focus, then the search for suitable candidates begins, which are generally also called targets. For example, in a larger project that exceeds your own possibilities in any way, you can look for suitable partners for a joint venture. The search parameters then of course depend in particular on the requirements of the company and its project. If, on the other hand, you want to weaken competition or expand your own market position, you look for companies that are eligible for a buy-up or with whom you can make other appropriate agreements.

On the other hand, the search for suitable goals in the context of mergers and acquisitions may also depend on the available means. And the risks of failure must also be considered in detail when looking for goals. But more on that later.

If you have found one or more potential targets, the actual examination begins. You look at the details that matter in your own projects. Does the goal meet the requirements needed to fulfill the purpose? Or are these conditions only partially met, so you have to adjust the plans further to ensure success?

So very different aspects also play a role here. Some even often only result in the course of such a due diligence examination. If due diligence does not take one aspect into account, this may determine the success of the project. For example, in international mergers and acquisitions, the respective mentality of employees can also play a role, which could have an additional impact on the company philosophy, which is often different for two companies. But there are usually completely different factors in the foreground of such an examination, namely facts that can be derived much more precisely from annual reports. But the question of future taxation also plays a major, often even decisive role in the course of the due diligence audit.

In the context of a due diligence audit, a joint letter of intent of all parties can also gain significance. This usually also includes regulations on measures that should apply to the different possibilities of the outcome of a due diligence examination.

Whether in the context of mergers & acquisitions, several candidates have the basic prerequisites for the intended purpose or only one candidate is in question, it is the negotiations that ultimately decide on the formation of a project. In doing so, one must always weigh which properties of the shortlisted goals have which value. In addition, an informed risk assessment must be carried out in order to make the best possible decision on this basis. Therefore, due diligence should take into account all relevant factors and its outcome should include appropriate decision supporting recommendations.

Once an agreement has actually been reached, the formal conditions for implementing the agreement must first be fulfilled. This includes, for example, steps in the course of business conversions or the preparation of other contracts, which are themselves subject to legal review. Other specialist areas can also have a significant influence on the drafting of contracts, for example with regard to potentially involved management consultants or auditors. And if other investors can also declare legitimate interests in this context, then of course they also have a say in this stage of the procedure.

This is usually followed by the signing of treaties and the fulfillment of mutual demands. Under certain circumstances, a controlling of the further development is subsequently provided, which takes over the comparison between agreed or projected nominal and actual values.

The most important means by which most mergers and acquisitions come about is debt financing. Because in order to carry out an extraordinary project, considerable financial resources are usually required. So lenders should have an interest in ensuring that the money they contribute actually serves their purpose. And by purpose, of course, is meant an economic, financial success. This logically requires both a risk analysis in advance and the previously mentioned controlling.

Nevertheless, planning and reality can differ considerably in some cases. The best example of this is probably the corona pandemic. However, there are also often opportunities to adapt the original plans to the constantly changing real conditions. For this reason, the direct route via Mergers & Acquisitions rarely leads to the goal, but even a winding path can ultimately bring the desired success. Nevertheless, along the way, the question is always whether the end also justifies the means used to achieve the end. But usually you can only answer this question at the end of the way. And even then, the answer may be anything but clear.

Since mergers & acquisitions can strengthen the entrepreneurial position in the market, a competition review in advance of such transactions is often necessary. When a firm consolidated in this way acquires a dominant market power, this is generally critical for many reasons. After all, a monopoly in a sector that affects the general public can do considerable damage. But agreements in economic aspects between several competing companies can also be generally harmful. Therefore, antitrust law is also addressed in this context as a component of competition law both in Germany and in most other countries of the world.

In Germany there is the law against restrictions of competition (GWB). Furthermore, the Federal Cartel Office as a central authority supervises national competition. In addition, the Federal Network Agency is also responsible for certain economic sectors (e.g. railways, electricity, telecommunications). And in the EU, corresponding rules (Treaty on the Functioning of the European Union, TFEU) and authorities (Directorate-General for Competition under the supervision of the Commissioner for Competition; current Commissioner: Margrethe Vestager) are also established. EU law generally takes precedence over national law, unless competition restrictions are only at national level.