Mergers and acquisition is also known as “M&A”. It defines a legal operation consisting of the transfer of the assets and liabilities of one company to another company. The assets and liabilities of the absorbed company are transferred to the absorbing company, involving a dissolution and an exchange of corporate rights. The absorption merger is pure and simple, where the two companies concerned form a single entity.
The merger-acquisition is less strong, it aims at legal control and powers at general meetings. The operation leaves the legal individuality of the two entities concerned.
By definition, a merger is “the operation by which several companies decide to combine their assets and liabilities to form a single company”.
They are distinguished by two different criteria: the size of the company and its level of activity .
SIZE OF COMPANY
There are therefore two types of merger in relation to the size of the company:
These are two companies of the same size that decide to pool their resources to create a new company. The equal merger is a rare case because it is very impractical and complex.
This is where two or more companies of different sizes decide to merge, thereby increasing the capital of the acquiring company.
This follows the logic of taking full or partial control over the assets and capital of another company.
ACTIVITY LEVEL OF THE COMPANY
Mergers are also made by their similarity on the products or services offered by the merging companies, we can therefore see 4 different forms of mergers:
This consists of bringing together competing companies, which then makes it possible to reduce unit costs and strengthen the market power of two companies operating in the same sector of activity.
This consists of upstream or downstream integration. Upstream is the integration of a company’s supplier, for example, which ensures its supply and lower costs. Downstream, this consists of absorbing its distributor, for example, in order to have better control over the distribution of its own products.
This corresponds to a grouping of companies that do not work in the same sector of activity. However, the nature of their activity may have a technical or commercial link allowing them to share or divide the cost or potential know-how.
This is a grouping of two or more companies where the products and services offered are totally different, the companies in this case are mainly looking to diversify their portfolio in the market concerned.
ECONOMY OF SCALE
By pooling the means of production, it is possible to reduce costs significantly, which in turn leads to an increase in the quantity produced and therefore also in turnover. Most mergers take place in the industrial or manufacturing sector where fixed costs are often very high.
When two or more companies merge, this allows them to increase their weight in the market and thus change their position at the same time. This sometimes makes it possible to become the market leader thanks to the ability to produce much more than others by grouping together most of the companies working in the same sector of activity, which often leads to a monopoly position in the market concerned. This power allows it to lead the way by being able to choose prices, which it could not do in a market where competition remains strong.
Diversification allows merging companies to enter several sectors at once, thereby increasing their revenues and limiting the risk of failure.
Each company has its own skills or operational capabilities. Merging with several companies allows the acquisition of other skills that the original company did not have, thus giving the company a real additional advantage over the competition.
MEANS OF MARKET PENETRATION
Merging companies also makes it easier to penetrate a market without creating a new company. This can also be explained by the motivation in some countries to want to acquire lower transaction costs and thus increase the volume of production, but also to be able to circumvent certain barriers to trade.
This merger operation can also be called delocalisation of part of the production through an alliance with another foreign company. This also makes it possible to reduce uncertainty in foreign markets because it is less risky (the company is already established in the country concerned and therefore already knows the market) and less expensive.
This consists of enabling the improvement of the company’s competitive position in its various segments through increased internal efficiency of the company (by achieving economies of scale, better control of added value, sharing of experience and know-how) but also by strengthening its market power.
Acquisitions can be a way of balancing the finances of the acquirer or a way of redeploying to new activities if its core business is in trouble.
Definition of acquisition criteria
CRITERIAS RELATED TO THE TARGET
The attractiveness of the sector: examine the market and the competition already present in order to establish a real analysis of potential risks or opportunities and also to see profitability in the medium term.
The existence of complementary points between the target sector and that of the acquirer: this may be commercial or industrial (diversification strategy) or financial (conglomerate diversification strategy).
– Organisational consequences during the preparation phase :
During a merger or acquisition, certain problems are recurrent, such as the lack of consideration for the cost of integrating the two companies. This can create major internal problems in the company because the two companies have different working cultures, values and management habits. This is why the issue of communication is essential to maintain a good internal functioning of the company. Depending on the reason for the operation, the majority of stakeholders are more inclined towards a more or less intuitive management, whereas an in-depth “pre-merger” study should be carried out.
CONFLICTS OF POWER:
The confirmation of the management systems and styles of the two companies can generate a real risk in terms of loyalty and trust towards the new managers. Conditions of mistrust and hostility may also arise from employees, which can then undermine the effectiveness of the company’s management.
Each company has its own culture and therefore can be a real obstacle to a successful merger, leading to unclear decisions and visions as well as confusion on organisational issues and resistance to change by members of the acquired company.
The human consequences can be heavy during the preparation phase because employees do not have access to the elements of the negotiations. This is why a real stress can set in within the companies concerned with regard to the future changes that will take place during the execution of the merger or acquisition.
New managers may be appointed, employees may be replaced and this type of change creates a real feeling of distrust and non-confidence in its managers. These problems can therefore also lead to serious efficiency problems within the company. Even before the agreement is final, we can usually observe, at the level of the company that is going to be “absorbed”, a high rate of absenteeism, and therefore a drop in production and in the commitment of the employees to their company and therefore to their customers.
These modes and solutions determine the different techniques used by a company in order to be able to adapt with another company and also to be able to solve problems/conflicts. Each mode is determined by the types of and reasons for the merger, but also by the characteristics of the absorbed and the absorber.
This type of mode is executed when the absorbed company decides to preserve their culture as well as their identity. They want to remain independent and will try to maintain their organisational practice.
Therefore, this integration allows a change of culture and partner practice without hostilities as neither company wants to dominate the other.
Unlike integration, the absorbed company will fully adopt the new values and culture of the absorber. This is often the case with non-performing companies where the management recognises that their culture or values do not allow for full efficiency of their company. Consequently, after the merger there will be cultural, structural and behavioural assimilation.
In a separation mode the level of cultural exchange between the two entities will be low because the members of the absorbed company are determined to keep their culture and organisational system. They totally refuse to be assimilated into another culture. If they are allowed to do so, they will function as a separate and independent unit