There are several ways to combine two companies. In this article we will take a look at the meaning of the terms, which are often confused and overlap with each other. You will find out what mergers, acquisitions, mergers by acquisition, mergers by the formation of a new company, and other forms of company transformations are and how they are different. After reading, it will be crystal clear to you.

Mergers and Acquisitions – What Is the Difference Between Them?

We generally call the mergers and acquisitions processes “company combinations”, i.e. the trend of combining companies into larger and larger business units. Companies assume that through combinations they will achieve synergy effects and the combined business will be more profitable than if each part continued separately.

So how are mergers and acquisitions different?

Merger = voluntary link-up between several entities forming one company

A merger is an agreement between companies that judge that they will do better together. One of the companies ceases to exist or both are dissolved and a brand new one is established. The plan behind a merger could be, for example, to make use of spare production capacity, the prospect of a larger market share, obtaining new know-how, technology patents and procedures or credit capacity. All companies in a merger process have to have the same legal form (limited liability company, joint stock company, cooperative, etc.).

We differentiate between two types of merger: by acquisition and by the formation of a new company. We can illustrate the situation using an example with two companies, which we will call A and B.

  • A merger with the formation of a new company (i.e. a merger of equals) – both companies (A and B) are wound up and a brand new company (C) is established. To put it a different way, A + B = C. Mostly they are companies of equal strength and the new name can be a combination of the original names, as was the case in 1998, when Exxon and Mobil merged into one company: ExxonMobil.
  • Merger by acquisition – company A ceases to exist and its rights and assets are transferred to company B. Typically, the “stronger” company, whether from the viewpoint of awareness of its trademark, number of customers, renown or other factors, remains. There was recently a merger between two forwarding companies, DPD and Geis, in the Czech Republic. The Geis brand does not exist anymore.

Acquisition = one company takes over another

In contrast to a merger, an acquisition does not always have to happen based on an agreement. It is the purchase and sale of a whole company or a majority interest (over 51%). In the case of an acquisition or take-over, no company is established or ceases to exist. An acquisition can take place in capital form (i.e. equity, through the purchase of the necessary number of shares in a joint stock company or interests in a limited liability company), in the form of monetary and non-monetary contributions or through the purchase of an enterprise or part thereof with all assets and liabilities that go with it.

On the Czech insurance market, we recently saw, for example, the purchase of Axa by Uniqa. We often encounter acquisitions in the form of the purchase of modern start-ups by larger companies.

The acquisition of a company can be friendly or hostile. We will again explain these methods using the example of companies A and B.

  • “Friendly” acquisition – company A takes over company B, where company B’s management agrees to the acquisition.
  • “Hostile” acquisition – company A takes over company B and company B’s management does not agree to the acquisition.

Types of Corporate Combinations by Relations in Industry

Companies combine for various reasons. We differentiate between four types of corporate combinations by relations in the industry.

  • Horizontal integration – integration of businesses at the same production stage and in the same industry (basically competitors). They achieve a positive effect resulting from production or provision of services to a larger extent. The aforementioned forwarders or insurance companies are an example of horizontal integration.
  • Vertical integration – combination of businesses at various related stages. If a company owns its supplier or customer, it has complete control over the course of business, manages costs more effectively and gets rid of dependence in commercial relations. It can obtain the opportunity to better coordinate and plan production or services. For example, it could be a situation where a business that sells clothes buys a sewing workshop that supplied it with clothing, or a flour producer buys a bakery.
  • Congeneric integration – a combination between companies from related industries. A frequent example from real life is the integration of a bank and insurance company, where both are active in the financial sector, but their products are different.
  • Conglomerate integration – concentration of companies without a relationship between them. Their aims could be diversification, expansion of the product range or use of spare resources. eBay bought Paypal in 2002 and because each of them does business in a different industry it was a conglomerate integration.

Risks of Mergers and Acquisitions.
What To Be Careful Of?

When combining businesses, it is necessary to take legislation into consideration, for example Act No. 143/2001 Coll., on economic competition, which regulates businesses’ position on the market. This prevents a situation where only one large company controlling a whole industry is active on a market. The act states that a dominant position is enjoyed by a competitor or competitors with joint dominance that have a larger than 40% market share in the period in question. Mergers and acquisitions are also supervised by the Office for Protection of Competition.

The process for merging companies is very demanding and requires careful preparation so that everything runs smoothly without any problems. Most troubles are caused by poor preparation, whether in terms of information or legal issues. It could happen that the resulting effect is not what the companies expected or the customers do not accept the change and the company loses them. Mergers and acquisitions are also complicated by insufficient communication and errors in negotiation, due to which the parties cannot come to an agreement. In the case of cross-border combinations, there could be disharmony between the two parties because of cultural and language barriers.

We Will Advise You on Corporate Mergers and Splits

You now know how what is mean to merge two companies. You should thoroughly consider whether a merger by acquisition, merger by formation of a new company or corporate takeover makes sense and will bring the desired result. And certainly don’t underestimate planning.

Do you need help with preparations and do you want to be certain that everything will run smoothly? Then professionals in the field will come in handy. We will be happy to help you! Get in touch with us using the contact form and we will discuss what we can do for you.

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