M&A transactions consist in combining business entities with a similar market position in order to create a completely new venture or take over a company with a weaker position on the market by a stronger company. The creation of capital groups enables enterprises to develop, increase competitiveness and strengthen their position on the market.
There are two main types of M&A transactions – mergers and acquisitions.
What is a company merger?
A merger, also called consolidation, consists in combining at least two enterprises by transferring all the assets of these entrepreneurs to another, newly established economic entity. The existing entrepreneurs are removed from the register of entrepreneurs, and the new entrepreneur is entered in the register of entrepreneurs as a capital company. Partnerships and capital companies are most often merged in this way, partnerships may merge only when the applicable regulations, e.g. the Law on the Bar, do not prohibit it. Due to the size of the enterprises, their position on the market and the area of operation of the enterprises which intend to concentrate, three types of mergers are distinguished: horizontal (horizontal) merger, vertical (vertical) merger and conglomerate merger.
What are the types of company mergers?
Entrepreneurs operating on the same market who have so far acted as competitors participate in horizontal concentration. Making such a concentration may result in the creation of an enterprise with significant market power on the relevant market, which will create a serious threat to competition, as other entrepreneurs, under the influence of difficulties resulting from the indicated concentration, will cease to compete with such an economic entity. Therefore, the control of such a concentration will be carried out in the most thorough way by the antimonopoly authorities.
Another type of merger of independent entrepreneurs is a vertical merger. It is achieved through the merger of entrepreneurs operating at different levels of economic turnover. The purpose of the merger is to reduce costs, introduce innovations or improve the product. This merger may carry a threat that will limit other producers’ access to raw materials or, at a higher level, to markets, but such a merger may also have a positive effect on the market by improving the quality of the goods or lowering the price.
A special type of concentration is a conglomerate merger. The merging entrepreneurs operate in other industries, on other relevant markets, there is no competition between them. The scope of their business activities is not related to each other until the moment of concentration, and is even separate. Concentration allows the company to operate in different areas of the market, which, as a result, when one of the areas declines, the entrepreneur will maintain its existence thanks to other areas of activity. Financial conglomerates and management conglomerates can be distinguished.
Acquisitions of companies
The second type of M&A transaction is a takeover, also called incorporation, which consists in transferring all the assets of one enterprise (the acquired company) to another (the acquiring company) for shares or stocks that the acquiring company issues to the shareholders of the acquired company. The acquiring company still retains its legal existence. After the transfer of assets, the acquired company is deleted from the register of entrepreneurs, and the acquiring company
makes an entry in the register regarding the increase of the share capital. The acquired partnership may not be deleted from the register of entrepreneurs until the increase in the share capital of the acquiring company is registered. Incorporation usually takes place when the market forces of the merging entrepreneurs are not balanced and the enterprise with greater market power absorbs the weaker enterprise.
Mergers and acquisitions – summary
Mergers and acquisitions are multifaceted, complex transactions that need to be analyzed in legal, tax and economic terms. Before proceeding with the M&A transaction, it is necessary to conduct a legal audit, the so-called due diligence, which will allow to evaluate the company, determine its current situation and identify potential legal risks related to the planned M&A transaction.