A business merger happens when two companies join together to form a single organisation. Mergers are often used to boost market share, cut costs, and create stronger competition by combining strengths. By working together, businesses can create efficiencies, called synergies, that benefit both parties. In this guide, we’ll break down what a merger means, how it works, and the key points to consider.
Definition of business merger
A business merger is when two or more companies agree to combine into one. Unlike an acquisition - where one company takes control of another - mergers are usually mutual agreements where both businesses benefit from the partnership.
Put simply, a merger means two companies unite their resources, people, and operations into a single entity. The main goal is to create a stronger, more competitive business than either could achieve on its own.
How does a merger work in the UK?
In the UK, mergers are regulated to ensure fair competition and compliance with legal standards. Here’s an overview of how the process works:
1. Initial discussions
Companies discuss the feasibility and benefits of merging.
2. Due diligence
Each side reviews the financial records, legal obligations, and operational practices of the other. This is known as due diligence, it's important to ensure transparency and assess potential risks.
3. Regulatory approval
Approval from the Competition and Markets Authority (CMA) may be required for mergers with significant market impact. This is to ensure the merger doesn’t create a monopoly or reduce competition in the industry.
4. Agreement and execution
If both companies agree to proceed, legal contracts are drafted, and the merger is executed. This may involve the transfer of assets, restructuring, and the creation of a new entity.
5. Integration
Post-merger, the companies work together to integrate operations, cultures, and systems to achieve the intended benefits.
Seven types of mergers
Mergers come in different forms, each designed to achieve specific strategic objectives. Understanding these types can help businesses determine the best approach for their unique circumstances. A corporate lawyer can help guide you through this process. Here’s a closer look at the seven key types of mergers in the UK:
1. Horizontal merger
A horizontal merger take place when two companies operating in the same industry at the same stage of production combine. The goal is often to reduce competition, increase market share, and achieve greater economies of scale.
Example: Two airlines merging to offer expanded routes and more competitive pricing.
Advantages ✅
Enhanced market dominance
Streamlined operations and reduced redundancies
Greater bargaining power with suppliers
Challenges: Regulatory scrutiny to ensure the merger doesn’t create a monopoly.
2. Vertical merger
A vertical merger happens between companies at different stages of the supply chain in the same industry. This integration helps improve efficiency, reduce costs, and secure supply or distribution channels.
Example: A car manufacturer merging with a tire supplier.
Advantages ✅
Reduced production costs by eliminating intermediaries
Improved coordination and supply chain reliability
Enhanced control over production and delivery schedules
Challenges: Complex integration processes and potential regulatory concerns over market control.
3. Conglomerate merger
This occurs when companies in completely unrelated industries combine. The aim is diversification, which can help reduce business risk and open new revenue streams.
Example: A technology company merging with a retail chain.
Advantages ✅
Diversified income sources reduce dependence on one industry
Opportunity to enter new markets
Challenges: Difficulties in managing businesses with different operational needs and cultures.
4. Market-extension merger
Market-extension mergers occur between companies offering the same products or services that operate in different geographical markets. The goal is to expand the customer base and geographic reach.
Example: A UK-based beverage company merging with a similar company in the US to enter the American market.
Advantages ✅
Broader market reach and customer base
Greater global presence and opportunities for growth
Challenges: Navigating cultural and market differences.
5. Product-extension merger
This type involves companies that produce related products merging to expand their product lines. It allows businesses to leverage shared expertise and customer bases.
Example: A skincare company merging with a haircare brand to create a comprehensive personal care portfolio.
Advantages ✅
Increased revenue opportunities through cross-selling
Better alignment of complementary products
Challenges: Ensuring that the merged products align with the company’s brand identity.
6. Reverse merger
A reverse merger allows a private company to go public. Private companies can do this without undergoing the traditional initial public offering (IPO) process. The private company merges with a public company, gaining access to public markets.
Example: A private technology start-up merging with a small, struggling public firm to list its shares on the stock market.
Advantages ✅
Faster and more cost-effective than an IPO
Immediate access to public market capital
Challenges: Potential regulatory scrutiny and integration difficulties.
7. Friendly vs. Hostile mergers
While not technically a distinct type of merger, these categories describe the approach to the merger process:
Friendly mergers | Hostile mergers | |
|---|---|---|
Summary | Both companies agree to the merger, and leadership teams work collaboratively to achieve shared goals. | One company pursues the merger without the consent of the other’s management. These are often achieved through purchasing a majority of shares. |
Example | Two financial firms merging to pool resources and expertise. | A large corporation acquiring a competitor’s shares to force a merger. |
What is the difference between a merger and an acquisition?
Although the terms 'merger' and 'acquisition' are often used interchangeably, they refer to distinct processes:
Aspect | Merger | Acquisition |
|---|---|---|
Definition | Two companies combine to form a new entity. | One company takes over another. |
Control | Typically equal, with shared leadership. | The acquiring company gains control. |
Nature of transaction | Mutually agreed and cooperative. | Can be hostile or agreed. |
End result | A new company is formed. | The acquired company ceases to exist or operates as a subsidiary. |
Legal factors to consider before a merger
Mergers involve complex legal considerations, and thorough preparation is essential to avoid disputes or compliance issues. Key factors include:
1. Competition law compliance
Ensure the merger doesn’t violate antitrust laws, which aim to prevent monopolistic behaviour and protect fair competition.
2. Shareholder approval
Both companies usually need the agreement of their shareholders to proceed with the merger.
3. Tax implications
Evaluate the tax consequences of the merger, including capital gains tax, VAT, and corporate tax liabilities.
4. Employee rights
Consider how the merger will impact employees, including potential redundancies or contract changes.
5. Intellectual property (IP)
Ensure all IP assets, such as patents and trademarks, are accurately valued and transferred during the merger.
FAQs
What is a merger in simple terms?
A merger is when two companies join together to form one new organisation. It’s a way for businesses to grow, reduce costs, and increase their competitive edge.
Can a merger create a monopoly?
Yes, in some cases, mergers can reduce competition significantly, leading to a monopoly. This is why regulatory bodies like the Competition and Markets Authority review proposed mergers to ensure fair competition.
Final thoughts
Mergers are powerful tools for business growth, innovation, and market expansion. They are often driven by the need to consolidate resources, enter new markets, or diversify offerings. In all cases, understanding the types and processes involved is essential for success.
Navigating a merger requires careful legal, financial, and strategic planning. By staying informed and seeking professional advice, businesses can achieve their intended goals and comply with all legal requirements. Consulting with a solicitor for buying a business can make the process smoother and benefit all parties involved.
References
Mergers: When they will be investigated from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.