A merger occurs where pre-existing companies are combined, which results in the creation a of single new company. Typically, the merging companies are equal or similar in terms of their existing size and scale of operations. The newly merged company tends to assume a new company name and operates under new management.
It is important to note that, despite often being used as interchangeable terms, mergers and acquisitions are two distinct restructuring processes. A merger involves separate companies joining forces to establish a new joint company. In contrast, an acquisition involves a financially stronger company taking over a smaller, financially weaker, company.
Mergers in the UK are subject to the legislation contained within the Enterprise Act 2002. Alongside this, the Competition and Markets Authority (CMA) is the regulatory body that controls and scrutinises mergers, in order to prevent mergers from unfairly restricting competition. For example, in 2019, the CMA blocked the proposed merger of the UK supermarket giants, Asda and Sainsbury’s, over fears that reduced competition would result in higher prices for consumers.
There are several types of merger that exist, each of which is dictated by the relationship between the merging companies, and the reasons they wish to merge. The five most common types of merger are:
Horizontal merger: companies in direct competition with each other that provide the same goods or services to consumers. Two competing UK supermarkets would fall into this category.
Vertical merger: companies that serve different functions in the supply chain of the same goods or services. For instance, a car manufacturer and a car parts supplier.
Congeneric merger: companies that serve the same customer base but provide different types of goods or services. A bank and an insurance company agreeing to merge would be a prime example of this.
Market-extension merger: companies that provide the same goods or services but in different markets. For example, a UK IT software company and a foreign IT software company.
Conglomerate merger: companies that operate in entirely different business activities or industries – i.e. the French multinational corporation LVMH was formed through a conglomerate merger of Louis Vuitton and Moët & Chandon.
A merger can be a highly effective way to achieve business growth and improvement in the following ways:
Eliminates competition: similarly sized companies will likely be rivals with one another, and therefore a merger can result in the elimination of competition. As well as reducing the advertising price of the company’s goods and/or services, mergers can assist companies with the threat of multinational firms in today’s globalised markets. A merger is a very useful business strategy to increase market share and penetrate new markets nationally, and possibly internationally.
Economies of scale: A single larger company with increased output will be able to exploit the notion of ‘economies of scale’ and so be able to benefit from reduced costs. Lower average costs to produce the company’s goods and/or services facilitates lower prices for the consumer and should consequently increase the company’s sales figures. A merger may benefit from various economies of scale, such as:
Reduced fixed costs
More favourable interest rates
Enhanced organisational efficiency
Acquisition of additional industry knowledge and talent: companies may decide to merge in order to profit from the industry-specific knowledge and skills of employees of the respective merging firms. A merger of companies operating in the same industry is likely to benefit from the union of expertise and experience in the field. This also rings true for conglomerate mergers where merging companies can share their best practices and competencies, optimising the operation of the new company, and quite possibly sparking greater innovation.
The following are just a few examples of some recent major mergers:
2010: British Airways and Iberia to form International Airlines Group (IAG)
2014: Dixons and Carphone Warehouse to form Dixons Carphone
2015: Paddy Power and Betfair to form Paddy Power Betfair
2015: Kraft Foods and Heinz to form Kraft Heinz Company
If a company’s board of directors or shareholders are proposing a merger, it is highly recommended to first obtain legal business-oriented advice in order to ensure compliance with UK merger legislation and regulations.
Avoiding breach of competition law: if a merger deal will result in a company holding a 25% or more of the combined share of sales or purchases in a UK market, or the turnover of one of the merging companies exceeds £70 million, it is deemed a ‘relevant merger situation’. This means it will be subject to the competition law contained in the Enterprise Act 2002 legislation.
Preventing CMA investigation and orders: the CMA can open investigations into proposed merging or already merged companies. It can make a range of orders if it deems the merger to be potentially serving to unfairly reduce market competition, or lower to quality of the market’s goods or services. Possible measures include:
Ongoing monitoring during investigation
Unwinding of a completed merger
Prohibition of the purchase of further shares in the merger without CMA’s consent.
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