In today’s society, companies buy and sell shares every second. Smaller companies are bought by larger ones, while rival companies might merge to gain a larger market share. All these operations are called “mergers and acquisitions”.
Large companies can grow by merging or acquiring other companies. Almost all have professionals trained to use strategic decisions to maximise the company’s growth.
Selling a company or merging with another is one of the most critical decisions an entrepreneur can make. Therefore, before making a decision, it is helpful to understand the types, motives, and main strategies of Mergers and Acquisitions.
What is M&A?
M&A (an acronym for Mergers and Acquisitions) correspond to various financial transactions through which companies are bought and sold. As a result of this process, one company joins with another.
As Aristotle said, “the whole is more than the sum of its parts”. For, the main objective of M&A is not to increase the capital of a business but to accelerate its growth at a pace that would be impossible organically. Other benefits of M&A include:
- Geographical expansion.
- Entry into a new market.
- Increase in business performance.
- An offering of new products and services.
- Access to a new client portfolio.
- Reducing costs and increasing production.
- Incorporation of staff with valuable knowledge and experience.
The different types of M&A in Spain
While mergers and acquisitions are core M&A activities, there are others such as changes like control and joint ventures. Types of mergers and acquisitions are classified according to the distribution of power in the new partnership and the length of time the partnership lasts.
Merger
A merger combines two companies to form a larger company. The companies involved are usually of similar size and value, but this is not always the case. During company mergers, each of the parties involved combines personnel and resources, allowing them to expand their reach and gain market share.
Acquisition
Unlike a merger, where the partners of each company retain some authority in the resulting company, an acquisition occurs when one organisation obtains full control of another by purchasing its shares or assets.
In corporate takeovers, the absorbed company will no longer operate as an independent entity. Thus, both the name and trademarks may be used by the buyer.
Change like control
This is a change in the distribution of power from sole to joint control. Often occurs if the number of shareholders increases or the identity of the organisation changes.
Joint venture
A joint venture arises from an agreement between two or more businesses to combine their resources to perform a specific business task. Once the objective is achieved, the joint venture is dissolved and each of its parts remains independent.
Corporate strategies
According to the company’s objectives, the buyer must evaluate the different corporate strategies offered by Mergers and Acquisitions and choose one according to its needs.
Verticals
Vertical mergers or acquisitions integrate companies that produce goods or services in the same industry. In this strategy, a company considers merging with a supplier or customer. Often with one that does not operate within the same production process, but fits into its production line.
Horizontals
In this case, two businesses that are in direct competition with each other are merged. To do so, both must offer products and services at the same level of production. Horizontal mergers and acquisitions seek to achieve economies of scale and greater market reach, while vertical mergers and acquisitions aim to improve efficiency.
Conglomerates
Such a merger occurs between organisations that have completely independent business activities. It is beneficial for the acquirer if it seeks to diversify its economic activity and expand into new markets.
Some of the objectives of conglomerate mergers and acquisitions are:
- Sharing assets and shares.
- Diversify the portfolio of services.
- Increase market share.
- Cross-sell products.
Reasons for M&A (mergers and acquisitions)
Among the main reasons for choosing M&A are economic and market power motives.
Economic reasons
The main economic motive is to achieve an economy of scale, where the company can produce at the lowest possible cost. This happens in the vertical strategy, by integrating with a company that already has what the company needs. Be it complementary production systems or the acquisition of new resources and skilled personnel.
It is particularly important in relation to the possibility of applying the Special Tax Regime of Title VII Chapter VIII of the Corporate Tax Law to be able to demonstrate that the merger or acquisition operation has taken place for a “Valid Economic Reason”, which is a concept that the doctrine has developed over time: some of the Valid Economic Reasons accepted by the Tax Administration are the reduction of administrative costs, greater solvency, or a better rationalisation of the activities carried out.
Market power reasons
Company size is an important variable when competing within a market. Through mergers and acquisitions, a company can overcome the barriers that prevent it from expanding into other sectors and countries.
If the globalisation of the company is to be achieved, horizontal Mergers and Acquisitions are the ultimate strategies. Merging with a rival company reduces the level of competition and allows for greater control over the market.
Conclusion
The successful merger of two companies should result in higher revenues, reduced expenses and lower total cost of capital. The strengths and weaknesses of each should be carefully examined separately so that the resulting transaction is mutually beneficial.
Both mergers and acquisitions can generate attractive benefits. The key is to ensure that the post-merger integration is successful, and any M&A transaction should be assisted by a skilled professional.
If you have any doubts on this subject, please contact our tax advisors in Barcelona.
