Mergers and Acquisitions (M & A) are defined as the consolidation of companies. These two terms refer broadly to the process of one company combining with another one. A merger is the combination of two companies of approximately the same size so as to create a new one, and this is called a ‘merger of equals’. The acquisition means that a firm buys another one and establishes itself as the new owner. The company purchased is absorbed into the buying one. Mergers are perceived as ‘friendly’ affairs of equal partners, while acquisitions can sometimes be ‘hostile’.
There are different types of mergers and acquisitions depending on the integration form, meaning which way both the companies choose to physically combine in the transaction to create one entity, and on the relatedness of business activities.
TYPES ON THE BASIS OF FORMS OF INTEGRATION
* Statutory merger: This category of a merger is when all the assets and liabilities of the smaller company are required by the acquiring firm. This means that the smaller target company loses its existence as a separate entity.
* Subsidiary merger: In this type, the smaller company becomes a subsidiary of the acquiring firm. This occurs because the target company may have a strong image that would make sense for the bigger company firm to retain.
* Consolidation: A consolidation merger is the one in which both companies cease to exist as separate entities and become units of a bigger new firm. This usually happens when companies are on the same size.
TYPES ON THE BASIS OF RELATEDNESS OF THE BUSINESS ACTIVITIES
*Horizontal Merger: This type occurs when a company takes over another one that is in the same industry and at the same stage of production. These firms are usually direct competitors, and this helps to eliminate competition and offers economies of scale due to an increase in size.
*Vertical Merger: This merger happens between companies that produce different goods or offer different services for one common finished product. The purpose of this merger is cost and operation efficiency and more control over the production.
*Conglomerate Merger: A conglomerate merger is when firms operate in totally different industries and do not have anything in common.
The reasoning behind M & A is companies to become more powerful and successful as they combine their forces instead of being on an individual stand. The most common explanations why companies decide to take this action appear below:
PROS AND CONS
M & As are not only a method of external corporate growth but also a strategic choice of the firm, enabling further strengthening of core competence. They help the newly formed business to increase its geographical footprint and acquire new talent, technologies and assets. Companies can generate more value together rather than being separate. On the other side, M & As deals can be time-consuming, and there is much risk involved. What is more, combining firms with different visions can be a unique challenge, and the failure rates are high due to financial and management issues.
M AND AS IN THE LEGAL INDUSTRY
Law firms have increasingly been looking to join with others in order to enjoy strength and profits. An example of a successful merger was Hogan Lovells in 2009 when London’s Lovells and US firm Hogan and Hartson joined forces. In the case of law companies, these decide to collaborate so as to create a stronger platform to meet the growing global needs of clients. The most important reasons why law firms mergers happen are:
Going global: Law firms want to look beyond national borders. They try to earn the ‘global’ tag. Example: King and Wood Mallesons + SJ Berwin = King & Wood Mallesons
Going national: The merger allows companies to extend their combined practice across the country. Example: Bond Pearce + Dickinson Dees = Bond Dickinson
Entering new markets: The advantages of booming and emerging markets give the motive for countless mergers. Example: Herbert Smith + Freehills = Herbert Smith Freehills
A merger can also present trainees with significant benefits and advantages. The new company may have greater resources, and that means they will be larger training budgets for more opportunities for learning and development. More offices can give a chance to relocation and work in different practice areas. This gives trainees career progression opportunities.
To conclude, mergers and acquisitions will continue to be an interesting but demanding strategy in the search for expanding corporate influence and profitability. Although the pandemic impacted the number of law firm mergers, all indications for 2021 suggest a strong merger season.
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