Everything you need to know about Absorption Merger
In 2021, the merger and acqusitions market in France will peak at $309 billion, 45% more than in 2020.
‘Low interest rates, easy financing and the strong agility of strategic and financial players have led to a significant increase in sales prices. As part of portfolio reorganisations carried out by strategic groups, subsidiaries were generally sold well above the valuation multiple of their parent company, which had the effect of pushing corporates to sell. In return, these divestments have been ‘very well received by the markets’, notes Pierre Drevillon, head of Citi’s French M&A practice.
Business mergers can result in a transaction involving securities, goodwill or assets. They may or may not give rise to the pooling of assets within a single entity, as permitted by merger mechanisms. The fiscal, legal or financial consequences will be different depending on the type of merger.
We will discuss here the case of mergers by acquisition.
How is a merger defined?
An absorption merger is the combination of two companies where the absorbed company transfers its assets to the absorbing company. The absorbing company continues to exist while the absorbed company ceases to exist.
The aim of a merger between two independent companies, is often to attain a critical mass and to become a reference player in the sector(s) concerned. The main driver of this type of capital transfer (and more broadly of any acquisition operation) is the complementarity between the activities and strategies of the absorbed and absorbing companies, leading to the pursuit of common value creation objectives.
In the case of a merger between related companies, the objective is more to simplify relationships between companies that already have long-term financial ties.
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How does an absorption merger work?
The merger operation involves two parties: the absorbed company and the absorbing company. The absorbed company transfers all its assets and liabilities to the absorbing company. It therefore ceases to exist. It disappears without being liquidated. It is a legal dissolution of the company’s activities. The absorbing company, or the new company resulting from the merger, receives all the assets of the absorbed company. In return, it will issue securities, as part of an increase in share capital, that it will issue to the shareholders of the absorbed company to compensate them for their contribution.
The irreversible nature of the operation demonstrates its strategic importance. This act must be prepared in advance through negotiations between the respective management teams. The modalities differ, however, in the case where the merger takes place between companies that already have long-standing capital relationships. After evaluation of the contributions made by the absorbed company, the draft merger proposal is voted on by management, and approved at a shareholders’ general assembly. The draft merger and the merger agreement are filed with the Registrar of the Commercial Court and published in the BODACC (Official Journal).
What are the advantages and disadvantages?
The benefits of a merger by absorption are measured in terms of growth and cost synergies. The transaction also simplifies the relationship between two entities which have merged to strengthen their competitive advantages.
The risks associated with a merger-absorption transaction are inherent to the risks associated with any acquisition transaction. Examples include: the need to mobilise often significant financial resources, which may affect the long-term survival of the company if the objectives of the merger are not achieved. Staff problems may also arise if the corporate culture or working methods differ too greatly between the merging companies.
This is why communication, education and organisation are particularly important during the acquisition and integration of the acquired company, beyond the strategic preparatory work that must be done beforehand.
In view of the difficulties of this type of operation, it is clear that such a project requires a significant level of professional support and advice from lawyers, accountants and M&A specialists.
When is a merger an acquisition? And when is it absorption?
An acquisition through merger is a generic term that covers several real-life scenarios. A merger by absorption is a type of acquisition merger. This is not the case with a straightforward acquisition, where the two companies, the acquiring and the acquired, continue to exist separately beyond the new capital linking them.
It is clear then that a merger by absorption requires the assistance of specialized consultants. If you are planning to expand in the Hauts-de-France region through acquisitions, Nord France Invest is an economic development agency that can, free of charge, put you in touch with specialized M&A services in the Hauts-de-France region and thus help you find the right opportunities.
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