Merger & acquisition 1

Defining M&A
One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.

Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

Distinction between Mergers and Acquisitions
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. Both companies' shares are surrendered and new company stock is issued in its place.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.


Mergers in China
The mergers common in the Western jurisdiction between two companies are rarely seen in the PRC.

There are two types of merger transaction: a “merger by absorption” and a “merger by new establishment” under current PRC law. A “merger by absorption” involves the absorption by one company of another where the absorbed company is dissolved, and its registered capital and assets are merged into the surviving entity. A “merger by new establishment,” means that each of the involved companies is dissolved and a new company is formed by combining the assets and registered capital of the “old” companies. Generally, the newly-established entity would be a complete successor of the pre-merger entities and assume all rights and liabilities of such entities; however, creditors of the companies to be dissolved are given the option of having their claims repaid in full prior to the completion of the merger. Whether the merger is a “horizontal merger” or “vertical merger” (defined by the merged entities’ market positions) does not have any impact on the PRC regulatory process.