Business combination — structuring a merger properly
Last updated:
- Initial conversation free of charge, without obligation and strictly confidential
- Both sides on the same valuation methodology
- Governance before romance: rules for the dispute are agreed beforehand
- More than 100 completed transactions in over 15 years
A combination is not half a sale. Two companies joining forces do not exchange money for shares but shares for shares — and therefore have to agree on something that plays no role in a sale: how they will decide together in future.
The economic logic is usually clear quickly: a joint market position, complementary capabilities, joint procurement and administration, more weight towards customers and suppliers. What combinations fail on is almost never the arithmetic but the question of who decides in the end.
When a combination is the better solution than a sale
Both sides want to carry on
A combination presupposes that the owners of both companies want to remain entrepreneurs. Whoever actually wants to leave will be unhappy in a shared structure — and will slow it down.
Scale that cannot be reached alone
Tenders, purchasing terms, recruiting, investment in technology: some thresholds can only be crossed together. That is the classic economic case for a combination.
Succession in stages
A combination can prepare a business succession when one owner steps back in a few years and the partner moves up. The shareholders’ agreement then already fixes the later transfer.
By way of distinction: whoever only seeks an exit is better served by selling the company. Whoever wants to buy in scale finds the route under buying a company.
Valuation and the exchange ratio
Both companies are valued, and the relation yields the shareholding quotas. What matters: the same methodology, the same normalisations (managing directors’ salaries, private portions, one-off effects), the same reference dates. Only then are the two values comparable.
The typical points of dispute: differing earnings quality, business real estate in one of the two companies, differing indebtedness, hidden reserves, an accumulated backlog of investment. Where the values do not fit the desired quota, equalisation payments are a customary instrument. The foundations are set out under company valuation.
The structures compared
Merger
The companies become one. Clear to the outside world, laborious in implementation, bound by corporate and tax form requirements.
Share swap
The shareholders of one company contribute their shares into the other and become shareholders there. The companies remain legally separate; the economic unit is created at shareholder level.
Joint holding company
Both companies remain in place and are put under one roof — usually the most pragmatic route, because customer, lease and licence contracts remain untouched.
Joint venture
Cooperation in a new company without combining the core businesses — suitable when only part of the activities is to be shared.
Which form holds up in tax and legal terms is decided by the tax advisers and lawyers of both sides; we structure the transaction and run the process.
Governance: the point where combinations fail
Without sugar-coating: two entrepreneurs who previously each decided alone will decide jointly in future. The shareholders’ agreement has to regulate: management and division of responsibilities, consent catalogues for material transactions, an advisory board, profit allocation and drawings, rules for deadlocks, non-compete obligations, exit clauses and the valuation mechanics in the event of a dispute, and tag-along rights.
The key sentence: whoever negotiates these rules only when they are needed negotiates them in conflict. Agreed beforehand, they cost a few pages; negotiated in a dispute, they cost the combination.
After closing: where the synergies actually arise
The first hundred days
Customers, staff and suppliers wait for signals. Whoever does not deliver a plan for the integration in the first weeks loses the best people on both sides.
Customers and employees
Customers want to know who serves them in future; employees want to know who decides. Both questions need answers before the announcement, not after it.
Systems and processes
A combination whose merchandise management, accounting and costing run in parallel for two years realises no synergies. The consolidation of systems belongs in the integration plan with dates and responsibilities.
The integration itself is described under post-merger integration.
Frequently Asked Questions
- What is the difference between a merger and an acquisition?
- In a merger, both sides move into a common structure and remain invested. In an acquisition, one side buys the other, and the selling side exits or becomes a minority shareholder. A merger therefore needs rules for joint management, not just a price.
- How is the exchange ratio determined?
- From the relation of the company values, established using the same methodology and the same normalisations on both sides. If the values do not match the desired quota, value differences can be smoothed through equalisation payments.
- Who manages the combined company?
- That is a matter of negotiation and belongs before closing: management, division of responsibilities and consent catalogues are fixed in the shareholders’ agreement. Whoever leaves this question open negotiates it later in conflict.
- What happens in a deadlock?
- That is exactly what the shareholders’ agreement needs a mechanism for: an advisory board, a casting vote, a mediation clause or a defined buy-sell procedure. Without such a rule the deadlock ends in court — and paralyses the company until then.
- Does the combination also take on liabilities?
- In a merger and a share swap, yes — both sides bring their balance sheet with them. That is why debt, pension obligations and risks from current contracts belong in the valuation and in the scope of the review.
- How long does a combination take?
- Usually longer than a sale, because both sides are reviewed and valued and the shareholders’ agreement has to be negotiated. The timetable is determined less by the valuation than by agreeing on the future governance.
If you are considering a combination, the initial conversation clarifies free of charge which structure will hold and which questions have to be answered beforehand.