Merger

An enterprise adopts cash, securities and other forms to purchase the property rights of other enterprises for a fee, obtains the right to control the assets of these enterprises, and causes the merged enterprise to lose its legal personality or change the economic behavior of the legal entity.

Merger is a basic form of centralization of capital; there is a distinction between the wider and the narrower sense of the concept. A merger in the broader sense refers to the acquisition of decision-making control right by one enterprise over other enterprises so that they are combined to operate as a single entity. A merger in the narrower sense means that enterprises of comparable strength combine their resources and are integrated into a new enterprise or company. A merger occurs without a distinct acquiring or acquired enterprise, and neither party dominates the other. The merger between the two enterprises is followed by the establishment of a corporate management structure.

There are three main types of mergers, namely horizontal, vertical and conglomerate mergers. Horizontal mergers are mergers between enterprises that produce similar products and provide similar services. Vertical mergers are mergers of enterprises that are related to each other in the process of production, operation, sales and distribution. Conglomerate mergers refer to mergers across industries or markets that are not directly related to each other’s production and operation.

From the perspective of the merger practice in China, in order for a merger to be successful, the merged party should, in principle, meet the following conditions: either the enterprise has a high debt ratio and is close to bankruptcy; or the enterprise lacks management and has poor operational results; or the enterprise has no prospects for development. Whether a merger can achieve the desired effect is also related to the merging party’s own conditions. The merging party must meet the following conditions: first, the products produced have broad market prospects; second, it has advanced production technology, with better capabilities of innovation and new product development; third, the enterprise management level is higher, good operation; fourth, the enterprise has a strong ability to pay off debts.

Merger of enterprises is a systematic project, which should have good internal and external conditions and sound market mechanism, in addition to the relevant conditions to be met by the merged and merging party. The main motives of mergers are to enhance the enterprises’ ability to adapt to and control the external market, to reduce and diversify the production and operation risks of enterprises, and to improve the remuneration of enterprise managers. Mergers may lead to monopoly, which is not conducive to fair competition. Therefore, in developed capitalist market economies, mergers are often subject to antitrust regulations.