What is Merger and Why Companies Do It?

Merger is one solution to help improve the competitiveness of companies. However, what exactly is this merger and what makes companies do it?

Understanding the Process

In general, merger is a process of uniting two companies into one company name. Besides uniting companies into one, based on the Company Law, merger is also a legal act that causes the company’s assets to change due to the merger. In addition, the legal status of the merged companies will also end due to the law.

In implementing the merger, a company must also pay attention to the interests of parties other than the company itself such as the minority shareholders, business partners, and the company’s employees.

If the merger is agreed by all the related parties, each party must prepare a merger plan, which must be approved before submitted to the GMS.

Reasons to Merger Companies

There are many reasons why companies are united into one new company. One of the main reasons is to fix the financial condition of the company. However, some companies also use it as a strategy so that the new company can be more competitive in the market. For more details, here are some of the factors and reasons why two companies merger into one:

1. Better Diversification/Faster Growth

In general, two companies that are merged into one have the same line of business. However, it is still possible for each company to have different kinds of product specifications. With this diversity, the new company has a better opportunity to develop its business and market. That way, they can get a better chance to generate more profit.

2. Increasing company funds

When two companies merge into one, their assets and wealth are also merged under the name of the new company making it a bigger company with increased assets and wealth. Consequently, the company’s liquidity will also increase, which in turn can help the financial capacity of the company.

In addition, with more promising opportunities and wider business fields, investors will be more interested in injecting their funds into the company. This will certainly be beneficial for all parties including the staff and shareholders of the company.

3. Tax Purpose

Every company has to pay taxes. However, unlike individuals, the amount of tax levied to companies can be very expensive. Sometimes companies cannot pay their taxes and cause the company to go bankrupt.

One strategy to reduce the amount of tax payments is to combine companies so that the new company can earn the same or even greater profits but pay less tax.

Things to Consider Before Merger

One of the processes that the merged companies need to carry out before merger is due diligence. This is an in-depth assessment on the financial and legal aspects of the company including the business risks if the merger is carried out.

In carrying out a due diligence process, it is better to only collect information based on the intended purpose. Therefore, before carrying out the due diligence process, each party should determine the scope to make the process easier. Collecting too much information is a waste of time, but collecting less information can also lead to information asymmetry.

Regardless of the benefits, the process of merging two or more companies is not easy. In addition to having to unify liquidity, the vision and mission of the two companies must also be re-equalized. However, if executed correctly, the merging of two companies can provide greater benefits.

Therefore, companies are advised to use experienced parties such as ADCO Law. Here at ADCO Law, we have a team that has great experience in conducting corporate mergers for either large or small companies. We also help gather the information you need for due diligence and provide assistance until the merger process is complete.