'Merger of Equals' Transactions - an Analysis of Relevant Considerations and Deal Trends

By Georgieff, Alexander; Latsky, Stephanie | Business Law International, January 2018 | Go to article overview

'Merger of Equals' Transactions - an Analysis of Relevant Considerations and Deal Trends


Georgieff, Alexander, Latsky, Stephanie, Business Law International


Introduction

'Merger of equals' transactions (MoEs) have experienced a regeneration, with merger announcements such as Lafarge/Holcim, Publicis/Omnicom, Dow/DuPont, London Stock Exchange/Deutsche Börse, Linde/Praxair, Clariant/Huntsman and, most recently, Siemens Mobility/Alstom making financial news headlines. Many of the business combinations sampled during the most recent MoE cycle are, or will be, 'transformational' not only for the merging companies but also for the industries in which they operate. They are frequently also of significant size, thus resembling the end of the MoE cycle of the late 1990s. The overwhelming media presence in these transactions has sparked a renewed interest in MoEs and their cyclical recurrence. MoEs are widely perceived to bear a high risk of failure: to what extent is this perception anchored in reality?

Despite the increased occurrence of MoEs over the last few years, these remain a phenomenon on which relatively little research has been written. Only a few academics have conducted detailed analyses on MoEs.1 The remainder of available information mostly comprises articles and commentary of industry experts or market participants. There are also no available databases or generally accepted numerical criteria for designating a merger as an MoE.2 Therefore, the trends identified in this article were compiled with reference to publicly available data and through an analysis of MoE transactions in the public domain announced between 1997 and 2016 (the 'sample period') consisting of 210 transactions (the 'sample data').3

This article seeks to examine more closely recent trends in MoE activity as well as comparing these trends with the MoEs of the last 20 years. It will address both familiar MoE considerations and concerns based on the latest MoE cycle, as well as new considerations and complexities (of both a legal and a corporate finance nature) that should be borne in mind by stakeholders and the market when assessing MoEs, particularly in the context of cross-border transactions. After making some general observations about MoEs, by way of a backdrop to our analysis, we will proceed to discuss in detail these trends and considerations.

Definition and characteristics of a merger of equals

MoEs are not a generally recognised form of transaction in a legal sense. Therefore, labelling a transaction as an MoE does not per se trigger the application of a distinct legal regime with associated consequences for the parties involved.4 These consequences or rules follow primarily from the chosen form of transaction(s), be it as one or more mergers and/or tender offers.

While there is no formal definition of an MoE, it is commonly referred to as the combination of two similar- sized firms to form a single company5 where there is no designated acquirer.6 A transaction is described as a MoE primarily to serve the parties' intent to create a desired market perception surrounding the transaction.7 Certain characteristics have, however, been identified over the years to help classify a transaction as an MoE.

First, it is expected that shareholders of each of the merging companies will have a more or less equal ownership share in the combined entity.8 In reality, however, only approximately one-fifth of all MoEs announced during the sample period had an assumed or estimated 50:50 ownership split between shareholders of each of the merging companies in the combined entity. The remainder of the sample transactions involved one merging company having up to 60 per cent ownership in the new entity, apart from a few outliers, which had more than a 60 per cent ownership share (see Appendix 1).

Secondly, MoEs are categorised as being a nil premium stock-for-stock transaction at a fixed-exchange ratio involving two companies with reasonably balanced value.9 However, most commentators would rather describe this as a 'low or nil premium' merger as the enterprise values of the merging companies are hardly ever truly equal. …

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