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WORDS TO UNDERSTAND

Steps in a Merger Process

Company merger: What it is

What a Merger is

Mergers are one of the main ways of concentrating businesses.

There are two possible types of merger. The first is through the formation of a new company (NewCo) and at the same time the dissolution of the previous legal entities. The second is through the merger of one or more companies into another company, with the result that the participating companies retain their identities.

The purpose of a merger is of an economic/industrial nature. The merger of two or more organizations allows for the generation of cost synergies (administration, production, and listing costs), as well as greater geographical coverage (with a positive impact on revenues and the possibility of further growth).

 

Steps in a Merger

There are three major steps in a merger transaction: planning, resolution, implementation.

1. Planning, which is the most complex part of the merger process, entails the analysis, the action plan, and the negotiations between the parties involved. The planning stage may last any length of time, but once it is complete, the merger process is well on the way.

More in detail, the planning stage also includes:

  • signing of the letter of intent which starts off the negotiations;
  • the appointing of advisors who play the role of consultants, examining the strengths, weaknesses, opportunities, and threats of the merger;
  • detailing the timetable (deadline), conditions (share exchange ratio), and type of transaction (merger by integration or through the formation of a new company);
  • expert report on the consistency of the share exchange ratio, for all of the companies involved.

2. The resolution is simply management's approval first, then by the shareholders involved in the merger plan.

The resolution stage also includes:

  • the Board of Directors calling an extraordinary shareholders’ meeting whose item on the agenda is the merger proposal;
  • the extraordinary shareholders’ meeting being called to pass a resolution on the item on the agenda;
  • any opposition to the merger by creditors and bondholders within 60 days of the resolution;
  • green light from the Italian Antitrust Authority, that evaluates the impact of the merger and imposes any obligations as a prerequisite for approving the merger.

3. Implementation is the final stage of the merger process, including enrolment of the merger deed in the Company Register.

Normally medium-sized/big mergers require one year from the start-up of negotiations to the closing of the transaction. This is because, in addition to the time needed technically, there are problems relating to the share exchange ratio between the merging companies which is rarely accepted by the parties without drawn-out negotiations.

During the merger process, share prices will adjust to the share exchange ratio. On the effective date of the merger, financial intermediaries will enter the new shares with the new quantities in the dossiers. The shareholders may trade without constraint the new shares and benefit from all rights (dividends, voting rights).

 
Steps in a Merger Process
 


Page updated 16 April 2018

 
 
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