Expertise - Mergers & Acquisitions
Whilst we have many clients whom aspire to start a new company in the Netherlands, we also do business with already established companies. In many cases, it can be profitable to expand your business by either merging with another company or corporation, or acquiring an already existing successful business within your niche. If this business is in a different country than your own, you might be able to profit from several factors such as the resources and business network in this new country. Currently, the number of mergers is increasing rapidly in the Netherlands.
In 2021, 892 mergers and acquisitions were reported to the Social and Economic Council (SER). That is an increase of an astonishing 41% compared to 2020, when there were a total of 633 mergers. Never before have there been so many mergers and acquisitions as in 2021. Covid probably played a role in this. Mergers are an important survival strategy for struggling companies and a number of mergers that were previously put on hold came off last year. It’s important to know about all the different types of mergers, in order to choose the best course of action for your business. What types of mergers can we distinguish and what are the various consequences? We will answer such questions in this article, plus provide you with all the information you need to make an informed decision.
What are mergers and acquisitions exactly?
Mergers and acquisitions is a generally known term, that effectively describes the consolidation of businesses and/or assets. This is realized via various types of financial transactions, such as acquisitions, mergers, tender offers, consolidations, the purchase of assets, and also management acquisitions. The term mergers and acquisitions can also refer to the departments housed in financial institutions, which deal in related activities. Please be mindful about the fact that both terms are used interchangeably sometimes, nonetheless they both have a very different meaning. When we speak about a merger, then we mean that two or more companies are merging and thus, they form a new legal entity with only one name. When we talk about acquisitions, we speak about a company buying another company. Later in this article, we will discuss the differences in detail.
Why choose a Dutch company?
The Netherlands is a perfect country for start-ups, as well as already existing entrepreneurs. With a very vibrant and lively business market, excellent infrastructure and many interesting options for collaboration, you are sure to achieve success here if you are willing to work hard for it. There is also a very active market for mergers and acquisitions, which offers plenty of possibilities for both Dutch target companies and foreign target companies. The atmosphere in the Netherlands is particularly suitable for entrepreneurs and offers many possibilities for growth and expansion. Due to the fact that the holding regime in the Netherlands is so efficient and effective, Dutch holding companies are often involved in many large international mergers and acquisitions. Sometimes as buyers, sometimes as sellers, and in some cases even on both sides. This is also the reason many foreign entrepreneurs set up branch offices in the country, since it provides them with a stable and solid network to expand and grow their businesses.
Different types of mergers and acquisitions
If you want to value any type of business objectively before you invest time and money, you should always look at comparable corporations or companies within your specific industry using metrics. But before you value a company and its assets, you should familiarize yourself with the many ways you can acquire a company, or merge with one. It is therefore important for you to have insight into the different forms that are used when merging with a company, or acquiring one. You need to be able to distinguish between these forms, because the form influences factors such as the nature of the personnel consequences, like whether the staff will have a new employer, and the way in which the decision-making takes place.
1. Legal merger or division
A merger means that two or more entities will merge into one single new legal entity. Thus, when parties wish to continue together in a legal unit, they may decide to legally merge into a single legal entity. This is made possible, due to the fact that a new legal entity is established, into which the two merging parties merge. There are other possibilities, of course, such as merging into a receiving entity. This means that one company merges into an already existing other company. The consequence of a legal merger, is that all rights and obligations are transferred that rest on the legal entities. So, that also applies to employees of a company, since a merger might mean that they get an entirely new employer, including a new contract and different working conditions. The opposite of a legal merger is the legal division, in which one legal unit is divided into two or more new legal units.
2. Administrative merger
When a company doesn’t own shares, such as a foundation or association, then it is not possible to transfer any kind of control with the sale of shares. Foundations, for example, don’t have shareholders. In such cases, you can opt for a legal merger as described above, but another option is an administrative merger. In this case, the Board of Directors of two or more foundations will need to consist of the same persons. Also, in some cases, the Supervisory Board of these foundations will also consist of the same persons. If you look at it legally, the foundations are still separate entities that also separately employ staff. Nonetheless, the board needs to strive to make decisions that are the same for all foundations involved. In many cases, after an administrative merger a legal merger also follows. In some cases, the work councils of the foundations involved also work together, but this is not a necessity. Sometimes the work council of a foundation wants to remain independent, in order to be able to represent the interests of the foundation adequately.
3. Cooperation agreement
A slightly less regulated form of a merger is a cooperation agreement. When you want to combine expertise and knowledge, you can decide to carry out certain activities together with other entrepreneurs or businesses. The content of the cooperation agreement is decisive in order to clarify what the consequences of that cooperation may be for the companies concerned. It’s possible to operate under your own name, but you can also decide to set up a new company together in the long run. Or merge a company into another one. Often a cooperation agreement acts as a first step, which can later be followed by a more definite step based on one of the merger variants mentioned above.
4. Selling the shares of a company
Many companies have placed their business activities in a private or public limited company, within a holding structure. This provides the advantage that, through the sale of the shares, the economic ownership of the company is transferred. This also goes for the legal ownership, and the control over the ownership. The simplest form of a corporate takeover is the scenario in which an owner, who owns 100 percent of the shares, negotiates with a buyer and as a result, a purchase agreement is entered into that sells the shares to the new owner. There are two special forms of share transfer, which we will outline below.
4.1 Via a public bid
This only applies to companies that are listed on the stock exchange. The stock exchange rules contain all kinds of special rules and regulations, that apply when a company wants to make a bid for the shares of a listed company. If you wish to take over another company, it is wise to inform yourself about these specific rules. It is assumed that, when it comes to a so-called 'friendly takeover', the works council of any corporation has an advisory right. A friendly takeover means that the offer is supported by the board of the company that is being taken over. In the event of a hostile takeover, where the offer is not supported by the management of the listed company, there is no intended rule or decision that dictates that the entrepreneur who is trying to take over the company must ask its works council for advice.
4.2 Via an auction sale procedure
When you choose an auction sale procedure, then this means that you are trying to interest several parties in the company and have them bid on the company. This can take place in multiple rounds. First, a so-called 'longlist' is drawn up of interested parties who are allowed to make a non-binding offer. From this list, the entrepreneur chooses a number of parties who are allowed to view even more information and are then asked to make a binding offer: this is the shortlist. From these bids, one, or sometimes several parties, are then admitted to the final negotiations. Once these negotiations have been concluded, one buyer remains. The company then concludes a preliminary agreement or agreement under conditions with this buyer.
5. Asset transaction
Unlike the sale of shares, in an asset transaction the company doesn’t sell its shares, but rather specific activities the company is known for. In this variant, the employees who transfer will have a new employer: the legal entity that was first their employer will not be transferred. Only the assets will be taken over by another legal entity, which will also become the new employer. Thus, a lot of attention will therefore have to be paid to the personnel consequences. It may also be that the company for which the works council has been set up ceases to exist, and the activities merge into the buyer's company. Do to the complexity of this type of takeover, the purchase agreement will also be a much more extensive document than a purchase agreement based on the sale of shares. This is due to the fact that it must describe exactly what is being transferred, down to every single asset in detail, for example the machines, the customer base, the orders and the stock amongst possible other things. It also needs to describe what rights and obligations are attached to the assets. Furthermore, the purchase agreement will have to describe which activities will pass and also which staff members will transfer to the new company.
6. Tender procedure
In (semi-)public sectors, there is something that takes place which is named a tender procedure. This entails that some projects and work are outsourced to third parties. Interested parties can then register to carry out certain activities, for example certain services or care contracts. An interested party who wants to participate in a tender, makes a binding bid to carry out certain activities and must, prior to actually making a bid, seek advice from the works council of the organization about the bid. Conversely, an entrepreneur who currently carries out the activities to be tendered, but decides not to make a new bid, will also have to ask the works council for advice, because that actually means that those activities will need to be outsourced to someone else as soon as possible.
Because the concession then passes to another party during the tender, all kinds of consequences that directly impact the staff can occur. This is why such changes are extremely important for a works council and thus, they need to be informed about them. A variant on this scenario is the case in which an entrepreneur wants to outsource certain activities. This can be anything, ranging from catering services, human resources tasks to ICT activities. Therefore, this entrepreneur issues a tender, just like public organizations do. Interested companies can make an offer on the basis of the list of requirements, as drawn up by said entrepreneur. It may be important for the works council to be informed about this list of requirements at an early stage, and to be given the opportunity to propose changes to it.
7. Privatization of a public company
A slightly more rigorous approach to the tender practice is the privatization of (part of) a public organization. This is a special form of transfer, that occurs when the government decides to transfer part of the tasks previously performed by a public legal entity to a private party. Public legal entities that perform such tasks are, for example, the State, a province or a municipality. Sometimes it can be cost-efficient, or simply more effective, to outsource certain tasks to a private legal entity. There is a rather large consequence when this happens for the employees, though. Because as a result of the privatization, civil servants will be given the status of employees. In the case of privatization, all kinds of different procedures need to be set up to achieve such a change. The reverse scenario, in which an activity passes from private hands to the government, is called deprivatization.
The role of the Dutch ACM
The Netherlands Authority for Consumers and Markets (ACM) is an organization that ensures fair competition between businesses, and protects consumer interests. In the case of major mergers and acquisitions, meaning that large corporations are involved, these must be reported to the ACM. Does a merger or acquisition create a company that is so large and powerful that it affects the competition? Then you need to take into account that the ACM will probably not grant permission for a merger or takeover. Does your company want to merge or take over another company? Then you must report this to the ACM, if:
- Both companies collectively have a net annual turnover of more than €150 million worldwide
- At least 2 of the companies within the Netherlands have a net annual turnover of at least €30 million
Does your company and the company you are interested in stay below the amounts mentioned above? Then you do not have to report the merger or acquisition to the ACM. When you and your company exceed these turnover thresholds, but you do not report a merger or acquisition to the ACM, then the ACM can impose a fine.
The importance of due diligence
Due diligence is described as a legally binding process, in which you as a potential buyer evaluate the assets and liabilities of the company you are interested in. This ensures that you make a well-informed decision, as opposed to buying or merging with a company blindly. In short, due diligence is like an audit or investigation, which is carried out to confirm or reject details or facts regarding a matter under your consideration. In the financial world, before someone enters into a transaction with other parties, due diligence is the requirement to examine the financial records of this party in order to know what you are up against. When considering a merger or acquisition, always remember to perform a due diligence investigation. This entails you checking the financial, fiscal, legal and commercial aspects of the third parties involved. This way, you are able to create a very complete picture about the company you intend to buy or merge with.
Due diligence basics you should know about
When choosing a company to merge with or buy, there are some basic factors you can take into consideration, in order to make a strategically smart move. Here are some specific things you should always remember when looking at other businesses:
- It is wise to consider entering into a cooperation before making a large step such as a takeover or merger. This way, you can figure out whether the other parties involved are a good fit for your business and ideas. Also, you split the risk and the capital, so you lose less if the cooperation fails.
- Always check the company’s past performance, and compare it to the company's growth plan. This way, you can check whether the company has realistic goals and ambitions.
- Plan an exit strategy if the merger or takeover fails.
- It’s wise to choose a company with innovative and promising products and/or services, preferably superior to your current products and/or services. This means your business will experience a significant boost due to the research and vision of the other company. Next to that, make sure that products have an increasing return on investment during a period of 5 years. This is due to the fact, that most investments are harvested after this period of time.
- Also make sure you have a clear harvest strategy for your preferred investment. Even the most promising ideas and start-ups can fail, simply due to changes in government policy, technology or market conditions. Make sure you inform yourself about current technologies and trends and be ready to harvest if your business fails to keep up with all changes and challenges.
Intercompany Solutions can assist you with due diligence, making it possible for you to invest your time and money in a company that meets all your expectations.
What can Intercompany Solutions do for your business?
Next to due diligence, we can assist and advise you on many other matters related to mergers and acquisitions and the general establishment of Dutch businesses. You can think about topics such as the following:
- Taking care of the legal and tax consequences
- Fiscal optimization
- Drafting a tax covenant or tax paragraphs
- Performing a due diligence for your company of interest
- Implementing and executing any type of management incentive plans
- Structuring of the funding for any kind of transaction
- Accounting related to the same transaction
- Managing all reorganizations regarding employees
- Negotiating about tax rulings related to identified tax exposures
- Setting up of the acquisition or preferred merger
- Handling any questions or discrepancies during the process
- Administrative support
We have an experienced multidisciplinary team with people who have extensive backgrounds in the fields of law, accounting, tax and human resources. Feel free to contact us anytime for advice, or a clear quote.
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