If you were to travel back a couple of decades and ask someone about a virtual merger, there would probably be a negative vibe to their answer. It was a second-hand option when a ‘true’ merger wasn’t viable and something of a dummy solution to console companies when the real merger wasn’t going to happen. But something changed, and now the virtual merger is a solid option as any other type of merger. So, what happened and what is the recent virtual merger?
The traditional merger is a bit like one of those massive cargo ships you might see if you visited one of the world’s biggest ports. They carry an enormous amount of cargo but take a long, long time to get anywhere. They must follow very set routes due to their size and are limited to where they can dock.
On the other hand, the virtual merger is more like a little speedboat, zipping from place to place, changing its route and docking anywhere. Virtual mergers are dynamic and an effective strategy that allows two or more entities to come together in a particular way – it might be with specific features, assets, operations, markets or technologies. All with the aim of reaching a common goal while still retaining financial and managerial autonomy.
Traditional versus virtual merger
The key difference between the two types of merger comes from new technology that has developed in recent years – the blockchain. With this, virtual mergers have become an option that makes more sense, opposed to trying to value and acquire another company entirely.
With virtual mergers, there is no transfer of ownership or shares between the companies. These types of merger don’t require shareholder approval and all the complexities they can bring to the process. Other critical differences to traditional mergers include:
- Contract governs the process without reference to statutorily determined procedures or consequences.
- One company isn’t consumed by the other.
- There are no cash-outs or exchanges with the shareholders of either company, and this means there are few cases where the merger is taken to court by unhappy shareholders.
What constitutes a virtual merger?
There’s no textbook definition of a virtual merger, and this is another benefit that the approach offers – it can be customised to the companies involved. The two companies remain independent of each other and company structure remains untouched. However, the merger may include conditions such as:
- A significant portion of business operations of one of the two companies.
- Joint management units that use the assets contributed by both companies.
- Either party can withdraw without penalty and can reclaim their assets, or buyout the withdrawing company’s interest including the contributed assets.
While the virtual merger may not work for all companies and scenarios, it is one that is of growing importance as companies look for new and intelligent ways to join forces. It allows both parties to remain themselves while joining together specific assets, working together for the benefit of both companies.