Way to success: internal restructuring?

28.09.2010

Karin Madisson
Partner
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Karl J. Paadam
Senior Associate
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During times of economic growth, some companies expanded the scope of their business, founding new companies both in Estonia and neighbouring countries. When the economy started to cool down, some entrepreneurs also had the courage to expand their businesses, feeling that the times called for more vigorous action and that resting on their laurels was no good. Recent dire economic straits have induced most medium and larger companies to increasingly engage in self-reflection. This often results in the realisation that a corporate structure chosen at a time of rapid economic growth is no longer appropriate and is now involving a rather costly and complex business operation.

Several entrepreneurs find today that their current undertakings need to be merged and their businesses reorganised. A merger may involve Estonian companies only or take place on a cross-border level. Entrepreneurs operating in the EU can merge their businesses into one legal person under the EU Cross-border Merger Regulation, already in effect since 2007. Although merger is not the only way to optimise business, recent practice shows that the number of mergers has multiplied. Merger of companies operating in the Baltic States has been seen as an especially economical business approach. For example, several insurance companies such as IF, AON and others have turned to SORAINEN to seek merger advice. After the merger, the acquiring company may operate in Estonia, Finland, Lithuania or Latvia. Kaido Konsap, executive manager of AON Baltic Estonian branch, explains the necessity for merger as follows, "Merger makes it easier to combine the know-how of our Latvian and Lithuanian undertakings. In addition, internal communication and efficiency increases with one management board instead of three."

Entrepreneurs see several reasons to merge the businesses of group companies operating in Estonia or in many countries. Merging subsidiaries and affiliates operating in a region may provide a convenient platform for cost-saving, helping to maintain business competitiveness in the long term. For example, several activities that may be overlapping can be combined under one; it may be complicated to compare companies because reporting requirements may differ by country; several employees may have only a part-time workload; the management structure may need optimisation; compliance with requirements deriving from laws of various countries may be unreasonably burdensome and costly. Advantages include cost-saving, uniform client and order databases, central warehousing, easier accounting and reporting, clearer management structure, less bureaucracy, and more. Companies that are subject to very high authorised capital requirements and other mandatory reserve requirements no longer need to meet all the relevant requirements applicable in several countries. This releases a substantial amount of capital and may also simplify the procedure for obtaining licenses and permits. An important aspect for companies participating in public procurement is the possibility to use a combined track record. Finally, merger allows tax optimisation and may open the way to tax advantages in the future.

After merger, the undertaking generally becomes bigger, stronger, and thus more reliable. After a cross- border merger, the company continues operating in other Baltic countries through a branch or permanent establishment, while in communicating with creditors only one legal person is responsible, irrespective of the country where the business is conducted.

Which company remains after the merger often depends on the organisational structure of the undertaking, the location of the strategic unit, or economic aspects enabling more efficient use of company resources. In the case of a cross-border merger it is also important to consider which country has the least bureaucratic obstacles or requirements. Examples include regulations applicable to regulated undertakings, requirements on communicating with the commercial registry and personnel-related requirements.

Accession to the eurozone unquestionably demonstrates Estonia's reliability as a state and hopefully encourages establishment of pan-Baltic business headquarters here. When Estonia joins the eurozone, leaders of regional businesses will have a strong stimulus to start running their companies from Estonia.

To ensure that investors will continue to trust in our business environment in the future and that Estonia takes a leading role as the business metropolis of the Baltic States, Estonian entrepreneurs and legislators must continue constructive cooperation to secure stability and sustainable development. Certainly, a decisive factor is tax policy. In this regard we have unfortunately become less attractive than our neighbours for various reasons. Personnel costs are relatively high for Estonian undertakings. A number of ideas have been put forward to reduce costs, such as setting a maximum limit on social tax. On the subject of tax generally, entrepreneurs need clear taxation rules. For example, currently the differentiation between dividend income and work remuneration is obscure. This ambiguity has made entrepreneurs careful. Additionally, closer cooperation between governments is needed to promote the synergy which Estonia, Latvia and Lithuania are capable of offering to potential investors due to their unique geopolitical position.

Merger is not a process that can be carried out overnight. To be successful, the full spectrum of strategic issues such as involvement of managers and employees, tax-planning, communication with the public and state authorities, need to be considered thoroughly. Failure to take into account a small detail or unprofessional counselling may frustrate the whole merger process. Merger requires a proper plan and teamwork capability. The process is long and complex but the benefits vastly outweigh any temporary inconvenience.

 

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