Mergers are not only for the big boys, but the small boys can also employ mergers as a strategy for growth.
By Aderinsola Fagbure
The term merger is more often than not associated with multinationals and global conglomerates, with big shots like Time Warner, Total Fina, Elf Acquitaine, Cadbury and Kraft coming to mind. A better understanding of the concept of mergers can be sought from a simplified definition of the term.
There are several technical definitions of mergers, but I have chosen to describe a merger as an economic marriage with the aims of increasing revenue, opening up new markets/ frontiers, developing new products and services and expanding client base for both parties (in this instance entities).
The reason for proposing consolidation transactions are numerous, thus making them attractive to forward-looking business managers, professional advisers, and investors. Mergers and Acquisitions may or may not be industry specific.
Locally, the announcement of the N25 billion minimum capitalization requirement by the Central Bank of Nigeria in 2005, brought about heightened talks of possible mergers and acquisitions (henceforth, M & As) among bank directors and managers who were passionate about their companies’ survival. The need for compliance with the directive saw a new wave of consolidation activities in the Nigerian world of finance and law.
A similar flurry of activities occurred about the same time in the Insurance Industry, due to regulatory requirements. Hence M & As can be a precursor to stronger industries as we have witnessed in our banking and insurance industries. So, are M & As only for big entities, or just for any business entity? M & As are recommended for almost any business entity.
In reality, any two incorporated companies can voluntarily embark on a merger, irrespective of employee size or capital structure. Startups and small scaled businesses are therefore not excluded from the merger equation. Meanwhile, it is most unfortunate that a large number of entrepreneurs see mergers as a deceptive form of liquidation.
The benefits of M & As are rewarding regardless of whether or not the entities involved belong to the same industry or cut across different industries. One of such benefits is synergy, which is one of the most talked about reasons for a merger. Often times, a business will attempt to merge with another business which has complementary strengths and weaknesses. Of course, amalgamating businesses leads to increased revenue and reduced business running cost, where the merger procedure is properly managed.
Another benefit related to synergy is the increased efficiency resulting in improved share value, which has further been given as one of the incentives of mergers. Research shows that on average the share value of the combining entities improves upon consolidation. The Nigerian example in which the banking consolidation exercise gave birth to a number of institutions strong enough to compete internationally shows how M & As can significantly improve on the profile, reputation, and competitive strength of the resultant entities.
Another benefit of M & As is that companies can enlarge their product range and supply chain by considering business combination options. For instance, the deal negotiated by Cadbury Plc and Kraft Foods Inc. opened up new opportunities for the resulting entity by creating new markets for Kraft Foods Inc. in Africa and Asia. Such access to these markets would not have been possible without the two companies coming together to become a stronger single entity.
Hence, the need to increase production scales and reduce competition was also given as an argument in favor of M & As. In other words, mergers provide acquiring companies an opportunity to boost their market share without necessarily improving their marketing strategy. Relatedly, a large or medium-sized law firm may acquire a small practice in order to expand its client-base and technical capacity.
Another benefit of M & As is the opportunity to take advantage of international partnership which allows for a global presence Global market pressures have led to a rise in cross-border merger transactions. For instance, Nigerian brands are sought after internationally, with a number of them partnering with global retail brands and stores. Such international partnerships could be strengthened through possible mergers, particularly those within the African continents of which Ghana and South Africa are examples of emerging frontiers.
As we are all aware, technological innovations are recorded daily of which the industry giant, Apple continuously reminds consumers about the limitless world of computers, by unveiling new products regularly. Hence, the demand for whizkid Chief Executive Officers has skyrocketed and been recognized as a major consideration for several cross-border corporate mergers.
A vibrant market for corporate control also improves the statistics of mergers and acquisitions. The possibility of successful bidders replacing poorly performing executive directors in order to enhance the profitability of corporations augurs well for any economy, thus encouraging dynamic business arrangements.
One cannot mention M & As deals without discussing the complications that accompany this procedure. As with marriages between human beings, divorces of corporate entities are not unheard of. To sustain M & A deals, great responsibility is therefore placed on deal advisers particularly lawyers, ensuring not only the success of birthing a new entity but also of sustainability.
Business experts believe that no two M & A deals are alike, which implies that high degree of legal expertise and innovation is required on the part of (Nigerian) solicitors dealing with business intricacies of M & As. More importantly, in a transactional setting, lawyers should carefully analyze all available and relevant data including the statutes and professionally advise clients on how best to structure their business affairs in a bid to comply with relevant provisions.
The deal flow of all acquisitions is standard, notwithstanding the uniqueness of each bargain. The process starts with an introduction, followed by the negotiation, then the due diligence (D.D) process which if successful leads to the obtainment of the board, shareholder as well as regulatory approvals. A well carried out due-diligence exercise is a prerequisite for a successful merger, hence the need for advisers to ask the right questions from the onset. The D.D process can be likened to an inspection carried out by a mechanic prior to the purchase of a car, an exercise aimed at determining whether the vehicle is worth its asking price. In essence, due diligence before a merger is like a courtship before marriage.
A merger, if well-coordinated, is expected to expand business opportunities. However, before embarking on this exercise, taking note of the number of employees the merging partner has is important, what risks has the business been exposed to, the legal and financial structure as well as the debt exposure of the relevant business. No entrepreneur wants to pay for a shell or end up like the lady who thought her husband was a billionaire but soon found out after marriage that he was living a borrowed life.
The merger transaction is rounded up by signing and closing. As soon as negotiations are launched, legal and financial advisers are engaged in structuring the deal and determining a fair price for the sale. The target has a vested interest in ensuring that it receives the best selling price while the bidder’s management is keen on a transaction that is indeed value for money.
In arriving at the true worth of a company, therefore, advisers should not only protect the interest of their clients but also ensure that the valuation results give an accurate and fair view of the firm’s worth and that the due diligence is conducted ethically. Legal advisers particularly have a role to play in drafting water-tight agreements which will stand the test of time in balancing the interests of the buyer and that of the seller.
It must be mentioned that having examined the incentives for business combinations certain factors inhibit the growth of such transactions in these parts of the world. Culturally, we hold on to investments irrespective of how logical it is to do so and in consequence would rather be the sole owner of a tottering business than be a part owner of a bigger cake.
The notion of “it’s my business”, I started it and must not allow anyone to share in my business successes”, must change. Another reason for the slow growth of M & As activities in Nigeria is that the relevant regulatory system is underdeveloped. The financial industry is also lagging in its response to credit requests, a situation which impedes the process of negotiations.
A merger is not just the coming together of two businesses. It is the amalgamation of corporate cultures. The culture and structure of Business A should be similar to Business B and should be synergized sufficiently to ensure a smooth running of the resultant entity. This is why it is important for startups founders to be clear about the mission and vision of their companies because, in reality, you cannot give what you do not have.
Equally, the management and employees of the merging entities must be carried along in the process. It can be scary to be asked to be part of new business as an employee. Therefore, it is the responsibility of the parties negotiating the deal to ensure that staff welfare is paramount. Realistically, however, only the best hands and the brightest brains can be retained in a change of structure transaction.
The customers of both entities must not be overlooked, also. Hence the customer enlightening sessions being carried out by the relevant entities in the proposed Diamond Bank Plc and Access Bank Plc merger is laudable because it has to a large extent helped in assuaging the fears of concerned customers
The result of a merger is a bigger and stronger brand. The shortcomings of mega-sized brands have been identified mainly as the inefficiency of size and variations in corporate culture among merging entities. These challenges do not overshadow the economies of scale associated with globally competitive businesses.
It is, therefore, evident that under the philosophy of the survival of the fittest, Mergers and Acquisitions will continue to thrive. Africa will do well to join in the trend actively. Nigeria can take the lead, particularly with the recognition given to some Nigerian companies recently by the London Stock Exchange.
These nominations evidence the fact that the small brand of today has the potentials to become an international brand if corporate governance and accountability are given priority. A good way to end this piece is by celebrating all the companies that were listed as part of the Companies to Inspire Africa, as compiled by the London Stock Exchange. Indeed, Mergers and Acquisitions are for big and small companies.
Editor’s Note: This article was originally published in The Spark Magazine. Find the magazine here to read other articles.
Aderinsola Fagbure is a Corporate lawyer with a special interest in corporate governance. She is a Senior Associate in the Transaction and Business Support Practice of Esher and Makarios. She is a graduate of Igbinedion University and has a Master's Degree in Corporate Law from University College London. She is a member of the African Society of Crowdfunding. Her column "in black and white "which is published in Thisday Law discusses innovations in corporate governance and finance. Derin is passionate about advising small businesses with a view to ensuring that they outlive their founders. An active bar member, she currently serves as the Chairman of the Young Lawyers' Forum of the NBA Lagos Branch.