Mergers and acquisitions (M&A) is a popular term that refers to the consolidation of companies or assets through various types of financial transactions.
M&A has numerous definitions depending on the transaction format. It can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.
In all cases, M&A is the biggest deal maker for Investment companies with deals extending to billions of dollars. In mergers and acquisition worldwide, at least two companies are involved.
The term M&A also refers to the department at financial institutions that deals with mergers and acquisitions. A merger occurs when two separate entities (usually of comparable size) combine forces to create a new, joint organisation in which, theoretically, both are equal partners.
In mergers, the boards of directors for two companies approve the combination and seek shareholders’ approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company.
For example, in 2007 a merger deal occurred between Digital Computers and Compaq whereby Compaq absorbed Digital Computers. This also means there would be a smooth financial and less Financial budgeting of transactions compared to managing the two companies as separate entities.
After a merger has occurred, there would be one managing director, one head office, all expenses would be reduced and with the admirable workforce and values.
Moreover, acquisition simply means the acquiring company obtains the majority stake in the acquired firm, which does not necessarily change its name or legal structure. An example of this transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organisational structures.
In 2014 at Goldman Sachs, I worked with other colleagues in many deals that led to Facebook Inc acquiring WhatsApp Inc, Direct TV Inc acquiring AT&C Inc, Allergan Inc acquiring Valeant Pharmaceuticals Intl and so on.
Why Companies Merge
The need for synergy, growth, eliminate competition, an increase in supply/price power and so many other reasons could lead to merging. In reality, mergers of equals do not take place very frequently.
When two companies merge, the benefit from combining forces come to play and two different CEOs agree to give up some authorities to realize those benefits. When this happens, the stocks of both companies are surrendered and new stocks are issued under the name of the new business identity with admirable economic values with fewer spendings.
Types of Mergers
From the business angle and structures. Here are a few types, distinguished by the relationship between the two companies that are merging:
Horizontal merger – Two companies that are in direct competition and share the same product lines and markets.
Vertical merger – A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
Market-extension merger – Two companies that sell the same products in different markets.
Product-extension merger – Two companies selling different but related products in the same market.
Conglomeration – Two companies that have no common business areas.
There are also two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:
Purchase Mergers – As the name suggests, this kind of merger occurs when one company purchases another.
Consolidation Mergers – With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
The Risk I M&A
Some companies crashed from Mergers & Acquisitions. And some of the documented reasons are, overpaying for deals, lack of due diligence during merging, insufficient operational diligence, Employee’s anxiety, morale, and/or engagement issues, limited access to the target company, inconsistent M&A planning and execution.
Some companies are in huge debt before a merger or acquisition occurs, it is important for the company willing to merge to strictly ensure due diligence and factor clear solutions on dealing with the debt. Imagine paying N100 billion for a company worth N40 billion.
Scrupulous consideration on managing debt value is key, however, having a huge debt may not necessarily mean the company cannot perform if well managed.
Are Nigerian Companies Matured For M&A?
Yes surely, Nigerian companies have done greatly well in M&A and this has begotten more financially successful Nigerian businessmen.
One case I like to showcase is that of Onajite Okoloko who led a consortium of international and local investors to buy the defunct National Fertilizer Company of Nigeria (NAFCON) funded by the biggest syndicated loan at the time of $222 million from seven banks in 2004/2005, and he also completed a successful rehabilitation of the asset which sat idle for 10 years.
Following this was the access bank deal pioneered by Aig-Imouhuede and Herbert Wigwe. They used a relatively smaller bank to acquired inter-continental bank which was one of the biggest banks at the time.
There are countless Nigerian companies that have done well in M&A, and Nigeria would continue to do more because it has got a huge business opportunity.
About the author:
By Obafemi Adekunle, Founder and Group Chief Executive of the Black Alliance Group/Black Alliance Capital.