Strongpreneur#Business Growth Strategies
January 17, 2019 39
Strongpreneur#Business Growth Strategies
January 17, 2019 39
Every business organization expects to make a profit which provides the justification and rationale for remaining in business. Of course, investors (that is owners) do not only use the profit level as a basis for assessing the performance of the management, but they are also expected to share at least part of the profit is a reward for their sacrifice and the risk they assume.
However, beyond profitable business operation, a major goal of virtually every purposeful business enterprise is survival and growth. Profitability is merely evidence of the organization’s ability to survive and grow.
Invariably, business organizations operate in a rather dynamic environment where they are subject to the influence of macro-environmental variables such as demography, economic, political socio-cultural factor, technology competition and so on. The ordinary firm has no control over the macro-environment forces, rather, they adapt to the development by adopting measures that will enable them to cope with such factor that may pose threat or at the same time present opportunities for profitable business operation. In a bid to cope with threats and exploit opportunities, the business organization often formulate policies and implement strategies that will facilitate their survival and growth one such strategy is merger and acquisition.
Nigeria’s Economy and the Advent of Mergers
The Nigerian economy has experienced some major changes since 1986 when the Structural Adjustment Programme (SAP) was introduced. These major changes include the devaluation of the naira, persistent scarcity of foreign exchange, high inflation and until recently, very high-interest rate. Over the years these changes have made the macro-economic environment very difficult and culminated in high distress rate and business failures. It has also reduced returns on investment in many cases.
To check the adverse influence of the environment on their returns on investments, some investors especially foreign technical partners had divested from their former companies either through Management-Buy-Outs (MBOs), outright divestment paving way for new investors or merging with others.
For instance, in order to reduce cost and enhance performance, some companies in Nigeria have merged to derive economies of scale and synergies.
Some examples are:
In the same vein, the management of Berger Paints Nigeria Plc, Livestock Feeds Pic, and Pfizer products Plc. Had also in 1997 acquired the foreign shares of their respective companies through management-Buy-Outs (MBO).
Some acquisitions have also taken place in the financial services industry and these include the acquisition of 75 percent of Citi-Trust Merchant Bank by Union Bank of Nigeria Plc 70 percent of Equity Bank of Nigeria Limited by Nigerian Intercontinental Merchant Bank Ltd and 30 percent equity interest of Merchant Bank of Commerce Limited (MBCOM) by 8GL Limited.
There are strong indications among economy operators in the country that more business combinations would be executed in the manufacturing, banking and insurance and other aspects of the financial services industry because of the unfolding economic environment.
The implication of all these is that there would be some mergers and acquisitions in both bankings as a way of ensuring survival and growth in the years ahead.
Invariably experts tend to agree that business combination such as mergers and acquisition should be encouraged particularly under the prevailing economic circumstances when most companies are finding it difficult to survive on their own. Thus, the strategic aim of a merger should be to improve competitiveness in a changing and expanding global market by pooling expertise to win market share or reduce the cost of developing new products and services to meet the pace of technological change.
Mergers and acquisitions are regulated in Nigeria by the Securities and Exchange Commission (SEC), the apex regulatory agency of the Nigeria capital market, in conjunction with the Federal High Court which sanctions or approve it.
The Concept of Merger and Acquisition
Merger and acquisition is a business strategy that is premised on the very popular philosophy which says “that in unity lies strength”. It is no gainsaying that, “two is better than one”.
The term merger acquisition, consolidation, and amalgamation are commonly used interchangeably. They all describe the event of two or more companies combining into one economic entity.
A merger is a combination of a single business enterprise of two or more previously independent enterprises. The merger is the absorption of one or more corporations by another with the acquiring firm retaining its corporate identity and the other firm(s) disappearing from the corporate community.
The Companies and Allied Matter Decree (CAMD) of 1990 defined merger as an amalgamation of the undertaking or interest of two or more companies and more corporate bodies. The acquisition, on the other hand, is the excoriation by one company of sufficient shares in another company to give the acquiring company control over the acquired company. Acquisition can also take place through the purchase of the assets of another company. However, Management-Buy-Out (MBO) is a situation where the managers of the business acquired majority shares to become its owners or major shareholders.
Consolidation occurs when all the combining firms disappear as distinct and separate corporate entities, and a new consolidated corporate entity is created.
The Basis for Mergers and Acquisitions
However internal expansion or diversification often brings problems caused by lack of management or expertise. Yet taking over the management with an acquired business can cause organizational and personality problems. Internal diversification carries the high risks associated with new ventures; the acquisition of established companies that have overcome their early problems can involve heavy costs in the purchase of goodwill. Whereas cash is necessary for internal expansion, “paper” (the creation of new shares and loan stock) can often be used for acquisition.
Forms of Mergers
A business combination may take a number of forms viz:
The general classifications are as follows:
Vertical mergers are also classified as:
Backward: Merging toward earlier stages of production (i.e., toward raw material source).
Forward: Merging toward later stages of production (i.e., toward consumers of the final product).
Conglomerate Merger: Unites firms whose products are neither horizontally nor vertically related. Conglomerate mergers may involve the addition of new products, a new entry into a new industry, or the combination of different production technology or marketing channels.
Concentric Merger: Occurs when merging firms are in different product areas but are related to raw materials, production, technology or marketing channels. Concentric mergers are classified as a subset of conglomerate mergers. The legal and financial forms which the merger takes are governed largely by tax corporate charter and other legal provisions that introduce the unique elements in each case.
In general mergers represent a formal, as against an informal form combination.
Reasons for the Merger Agreement
The primary justification for a merger or acquisition is the “synergetic effect” of combining two or more firms. The combination is assumed to provide some real economies of scale a reduction in risk or both. Since any increase in earnings or reduction in risk has the effect of increasing the value of a going concern the value of the firms combined is presumably greater than the sum of their values separately. The synergetic effect will occur when a merger produces economies of scale in production costs or the elimination of duplicate facilities. It may also occur as a result of a reduction in marketing costs. A reduction in marketing costs may result from either an expansion of product lines or the easing of competitive pressures.
Finally, there may be economies of scale in either the management or the finance function. Prevention of business failure may be a key reason for the merger.
A “take-over bid” represents a direct offer by the acquiring firm to purchase all, or a majority, of the outstanding stock from the stockholders of the target company.
Identification of Merger Candidates
Successful mergers and acquisitions do not just happen they must be planned and executed effectively because a clear understanding of the issues involved in a merger and acquisition activity starts with knowing how to identify the right merger or acquisition candidate as a faulty approach can possibly derail the whole exercise and put it in jeopardy.
A quick guide to proper identification of merger candidates will include the followings:
It is argued that mergers and acquisitions are recognized worldwide as veritable tools of resuscitating financially distressed companies. Regulatory authorities and entrepreneurs in the country should change their attitude towards the concepts as an option for business survival and success.
Part of the attitudinal change towards mergers and acquisition strategy (as an option for business survival and success on the part of Africa entrepreneurs) will involve understanding and appreciating vital issues which include the evaluation process for merger and acquisition candidates types of mergers and acquisitions and benefits of mergers and acquisitions.
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