Abstract – Mergers and Acquisition are popular terms in the 21st century business space. Although, it cannot be said in definite terms that M&A is a creature of the 21st century. This is traceable to the fact that before the development or popularization of M&A, there are different system of practices which served its purposes. Owing to the nature of the 21st century business setting, there is need for trumpeting the imports of Mergers and Acquisition to business organizations in order to bring to bear its numerous advantages.
The misunderstanding of what M&A stands for in business is fatal to business growth, development and innovations that stand to transform same. Some business owners are rigid even at liquidation to the point of rejecting offers for merging which unarguably could serve the magic for revival. Similarly, many companies have wound up due to the inability of its drivers to take strategic decisions which borders on Merging and allowing Acquisition. It is therefore important to stress the need of M&A in business space.
Mergers and Acquisition is not a one way traffic business tool. It is applicable to every kind of industry and business organizations. The banking, aviation, oil & gas, creative, manufacturing, education and entertainment industry can explore these tools to boost performance and compete favourably with other business organizations. This paper posits to critically discuss Mergers and Acquisition as tools for business growth and to meticulously expose some of the pitfalls in the application of M&A.
Keywords: Mergers, Acquisition, Tool, Business.
Introduction
The 21st century business setting is highly competitive. Business activities in this age is beyond the culture of business transaction fifty years ago. Modern business enthusiast are keen on leveraging scarce opportunities and to break even. Running a successful business as government, institution, organization or individuals is highly dependent on skills and the ability to navigate through the turbulent seas most times.
The 21st century market space is highly competitive, this informs the numerous legal frameworks and regulatory set-up that emerged to ensure healthy competition, economic development and optimal function of businesses. Mergers and Acquisition (hereinafter referred to as “M&A”) has been a great business tool leveraged by skillful and experience business practitioners to unlock potentials, break even and engage conversation at high level business discussion.
It is also important to put on the table the fact that growing great business entails learning the culture of the space. Where one is not familiar nor understand the terrain and culture of the business space or setting he becomes automatically unfit to lead conversation in the world. M&A remain the foremost strategic tool a business practitioner in this era must strive to acquire to lead gainfully. With the nature of business setting and the level of resources being invested, it is only a wise bargain to employ the instrument of M&A to save difficult business situation.
Some of the A list Banks, business empires, organization and empires leading transaction and conversation in the business sector today materialize as a result of the instrument and/or tool of M&A. It is on this background this paper posits to critically discuss Mergers and Acquisition as tools for business growth and to meticulously expose some of the pitfalls in the application of M&A.
Conceptual Framework
Mergers
Mergers is the combination, joining, fusion of two or more independent companies into an entity, one organization or company with common ownership and management. Merger cannot take place within a company, it can only take place between two or more companies. In a simple term, when there is combination or fusion of two or more companies through a mutual agreement and understanding, we say mergers have taken place.
According to Anthony (2008); a merger refers to the combination of two or more organizations into one larger organizations. Such actions are usually voluntary and often result in new organization name (often combining the names of the original organizations). Merger entails the coming together of two or more firms, the mixing of entities resources for growth and renovation.
A merger occurs when two companies through a mutual agreement consolidate into an entity. Illustratively, Merger is where Company Y join Company Z to form a single company or a new entity, Company YZ. Good examples of Mergers and acquisition is the merging of Diamond Bank and Access Bank, Exxon Corporation and Mobil Corporation.
Acquisition
Okpanachi defines acquisition as the taking over or purchase of small firm by a big firm, both of which are pursuing similar motives. Similarly, Pandey defines acquisition as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. An acquisition is the purchasing of a Company’s Asset and operations by another Company allowing the acquired venture to retain its legal existence and continue its business with the acquiring company assuming the status of a holding company to the acquired company.
Acquisition occurs when a person purchases shares, assets, or other interest in a Target entity resulting in the acquiring company (that is, the Purchaser) acquiring stake in the target. In some scenarios, the acquired company may retain its identity or be absorbed into the acquiring company.
Types of Mergers and Acquisition
There are several types of M&A but only four is discussed in this paper.
Horizontal Mergers
This type of merger takes place between companies engaged in competing businesses which are at the same stage of industrial process. This type of merger is between two companies in the same industry, for example, merger between Access and Fidelity Bank. Illustration- merger between two companies involved in the manufacture of two similar kind of cars, one company may decide to merge with the other company so that both types of cars can be sold in the market without any competition. Examples – Toyota and Volkswagen merger, Tesla and Benz merger, etc..
Vertical Mergers
This is a type of merger between companies of different stages of production. Examples between a producer of bag and a supplier of leather. This kind of merger takes place between companies engaged at different stages of industrial process. Illustration- to manufacture a car, tires are required. An automobile company involved in manufacturing of tyres. One of the examples is the merger between eBay and PayPal.
Conglomerate Mergers
This is a merger between companies that are engaged in totally unrelated business activities. The primary reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital. Example is a merger between a financial institution and a fabric company, Walt Disney Company and the American Broadcasting Company merger etc.
Congeneric Mergers
Merger between companies engaged in the same general industry without any common customer – supplier relationship. A company uses this type of merger in order to use the resulting ability to use the same sales and distribution channels to reach the customers of both businesses. Example – Citigroup’s acquisition of Travelers Insurance.
The Legal and Regulatory Framework for Mergers and Acquisition
There are varieties of laws and instruments that which govern M&A in Nigeria. Prominent among them are:
The Federal Competition and Consumer Protection (FCCP) Act 2019;
The Nigerian Communications Act 2003;
The Companies and Allied Matters Act (CAMA) 2020;
The Merger Review Regulations, 2021;
The Merger Review Guidelines, 2019;
The Companies Regulations 2021;
The Investments and Securities Act (ISA) 2007;
The Rules and Regulations of the Securities and Exchange Commission (SEC);
The Nigerian Stock Exchange Rulebook etc.
Regulatory Authorities for Mergers and Acquisition
The Federal Competition and Consumer Protection Commission (FCCPC): The FCCPC is established by the FCCPA and it is saddled with the responsibility of regulating competition, empowered to prevent and punish anti-competitive practices, regulates mergers, takeovers and acquisitions, and protect regulated industries in Nigeria. It created Competition Tribunal to deal with any disputes and concerns arising therefrom.
The Security and Exchange Commission (SEC): The duty of SEC in M&A is to maintain fairness in the exercise of its primary function as the regulator of the capital market.
The Corporate Affairs Commission (CAC): The Corporate Affairs Commission (CAC) plays significant role in relation to corporation that intend to merge. It is the duty of the CAC to receive corporate resolutions, filings and to certify corporate resolutions and the de-registration of any dissolved that may occur in the merger process.
Central Bank of Nigeria (CBN): The Central Bank of Nigeria gets involved in merger and acquisition process where banking institutions are involved. Any merger that concerns the bank must first get prior approval of the CBN before SEC approval is granted. In 2005 the CBN issued directive to banks to increase their share capital from N2 billion to N25 billion, this necessitated the merging of United Bank for Africa PLC and Standard Trust Bank PLC.
Nigerian Communications Commission (NCC): The NCC plays an important in activities relating to mergers and acquisitions in the communication industry. As the sole regulatory agency, it gives clearance certificate, ensure the protection of consumer rights and above consider the import of such to quality of service and the communication industry entirely. NCC regulates any merger that would take place between MTN and AIRTEL, Glo and 9 mobile etc.
Federal Inland Revenue Service (FIRS: it is important to note that no merger and acquisition can take place without the prior direction and clearance by the Federal Inland Revenue Service especially in respect of capital gains tax. It is the duty of the FIRS to ensure that all taxes due or payable by the merging companies are fully recovered. Hence it is important for the merging companies to bring the merger proposal to the FIRS for evaluation.
Mergers And Acquisition As Tools For Business Growth
Mergers and Acquisition (M&A) are common strategies for business growth. The instrument of M&A, Companies survived the burning consequences of economic downturn and come through strong. Companies combine resources, eliminate competition, and achieve economies of scale. The significance of M&A, are very evident and have been recognized by businesses of different sizes and varieties of transaction ranging from small business mergers to multi-billion dollars deal between large corporations and empires. Evident is the report by PwC, that the total value of M&A deals in 2021 reached $4.4 trillion globally, the highest in level in more than a decade.
One key advantage of M&A is the ability to expand into new markets. By acquiring a company with an established presence in a different geographic region, a business can quickly gain access to new customers and distribution channels. This is particularly important for companies that are looking to enter new international markets, where regulatory barriers and cultural differences can make it difficult to succeed alone. According to PwC, Cross-border deals accounted for more than half of the total value of M&A deals in 2021.
M&A holds great prospect for business growth in Nigeria. The 1999 merger of Exxon Corporation and Mobil Corporation two leading oil company to form Exxon Mobil Corporation and the merging of Diamond Bank and Access Bank are testamentary to the working of M&A in Nigeria.
Another benefit is the ability to acquire new products or services. By purchasing a company with a complementary product or service offering, a business can expand its portfolio and enhance its competitiveness. This is particularly important in industries where innovation is key, as M&A can provide access to new technologies and intellectual property. In fact, as reported by PwC, technology was the most active sector for M&A deals in 2021, with a total value of $764 billion. M&A can be an effective way to eliminate competition. By acquiring a rival company, a business can reduce competition and gain market share. This without doubt can lead to increase pricing power, higher profit margins, and greater customer loyalty. According to PwC, the healthcare sector saw a significant number of M&A deals in 2021, driven by the desire to achieve scale and reduce competition.
However, M&A is not without its challenges. Integration can be difficult, particularly when combining companies with different cultures, systems, and processes. There may also be regulatory hurdles, such as antitrust laws, that can limit the ability to complete a deal. Additionally, there is always the risk that the anticipated benefits of the deal will not materialize, leading to financial losses and a decline in shareholder value.
Despite these challenges, M&A remains a popular strategy for business growth. In fact, according to a survey by PwC, 79% of CEOs plan to execute at least one acquisition in their time to grow visibility and managerial prowess. This foregrounds the continued importance of M&A as a tool for strategic growth.
1.6. Challenges in Mergers and Acquisition
a. Overvaluation of the Target Company: among the numerous pitfalls that accompany M&A is overvaluation of the target company. This may occur due to several factors ranging from unrealistic growth progression, emotional tie to the deal, or being overly optimistic about prospective synergies and financial benefit might result from the deal. Overvaluation of the target market can also lead to paying excess for the acquisition, which can result in reduced returns, financial strain, and bankruptcy.
b. Incompatible Cultures and Style of Management: corporate acquisition often involve the combination of two or more companies with different cultures and management styles. There is no doubt, incompatible cultures and management style can inform significant challenges, including but not limited to, employee turnover, resistance to change, reduced productivity, cost overruns and severed synergies.
To avoid pitfall, it is essential to consider cultural and management compatibility at the early in the acquisition process. This should involve a thorough assessment of the two companies’ cultures, values, communication strategies and management styles as well as possible plan for addressing any differences or challenges. Involvement of key stakeholders in the integration planning process would also guarantee a smooth and successful integration.
c. Poor Financial Due Diligence: it is important to note that the valuation of the target market/company cannot be done without proper financial due diligence. What then is financial due diligence? Financial due diligence is a detailed investigation of the target company’s financials and accounting policies in order to understand its business and investment risk. It provides valuable information to support a fair purchase price and ensures the appropriate warranties and representations are included in the purchase agreement.
The avoidance or conducting poor financial due diligence can result in being financially liable for the past non-compliance under applicable laws. This can also lead to other unexpected surprises that can derail the success of the M&A.
d. Poor Legal Due Diligence: M&A deals are subject to various regulatory and legal considerations, depending on the specific industry and state. Legal due diligence covers a wide range of legal areas, including but not limited to corporate and business structure, review of contracts and agreements, intellectual property, taxation, employment and labour matters, legal disputes and insurance coverage.
Legal due diligence can help greatly in the identification of past or potential legal risks and liabilities, allowing the acquiring company to negotiate appropriate indemnification clauses, representations, and warranties, or even to reconsider the decision to proceed with the transaction entirely. More so, legal due diligence enables the identification of elements that may impact the acquiring company’s operations, reputation, and financials after the transaction is completed. For example, regulatory compliance issues may arise if the target company has not been thoroughly assessed for compliance with applicable laws and regulations. This, in no doubt can result in regulatory penalties, fines, and other legal consequences for the acquiring company, thereby affecting its reputation, operation in some cases and financial performance.
Conclusion
Conclusively, mergers and acquisitions can be an effective way for businesses to achieve strategic growth. By expanding into new markets, acquiring new products or services, and eliminating competition, M&A can provide significant benefits and serve as positive drive for companies of all sizes. However, it is important to approach M&A with caution and to carefully consider the risks, pitfalls and challenges that may accompany it.
Notwithstanding the challenges, M&A has remained a veritable and strategic tool for business growth and resuscitation across the globe. With the right strategy and execution approach, M&A can be a powerful tool for achieving long term business success and breaking through new market.
Stephen Peter Okangla is a final year student of law at the University of Maiduguri, Borno State, Nigeria. He is a skilled legal writer, researcher and season author. He has written and published over thirty academic papers and ready to up-skill through mentorship and training. He can be reached via:
WhatSapp/Phone: +2348132040369
E-mail: stephenokangla@gmail.com
1 The Regulatory Framework of Mergers and Acquisition <https://omaplex.com.ng/the-regulatory-framework-of-mergers-and-acquisition/> accessed 21 October 2023
2 Ejoor Frank Wisdom et al Mergers and Acquisitions as a Growth Strategy in Business Organizations: A Study of Nigeria Banking Sector; European Journal of Business and Management
3 Ibid
4 Ejoor Frank Wisdom et al Mergers and Acquisitions as a Growth Strategy in Business Organizations: A Study of Nigeria Banking Sector; European Journal of Business and
The Regulatory Framework of Mergers and Acquisition https://omaplex.com.ng/the-regulatory-framework-of-mergers-and-acquisition/ accessed 21 October 2023
Rationale Behind Mergers and Acquisitions https://blog.ipleaders.in/rationale-mergers-acquisitions/ accessed 30 October 2023
Lecture by Victoria
Rationale Behind Mergers and Acquisitions https://blog.ipleaders.in/rationale-mergers-acquisitions/ accessed 30 October 2023
Lecture by Victoria Ezekiel Anuri, Senior Associate, Templars
Rationale Behind Mergers and Acquisitions https://blog.ipleaders.in/rationale-mergers-acquisitions/ accessed 30 October 2023
Ibid
The Mergers & Acquisitions Review: Nigeria accessed 03 December 2023
