Many a time, companies are outdone by the competition, or their managerial expertise can no longer meet up with the demands of the corporate world or the growth of technology has necessitated an expanded base or as we have experienced recently in Nigeria, the demands of what some may call “regulatory strangulation” has required that existing corporate entities must fuse together in other to move forward. The direct result of this is that, companies have either decided to fuse with each other or one entity has entirely acquired the other. The process of a company fusing with another is called a merger, while the process of one buying up another is an acquisition.
Mergers and Acquisitions (M&A) are worldwide corporate phenomena carried out all over the business world. The Nigerian business landscape also is no stranger to M&A. We have in the past heard of the merger of Unilever Nigeria Ltd and Lever Brothers Nigeria Plc. in the 90’s and the well-publicised mergers of several banks in the banking consolidation era of 2004 and 2005. To mention but a few.
Above we have given a very simple explanation of what a merger or an acquisition is. But technically, what is a merger? A merger is a process where two previously autonomous companies combine to form a larger company under the common control of a new company comprising of all or a substantial number of the shareholders of both companies. A merger is sometimes referred to as an “amalgamation”; this is because it involves the fusion or absorption of one right into another. That is also the colouration of the definition given by the Investment and Securities Act 2007 (“ISA” or “the Act”). Section 119 of the ISA defines a merger
An acquisition is the assumption of control of the management of a company without necessarily involving a transfer of absolute title. It is the purchase by one company of all or substantial interest of another company, such that the acquired company becomes a subsidiary or division of the acquiring company. A more practical definition is that an acquisition bid is an offer made to the existing shareholders of a company or to one or more classes of such shareholders to acquire their shares for a consideration in cash or securities; the purpose of the offer being to transfer control of the company to the offeror. An acquisition is often used interchangeably with a takeover because the later also involves the acquisition of share assets or control of the targeted company.
The distinction between an acquisition and a merger is that while the former is the direct or indirect control over the assets of the acquired company by the acquiring company or entity, in the latter, the separate shareholding in the combined companies will be spread between the shareholders of the two companies. Often the distinction is a question of degree of involvement or might of one of the companies. If the dominant company makes a share for share exchange for a target company of roughly the same size, the former shareholders of the target company will finish up holding about 50% of the share capital of the dominant company which is essentially a merger. If the dominant company is larger than the target company, then the operation would be regarded as an acquisition.
Mergers could either be horizontal, vertical or a conglomerate merger. A merger is horizontalwhen it involves two or more companies in the same line of business. An example is two pharmaceutical companies. It is vertical when it is between two companies in complimentary businesses. An example is a company into timber business and a company that actually uses those timber to make furniture. A kind of customer supply relationship. While a conglomerate merger is a merger between two or more companies in different lines of business. For example, a sugar processing company and a cement manufacturing company. Which type of merger it is one thing merging companies should take note of is creating a monopoly. That would run foul of Section 122 of ISA.
Or why do companies have to merger or acquire the assets and liabilities of another? Above we have already passively adduced some reasons why companies merge or have to merge. But there are several more reasons than those. It could be that the merging companies are trying to meet with the demands of statutory regulation as we saw amongst the banks and insurance companies in Nigeria very recently. The merging companies could also be trying to diversify their operations as well as their market. This is mostly the case in conglomerate mergers. The merging entities could as well be seeking to increase their productive capacity; improve output but reduce long-term cost. Also company may decide to go into a merger due to its lack of required expertise, either or both, at managerial level and low level personnel. Another reason may be to achieve stock market quotation. A private company desirous of been quoted on the Nigeria Stock Exchange (“NSE”) but unable to meet Listing Requirements may decide to merger with a public company to meet its desired end. And so on. It is my view that this list is inexhaustible as companies usually merge for various reasons.
We will continue from here next week! Ciao!