Mergers and Acquisitions: A Viable Option
By Enitar Ugwu
Mergers and Acquisitions. Good ideas and swell sounding words, especially when one's property is not the centre of those propositions.
In the Nigerian context, "my own is my own". And any attempt to enlarge the ownership structures of one's enterprises is always met with stiff resistance.
But when the 'entire talk' about mergers and acquisitions is on banks, when the stake is high up there. What makes the stake is when higher is that this 'talk' is coming from some high and mighty quarters like the Central Bank of Nigeria (CBN).
For instance, recently the CBN Governor Professor Charles Soludo had warned that the apex bank will crack down on banks top shot that endorses false financial reports sent by banks to CBN.
The import being that such false report essentially conceals the actual health of the said bank.
He then based on the foregoing advised such banks to consider the option of mergers and acquisitions as the apex bank will soon crack down on ailing banks.
Also he came down hard on those bank owners who cling to their sole ownership even when they know that the bank is on the way down.
His words "An obvious feature of the Nigerian banking system is the continued existence of a large number of small players, which are usually prone to crisis and are largely uncompetitive because of their small sizes and inability to take advantage of economies of scale".
Apart from that, the CBN boss stressed that the culture of "not-letting go" exhibited in Nigerian businesses by the owners must have contributed to the unpopularity of the mergers and acquisitions option.
He noted that the "general tendency" of Nigerians for sole proprietorship and to "avoid by all means, the dilution of ownership's, adding that, the tendency had resulted in," only a little over 20 cases of mergers and acquisitions in Nigeria".
His words, "there are ample examples of the reluctance by Nigerian businessmen to dilute their holding even when it is clear that the demise of the business is imminent. This more than any other thing explains why the option of mergers and acquisitions is not popular in the country."
Concluding, he pointed out that mergers were a world wide phenomenon, adding that the trend would create a very large and complex financial industry in the country, which would in turn improve the economy.
Also making his views known on the issue, Mallam Suleyman Ndanusa, Director General, Securities and Exchange Commission noted that, most studies confirm that economic rationality assumption is the real root for M&As;, adding that economic rationality implies that, man will always do what seems to him appropriate to further his economic interests.
Besides, he pointed out that despite all the business combinations found among financial institutions, what is still lacking is the absence of meaningful mergers between banks in such a manner that will result in solid capitalisation necessary for long term funding, of the real sector of the economy.
He added that over the years, banks and insurance companies have been pre-occupied with issues of minimum capital requirement, acquisition of what technology and branching out, noting that the banks particularly have to contend with minimum ratio of capital to loans and advances, liquidity, capital adequacy ratios etc.
Based on this, he explained that in order to comply with regulatory requirements, banks have generally relied on the primary segment of the capital market noting that most of the funds are raised by way of Rights Issue and offer for subscription. For instance, in year 2002, banks raised about N24 billion form this market. Out of this sum N12.3 billion was by way of offer for subscription and N11.7 billion by way of Rights.
However, Ndanusa noted that, although, there are various options available to these financial institutions to fulfill the requirements for recapitalisaiton, such as public issues, rights issues etc., the pressures on the primary segment of the market may hamper this source of capital.
He stated for instance, the return of the federal government to the bonds market with jumbo issues, the privatisation of huge government-owned institution in the telecommunications and power-sector, and the attraction of the primary segment of the capital market to both state government and banks, will obviously reduce the capacity of the primary sector of the market to provide the much needed funds at just any time.
Owing to that, he lamented that presently, what we have in the economy is the continued existence of a large number of fringe players who are prone to crisis, and are incapable of rising to the demands profitable business due to their size and low level of capitalisaiton.
For instance, he pointed out that, given the deregulation of the petroleum sector, Nigerian banks will face huge challenges that would continuously test their capacity to fund oil and gas related operations, adding that, their failure will amount to loss of business for Nigerian companies, in favour of better funded foreign competitors.
Also, he said that the largest bank in Nigeria probably has close to $600 million paid up capital, adding that no bank can single-handedly finance the exploration risk of local oil and gas marginal field operators without running foul of CBN prudential guidelines, pointing out that with the cost of drilling two dry holes put at about $10 million per hole, most banks will find business in this segment of the petroleum business, a no-go- area.
However, Mergers and Acquisitions as an option is not an easy route as it has its challenges.
According to Ndanusa, the greatest challenge is in making mergers and acquisition work through the integration processes that follow amalgamation, explaining that this integration process is determined by various issues that must be appreciated in embarking on nay strategic alliance.
Some of these include, cultural issues which encourages the building of business empires around individuals and members of their family.
The preference therefore is for the aggregation of capital in an individualistic fashion, failing to see business enterprises as assets that are Eangible and tradable.
This age-long culture, he remarked, continue to feature in modern business endevours in our country, noting that we must realize that the overriding success story of any business is in its growth, development and quest for market leadership in the sector the business operates.
He stressed that growth and continuity are not for narrow, self-cented firms lacking in sufficient capital, sound management and efficiency.
Meanwhile, he warned that, it must be expected that mergers may not be between "strange bed fellows", otherwise there will be a great problem of integration after the combinations, pointing out that, in the case of acquisition, there can be hostile scenarios.
He pointed out that if one studies the make up of the Exchange Management of most second and third generation banks and insurance companies, one will find that a good number of them were founded on fraternal grounds, explaining that admission of new partners would only be forced by distress rather than seeking to become key local and international players.
Equally, deriving from the cultural factor is the usual squabbles that will herald business combination. usually, there are questions regarding who will remain at the helm of affairs of the consolidated outfit as managing director, general manager, assistant general managers or even chairman.
Ndanusa, pointed out that this situation runs counter to the need to eliminate duplicate functions or activities which are cost centres, adding that M & A is one business strategy that creates value and wealth, but one of the important factors that will underpin the success or failure of merger for example, is whether the parties to the merger have a shared vision and understanding of the future or the industry in which the resultant company will operate after the consolidation.
He stressed that, in the case of acquisition, it must be determined from the outset whether the proposed acquisition will fit into the growth or expansion plan of inquirer, adding that it is therefore advisable to consider the company whose acquisition best fits its choice of a strategic partner.
Based on the foregoing, he recommended that mergers and acquisitions should be seriously considered as an alternative to public issues, not only to satisfy regulatory requirements, but also to bring about the gains of synergy, good return to shareholders, and a stress free response to the pressure of competition and technology.
This is because, the wild race for depositor's funds in his banks have known to have created a lot of distortions in the interest rate structure of the economy, he said, pointing out that, it has also put staff and management under severe stress, leaving less room for core banking activities.
However, he advised, that companies contemplating M & A and other forms of business combinations have to properly sensitize shareholders, directors, employees and trade unions in readiness for the changes that M & A will bring.
The regulatory authorities on their part, he warned, must endeavour to harmonise their requirements in such a manner that will reduce the burden and delays in the processing of M & A applications.
Apart form that, he noted that the formation of strategic alliance through M & A is indeed a business decision that requires due diligence and careful negotiation to consummate, adding that integration management should be recognised as a distinct business function like other operational functions, to bridge the gap in corporate culture between companies involved in M & A.
Well said. But with the owner takes all syndrome" in this part of the world, will our businesses be allowed to grow using the M & A option?
|
