Some SMEs have been able to withstand the shocks and are making great strides and contributions to the country’s socio-economic environment.
However, majority of these enterprises have not been able to survive beyond three or five years (according to research) upon their establishment; and those, which have existed beyond these initial difficult periods, still face serious problems for so many reasons; the major ones being lack of adequate capital and funds for various aspects of their running, lack of managerial expertise and, most of all, not believing in themselves in facing the competitive environment in which they operate.
It is, for these reasons that those which have been able to hold their good grounds and have faced the harsh competitive environment squarely should be helped to grow further; and at the same time, also, seeing to it that even the well grounded and comparatively bigger firms are assisted to become world-classed establishments which can face the global competition.
It is as a result of these that Mergers and Acquisitions come into play. This write-up, therefore, seeks to bring to the fore the need to apply the concept of Mergers & Acquisitions (M&A) to help the further growth of these small and medium-sized establishments and, even, the well-grounded “not-all-that-big” companies -- which cannot match the current competitive global markets.
What Are Mergers and Acquisitions?
Mergers and acquisitions are both changes in control of companies that involve combining the operations of multiple entities into a single company.
In a merger, two companies agree to combine their operations into a single entity or company. One or more companies may merge with an existing company or they may merge to form a new company.
In merger, there is a complete amalgamation of the assets and liabilities as well as shareholders’ interests and businesses of the merging companies. There is yet another mode of merger.
Here one company may purchase another company without giving proportionate ownership to the shareholders of the acquired or without continuing the business of the acquired company.
Now, let me quickly state the forms of merger.
There are three types of mergers - the Horizontal, the Vertical, and the Conglomerate.
The horizontal is the combination of two or more firms in similar type of production or rendering similar services - for example, combining two banks or two insurance companies.
In Ghana, the recent ones between Ecobank Ghana and The Trust Bank; and the Fidelity and ProCredit Savings & Loans are vivid examples.
The vertical is a combination of two or more firms involved in different stages of production or services - for example, a vehicle manufacturing or assembling company and a vehicle marketing company.
When a company combines with a supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.
A conglomerate merger is when a combination of firms engaged in unrelated lines of business activity occurs - for example, merging of different businesses like car manufacturing, cement manufacturing, a Bank or an insurance company.
In an acquisition, one company purchases another company, and has the right to sell off operations, merge them into similar groups in the purchasing company, or close facilities or cancel products altogether.
A fundamental characteristic of merger (either through absorption or consolidation) is that the acquiring or amalgamated company (existing or new) takes over the ownership of the other company and combines its operations with its own operations.
Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of businesses or companies.
A substantial acquisition then occurs when an acquiring firm acquires substantial or bigger quantity of the shares or voting rights of the target company.
Thus, in an acquisition, two or more companies may remain independent, separate legal entity, but there may be change in control of companies.
An acquirer may be a company or persons acting in concert with that act together for the purpose of substantial acquisition of shares or voting rights or gaining control over the target company.
Recent cases in Ghana are the ones that have occurred between Dannex Pharmaceuticals and the Starwin Products Ltd. (SPL); MET Insurance and Hollard of South Africa, and the Republic Bank of Trinidad & Tobago versus the HFC Bank.
Companies would choose to merge together for different reasons:
• The combined entity would be larger, and have corresponding larger resources for marketing, product expansion, and obtaining financing. This could help them better compete in the marketplace.
• The combined entity could merge similar operations to reduce costs. Corporate and administrative functions, such as human resources and marketing, are often targets for combinations. They might also combine the production areas if the companies produce similar products and reduce costs by having fewer plants or facilities in operation.
• The combined entity might have less competition in the marketplace. If the products of the two companies competed for customers, they could combine their offerings and use resources for improving the product, rather than marketing against each other.
The combined entity might have synergy in operations. Synergy is when combined operations show lower costs or higher profits than would be expected by just adding their financial information together on paper.
This could be due to economies of scale, where costs are lower due to higher volume of production, or due to vertical integration, where greater control over the production process is achieved due to owning more steps in the production process.
Acquisitions are undertaken for strategic reasons. For example:
• A company might acquire another company to obtain a specific product. It can be less expensive to purchase a company offering a product you'd like to sell than building the product yourself. Software companies often purchase smaller companies that offer extensions to their product line if they become popular with customers, so they can add the functionality to their primary offering.
• A company might acquire other companies to increase its size. A larger company may have more visibility in the marketplace, and also better access to credit and other resources.
• A company might acquire another to obtain control over a critical resource. For example, a jewelry company might acquire a gold mine, to ensure they have access to gold without market price fluctuations.
Types of Business Combination
To further explain, there is, however, a great deal of confusion and disagreement regarding the precise meaning of terms relating to business combination viz., merger, acquisition, takeover, amalgamation and consolidation.
Sometimes, these terms are used in broad sense, encompassing most dimensions of business combination, while sometimes they are defined in a restricted legal sense.
Merger or amalgamation may take two forms:
- Merger through absorption
- Merger through consolidation
Absorption is a combination of two or more companies into an existing company.
All companies, except one lose their identity in a merger through absorption; a term normally given this is “swallow”, thus one company swallowing the other or others.
A typical example, in Ghana, is when the then Social Security Bank (SSB), in 1994, swallowed the National Savings and Credit Bank (NSCB), an exercise which was consummated by Databank Ltd. – an investment bank.
Here, let me point out that similar exercises were going to come on between the then Bank for Housing & Construction (BHC) and the National Investment Bank (NIB); the Agricultural Development Bank (ADB) and the former Cooperative Bank but for the confusing and difficulty which characterized the first of such exercises between the SSB and NSCB led the then government to shelve or abandon the subsequent ones.
Consolidation is also a combination of two or more companies into a new company. In this form of merger, all companies are legally dissolved and a new entity is created.
In a consolidation, the acquired company transfers its assets, liabilities and shares to the new company for cash or exchange of shares.
In a narrow sense, the term amalgamation and consolidation are sometimes used interchangeably.
Benefits of a Merger or Acquisition
There are many good reasons for growing your business through an acquisition or merger. These include:
1. Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business.
2. Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity which can be bought at a small premium to net asset value.
3. Your business underperforming. For example, if you are struggling with regional or national growth it may well be less expensive to buy an existing business than to expand internally.
4. Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers.
5. Diversification of the products, services and long-term prospects of your business. A target business may be able to offer you products or services which you can sell through your own distribution channels.
6. Reducing your costs and overheads through shared marketing budgets, increased purchasing power and lower costs.
7. Reducing competition. Buying up new intellectual property, products or services may be cheaper than developing these yourself.
8. Organic growth, i.e. the existing business plan for growth, needs to be accelerated. Businesses in the same sector or location can combine resources to reduce costs, eliminate duplicated facilities or departments and increase revenue.
Mergers and Acquisitions are also beneficial
• When a firm wants to enter a new market.
• When a firm wants to introduce new products through research and development.
• When a forms wants achieve administrative benefits.
• To increased market share.
• To lower cost of operation and/or production.
• To gain higher competitiveness.
• For industry know how and positioning.
• For Financial leveraging.
• To improve profitability and Earnings Per Share.
Issues in Combining Companies
It can be difficult to combine companies, whether they are merging or one is acquiring the other.
Combining operations means that some people will lose their jobs, since the company might only need, say, one Director of Human Resources but they have two currently available.
Companies may have different systems for managing information (MIS), including production information, financial information, and even communications, such as email systems.
There can be a significant effort required to merge the systems into a single system, in order to take advantage of the synergies of combined operations.
Companies may have very different cultures, and be unable to work together.
But surely, from the above, it must be seen that the benefits that accrue to mergers and acquisitions far outweigh the non-benefits or disadvantages.
And, be aware that teething troubles or problems arising out of such exercises can be resolved with time and with dedication. There is nothing that is insurmountable.
Calling for mergers and acquisitions
Banks, Insurance companies, small and medium-scale enterprises (SMEs), Law Chambers, Accounting firms and other scattered small businesses in Ghana should begin to think of such merging and acquisitioning to have big roots for competing with others globally.
For a country as small as ours, operating 35 banks, 27 Savings & Loans companies, and an uncountable number of Rural & Community Banks, Microfinance institutions and Credit Unions is, certainly, on the high side.
It is in the light of this that the Central Bank (BoG) should do EVERYTHING within its power to ‘force’ some of these financial establishments to merge so that they can have bigger capital bases to rock shoulders with other bigger institutions in Africa and the world over.
I will, therefore, call on the apex bodies of the various sectors of the “Socio-Economic” groupings in the country like the Association of Ghana Industries (AGI); the GHAMFIN and GAMC, (both for the microfinance companies); the GHASALC (for Savings & Loans companies); the Credit Unions Association (CUA Ltd.); the Ghana Bankers Association; the Apex Bank and ARB (both for the Rural & Community Banks); the Private Enterprise Federation(PEF); the Ghana Insurance Association (GIA) and the many others, to encourage their members to see the benefits of mergers and acquisitions that would accrue to them should they take advantage and pursue such exercises; for it is true a statement that “two or more heads are always better than one”, in terms of management; and, again, leading to enhanced capital growth for creating bigger establishments.
Indeed, these apex bodies mentioned must be seen as the first step in the promotion of the formation of bigger enterprises; and, the second step, prompting their members to consolidate.
Ghanaian businessmen and women DO NOT trust each other and therefore the lack of such collaborations. Let Ghanaian business owners trust each other and imbue themselves with Honesty, Integrity and Truthfulness – mind you, business only thrives on these three pillars.
It is only with these qualities that they will have the vim to enter into mergers and acquisitions for the resultant bigger and sustainable businesses of international repute, which will be good for their own selves and for the good of the economy of Ghana.
Let the “business world” in this country challenge themselves with this thought, and they wouldn’t regret it. They will, rather, find their combined forces sending them to greater heights and hence moving from glory to glory.
Their businesses will be well positioned for continued and sustainable success.
• Sam Bediako-Asante is the CEO of Sambed Consult, a Business/Investment Advisory firm. He is also a former Banker, a Professional Administrator, and also presently, a certified and an accredited SA Specialist of the South African Tourism in Ghana.