In Ghana, and in most developing countries, there is no denying the fact that Small and Medium-scale enterprises play major roles in the growth of their economies. Some SMEs have been able to withstand the shocks associated with their establishing and been able to sustain themselves, hence, making great strides and contributions to their countries’ 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-class establishments which can face the global competition. It is as a result of these that Mergers and Acquisitions come into play and, hence, the promotion of such exercises or needs.
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.
We begin this discussion with:
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.
Autbor: Sam Bediako-Asante || Sambed Consult