Sound Financial Advisory: A Cornerstone for successful mergers and acquisitions

INTRODUCTION

Having a solid understanding of the intricacies and fundamental processes involved in mergers and acquisitions is vital for both business leaders and investors.[1] The murky nature of M&A deals highlights the complexity, confidentiality, and potential risks involved in these transactions, necessitating careful due diligence and transparency to mitigate uncertainties. Mergers and Acquisitions involve the combination of two or more business entities, leading to a restructuring of their corporate framework. The goal is to enhance synergies within the organization, ultimately boosting its effectiveness and efficiency.[2]

A company might opt to buy and integrate another company entirely, merge to form a new entity, acquire a portion or all of its significant assets, extend a tender offer for its stocks, or even initiate a hostile takeover.[3] Mergers and acquisitions (M&A) encompass intricate transactions where ownership, assets, and liabilities are transferred between two or more companies.[4]

The terms mergers and acquisitions are commonly interchanged, yet they hold nuanced differences in meaning. The Federal Competition and Consumers Protection Act defines a merger as “when one or more undertakings directly or indirectly establish direct or indirect control over the whole or part of the business of another undertaking”.[5] The Act goes further to state that a merger may be achieved through any of the following means:

• The purchase or lease of the shares, an interest or assets of the other undertaking in question.
• The amalgamation or other combination with the other undertaking in question.
• A joint venture.[6]

Essentially, a merger takes place when two companies amalgamate to establish a new corporate entity.[7] A notable example of a merger transaction in Nigeria was between Unity Bank and Bank of Commerce and Development in 2015.[8]

On the other hand, an acquisition is a corporate transaction where one company buys and assumes control of another company.[9] An acquisition also entails the take-over by one company of sufficient shares in another company to give the acquiring company control over that other company.[10] It is a transaction in which one company buys the majority or all of another company’s shares to assume control of that company.[11] A popular acquisition that took place in the Nigerian banking sector was the acquisition of Diamond Bank by Access Bank in 2019.

CATEGORIES OF MERGERS IN NIGERIA

A merger can take different forms: it may be horizontal, involving companies producing similar goods in the same industry; vertical, involving companies producing different goods within the same industry; or conglomerate, involving companies from diverse industries.[12]

According to the Federal Competition and Consumer Protection Act, 2018, mergers may be broadly categorised into two: Small Mergers and Large Mergers.[13]

• Large Mergers: The Federal Competition and Consumer Protection Act, 2018 does not explicitly define a large merger. However, this can be deciphered from the provisions of the Federal Competition and Consumer Protection Act, 2018- Notice of Threshold for Merger Notification Pursuant to Section 93(4).[14] According to the Federal Competition and Consumer Protection Act, 2018, a party to a large merger must notify the Federal Competition and Consumer Protection Commission prior to implementing the merger.[15]

The Federal Competition and Consumer Protection Act, 2018- Notice of Threshold for Merger Notification Pursuant to Section 93(4) highlights when the Federal Competition and Consumer Protection Commission has to be notified of a merger. It specifies that the Federal Competition and Consumer Protection Commission must be notified before a merger is implemented if in the financial year preceding the merger, the combined annual turnover of the acquiring undertaking and the target undertaking equals or exceeds ₦1,000,000,000 (One Billion Naira) or where the annual turnover of the target undertaking equals or exceeds 500,000,000 (Five Hundred Million Naira).[16]

Therefore, a large merger occurs between two companies whose combined annual turnover equals or exceeds ₦1,000,000,000 (One Billion Naira) or where the annual turnover of the target undertaking equals or exceeds 500,000,000 (Five Hundred Million Naira). In this case, the Federal Competition and Consumer Commission must be notified of the merger.

• Small Mergers: The Federal Competition and Consumer Protection Act, 2018 does not provide an explicit definition of a small merger either. Nonetheless, the Act specifies that a party involved in a small merger is not obligated to inform the Federal Competition and Consumer Protection Commission unless the Commission deems it necessary.[17] This determination is based on the Commission’s opinion that the merger could significantly impede or reduce competition.[18] Additionally, the Act allows a party involved in a small merger to choose to voluntarily inform the Commission about the merger.[19]

It can also be presumed that a small merger is the opposite of a large merger in this case. This implies that a small merger involves two companies with a combined annual turnover of less than One Billion Naira (₦1,000,000,000) or where the target company’s annual turnover is below Five Hundred Million Naira (₦500,000,000).

ADVANTAGES OF MERGERS AND ACQUISITIONS

The following are possible advantages of M&A transactions:

• It creates a potential to boost sales and generate higher revenue. This could stem from gaining access to new customer segments, expanding product or service offerings, utilizing additional distribution channels, and other factors.[20]
• It creates the opportunity for technology migration and acquisition. Sometimes, the easiest path to technological advancement is by merging with a competitor possessing the desired technology.[21]
• It creates the possibility of exploring new markets. Growth is a paramount goal for any business, and the quickest route to achieve it is by venturing into and exploring new markets.[22]
• Mergers and Acquisitions also have the potential to rescue a company from bankruptcy.[23]
• Mergers and Acquisitions provide a chance to enhance the efficiency of capital-intensive assets.[24]

 

THE ROLE OF ADVISORS IN M&A TRANSACTIONS

The role of advisors during the process of mergers and acquisition cannot be overemphasized. These advisors are professionals who offer guidance and facilitate transactions during the process. They ensure proper navigation through the process to ensure a seamless experience and achieve the best possible results.[25] Amidst the complexities of M&A deals, a pivotal factor that can determine the success or failure of an M&A deal is the involvement of a financial advisor. Some of the services provided by these advisors are:

• Prior to the M&A process, the advisor looks into the goals of the company after the M&A process, covering both financial and non-financial aspects. They offer guidance on valuation expectations, etc. all while structuring the process to align with non-financial priorities.[26]
• They conduct an analysis of market conditions: Mergers and Acquisition advisors possess valuable industry expertise and have access to up-to-date data concerning market trends and comparable transactions.[27]
• They proffer advice regarding the financing alternatives available for the transaction. They can recommend the suitable capital framework and funding channels, which may involve debt, equity, or a blend of both.[28]
• Advisors may also perform due diligence as part of the M&A process, ensuring thorough investigation and assessment of all relevant aspects before finalizing the transaction.[29]
• M&A advisors also tap into their industry expertise, fostering trust-based partnerships and meaningful connections with potential buyers. Their introductions boost the chances of finding an ideal match, ensuring your business sale aligns with your goals efficiently.[30]

 

DUE DILIGENCE IN M&A TRANSACTIONS

As mentioned previously, a key service offered by an external advisor in an M&A transaction involves conducting due diligence. Mergers and acquisitions generally require extensive due diligence from the buyer. Prior to finalizing the transaction, the buyer seeks to understand the assets and liabilities being acquired, including contingent liabilities, contract issues, legal risks, intellectual property concerns, and other relevant factors.[31]

Generally, there are five types of due diligence and they are:

• Financial Due Diligence: This involves the evaluation of the company’s financial performance to date, verifying the accuracy and sustainability of the numbers reported in its financial statements.
• Legal Due Diligence: This involves an investigation of all legal facets of the business and its contractual relationships with stakeholders. This process typically covers licenses, regulatory matters, contracts, and any pending litigation.
• Operational Due Diligence: This involves an analysis of the company’s operational processes, focusing on how it transforms inputs into outputs.
• Tax Due Diligence: This involves an investigation of the company’s tax matters to confirm that all tax obligations have been settled up to the present. It also considers how a merger will affect the tax responsibilities of the newly formed entity resulting from the transaction.
• Information Technology Due Diligence: This involves an assessment of a company’s IT systems and operations, often emphasizing security evaluations. This type of due diligence aids the acquiring company in appraising existing IT frameworks and identifying potential security risks.[32]

 

CONCLUSION

In conclusion, navigating mergers and acquisitions can be a complex undertaking, with numerous intricacies and potential pitfalls along the way. Throughout every stage of the process, from initial considerations to post-transaction integration, having a knowledgeable advisor is essential for success.

At Crimson Oak Capital, we understand the nuances of M&A transactions and offer comprehensive advisory services tailored to meet the unique needs of our clients. Whether you are seeking guidance on strategic planning, valuation, negotiation or integration, our experienced team is dedicated to providing expert support every step of the way.

[1] ‘Behind Mergers & Acquisitions: A Deep Dive into The M & A Process’ (6 October, 2023, Wrike) < https://www.wrike.com/blog/m-and-a-process/ > accessed 17^th April 2024.

[2] ‘Merger vs. Acquisition’ (CFI Team) < https://corporatefinanceinstitute.com/resources/valuation/merger-vs-acquisition/ > accessed 17^th April 2024.

[3] Adam Hayes, ‘Mergers and Acquisitions (M&A): Types, Structures, Valuations’ (20 February, 2024, Investopedia) < https://www.investopedia.com/terms/m/mergersandacquisitions.asp#:~:text=When%20a%20company%20faces%20competition,

human%20capital%2C%20and%20customer%20bases. > accessed 17^th April 2024.

[4] Vishakha Kothari, ‘The Importance of Mergers and Acquisitions in Today’s Economy’ (21 February, 2023, LinkedIn) < https://www.linkedin.com/pulse/importance-mergers-acquisitions-todays-economy-vishakha-kothari#:~:text=It%20allows%20companies%20to%20achieve%20economies%20of%20scale%2C%20diversify%20their,to%20expanding%20into%20new%20markets. > accessed 17^th April 2024.

[5] Section 92(1)(a) of the Federal Competition and Consumer Protection Act 2018

[6] Section 92(1)(b) of the Federal Competition and Consumer Protection Act 2018

[7] Zoe Kaplan, ‘Is Mergers and Acquisitions a Good Career Path?’ (15 August, 2023, Forage) < https://www.theforage.com/blog/careers/mergers-acquisitions-good-career-path > accessed 17^th April 2024.

[8] Obialor Kalu, ‘Recent M & A of Nigerian Banking Sector’ (27 March, 2023, LinkedIn) < https://www.linkedin.com/pulse/recent-m-nigerian-bankig-sector-obialor-kalu > accessed 17^th April 2024.

[9] Jeanine Skowronski, ‘What is an Acquisition? Definition, Types and Examples’ (17 March, 2023, Forage) < https://www.theforage.com/blog/skills/acquisition > accessed 17^th April 2024.

[10] Rule 421 of the Securities and Exchange Commission Rules and Regulations.

[11] Will Kenton, ‘What is an Acquisition? Definition, Meaning, Types and Examples’ (10 October, 2023, Investopedia) < https://www.investopedia.com/terms/a/acquisition.asp > accessed 17^th April 2024.

[12] ‘Mergers and Acquisition in Nigeria’ (9 July, 2020, Tonbofa LP) < https://tonbofa.com/mergers-acquisition-in-nigeria/ > accessed 17^th April 2024.

[13] Section 92(4) of the Federal Competition and Consumer Protection Act 2018.

[14] Federal Competition and Consumer Protection Act, 2018- Notice of Threshold for Merger Notification Pursuant to Section 93(4).

[15] Section 96(1) of the Federal Competition and Consumer Protection Act 2018.

[16] Section 1 of the Federal Competition and Consumer Protection Act 2018 – Notice of Threshold for Merger Notification Pursuant to Section 93(4)

[17] Section 95(1) (a) of the Federal Competition and Consumer Protection Act 2018.

[18] Section 95(3) of the Federal Competition and Consumer Protection Act 2018.

[19] Section 95(1) (b) of the Federal Competition and Consumer Protection Act 2018.

[20] ’17 Benefits of Mergers and Acquisitions’ (Burnie Group) < https://burniegroup.com/17-benefits-of-mergers-and-acquisitions/ > accessed 22^nd April 2024.

[21] Shelly Bougnague, ‘The Top 11 Benefits of Mergers and Acquisitions’ (1 November, 2023, Cloudficient) < https://www.cloudficient.com/blog/the-top-11-benefits-of-mergers-and-acquisitions#:~:text=A%20merger%20or%20acquisition%20provides,door%20to%20favorable%20tax%20reductions. > accessed 22^nd April 2024.

[22] Ibid.

[23] ‘Merger’ (CFI) < https://corporatefinanceinstitute.com/resources/valuation/merger/ > accessed 22^nd April 2024.

[24] ’17 Benefits of Mergers and Acquisitions’ (Burnie Group) < https://burniegroup.com/17-benefits-of-mergers-and-acquisitions/ > accessed 22^nd April 2024.

[25] Dani Sherrets, ‘The Role of M&A Advisors in Mergers and Acquisitions’ (22 February, 2023, Lutz) < https://www.lutz.us/blog/role-of-ma-advisors-in-mergers-acquisitions > accessed 18^th April 2024.

[26] Peter Lehrman, ‘The Role of M&A Advisors’ (31 October, 2014, Vistage) < https://www.vistage.com/research-center/business-financials/mergers-acquisitions/role-ma-advisors/ > accessed 18^th April 2024.

[27] Dani Sherrets, ‘The Role of M&A Advisors in Mergers and Acquisitions’ (22 February, 2023, Lutz) < https://www.lutz.us/blog/role-of-ma-advisors-in-mergers-acquisitions > accessed 18^th April 2024.

[28] Falating Nwagwu, ‘The Vital Role of a Financial Advisor in Your Business’ M&A Transactions’ (17 April, 2023, LinkedIn) < https://www.linkedin.com/pulse/vital-role-financial-advisor-your-business-ma-falating-nwagwu > accessed 18^th April 2024.

[29] ‘The Role of M&A Advisors: Understanding the Value They Bring to The Deal-Making Process’ (Destined) < https://www.bedestined.com/insights/the-role-of-ma-advisors-understanding-the-value-they-bring-to-the-deal-making-process/ > accessed 18^th April 2024.

[30] Ibid.

[31] Richard Harroch, ’20 Key Due Diligence Activities in a Merger and Acquisition Transaction’, (19 December, 2014, Forbes) < https://www.forbes.com/sites/allbusiness/2014/12/19/20-key-due-diligence-activities-in-a-merger-and-acquisition-transaction/?sh=439d0e764bfc > accessed 22^nd April 2024.

[32] ‘M&A Due Diligence – Everything You Need To Know’ (12 June, 2023, Synoptek) < https://synoptek.com/insights/it-blogs/due-diligence-in-mergers-and-acquisitions/#:~:text=The%20due%20diligence%20process%20helps,key%20factors%20that%20drive%20profitability. > accessed 22^nd April 2024.

 

Can we rework this header? Sounds a bit AI generated