The Impact of Mergers and Acquisition in Nigerian Economy
The impact of this is of great importance because it highlights the consequential success of failure (that is, profitability or otherwise) and the operating problems. The great importance is that it has positive impact or importance and negative impact or importance.
2.1.1 THE POSITIVE IMPACT/EFFECT:
The impact of mergers and acquisition in Nigerian economy has economic value because it gives rise to three basic structural movement or expansions.
The first is the expansion of a company’s operation through combination in the same line of business and usually a the same level. An example is where a company producing baby food combines with another company in the same business.
The second is the expansion of a company’s operation through combination with another company at different level in the same business. An example is where the manufacturer of soap combines supplying the raw materials required for the manufacturing of the soap.
The third is the expansion of a company whose operation is through combination with a company whose operation is unrelated to his own. An example is where the manufacturer of Electronic Gazettes combines it with another company manufacturing textiles.
The impact of mergers and acquisition could also be seen on the shareholders, the employees and the society at large.
- THE NEGATIVE IMPACT/EFFECT:
Since business activities are executed on the basis of mixed economy, an investor would always want his or her share values to appreciate over a period (long) of time. But under a merging arrangement, the shares of the acquired company would in most cases be exchanged at a lesser value with that of the acquiring form and visa versa.
Regarding to this, the shareholders of the company to be acquired would incur same financial losses on their investment and if possible, they would present many more towards this direction.
To the staff of the company to be merged, they would be apathetic of what their position would be. In the past, mergers and acquisition have always resulted to loss of status and in some cases, loss job especially the key personnel of the acquired firm. Where such happens, the already saturated unemployment market welcomes such casualties into its “domain”. This has its own adverse effect on the economy in that it increases unemployment and increases the social problems of the society.
Mergers of uncontrolled could easily lead to a monopolistic and oligopolistic tendencies. This is particularly true of horizontal mergers. In a monopolistic merger, a single firm producing a commodity for which there are no close substitute emerges. In full control the monopolistic are presumably able to raise prices when they want to increase profit by producing less, thereby creating inflation in the economy and pushing up the cost of living.
- GENESIS OF MERGERS AND ACQUISITION IN NIGERIAN ECONOMY:
Unlike in the developed countries of the west-like United States of America and United Kingdom, where mergers and acquisition is relatively old, mergers and acquisition in the Nigerian business scene is relatively novel.
Business regrouping in Nigeria prior to 1973 when the first phase of indigenization came into force, were purely in-house affairs that involved either wholly owned foreign enterprises or wholly owned Nigerian enterprises.
With the introduction of the Indigenization Act of 1973 and the initial requirement that 40% share of foreign enterprises be sold to Nigerians, foreign business separated incorporated began to regroup and come together as division of one company. Such was the formation of UAC of Nigeria with its myriads of divisions still operating their traditional line of business, Pz Industries, a product of Paterson Zochonis and Company Nigeria Limited and Association Industries Limited Leventis Group, a forge between A. G. Limited and Leventis Stores and many more.
A merger and acquisition which basically thrives on fostering the growth and profitability which would have virtually been impossible for participating companies to attain separately has became more urgent in some areas.
From the foregoing, it can be seen that mergers as it is practiced in the developed countries of the West, started in Nigeria with the emergency of the economic problem in the country and the subsequent austerity measures introduced by the government to bring the situation under control.
- REASONS FOR MERGERS AND ACQUISITION IN NIGERIAN ECONOMY:
There are always several reasons for going into mergers and acquisition. The key common factors that can influence positively on the economy is the decision to undertake a merger or acquisition exercise abounds.
There must be benefits to the parties involved. Usually, mergers have to do with combination of strength to eliminate weakness and exploit opportunities. Company “A” for instance, has financial-strength with cash-rich balance sheet and is a business with good cash generation but declining future prospect and limited room for expansion. Company “B” has good product portfolio with numerous business opportunities for extension of its existing business. If company “B” is short of cash a combination or integration of companies “A” and “B” may produce a good balance which in this new configuration, provides both the required cash and investment opportunities for expansion and profitable compatible products, may experience operational friction in mergers. For instance, product that can be distributed through the same warehouse because of their compatibility or products that can be sold through the channel, can produce goods or items to be exploited and operational benefits and savings in cost that could be material and positively impact the fortune of the combined business.
In the ongoing economic scenario in Nigeria, we have witnessed reduction in capacity utilization and the purchasing power in the hands of the consumers continued to be eroded. Companies in distress may have to combine with others with better strength in order not to get liquidated.
With industrial output going down and consumer purchasing power being eroded by inflation, smaller companies have come to deceiving and of the structuring policy. Many have folded up, while others with wider vision are seeking mergers and acquisition with other older and more powerful ones.
Business are set up to create wealth and produce adequate rewards for its shareholder. A business which is unable to meet the object of its establishment should seek ways and means to address the situation.
A company other than a social service organization that is unable to sustain the fabric of the business and pay dividends to the shareholders is hardly meeting its obligations. If such a company secures a merger with a stronger company that will be able to bail it out, such options will be able to increase the strength of the company to meet its obligation.
In the present days of the cash squeeze, high inflation, low rate of returns and high interest rate, a merger is the appropriate means of financing growth and area of business opportunities with new capital and cash injection into the business. By mere exchange of one share certificate for another, asset of the acquired company becomes available to the acquired, in the enlarged company for more profitable use.
Mergers could be used as a cost effective means of achieving business restructuring. The combines companies will reduce numbers in certain areas, such saved bodies will sensibly be used to exploit additional business opportunities preferably and to advantage.
Mergers and acquisition could provide a valuable route to the attainment of least cost of operation as facilities are put into separate companies.
It is therefore for the good of the economy and the society for an ailing company to be assisted and prevented from collapse and liquidation particularly, if by so doing, all parties involved benefits.
- INITIATION OF MERGERS AND ACQUISITION PROPOSAL IN THE NIGERIAN ECONOMY.
Every corporate entity in an economy is faced with a problem of growth whether through output or profitability. Growth may be achieved through internal or external entry into a new industry or market. In the entry, model mergers and acquisition is seen as an act of external entry.
When, for example, a strong initiation is made for a firm that is not growing to merge with a growing firm, the directors of both company commences discussion with a view to achieving the objective of mergers and acquisitions. The initiation of mergers could be made by either the situation relating to the mergers and acquisition in the economy.
If the objective of the growing firm is to increase its rate of growth, it could initiate the use of mergers. For example, if company “A” whose rate of growth is very sure and it wants to achieve a high rate of growth, and Company “B” has a very high rate of growth, the directors of company “A” can bring to the notice of company “B” their willingness to merger with it. If the Directors of Company “B” after due consideration and in consultation with the shareholders considers it proper to merge company “B” with company “A”, they can set in motion, the appropriate and lay down procedure to effect the merger. But if they consider the proposal not in the best interest of the owners of the company, they can refuse the proposal.
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This article was extracted from a Project Research Work Topic:
“THE IMPACT OF MERGERS AND ACQUISITION IN NIGERIAN ECONOMY (2002 – 2005)”