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An Eagle Eye View of Mergers and Acquisitions

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An Eagle Eye View of Mergers and Acquisitions & ship Org ur an e iz n a e t r i p o Dauda, J Entrepren Organiz Manag 2013, 2:1 e n r Journal of Entrepreneurship & t M n a E n DOI: 10.4172/2169-026X.1000102 f a o g l e ISSN:a 2169-026X m n r e u n o t J Organization Management ResearchResearch Article Article OpenOpen Access Access An Eagle Eye View of Mergers and Acquisitions: A recipe for venture expansion Abdulwaheed Dauda* Department of Entrepreneurship & Bus Studies, Federal University of Technology, Minna, Nigeria Abstract In today’s global, competitive environment, mergers and acquisitions are sometimes the only means for long-term survival and growth of firms. The underlying principle behind M&A is simply 2+2=5, when we merge two companies; the synergy produces the additional value of 5. It is imperative that everyone involved in the process has a detail understanding of how the process works. An appropriate valuation method must be adopted to ascertain the worth of the companies in order to know whether the deal will be beneficial for the business concern. Merger and Acquisition especially in the banking sector is now a global phenomenon, the last few years has witnessed the creation of the world’s banking groups through M & A. All over the world and given the internationalization of finance, size has become an important ingredient for success in the globalizing world. The option of consolidation is predicated on the relationship between the two banks that are merging, the benefits accruing there-from involves creation of synergies and economies of scale, expanding operations and cutting costs. However, to ensure that the synergy envisage is fully harnessed, and to mitigate post-consolidation conflicts, adequate steps should be taken to train and retrain the staff of all the banks that have scaled the capitalization huddle while the regulatory environment has to be tightened to close all the loopholes that could come up as a result of the increased size of the firms in the industry. Keywords: Valuation; Synergy; Target company; Due diligence; speculative share in a more conservative security. The term could also Consolidation; Merger; Acquisition connote the selling of equities at a gain and reinvesting of the proceeds in fixed-interest securities. Similarly, the Harold Sloan and Arnold Introduction Zurcher Dictionary of Economics (1970) conceptualized consolidation Mergers and Acquisitions have become a big part of the corporate as a fusion of the assets and liabilities, in whole or in part, of two or more world, and are among the most strategic and tactical decisions made business establishments to form an entirely new establishment. From by companies. Wall Street investment bankers arrange many M&A the above definitions, consolidation represents the idea of investment transactions everyday, which bring separate companies together to and the coming together of firms or enterprises as a single entity. form larger ones. Consolidation also means larger sizes, larger shareholder bases and Throughout the last decade, M&A deals have been increasing larger number of depositors. According to Adam [1], bank or corporate significantly, while making some scenic news. M&A deals can be worth consolidation could be achieved by way of mergers and/or acquisition, hundreds of millions, or even billions, of dollars, and may dictate the recapitalization and proactive regulation. Bank consolidation is more fortunes of the companies involved for years to come. The future of a than mere shrinking of the number of banks in any banking industry. company, the career of a CEO, or the value of shareholders shares might It is expected to enhance synergy, improve efficiency, induce investor be drastically changed. Therefore, any M&A would significantly affect focus and trigger productivity and welfare gains Nnanna [2]. The main the daily running of the involved companies. With the current trends motivation behind consolidation is to maximize shareholders’ value. of globalization, more and more M&A happened also internationally. Value may be maximized through Mergers and Acquisitions mainly by Compared to national M&A, international transactions are dealing increasing the participating firm’s market power in setting prices or by with more complicated situations, such as culture differences, trading improving their efficiency and, in some cases, by increasing their access barriers, different national policies, etc. to the safety net. Imala [3] identified eight reasons for M&A’s in the The main idea of M&A is 1+1=3. To achieve this particular goal, both financial services sector. They include: companies have to be valuated in details before merging. This brings • Cost savings, attributable to economics of scale as well as more the knowledge if the whole process of M&A is able to be successfully efficient allocation of resources. finished, and how high can be expected profit after connection. The world over, strategic financing and investment decisions of corporate firms have also identified M&A as one veritable route to business frontiers expansion. In Nigeria, a major wave in M&A was experienced *Corresponding author: Abdulwaheed Dauda, Department of Entrepreneurship following the consolidation and recapitalization exercise in the banking & Bus Studies, Federal University of Technology, Minna, Nigeria. E-mail: [email protected] sub sector. The underlying principle behind a Merger or Acquisition is to create shareholders value over and above that of the sum of the two Received December 01, 2012; Accepted December 02, 2012; Published March 10, 2013 companies. Citation: Dauda A (2013) An Eagle Eye View of Mergers and Acquisitions: A recipe Review of Literature for venture expansion. J Entrepren Organiz Manag 2: 102. doi:10.4172/2169- 026X.1000102 Background of bank consolidation Copyright: © 2013 Dauda A. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted The Pan Reference Books Dictionary of Economics defined use, distribution, and reproduction in any medium, provided the original author and consolidation as the action of reinvesting a capital gain made on a source are credited. J Entrepren Organiz Manag ISSN: 2169-026X JEOM an open access journal Volume 2 • Issue 3 • 1000102 Citation: Dauda A (2013) An Eagle Eye View of Mergers and Acquisitions: A recipe for venture expansion. J Entrepren Organiz Manag 2: 102. doi:10.4172/2169-026X.1000102 Page 2 of 3 • Revenue enhancement, resulting from the impact of Tax Gains: This may be a powerful incentive for mergers and consolidation on bank size, scope, and overall market power. acquisition. The increased size of a firm resulting from consolidation enables it enjoy tax gains resulting from the use of tax losses which • Risk reduction, due to change in organizational focus and would have resulted from separate net operating losses, the use of efficient organizational structure. unused debt capacity and the use of surplus funds which the individual • New developments, which impose high fixed costs and the need small companies were not able to invest. to spread these costs across a large customer base. However, having outlined the advantages of consolidation, it • The advent of deregulation, which removed many important is important to note that in spite of the points adduced in favour of legal and regulatory barriers. economies of scale as an advantage of consolidation, banking and finance literature have amply documented the fact that diseconomies • Globalization, which engender a more globally integrated of scale are possible. In fact, some studies have shown that the extent financial services industry and facilitated the provision of of economies of scale reported in the earlier studies was exaggerated wholesale financial services and geographical expansion of and there exist diseconomies of scale in the large banks. However, a banking operations. more recent study, Lemo [4] explains that in spite of observation of • Financial stability, characterized by the smooth functioning diseconomies of scale, there has been an underlying change in bank of various components of the financial system, with each technology that has increased the minimum efficient size as well as component resilient to shock. favored large banks to small ones. From the foregoing, it is obvious that with the advancement in technology, consolidation would remain a • Shareholders’ pressure on management to improve profit preferred option for cost effectiveness and business growth. margins and returns on investment, made possible by new and powerful shareholder blocks. Valuation tools in Mergers & Acquisitions The most important synergies to be derived through consolidation Investors in a company that is aiming to acquire another one must of firms in an industry are the ability to enjoy economies of scale, ability determine whether the purchase will be beneficial to them. In order to to earn increased revenue and the potentials for tax gains. These sources do so, they must ask themselves how much the target company being of synergy are discussed briefly hereunder: acquired is really worth. Economies of Scale: One of the major advantages of the banking Naturally, both sides of the M&A deal will have varied ideas about sector consolidation that is often harped on is its potential for firms in the worth of a target company: its promoters/seller will tend to value the industry to enjoy economies of scale. In his maiden address to the the firm high and above its worth while the buyer will try to get the Bankers’ Committee, the CBN Governor, Prof. Charles Soludo, posited lowest price possible to guarantee a higher return. The Deal makers that most banks in Nigeria have a capital base of less than US$10million employ a variety of methods and tools when assessing the worth of a or about N1.3billion and that the largest bank in Nigeria has a capital target company. These involve: base of about US$298 million compared to US$526 million for the (a) Comparative ratios: the following are two examples of the smallest bank in Malaysia.
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