By Jeremiah E. Aneji
Merger & Acquisition describes businesses’ strategies to give them a competitive edge over rivals, increasing the prospects for multidimensional expansions as far as state antitrust laws will allow.¹
It is that part of corporate reengineering that focuses on the buying, selling and consolidation of companies². It is a veritable source of business expansion in any thriving economy and arguably the most famous external corporate restructuring tool employed by companies globally to achieve growth and expansion. The Nigerian Corporate regulatory frameworks³ not only recognise these concepts but have developed and encouraged the use of the same in sustaining the growth and survival of businesses over time.
In this series, we shall be exploring the concept of Mergers and Acquisitions on a general note and examine the opportunities these afford businesses to leverage for multidimensional expansions, especially in a competitive market system like Nigeria’s.
To achieve the preceding, we shall set out to discuss this subject under the following headings:
- The Concept of Merger and Acquisition
- The Multidimensional Benefits Merger and Acquisition.
- The legal framework for Acquisition in Nigeria
- THE CONCEPT OF MERGER AND ACQUISITION
As already pointed out in the introductory part of this work, Merger and Acquisition deals with the buying or selling or consolidation of companies ⁴. Although the term acquisition is sometimes used synonymously with a merger, however, both words technically have different meanings. In an acquisition, the two companies continue to function as separate legal entities. The relationship is more like a parent company and its subsidiary. A merger, conversely, occurs when two existing companies combine to form a new legal entity or where one is subsumed into a more significant entity with the Major as the sole survivor.⁵
Although these concepts serve the purpose of business combination and expansion, they differ. For a more precise understanding, we would further highlight the distinctive features between Mergers & Acquisitions and their similarities.
The Investment and Securities Act defines a merger as:
“A merger means any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies OR the undertakings or part of the undertakings of one or more companies or more bodies corporate.”⁶
In tandem with the above definition, Chike Obimma simplified it to mean “…a combination of two companies or businesses. This combination may produce one entity, retain the two entities or result in three entities at the close of the transaction. So, 1+1 may become 1, or 1+1 may be 2 (preferably written in roman numerals as II to show they are still two different companies); or 1+1 will become 3 (or III). The point should be made that in commercial transactions, no term or concept is ever so rigid”⁷.
LEXROLL.com Dictionary further defined a merger of corporations as the uniting of two or more corporations by the transfer of property of all to one of them, which continues in existence, the others being swallowed up or merged therein. The survivorship of one of the constituent corporations differs from a “consolidation,” wherein all the consolidating companies surrender their separate existence and become parts of a new corporation. ⁸
The Investment and Securities Act did not define the term acquisition, but it is defined in the Consolidated Securities and Exchange Commission rules as
“….the take-over by a company of sufficient shares in another company to give the acquiring company control over that other company.”⁹
Acquisition is the purchase of shares or assets in another company to achieve a managerial influence. It occurs when a company (in most practical cases, a larger company) acquires all or a substantial interest in another company. Under acquisition, a new company does not emerge when interest is acquired in the target company; the acquiring company or the acquired company becomes a subsidiary of the acquiring.
Acquisition also means the purchase of a business either wholly or in part. Investopedia.com, in simplifying this concept, defines it as “a transaction when one company purchases most or all of another company’s shares to gain control of that company”¹⁰. According to WallStreetMojo, “An acquisition is a business strategy that involves procuring one business entity by another. It can be done by either purchasing a significant portion of the target company’s stocks or buying off its assets.
Acquisition has many synonyms such as buyout, procurement, purchase and possession, which are often used interchangeably.” ¹¹
C. Distinguishing Between Merger and Acquisition
- Merger and acquisition is a forms of external expansion; however, the two concepts differ. While merger means “to combine” “acquisition means to “acquire, buy or own something”
- Merger alludes to the combination of two or more firms, to form a new company, either by way of amalgamation or absorption, acquisition on the other hand, is a business strategy in which one company takes the control of another company.
- Merger is usually done voluntarily by companies, while acquisition is done either voluntarily or involuntary
D. Distinguishing Acquisition from Takeover
Takeover means the process of purchasing controlling shares of a publicly traded company. In simple terms, publicly traded shares are not acquired; they are said to be taken over. Also, Section 133(4) of the Investment and Securities Act (2007) of Nigeria provides explicitly that a takeover bid shall not be made in any case where the acquired shares are in a private company. This shows that privately held shares cannot be the subject of a takeover. Takeovers are usually regulated by some codes or rules given that they affect the ‘public’ whose shares are the subject of purchase and who cannot directly partake in discussions with the purchaser(s).
A takeover may also be referred to as a “take private” or a “public to private”. The reasoning behind this definition is simple. Acquisition in the M&A context means purchasing privately held shares (in a private company). This usually happens through negotiation between the private company’s shareholders and the purchaser(s), after which a share purchase agreement is signed, and the purchaser assumes control of the company. In a takeover, the purchaser does not have the convenience of negotiating with the shareholders, who are likely numerous and scattered across the globe. Hence, negotiations are typically done with the management of the public company, after which the purchaser makes an offer for the public company shares, and the management presents the offer to the shareholders. Where the shareholders vote in favour of the proposal, the purchasers will pay and take over the shares of the shareholders, thereby taking the company into private ownership (hence why it is called a take private).¹²
A takeover is said to be ‘hostile’ where the management of the public company is not in support of a sale of the company to a particular bidder or to any bidders, usually because they believe the company will get into wrong management following the sale, or they (the management) may be out of job following the takeover. Where this is the case, the bidders will take their offer directly to the shareholders and will typically bid for their shares at a premium. The management will on the other hand seek to apply several takeover defence mechanisms such as issuing additional shares at a discount (the famous poison pill) or issuing bonds redeemable before maturity in the event of a hostile takeover (poison put). The purpose of these mechanisms is to scuttle the takeover.
2. THE MULTI-DIMENSIONAL BENEFITS OF MERGER ANDACQUISITION
The strategic benefits of Mergers and Acquisitions are enormous. WINDES¹³ enumerate them as follows.
A. Economies of Scale – Often, the end goal of a merger and acquisition is to realise economic gains and economies of scale. This becomes possible when the two firms involved in the merger and acquisition are more robust, more productive, and more efficient together than apart. Businesses consolidate to reap benefits like increased access to capital, better bargaining power in the market, lower costs resulting from high-volume production, and more.
B. Economies of Scope – Mergers and acquisitions benefits include economy of scope, which refers to the reduction in production cost of one product due to the production of another related product. In other words, one product supports another to reduce the overall costs. Economies of scope typically occur when producing more products is more feasible and economical than making single or fewer products. Mergers and acquisitions can sometimes lead to economies of content that may be impossible to achieve through organic growth.
C. Competitive Edge in the Market – Mergers and acquisitions mean greater financial strength for both companies involved in the transaction. Greater economic power can lead to higher market share, more customer influence, and reduced competitive threat. In most cases, more companies are harder to compete against.
D. Access to the Best Talent– Talent acquisition is one of the biggest concerns for companies that wish to excel in the market. The recruitment industry knows that talented employees are attracted to big names. Consequently, the bigger the company, the better access it enjoys to the best available talent. This trend is evident across industries, from manufacturing to technology and services.
E. Access to Resources – Businesses in the same sector can sometimes improve access to materials, suppliers, and tangible resources through acquisition. For example, one business may acquire or merge with one of its suppliers to improve production cycles and guarantee access to critical materials.
F. Diversification of Risk through Portfolio Divergence – Mergers and acquisitions allow companies to spread risk across different revenue streams by diversifying the products, services, and prospects for the business. If one revenue stream falls short, the business will still have several other income streams to fall back on and continue operation. By diversification of risk, the company can ensure sustainability in the long run.
G. Cost-Effective Alternatives for Facilities – Mergers and acquisitions present a cost-effective alternative to starting from scratch. Setting up production centres, buying machinery and equipment, building storage places, and initiating distribution channels are costly. It is more cost-effective to merge with another company already equipped with the facilities you require. Furthermore, the transaction will bring all the other merger and acquisition benefits that will contribute to business success.
H. Access to New Markets – Breaking into a new market can be challenging, even for established businesses. While setting up a subsidiary or branch is always an option, a merger or acquisition can save companies time, effort, and money compared to starting from scratch. This is especially true for businesses ready to move into a foreign geographical market. International markets can be exceedingly difficult to penetrate. Therefore, it is more feasible for most companies to merge with or acquire an established local business with a loyal customer base.
I. Opportunist Value Generation – Larger organisations often look for acquisition opportunities where the purchase price is valued at less than the market value of the target’s net assets. Such financial positioning indicates that the target company is experiencing financial distress. In such cases, a merger or acquisition can allow the acquired company to stay afloat and the acquiring company to reap benefits such as proprietary rights to products, increased market growth, penetration in new geographic regions, and more.
J. Enterprise Continuation – Some small businesses are family or privately owned. Once the founder retires, there is a risk of business failure because there may need to be a clear succession plan for the business to put employees out of work and impact suppliers to the business. A merger or acquisition is one strategy to help ensure business continuity, reduce interruptions in the operation, and provide job security for employees.
K. To meet Statutory Requirements – where the law prescribes a minimum threshold to operate in a sector, mergers come in a handful to provide the needed capital.
- THE LEGAL FRAMEWORK FOR ACQUISITION IN NIGERIA
Several laws govern the acquisition of a company in Nigeria. The Companies and Allied Matters Act(CAMA), 2020 is the primary legislation. It deals with issues concerning the acquisition and disposition of shares and the right of individual shareholders in that regard. It is also the procedure for merger and take-over bid, the provision for a scheme of arrangements and other tools which facilitates the process, in addition to the regulatory powers of CAMA, several other laws such as the Investment and Securities Act, 2007, The Federal Competition and Consumer Protection Act, 2018, SEC regulations as we would be enumerating below.
In this work’s introductory part, three (3) major statutes were pointed to provide the framework for Mergers and Acquisitions in Nigeria. They jointly exercise various degrees of regulatory governance over any such schemes or arrangement since it would have the same effect as a merger & acquisition. These statutes and the role they play are thus:
A. The Companies and Allied Matters Act 2020 – This provides for and governs the procedures mergers are to follow and how to deal with and resolve issues arising from dissenting shareholders. It also provides for the re-registration
B. The Investment & Securities Act – The Securities & Exchange Rules &Regulations (SERR) made under the Act governs Nigeria’s mergers and acquisitions procedure. However, this may or may not apply to all mergers only, as its applicability depends on the threshold of the Assets of the merging entities. It also takes competitiveness into consideration.¹⁴
C. Federal Competition and Consumer Protection Act – This vet the merger scheme to ensure unhealthy monopolies are not intended and weigh in on the overall public interest. The Federal Competition and Consumer Protection
Commission (FCCPC) approves all mergers according to Section 93 of the FCCPA. However, public companies are to comply with the provisions of the Investment Securities Act & Securities and Exchange Commission Rules (SEC Rules) for mergers. By the Joint Advisory and Guidance on Mergers,
Acquisitions & Other Business Combinations Notifications of 4th May 2019, all notifications of mergers will be reviewed under existing SEC Rules until the FCCPC establishes regulations by Section 93(2) of the FCCPA 2019.
Kindly note that before the enactment of the Federal Competition and Consumer Protection Act 2018 (“FCCPA”), mergers and acquisitions in Nigeria were generally regulated by the Investment and Securities Act 2007 (“ISA”), while the Securities and Exchange Commission were the regulatory authority. However, the FCCPA has now repealed sections 117-128 of the ISA which deals with mergers and acquisitions, excluding 121 (i) (d). However, the regulatory authority that sanctions mergers in Nigeria is the Federal Competition and Consumer Protection Commission (“Commission”) and no longer SEC.¹⁵
D. The Federal High Court Act– In addition to the provisions of Section 251 ofthe 1999 Constitution as amended, the Companies and Allied Matters Act 2020 provides the enabling jurisdictions for the court to sanction merger schemes where it is required to do.
A. The Regulators
The following agencies regulate the merger and acquisition process in Nigeria.
- The Corporate Affairs Commission(CAC)
- The Securities and Exchange Commission(SEC)
- The Federal Competition & Consumer Protection Commission (FCCPC).
- The Federal High Court of Nigeria.
- The Central Bank of Nigeria and other regulators overseeing the various sectors where these merging entities operate.
Capital expansion and growth sometimes require a lot of combined resources and market leverage, including initiating mechanisms to cut costs, minimise competition, sustain momentum and deliver quality products and services to clients. There are times it also becomes necessary to satisfy statutory and regulatory requirements.
The resources to create or invent innovative products and services to capture a market. Acquisition for such a private investor would enable him to buy into buoyant and unique ideas and incorporate them as his own. This also gives him the advantage of overseeing his investments firsthand and playing a determinant factor in the projected goals and targets of his assets. Where the path is taken, the investor makes a profit and stimulates economic growth in the long run.
This article is for information purposes and is not intended as a legal opinion or advice on any issue. Therefore, any usage of this article must be with the proper legal guidance as the position of the law may have changed.
1 For Nigeria, we have the Federal Competition and Consumer Protection Act, 2018 and before it passage, we also had the Investment and Securities Act, 2007 which regulates mergers and other monopolistic tendencies in the market.
3 The Companies and Allied Matters Act, 2020, the Federal Competition and Consumer Protection Act, 2018, the Investment and Securities Act, 2007. For Regulatory bodies, the Nigerian Stock Exchange, the Securities and Exchange Commission, The Corporate Affairs Commission, the Federal Competition and Consumer Protection Commission, The Federal High Court of Nigeria etc.
4 Ibis @ 1
5 The Nigerian Diamond and Access Bank Merger : Changing Financial Landscape in Nigeria
https://www.mondaq.com/nigeria/financial-services/886458/diamond-and-access-bank-merger–changingfinancial-landscape-in-nigeria-january-22-2020 (Accessed 17/11/2022)
6 Section 119(1) of the Investment and Securities Act, 2007
7 Chike Obimma: Nigeria: Mergers And Acquisitions Terms & Concepts – Understanding The Words That Make The Deal: https://www.mondaq.com/nigeria/shareholders/1205828/mergers-and-acquisitions-termsconcepts-understanding-the-words-that-make-the-deal?login=true&debug-domain=.mondaq.com accessed on the 18/11/2022
8 Lex Roll Dictionary: https://encyclopedia.lexroll.com/encyclopedia/merger/ accessed on 18/11/22
9 Rule 421,Consolidated Securities and Exchange Commission Rules 2013
10 https://www.investopedia.com/terms/a/acquisition.asp accessed on 15/11/22
11 https://www.wallstreetmojo.com/acquisition/ accessed on 13/11/2022.
12 Ibid: https://www.mondaq.com/nigeria/shareholders/1205828/mergers-and-acquisitions-terms-conceptsunderstanding-the-words-that-make-the-deal?login=true&debug-domain=.mondaq.com Accessed on the 17/11/22
13 The Benefits of Acquisition you should know: https://windes.com/the-top-mergers-and-acquisitions-benefitsyou-should-know/ accessed on 18/11/22
14 Section 121(3) of the Investment and Securities Act, 2007: Rule 421, Consolidated Securities and Exchange Commission Rules 2013.
15 An Overview of Merger and Acquisition In Nigeria. https://www.legalnuggets.com/an-overview-of-mergers-andacquisitions-in-nigeria/ accessed on 18/11/22.