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Letters
LETTERS: Demystifying mergers, takeovers of firms
Thursday, May 23, 2019 20:22
By STEPHEN NDUVI |
Merger and takeover activities have been common trends in the liberal market economies all over the world, including Kenya. These activities are highly procedural and make use of the provisions of the regulatory frameworks which stipulates what is allowed at each stage and the corresponding content of any document to be issued at a given stage.
For instance, in Kenya, there is a fairly detailed legal framework for both takeovers and mergers which form part of securities market regulation (in the case of listed companies) and competition laws.
Though the word “takeovers” and “mergers” have been used interchangeably, they constitute different meanings. A takeover can be defined as the assumption of control of another (usually a smaller) firm through purchase of over 50 percent of its voting shares or stock.
It can also be defined as the transfer of control of a firm from one group of shareholders to another group of shareholders leading to a change in the controlling interest of a corporation.
The purchasing company is the bidder or acquirer, while the company it wants to buy is the target. It is a type of merger, but not of equals. In the case of a takeover, there is a predator and prey. When the targeted firm finds it favourable activity, then the takeover is described as friendly one while when it resists the takeover proposal, the takeover is described as hostile and is usually done through a public offer to change the corporate governance structure or the top level management.
Further, the Capital Markets Act, 2002 defines takeover as a general offer to acquire all the voting shares in the offering or selling company and includes a takeover scheme. Therefore, takeover simply means the actual acquisition of the control of another company.
The takeover schemes stipulate how a takeover is to be executed including the extent of control in terms of shareholding of at least 25 percent in a highly profitable subsidiary of the selling company or offeree. A merger, on the contrary, refers to a voluntary amalgamation of two firms on roughly equal terms into one legal entity.
In Kenya, the notable merger and takeover activities happened in 2001 and 2012 after the operationalization of the Competition Act. Further, this process continued after the 2013 general elections which were peaceful providing a favorable political environment hence creating a conducive investment environment with prospects of economic growth.
For instance, Access Kenya was acquired by Dimensions Data Holdings, Inter Consumer Products Limited acquired by L’Oreal South Africa (Pty), I&M bank acquired by City Trust Limited among others.
Currently, various companies such as Commercial of Africa and NIC Bank, KCB and National Bank of Kenya are in the process of undertaking a merger. If successful, CBA and NIC banks may become the third biggest in Kenya by total assets, and the second biggest bank in Kenya in terms of customer deposits, according to South Africa rating agency, Global Credit Ratings (GCR).
The main reasons for mergers and takeovers range from seeking to benefit from economies of scale by sharing resources and services, increasing the power of their market share and control over the markets, creating more competitive businesses through technological developments, enjoy tax benefits by use of tax shields to increase monetary leverage and utilise alternative tax benefits, reducing financial risks by risk pooling using innovative techniques, creating synergies that promotes increased value efficiencies and cost savings and increasing profit margins as seen in the fifth wave.
However, mergers and takeovers also pose serious challenges such as; loss of experienced workers leading to inability to understand the business well, employees from small firms may require exhaustive re-skilling leading to increased operations costs, internal competition among the staff of the united companies may lead to operation inefficiencies, duplication of roles for companies doing similar activities and this may lead to retrenchment of some staff, increase in cost of operations if there is delay of the implementation of the new structure and lack of the right modification of business structures, uncertainty and delays of approvals of the merger and takeover by the respective regulatory authorities among others.
The pros and cons of mergers and takeovers mainly depend on the new entity’s short term and long term strategies and efforts.
Stephen Nduvi, policy analyst and governance expert.
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