Mergers and Acquisitions

(By Mr. Nazir Ahmed Shaheen, Registrar of Companies & Executive Director (CLD), Securities & Exchange Commission of Pakistan)

Global Phenomenon
The merger and acquisition is a strategic tool available in the hands of the management of the company to gain competitive advantage by exploiting synergies. In a merger, two companies combine to form a new company. In an acquisition, one company takes over the other in terms of management or ownership. Both Mergers and Acquisitions are attempts from companies to combine their strengths in order to achieve synergistic benefits. The reasons behind a merger or acquisition are varied, e.g. increasing market share, entering new markets, developing new products through R&D, or achieving administrative benefits. Mergers can create economies of scale, in which costs of similar functions can be reduced. The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. The phenomenon has evolved with the passage of time and today, in most developed economies, corporate mergers and acquisitions has become a regular feature. In this era of globalization, merger and acquisition has become a buzzword in the corporate world today. In mathematics 1 + 1 is always equal to 2 but in corporate world it has always been an endeavor to make 1+1 =3. This is exactly what we define as synergy effect. It is the very reason why merger and acquisition have become so popular today. Other reason behind this transition is that the merged companies can acquire more power, with which they can operate freely across the borders and influence policies of governments where they operate. Countrys Perspective Mergers in Pakistan are a recent phenomenon, and the activity is still in its infancy stage. It has been observed that the total deals done in the country are quite negligible as compared to the developed countries. The activity is suffering in Pakistan due to various deterrents, including inflation, cost of debt, lack of synergistic operating economies, lack of motivation of shareholders, small industrial base, insider trading and unfair trade practices. Since today's global business environment is becoming more complex, one of the best ways for the companies to seek growth and survival, is through merging with another company or acquiring other companies. Mergers and Acquisitions In Business or Economics, a merger happens when two companies, often of about the same size, agree to go forward as a single new company rather than remaining

separately owned and operated. It can be termed as a transaction whereby two companies agree to integrate their operations on a relatively equal basis, because they have resources and capabilities that together may create a stronger competitive advantage. Mergers are commonly voluntary. Merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding. Following are the common types of mergers: i. ii. iii. Horizontal mergers take place where the two merging companies produce similar product in the same industry. Vertical mergers occur when two companies, each working at different stages in the production of the same good, combine. Congeneric mergers occur where two merging companies are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Conglomerate mergers take place when the two companies operate in different industries.

iv.

Acquisitions: However, companies are now increasingly using their surplus funds for acquiring other companies, often in the same line of business, to widen product range and to increase market share. An Acquisition occurs through buying of one company (the target) by another, with the intent of more effectively using a core competence by making the acquired company, a subsidiary in its portfolio of businesses. This activity may be friendly or hostile, and termed as a Takeover where the target company did not solicit the bid of the acquiring firm/ company. Benefits of Mergers and Acquisitions: Corporate Mergers and Acquisitions represent part of a corporate/ business strategy used by many companies to achieve various objectives. There can be a number of motives for a company to pursue a strategy of Merger. Following motives are generally considered before Mergers, Large enough size to realize economies of scale, Diversification to reduce the risk of business, Desired synergies, Taxation advantage not available without merging, Increased efficiencies, Reduction in administrative cost and overcoming critical lacks, Risk spreading, Increased revenue and utilize unutilized market power/ share, Eliminating competition and to achieve monopoly benefits, Creating opportunities for cross-selling, Displacing an existing management, Efficient access to capital markets

Odds in the Mergers and Acquisitions Game: Corporate Mergers and Acquisitions do not always result in the success; indeed many result in a net loss of value due to certain inherent problems. These problems in achieving success of mergers interalia includes high social and financial costs, duplication of activities, incompatibility of systems, people and culture, etc. There

might also be a resistance by workers, directors and shareholders of the target company, and even in some cases, by the government in the interest of the country. In addition, market of the target company might resent a sudden take over and consider going to other suppliers for their goods or services. However, the companies entering into such arrangements, might overcome or mitigate these odds by exercising due diligence. Basically, the parameters that need to be considered while evaluating mergers are strategic, tactical, fiscal and human. One has to mitigate the risk involved and get the right decision for success of Mergers and Acquisitions. Legal Procedure in Pakistan In Pakistan, Sections 284 to 289 of the Companies Ordinance, 1984 (the Ordinance) and rules, 55 to 68, contained in the Companies (Courts) Rules, 1997, deals with the requirements for Mergers and Acquisitions of companies. An application is required to be made under Section 284 of the Ordinance to the High Court by all the merging companies for the purpose. The preparation of a scheme of amalgamation/merger by the companies, which have arrived at a consensus to merge, is the most critical step towards undertaking the activity. There is no specific form but it generally contains rationale for activity, financial information, valuations of shares and involved determinations, any pending litigation, etc Another focus area for the companies, is the valuation and pricing of shares that must be fair and reasonable. The purpose of valuation of shares of companies is to ascertain the swap ratio to be used for the exchange of shares of the merging company or companies with the surviving company.