Mergers
and acquisitions are carried out
for a number of reasons. Some of
these include:
1. Boost profit margins by increasing
revenue while cutting costs (e.g.
LOJ and First Life)
2. Generate rapid growth in a business
3. Increase the size of a company
to make it more competitive in the
market (First Global and George
& Branday, PCFS and MSMB)
4. Geographic Expansion
(DB&G and Billy Craig Finance
& Merchant Bank Ltd., Nestle
and Cremo Ltd.)
5. Acquire technology (Microsoft
and Hotmail)
6. Vertical integration into
supplier or customer businesses
(Alcan (bauxite mining) and Pechiney
(aluminum can production))
The volume of mergers
and acquisitions activity in Jamaica
and the Caribbean has seen a marked
upturn in recent years. Many high
profile public companies have embarked
on mergers / acquisitions with other
listed companies or privately held
companies.
Some of this activity was a direct
result of the financial meltdown
that saw many banks and insurance
companies being bought and consolidated
by the healthier institutions. This
opened the door for overseas competitors
such as RBTT and Guardian to enter
the Jamaican market.
The necessity of these mergers
is magnified by the wave of free
trade agreements such as the CSME
and NAFTA that open up markets to
foreign competition and increase
the need to build companies that
are of a scale that allows them
to be competitive.
Some of the more publicized Jamaican
/ Caribbean transactions include:
-
CIBC and Barclays
-
Pan Jam's Hardware & Lumber
with Grace, Kennedy's Rapid
& Sheffield
-
DB&G and Issa Trust &
Merchant Bank
-
Sagicor and LOJ
-
LOJ and First Life
-
Pan Caribbean Financial Services
and Manufacturers Sigma Merchant
Bank
-
NEMWIL and Caribbean Home Insurance
Company in Trinidad merged to
from Guardian General Insurance
Limited
-
Globe Insurance and Jamaica
General Insurance Company
-
Supreme Ventures Ltd. and Jamaica
Lottery Company
Main Causes of Failed Mergers
and Acquisitions:
Mergers and acquisitions require
a lot of work to succeed and present
many challenges. Some of the more
common reasons for the failure of
mergers and acquisitions to deliver
the promised boost to shareholder
value are:
-
Culture Clash:
The cultures of the companies
are too different and there
is a war on for dominance and
control. Culture is also a potential
problem when a company is acquired
and the acquirer's management
tries to preserve the target's
culture and very little integration
occurs.
-
Premium is too High:
This case occurs where
there is a hostile takeover
or a bidding war ensues for
the target between two or more
companies. The new company is
stuck with high-priced assets
that dilute future earnings.
-
Poor Business Fit:
In some cases mergers
are unsuccessful because technologies
are incompatible, companies
do not fit in terms of lines
of business, or they do not
have the requisite knowledge
about the other company.
-
Debt: In situations
where a company borrows money
to fund an acquisition or assumes
too much debt of an acquired
company, too much of the earnings
of a company are consumed by
interest payments. In some cases
short-term financing is used
to finance the long-term investment
and the company has difficulty
refinancing.
-
Regulatory Delays:
In instances where
regulatory approval is required,
any delays may cause staff to
become nervous which could lead
to the loss of talented employees
from both companies.
-
Failure to Deliver
on Synergies: Sometimes,
the cost savings or revenue
boost an acquirer expects to
realize from a merger does not
materialize. This can result
from poor due diligence or overly
optimistic forecasting. This
shortfall in earnings can leave
the acquirer's shareholders
worse off than they would have
been without the transaction.
Job Losses:
One of the more painful aspects
of mergers and acquisitions is the
related job loss. When companies
merge they usually have more people
than they need for certain jobs,
and in order to reduce costs and
streamline operations they are forced
to lay off employees.
If the company does not communicate
effectively during the merger process
employees will become nervous and
demotivated, and most will look
to leave the company any chance
they get. It is important for the
company to keep the communication
lines open.
Many companies offer counseling
and job search assistance for those
employees who are affected by mergers
and acquisitions.
Critical Success Factors
of Mergers and Acquisitions:
When managed correctly, mergers
and acquisitions are helpful tools
that managers can use to achieve
their business objectives. In order
to meet the challenges of conducting
a successful merger or acquisition,
there are certain initiatives that
can be taken. These include:
-
Ensure that there is a strong
case for the merger / acquisition
from a business strategy point
of view
-
Conduct detailed due diligence
on all aspects of a potential
partner
-
Create a merger planning group
to identify and manage merger
issues anticipated at all business
units and levels of the organization
-
Communicate constantly with
employees so that they are not
susceptible to rumors or not
left in the dark on issues regarding
the rational for the transaction
or the strategy or structure
of the entity
-
Pay attention to the details
to ensure that nothing is taken
for granted or left unattended
-
Once the deal is finalized,
concentrate on implementing
the strategy of the merged entity
so as to achieve the original
objectives of the merger
There have been successful mergers
on the local and international market.
One of the larger of these was the
combination of Exxon and Mobil in
1999 to form the world's largest
energy company. The company is also
the second largest company in the
world in terms of revenues and fourth
largest in terms of market value
according to Forbes Magazine's 2003
list of Global 2000 Companies. In
comparison, The Royal Dutch Oil
Company / Shell merger, also part
of the last wave of large-scale
consolidation in the energy sector,
has been having its challenges recently.
This can be attributed to one of
the causes of failure mentioned
earlier; lack of integration. Two
boards, one in the United Kingdom
and one in The Netherlands have
managed the company since the merger.
In Jamaica, mergers and acquisitions
of this relatively large scale are
new. The recent stellar performance
of LOJ, which was an amalgamation
of troubled life insurance companies,
demonstrates that we have the management
expertise to make these transactions
successful. There are currently
a few large transactions taking
place, namely H&L and Rapid
& Sheffield, and PCFS / MSMB.
And with market conditions as competitive
as they are, and globalization taking
place, we are only getting started.
Financial Gleaner - March 19, 2004
|
