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:

1. CIBC and Barclays

2. Pan Jam's Hardware & Lumber with Grace, Kennedy's Rapid & Sheffield

3. DB&G and Issa Trust & Merchant Bank

4. Sagicor and LOJ

5. LOJ and First Life

6. Pan Caribbean Financial Services and Manufacturers Sigma Merchant Bank

7. NEMWIL and Caribbean Home Insurance Company in Trinidad merged to from Guardian General Insurance Limited

8. Globe Insurance and Jamaica General Insurance Company

9. 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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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:

1. Ensure that there is a strong case for the merger / acquisition from a business strategy point of view

2. Conduct detailed due diligence on all aspects of a potential partner

3. Create a merger planning group to identify and manage merger issues anticipated at all business units and levels of the organization

4. 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

5. Pay attention to the details to ensure that nothing is taken for granted or left unattended

6. 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