Mergers and acquisitions: strategic and regulatory issues

A company can grow by building, by partnering or by buying. Buying is the fastest route and the most dangerous. The price may be too high, the promised savings may not appear and two cultures may clash. Many acquisitions fail. A finance manager must know why companies buy, how to choose a target, what the law requires and how a target defends itself.

This topic covers the difference between a merger and a takeover, acquisitions against internal growth and joint ventures, criteria for choosing a target, synergy, why acquisitions fail, the Nigerian regulatory framework, defences against a hostile bid, what makes shareholders accept, due diligence and reverse takeovers. The previous topic covered cash flow valuation. The next covers valuation for mergers and acquisitions. The May 2014 and November 2014 Pathfinder papers tested these ideas.

Key terms in plain English

Syllabus check

This topic is in syllabus area D (mergers and acquisitions, organic growth and reconstruction). It covers:

• the arguments for and against acquisitions and mergers, and criteria for choosing a target;
• the reasons for the high failure rate and the use of a reverse takeover;
• defensive strategies in hostile bids and due diligence.

CAMA 2020 and mergers

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria.

Acquisition or internal growth

The objective of a takeover should match the company’s overall objective, to raise shareholders’ wealth; a merger should raise the wealth of both sets of shareholders. Alternatives to acquisition are internal development and a joint venture.

Advantages of acquisition:

• growth is much faster;
• the buyer gets new products, markets and customers at once;
• it allows entry to markets with high entry barriers;
• it stops a competitor buying the target;
• it may bring cost savings and higher profit (synergy).

Disadvantages:

• it may be expensive, because the price must tempt the target’s shareholders, so the return may be low;
• proportional ownership falls: a 10% holder in one of two equal companies owns about 5% after a merger;
• different structures, management styles and pay systems are hard to combine, staff may feel threatened and leave, and disruption often lasts about a year;
• a clash of cultures, as when a traditional lending bank merges with an investment bank.

Choosing a target

• Strategic aims: does it widen the product range or enter new markets? Some firms buy many small companies in a fragmented market to become the leader.
• Cost and relative size: targets are usually affordable; a small buyer taking over a much larger one (a reverse takeover) is rare.
• Opportunity and availability: a chance to buy may arise.
• Potential synergy: private equity funds often look for undervalued firms they can run better.

Synergy

• Revenue synergies: higher combined sales, for example from a stronger brand or the ability to bid for large contracts. Unusual. If A (sales ₦500m) buys B (₦200m), combined sales of ₦750m would be a ₦50m synergy.
• Cost synergies: savings from combining administration, warehouses and so on, often with redundancies. Planned savings are often hard to achieve because integration is slow and complex.
• Financial synergies: a larger group may reach the bond market and borrow more cheaply as a lower credit risk.

Why acquisitions fail

• the price paid is too high;
• the expected synergies do not occur;
• integration problems: culture, staff loss, lost knowledge, weak management control;
• senior managers give the acquired company too little time and attention;
• competitors respond with new strategies, which can lower profit for all.

The regulatory framework

Three bodies of law apply to a merger or takeover in Nigeria.

• Company law (CAMA 2020). A merger of companies is carried out by a scheme under s. 711. The Federal High Court may order separate meetings of the members of each company. Members representing at least three-quarters in value of those present and voting, in person or by proxy, at each meeting must agree. The Court then sanctions the scheme, which binds the companies once sanctioned, and the order is filed with the Corporate Affairs Commission (CAC) within 7 days. Section 710 defines an “arrangement”, and under s. 715 the Court may refer a scheme to the SEC to test its fairness.
• Securities law. Under the Investments and Securities Act 2025 and the SEC’s rules on mergers, takeovers and acquisitions, deals involving public companies need SEC approval at several stages.
• Competition law. The Federal Competition and Consumer Protection Commission (FCCPC) reviews mergers above the prescribed thresholds under the Federal Competition and Consumer Protection Act 2018. Bank mergers also need the Central Bank of Nigeria and telecoms mergers the Nigerian Communications Commission.

Hostile bids and defences

In a friendly bid the board recommends the offer and gives the bidder access to records for due diligence. In a hostile bid the board rejects it, so the bidder works without management information, which is risky.

The main defence is to persuade shareholders to reject the offer, truthfully and without misleading them: forecast higher profits (so the price is too low), promise to return cash by a bigger dividend or buy-back, or explain the board’s strategy.

Other defences:

• a white knight
• a poison pill, which is open to legal challenge in most places
• changing voting rules to require a larger majority (acceptable before a bid, but open to challenge if done after)

Shareholders’ willingness to accept depends on the offer price, the consideration (cash, debt or shares), job security where managers and employees hold shares, and alternative offers.

Due diligence

A seller knows more than a buyer, like a used-car seller who knows about a gearbox fault. Due diligence reduces that risk by an investigation before signing. It aims to confirm the accuracy of the information and assumptions behind the bid, give an independent review, identify and quantify commercial and financial risk and give assurance to providers of finance.

Financial due diligence reviews financial statements, management accounts and projections, and especially their assumptions. Legal due diligence covers hidden warranties, security over assets, legal disputes and break clauses in supply contracts that could lose customers.

Reverse takeovers

A reverse takeover occurs when an entity acquires another and the acquired entity’s shareholders end up controlling the combined entity. ICAN’s example: X Plc has 10,000 shares and Y Ltd 10,000. X buys all of Y by issuing 30,000 new shares to Y’s owners, who then hold 30,000 of 40,000 shares, 75%. X is the legal acquirer, often a shell, but Y has effectively taken it over.

A private company can use this route to become listed without an IPO. Benefits: more liquid shares, greater access to capital markets, share option schemes and shares as currency for further deals.

The rules in more depth

Why most of the value goes to the target

A bidder must pay above the market price. If it also pays too much for synergy, little is left for its own shareholders.

Why integration decides success

Synergies come only when operations, systems and people are actually combined, and that takes time.

Why a regulator reviews competition

A merger that cuts competition can harm customers, so it needs approval first.

Why due diligence precedes signing

Errors found afterwards cannot be priced into the deal.

Effect on analysis

Match the argument to the case: motive, target fit, price, risks, approvals and defence.

Worked examples

1. The merged company has twice the value and twice the shares.
2. The holder’s shares are now half of what they were as a share of the total.
3. The holding falls to 5%.

1. Value of XY.
   2,000,000 × 35 = ₦70m.
2. Shares to issue = 70,000,000 ÷ 64.
3. Shares to issue = 1,093,750.

1. Value gained.
   100 + 15 = ₦115m.
2. Price paid = ₦120m.
3. Net effect = −₦5m: value is destroyed.

1. Total shares = 80,000.
2. Private’s owners hold 60,000.
3. Their share = 75%, so they control the listed group.

How to score full marks

• Tie the motive to shareholder wealth.
• Weigh advantages against internal growth and joint ventures.
• Name the type of synergy and whether it is realistic.
• List the approvals required.
• Match the defence to the bid type.
• Cover both financial and legal due diligence.

Common mistakes in the exam

• Assuming synergy is certain.
• Forgetting the effect on ownership.
• Leaving out SEC approval and court sanction.
• Confusing a white knight with a poison pill.
• Treating due diligence as an audit only of accounts.
• Calling any share-financed deal a reverse takeover.

Quick revision

• Merger: equals; takeover: larger buys smaller; aim is shareholder wealth.
• Acquisition: fast, but costly, dilutive and hard to integrate.
• Synergy: revenue, cost, financial.
• Failure: price, synergy, integration, attention, competitors.
• Scheme: special resolutions, SEC, 75% in value, court, CAC.
• Defences: persuade, white knight, poison pill, voting rules.
• CAMA 2020: ss. 305, 306, 308, 710, 711, 715.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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