Financial Times

Mergers and acquisitions: the way forward?
By Ravi Mahendra
It is interesting to note that a number of acquisitions and mergers are currently taking place in Sri Lanka. SLT acquired Mobitel, JKH has acquired Asian Hotels and Phoenix and Jewel knit have merged to form a group of their own by the name of Brandix. A couple of years back, when HNB attempted to acquire Sampath Bank, a lot of publicity was given to the fact. The acquisition failed eventually, because of stiff resistance from the target.

In many cases, companies resort to mergers or acquisitions because they believe that it is the easiest and fastest way to growth. Even though this view is acceptable to a certain extent, many acquisitions do not produce the expected results. This is because there are problems of post-acquisition integration and failure to achieve the results projected. Vanik had bad experiences in integrating some of its acquisitions. On a global scale the merger between AOL and Time Warner Group proved to be a flop.

Acquisitions and mergers are also forms of fulfilling managerial egos as they lead to the creation of large corporate empires. One wonders whether the building of such empires serve any purpose to the shareholder, if shareholder value is not enhanced, as a result of these changes.

Shareholders
The impact of an acquisition or merger is ultimately borne by the shareholders. The concern that the shareholders of JKH are likely to share today would be as to what the projected earnings of Asian Hotels for the next quarter will be, and its influence on the earnings of JKH. If an acquisition increases the earnings of the company and also boosts confidence, it would be reflected by the PE (Price:Earnings) ratios.

This would result in a positive impact on the share price, which in turn will tend to rise. Shareholders will also be concerned about the funding of an acquisition. If it is in the form of debt capital it could lead to an increase in the financial risk. On the other hand, issue of new shares or a rights issue can also fund an acquisition. A new issue will dilute the shareholding whereas a rights issue will not. However if an increase in market value is not significant, both can result in a decline in the price per share.

From the shareholders' point of view, an acquisition would be successful only if the management team of the acquirer is able to integrate the organisations successfully and achieve the benefits of synergy.

No acquisition can be successful without the support of the employees. HNB's attempt to take over Sampath Bank failed because of opposition from the employees. On the other hand, the employees of Mobitel were keen about the take over by SLT since they expected better growth opportunities under the new parent. The acquirer will have to win the employees to its side since their support is essential in order to understand the business as well as to implement new strategies. Any redundancies, which arise, should be dealt with quickly, and payments should be generous, if funds permit, since this will boost the morale of the retained employees.

Regulatory interest
To uderstand public or regulatory interest it is important to understand the drawbacks of mergers and acquisitions. These changes could result in a monopoly or a near monopoly situation, which could be detrimental to the interests of consumers. Large firms might get the opportunity to adopt anti-competitive practices, which may prevent the development of new as well as existing competitors in the market.

A merger or an acquisition goes against public interest if it is in a position to control and dominate the market for goods or services. In such situations, the Fair Trading Commission is empowered to investigate a merger. For example in Europe, EU regulators prevented GE's proposed merger to Honeywell, because they feared it would create the world's largest manufacturer of aircraft engines.

There are also situations where acquisitions and mergers are opposed on grounds of nationalism. When Nestle attempted to acquire Rowntree in the UK, a newspaper published the headline: " Help! The Swiss are Coming For Our Smartees".
Acquisitions and mergers are a must as they can help to ensure that firms enjoy economies of scale as well as minimise unnecessary competition. Mergers such as Brandix can help to build strong Sri Lankan firms, which can be competitive internationally.

With the development of the open economy the Sri Lankan mindset may change, and there will be more openness towards acquisitions and mergers in the future. There may be a situations arising where foreign organisations might acquire local companies. An interesting deal to look out for would be the privatisation of the People's Bank.

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