BUSINESS COMBINATIONS (MERDERS & ACQUISITIONS)

SCHOOL OF POST BRADUATE STUDIES DEPARTMENT OF ACCOUNTANCY

,*

FACULTY OF BUSINESS ADMINISTRATION UNIVERSITY OF NIGERIA

ENUGU CAMPUS

BeingJ Seminur Paper On. 1

ADVAFICED ACCOUNTING THEORY

LECTURW: PROF. (MRS) U. MOOUM

BUSINESS COMBINATIONS (MERGERS & ACQUISITIONS)

INTRODUCTION:

The fusion of two or mom companies or organizations to become one establishment,

could be regarded as merger. Acquisition is used interchangeably with merger to

describe a business combination in which the ownership and management of

independently operating enterprises are brought under the control of a single

management.

A merger could also be defined technically, as a combination or integration of two or

more existing companies with the combined companies choosing the name of one of #

the companies or taking a completely new name. Takeover (acquisition) results where

the party initiating the combination is much large or stmnger than the other party. In

financial management the concern is on the financial decision making process which

leads a company to decide on a merger, to determine the terms on which it should be

carded through and to plan how it should be financed. ,. Amalgamation or consolidation is a form of merger because it is a combination in which

all the combining companies are legally dissolved and a new company is formed.

furthermore, a reconstruction could also be a form of merger if it invokes the transfer of

the undertaking of the company to another company owned substantially by the same

directors following liquidation of the first company.

The Nigerian Companies and Allied Matters Act (CAMA) 1990 (as amended), Section

590 - 591 applied the term merger, amalgamation, reconstruction, interchangeable

because they are interwoven. Hence, the terns could mean the same thing because

they are not terms of art with clearly defined and distinguishable legal meaning.

On the other hand, a takeover or acquisition is defined in Section 590 of CAMD as 'the

acquisition of one company of sufficient shares in another company to give the

acquiring company control over that other company'. The distinction between takeover,

acquisition and merger is that in a take-over no company goes into liquidation, one

becomes a holding company, while the other becomes it's subsidiary.

Management and leveraged by-out is the purchase of a part or the whole of a

business by a group of investors, usually its managers andfor employees using large

amount of debt and small amount of equity to finance the acquisition.

The Securities and Exchange Commlssion, behg the apex regulatory of the capital

market, is charged by section 99(2) of the investment and Securities Act No. 45 of 1999

to review and approve all mergers and acquisitions in Nigeria.

Forms of Mergers

Mergers can be categorised as horizontal, vertical or conglomerate mergers.

1. Horizontal Merger

This is the combination of firms that compete in the same industry at the same level

of production or distribution. Their products are substitutes and the merger is

designed to achieve operating economies. Firms may acquire monopoly power by

this arrangem"ent so that this type of combination may be objected to by the

government for anti-trust considerations.

2. Vertical Merger

This is a combination of two firms that compete in the same industry but not at the

same stage of production and distribution system. under this arrangement the firms

achieve a successive functional relationship. That is one firms output is input for the

other or is marketed by the other. Their products are thus complementary.

if a textile manufacturing company decides to acquire a cotton farm so as to also

produce the necessary raw materials, it is a vertical backward integration merger.

3. Conglomerate Merger

This form of merger involves companies in unrelated lines of business. this

arrangement is usually motivated by need to diversity to reduce risk. Both operating

and financial economies may be achieved but the combination does not reduce the

3

number of competing firms. An example is where a textile company merged with a

cement company. Conglomerate mergers may be differentiated into three forms:

Geographic market extensions, product extensions or pure conglomerate mergers.

REASONS FOR MERGER

According to Aliyu (2004), there are possible economic benefits for mergers which

include:

Mergers can improve earnings by increasing revenue and reducing costs or

both, thereby contributing positively to the overall national economy.

Mergers and acquisitions may increase earnings per share as well as the

market value of the acquiring company's share.

Provide avenue for diversification that yields spontaneous economic growth

and reduce risk to the barest minimum. #

Mergers if properly consummated can also result in acquiring superior

management skills that would improve the worth for the merged firms.

The unused retained earnings of a subsidiary can be deployed to another

subsidiary at little or no cost.

Mergers appeai to be attractive when there exist possibilities to exploit economies of

scale, synergy, the acquisition of under valued assets etc.

Equally relevant are acquisitions that might reduce the likelihood of bankruptcy,

uncompetiveness or that would lead to a better blend between talents of corporate

managers and the resources at their disposal.

MERGER ACCOUNTING:

Consolidation of the subsidiary's operation and its net assets are most times Carried

out using a method commonly referred to as purchase, acquisition or traditional

method. However, a uniting of interest or pooling of interest also referred as merger

occurs when the shareholders of two or more enterprises combine in one entity the

whole of the net assets and operations of the enterprises in such a way as to achieve a

continuing mutual sharing in the risks and benefits of the combined enterprises.

Merger accounting requires the aggregation of the financial statements of the combing

entities and then presented as if they had always been part of the same reporting

entity.

The merger may take place at the middle or part of the financial year, the results of the

combining enterprises for the full financial year are reflected in the group accounts for

the period and corresponding amounts are presented on the same basis.

Under the merger accounting method of business combination, shares issued in

consideration for the acquisition must be at their par value and not at their market

Value. The main objective in the pooling of interest method is to recognize the pooled

entities as though the separate businesses were continuing as before despite now

jointly owned and controlled. Thus only minimal changes are made in aggregating the

individual financial statements.

In adoption of merger or pooling of interests method in business combination, assets

are taken at their book value and therefore there is no revaluation of assets.

The merger metbd does not recognize goodwill on Consolidation and if any, it must be

written off from existing reserves. It is also of intend to note that all reserves of the

subsidiaries and the parent company are regarded as post acquisition. There is no pre-

acquisition reserves under the merger accounting method.

The accounting policies of the combining entities are usually adjusted to achieve

uniformity, but the assets and liabilities need not be adjusted to reflect fair values at the

date of the combination. In other words, the balance sheet totals under the merger

method are the same before acquisition and after acquisition. This is because the

merger method does not recognize goodwill and assets are not usually revalued. Any

share premium accounts and Capital redemption reserves of the new subsidiary entity

are not preserved as such in the consolidated accounts, since they do not relate to the

share capital of the reporting entity, but are brought in by being shown as a movement

on other reserves.

The merger accounting method is used principally where the consideration for

( acquisition or combination is settled in shares or principally in shares. Therefore, the

members before and after the acquisition are basically the same.

I The main features of merger accounting

I (a) The main concept underlying a merger is one of continuity of the amalgamating

I businesses .No assets are being distributed to share-holders and no party is

identified as acquirer.

I (b) The only change that has taken place is in the separate ownership which are

considered to have been pooled into one common ownerships and reallocated

I among the individual owners or exchanged.

(c) It is not possible to identify an acquirer but perhaps a dominant party. The

shareholders of the joining entities unite in a substantially equsll arrangement to

share controls over the combined entity.

(d) All parties to the combination participate in the management of the combine

business..

(e) There must not be a significant reduction in the right attaching to the shares of

one of the combining parties, as this would weaken the position of one in

relation to the other.

(9 The fair value of combining entities should be substantially equitable

(g) Under pooling of interest, any difference arising on consolidation between

nominal value of shares and fair values taken in exchange are taken as reserves

on consolidation, rather than as goodwill or as premium.

AcquDsDtDon Accounting :

Any business combination that is not a merger can be referred to as acquisition. The

purpose of acquisition accounting method is to account for the acquired entity by

applying the same. Principles as are applied in the normal purchase of assets. In

acquisition amounting method, the results of the acquired company are brought into

the group account only from the date of acquisition. Assets and liabilities acquired are

usually included at fair value in the consolidated accounts and are therefore stated at

their cost to the acquiring entity.

The main features of acqulsition accountlng:

(a)Acquisition accounting is based on the assumption that the ownership of a

company charges on acquisition

(b)The purchase consideration is treated on the basis that it is used to acquire

the net assets of the new subsidiary, which will generate future profit,

(c) It follows that after the acquisition, the assets and liabilities of the acquired

company should be included in the consolidated accounts at their fair values.

(d)The retained earnings of the acquired company at the date of acquisition are

not treated as distributable profit of the group.

CONDITIONS THAT PETRMIT THE USE OF MERGER

ACCOUNTING METHOD t

Looking at the provisions of 1AS22 and sections of the Companies and Allied Matters

Act- 1 990, the following conditions could Permit the use of merger accounting method.

(i) Role of the parties: Among the entities uniting, no party to the combination is

shown as either acquirer or acquired, either by its own board or management or by

that of another party to the combination.

(ii) Relative size of the parties: No party to the business combination will be

relatively larger or dominant to other parties. If otherwise, it will be presumed that

the larger party can or will control and dominate the combined undertaking. In

such a situation where one party is substantially larger than the other parties, the

combined entity will not be an equal partner. Thus it will be inconsistent to treat

such a business combination as a merger.

(iii) Non-equity consideration: the provisions of the Companies and Allied Matters

Act, 1990,stated the limit on non- equity consideration -that the fair value of any

consideration other than equity shares should not exceed 10 % of the nominal

value of the equity shares issued.

Dominance of management: Participation in establishing the management

structure for the combined entity involves all parties to the combination as being

represented by the boards of directors or their appointees. Strategic decision are

made on the basis of a consensus between the parties to the combination

instead of adopting the exercise of voting rights

Special Interest in Performance of part of the Combined Entity: The

performance of a part of the business should not be of the business should not

be of special interest to any equity share holder after the combination. If not

prohibited by companies legislation, when the above stated concisions are met,

merger accounting method should be used.

ADVANTAGES OF MERGER OVER ACQUISITION ACCOUNTING:

The balance of the profit and loss account of the enlarged entity is the sum of the

profit and loss account balances of the combining enterprises. Thus, there is no

loss of distributable profit if when merger accounting is used.

Regardless of the date of the combination of the entities concerned, the profits of

the combining businesses are included for the full year period. This is to say that

the date the combination took place are not considered.

The merger method does not permit the creation of fictitious assets like goodwill

account which will need to be written off later.

The merger accounting method is much simpler in application.

The assets acquired after business combination creates opportunities for

companies to boost earnings by selling an asset brought into the merger at

historical cost but worth considerably more.

CRITICISMS OF THE MERGER ACCOUNTING METHOD:

(i) Merger method creates under valuation of assets of the combined entities.

(ii) There is also the creation of instant earnings through merger accounting method

(iii) It gives rise to instant distributable reserves.

8

Example I :

The Summarised balance sheets of Green PIC and White PIC as at 31/12/05

immediately prior to their combination were as stated below:

G'men plc

er,ooo

Ordinary shares (NI per share) 15,000

Revenue reserves _ 2.000

Fixed assets 13,000

Net current assets 4.000

m

White plc

N,OOO

Green PIC acquired the entire share capital of WHITE PLC by issue of one new

ordinary share for one share in GREEN PLC

The fair value af the consideration was N12,600,000 this being the market value of

WHITE'S shares (N1.40 per share) The fair value of white's total assets was

N 10,000,000

Rewired:

Prepare a summarized consolidated balance sheet at 1st January, 2006 for Green plc

immediately after combination, assuming that:

(i) Merger accounting techniques are followed; and

(li) Acquisitions accounting techniques are followed

Solution

(i) Summarized consolidated balance Sheet at 1st January,

2006 (Merger accounting)

Pr,ooo Fixed Assets (13000 x 8000) ' 21,000

Net Current Assets 6,000

27.000 Financed by:

Ordinary Shares' (I41 per Share) 24000

Revenue Reserve 3000

i!ziQQQ (ii) Summarised consolidated balance sheet at lSt January 2006

(Acquisition accounting)

Goodwill

Fixed Assets

Net Current assets

m

Financed by

Ordinary shares (N 1 per shares)

Reserves:

Sham premium

(811 2,600,000 - PJ9,000,000)

Revenues

Example 2:

The directors and shareholders of Minor PIC have agreed to accept an offer by GIANT

PLC for the whole of MINOR'S PLC Ordinary Share Capital. The offer comprises 2

newly issued Ordinary Shares (nominally valued at 20k) of GIANT PLC for every five

ordinary shares (nominally valued at 50k) of MINOR PLC. At the offer date, the

ordinary share of GIANT PLC each had a stock market value of 813.00

The summarized balance sheet of both companies immediately prior to the offer being

effected on 01\01\06 are give below:

GIANT PLC Minor PIC

Blm Blm Bhn Blm

Fixed Assets - 74.8 - 14.6

Current Assets 29.7 - 12.3 - Less Current

Liabilities - 19.7 10.2 - 9.9 2.4

85.0 17.0

Financed by:

Ordinary share Capital 65.00 7.00

Retained profit - 20.00 - 10.00

85.00 17 -00 b

The book value of MINOR'S PLC assets as at 1/1/06 approximated to their fair value.

MINOR PLC is a major supplier af GIANT PLC. on 01/01/06, GIANT PLC had

N4,800,000 worth of stock pumhased from MINOR PLC. The stock had cost MINOR

PLC N4,300,000 to produce. In addition, as at 01/01/06, GIANT PLC owed MINOR

PLC N3,200,000 for goods supplied.

You are mquimd to:

a. Prepare on merger accounting basis the opening balance sheet of the new group as

at 01/01/06.

b. Prepare on acquisition accounting basis the opening balance sheet of the new

opening group as at 01/01/06

c. Outline in general terms without reference to the above example, the factors that

would influence a management decision on whether to use the merge or the

acquisition accounting method in business combination.

1 Solution:

Notes:

1. GIANT PLC to acquire 100% of MINOR PLC

2. MINOR PLC Ordinary Share Capital = N10,000,000

3. The nominal Value uf MINOR'S PLC Share Capital is 50k

4. The number of shares in MINOR PLC

= PC10.000.000 = 20,000,000 shares

0.50 '

5. Consideration for acquisition of shares is 2 shares of GlANT PLC for every 5 shares

of minor PIC

:. the number of shares of GlANT PLC to be issued to MINNOR PLC would amount to:

20.000,000 x 2 = 8,000,000 shares of GIANT PLC t

5

6 . Under the nwyer mw\niHrig nifrtticrd, stwtcrs iss\~s<f for tho acquisition must ha at

Par 7. The par value of GlANT PLC shares is 20k per share

8. Therefore, consideration for the acquisition under the merger method

= 8,000,0?)0 x 20k = 811,600,000

9. The market value of GlANT PLC share = P33.00

Therefore consideration for the acquisition of Giant's Plc shares under the

purchase method would be: 8,000,000 shares x 843.00 = N24,000,000

The unrealized profit of W00,000 would not be adjusted for because the

transaction had already taken place before the commencement of the subsidiary

relationship.

The amount owned to MINNOR PLC of 813,200,OO will now be regarded as inter

company balance and therefore during consolidation the balance would be

deducted from the current assets and current liabilities accordingly.

I a. "sing merger accounting method:

b. Using acquisition accounting method:

Fixed Assets

Investment in Subsidiary

Current Assets (29.7-3.2)

Less Current Liabilities

(1 9.5-3.2)

Financed by:

Ordinary share Capital

Capital reserve

Retained profit

GIANT PLC

B1 million

74.8

1.6

26.5 - 102.9

(16.3)

86.6 -

21.6 - 65.0 - 86.6 -

Goodwill

Fixed Assets

Investment in Subsidiary

(Market fair value)

Current assets (27.7-3.20

Less current liabilities

(19.5 - 3.2)

Financed by:

Ordinary share capital (20 +1.6)

Sham premium (24 - 1 -6)

Retained profit

GIANT PLC

BC million - 74.8

24 .O

26.5

125.3

(1 6.3)

109.0 -

21.6

22.4

65.0 - 109 -

MINNOR PLC

B1 million

14.6

MINNOR PLC

W million .. 14.6

CBS

W million

89.4

CBS

B1 million

7.0

89.4

c. Factors that can influence management decision on the method to use.

i. The merger accounting method is used where the consideration for the acquisition is

in shares or principally in shares and therefore, the mode of settlement of the

purchase consideration would determine the method to be used.

ii. If the management aims at a higher balance sheet totals, then the purchase method

should be used instead of the merger method.

iii. The return on capital employed is higher under the merger accounting method than

under the purchase or acquisition accounting method. This is because the balance

under the merger method is lower since the merger accounting method does not

recognize goodwill or revaluation of assets. #

Example 3:

PARKSON INDUSTRIES LTD is a public company operating in the plastic and allied

sector of the economy. The Directors approached BENCO LTD, a private

hydmcarbon" materials company as a compatible partner for business combinations

in order to achieve economies of scale. As a first step, Parkson INDUSTRIES LTD

acquired all of the ordinary share capital of BENCO LTD by way share exchange on

1st July, 2005, and changed the corporate name to BENCO PARK PLC.

PARKSON INDUSTRIES LTD issued seven of its own shares for every five shares

in BENCO LTD. The market value of PARKSON INDUSTRIES LTD share on 1st

July, 2005 was 449 each. The summarized financial statements of both companies

for the year ended 31st December, 2005 are:

PWit and Loss Account for the year ended 31st December 2005.

PARKSON BENCO

Pr,ooo P1,ooo Turnover 180,000 150,OO

Costs of sales (1 24.500) (88.500)

Gross profit 55,500 61,500

Operating expenses (1 2000 (7,500)

Profit before 43500 54,000

In come tax (1 5,000) (22,500)

Retained profit 28,500 31,500

BALANCE SHEET AS AT 31ST DECEMBER 2005.

Parkson Benco b

Fixed Assets:

Land and Building

Vehicle, Plant & Machinery R

Current Assets:

Stocks 171,000

Debtors & Prepayments 123,000

Cash and Bank 3.750

297,750

Current Liabilities:

Creditors & Accrued 1 14,750

Income tax 1 6.500

(1 3 l,.25O)

15% debenture Stock

Share Premium 30,000 18,000

Retained profit 429.000 320.250

1 646,500 563,250

The following information are relevant:

I i. The fair value placed on land and building of BENCO LTD for the purpose of 1 Combination was N37,500,000 in excess of its book value as at the date of

1 acquisition.

ii Consolidation good will is deemed to have serer years life with f ime apportioned

charges (treated as operating expenses in the year of acquisition).

Required:

a. Prepare the consolidated profit and loss Account and Balance Sheet of BENCO

PARK PLC fbr the Year 31st December, 2005 using acquisition accounting method.

b. Explain and differentiate the features of pooling of interest (merger accounting) and

discuss whether the business combination above should be accounted for using

merger accounting or acquisition.

SOLUTION:

a. BENCO PARK PLC

Consolidated profit 8 Loss Account for the Year Ended 31st December, 2005

(Using Acquisition Accounting Method)

N,000

Turnover (N 180,000 + (611 2 x 150,000) 255,000

Cost of sales (N 124,500 + (611 2 x 88,500) (1 68,750)

Gross Profit 86,250

Operating expenses (N12000 + 611 2 x 7,500)

+ N48.857 goodwill depreciation note 64,607

21,643 b

Income Tax (N 15,000 + 611 2 x 22500) (26,250)

(4,607)

Consolidated balance Sheet as at 31st Dec., 2005

Fixed Assets N,000

Land & Building (N330,OOO + 262,500)

+ N37,500 fair valve adjustment

Vehicle, plant and machinery

Goodwill (N684,OOO - 48857) note

Current Assets

Stocks

Debtor and Prepayment

Cash and Bank

Current Liabilities

Creditors and Accruals

Income Tax

Net current Assets

Financed by:

Ordinary Shares of

N 1 each (150,000 + 126,000, Note 2)

Share premium (note 3)

Retained profit (not1 )

15% debenture stock

Workings:

Notes I:

Consolidated accumulated profits

PARKSON Reserves per question

BENCO'S post acquisition reserves

611 2 x N31,500

Goodwill amortization (see note 2 below)

2. Cost of control in BENCO LTD. PARKSON issued 7 shares for every 5 in BENCO

LTD. Therefore PARKSON issued 90.000 x 7

5

= P1126,OOO shares at a value

of N9 each to the share holders of BENCO LTD.

This will be recorded in PARKSON'S books as ordinary share capital of N126,000

and share premium N1,008,000.

Goodwill: 44,000 44,000

Investment at Cost (126000 x N9) 1,134,000

Less: Ordinary share of Benco Ltd 90,000

Share Premium 18,000

Pre acquisition reserve (320500 - 15750) 304500

Revaluation of Investment 37,500 (450.000)

Goodwill on Consolidation 684,000

Amortisation of goodwill for the year to 31 st December, 2005 will be

684000 x 6

7 12 = 4l48,857

3. Share Premium N

Investment at cost (1 26,000 x N9) 1,134,000

Shares Issued to BENCO LTD 126.000

1,008,000

4. Consolidation may be part year or whole year. The latter involves pooling the group

turnover, and cost of sales for whole year up to net profit after tax. Then the

proportion of the net profit after tax for the period prior to acquisition is deducted

from the consolidated net profit after tax. From this figure, goodwil1,is deducted to

obtain the retained profit for the year for the new company. The result would be

same as for part year method.

b. Diffemnces between the merger and Acquisition accounting methods.

i. The mergef method may not be used where the settlement of purchase

consideration is wholly in cash, and also the fact that even if shares are issued for

settlement of purchase consideration no Company poses as acquirer.

ii. The shares issued for the settlement of purchases consideration must be at their

nominal or par value under the merger accounting method, hence no share premium

should arise but for the acquisition accounting method, shares may be issued at

their fair values, and will therefore give rise to share premium.

iii. Durlng consolidation under the merger method, the combined assets, liabilities and

resewes are recorded at their existing carrying amounts. Revaluation of assets are

not permitted under the merger accounting method but under the acquisition

accounting method, assets may be shown et their fair values under the purchase or

acquisition accounting method.

iv. The merger accounting regards all reserves both holding company and subsidiary

as post acquisition. Thus the result of operations and the assets and liabilities of the

pooled enterprises are combined as if they had been part of the group for the whole

the current ds. This is not the case under acquisition

accounting method as part of the subsidiary reserve may be treated as pm acquisition and not to be consolidated.

v. Under merger accounting method, the balance sheet totals before and after the

acquisition are the same. This happens because the assets are not revalued and

goodwill is not recognised whereas this may not be the case under the acquisition

accounting method.

vi. Under merger accounting method the cost of acquisition (both shares issued plus

cash if any) is matched against the share capital of the subsidiary acquired in

determined goodwill or capital reserve arising out of consolidation. Whereas under

acquisition accounting method, cost of acquisitions matched against the net asset or

net worth of the subsidiary.

Note: n

As part of solution to the example above, acquisition accounting method has been used

since the proposal made in respect of the merger was not in compliance with the

condition for equal stakes and benefits in the combined entity.

Example 4:

The Board of Directors of Ogele Ltd and Okoro Ltd agree to amalgamate their business

on 1st January, 2006 by selling their separate businesses to Okoronaogele Nigeria

Ltd., a new Company formed for that purpose.

The authorized share Capital of the new Company is 200 million Ordinary shares of N1

each. The following are the summarised balance sheets of the respective Companies

as at 31st December, 2005.

OGELE LTD OKORO LTD.

OGELE LTD. OKORO LTD

W,OOO W,OOO

ASSET EMPLOYED:

Freehold Property - 72,000

Plant and Machinery 62,310 24,320

Stocks 26,740 27,810

Debtors 68,750 20,070

Bank Balance 48,200 53.870

206,000 1 98,070

Financed by: I

Share Capital 125,090 57,470

Loan - 50,000

Current Liabilities 80,910 90,600

206,000 198,070

The followhg was agreed:

(a)Okomnaogele should take over the assets and liabilities of the hrvo Companies

except bank balances and loan

(b)The sale values should be the book figures adjustment. The agreed value of

freehold property is N90 million. Obsolete stock of N3 million is included in Ogele

Ltd accounts. A debt of N5 Million owed to Okoro Ltd is considered irrecoverable.

(c)The Company should issue 80 Million Ordinary shares of N1 each at par to the

shareholders of Ogele Ltd and 75 million Ordinary shares to the shareholders of

Okom Ltd in consideration for:

1. The amount due to the share holders respectively for the net assts acquired by

the new Company.

ii. A cash payment by shareholders of Ogele Ltd and Okom Ltd that would be made

to cover excess shares allocated under the scheme.

The foregoing transactions were completed by the Companies as agreed on 1st

January, 2006.

21

Required:

a. (i) Prepare a statement showing the amount of cash to be paid to Okorona

Ogele Itd by shareholders of Ogele Ltd and Okoro Ltd respectively in respect of

shares allotted to them.

ii. The Balance sheet of Okoronaogele Ltd as it would appear immediately

after the Completion of the merger

b. Enumerate the principal advantages of business combination.

SOLUTION:

1. Assets and liabilities taken over by Okomnagele Ltd as the adjusted book values

are:

Freehold Property

Plant & Machinery

Stock II

Debtors

Current Liabilities

Sales Value

Ordinary Shares at Par issued by

OkoronaOgele Ltd

Cash payment due to

Okorona Ogele

OGELE LTD

N,000 -

62,310

23,740

68,750

154,800

80,910

73,890

OKORO LTD

N,000

90,000

23,320

27,810

1 5,070

1 57,200

90,600

66,600

Workinas:

Ogele Ltd stock 26,740 - 3,000 = 23,740

Okoro Ltd debtor 20,070 - 5,000 = 15,070

The above figures are now aggregated to provide the figures for Balance sheet.

OKORONA OGELE LTD Balance sheet immediately after Merger

B1 B1 Fixed Assets: Free hold property (at Valuation) 90,000 Plant and Machinery 86,630 176.630 Current Assets Stock 51,550 Debtors 83,820 Bank 14,510

149,880

Current Liabilities:

Authorized share Capital

Issued and fully paid Capital

t b) i.

. . II.

iii.

iv.

The principal advantages of business combination are:

Economies of Scale in Operations

Business combinations may result in economies of scale, making the merger

desirable: example fixed cost could be allocated over a large sales base

Diversificatio y

This is another factor frequently cited as a motive for mergers.

Acquirina Manaaement Skill

A firm may on occasion seek to acquire another firm to gain access to its

management skills.

Growth - Some companies find it difficult to sustain internal growth. The potential for

generating new ideas and new products may be limited, consequently, growth

through mergers and acquisition begins to look more desirable. Some

Companies feel that it is Cheaper to grow by buying into ongoing concerns than

stnrtiryl from scrrrtch.

Synergy

Ordinarily, Mergers should produce certain synergy. In a financial context,

synergy means that the combined firm does better, or has improved profits than

a situation where the two firms operate separately.

Financial Prospects

Firms with excellent growth potential may find that their ability to achieve their

potential is limited by a lack of access to financing. In these case they may find it

desirable to-seek merger with a firm with excess cash.

CONCLUSION:

The economic climate in Nigeria calls for the pooling together of resouzes and the

maximum use of such resources to ensure economies of scale, survival of business

organizations as well as reactivation of the national economy. b

Copeland, et al(1988) and Leslie, et al(1995) identified that mergers and acquisitions

have long played an important role in the growth of firms.

In consummating mergers and acquisitions there are certain strategies which should be

adopted to guahtee success and there are also certain pitfalls which should be

guided against, (Aliyu, 2005)

MERGER INTEGRATION STRATEGIES:

Articulate clear goals and objective

Establish control decisively and rapidly

Take time to understand the acquired business properly

Make changes at the appropriate speed

Acknowledge cultural differences

Communicate vertically, horizontally, regularly and consistently.

Create stakeholder understanding / buying.

Try to achieve specific gains

Evaluate and report on progress regularly.

MERGERS AND ACQUISITIONS PITFALLS

Incompatible cultures

Inability to manage target

Unable to implement change

Synergy nonexistent or overestimated.

Did not anticipate foreseeable events

Acqulmr paid too much

Acquired firm too unhealthy

Need to spin off or liquidate too much

Incompatible marketing systems.

As opined by Esosa (2004), several internal and external factors do exist which can

bring pressure on the merging partners to the extent of threatenins their successful

consummation. Thus, due diligence analysis is absolutely necessary to thoroughly

evaluate a merger, before, during and after the deal is done in order to identify the

propellers moving the merger forward and leverage them as well as the anchors that

tend to weigh it down and scuttle its success.

REFERENCES:

Aliyu, B . J . (2OO4), Mergers and Acquisitions: Avenue for Nigeria's Economic

Development, The Sec. News: The Journal of SEC,

Vol. 2: No. 1 (November) pp.4

Aliyu, Y (2005)^, "Consolidation, Mergers and Acquisition: "Challenges of the New

Banking Reform Agenda". Seminar paper on ICAN MCPE

Programme, Lagos.

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Copeland T. E, and Weston J. F, (1988), Financial Theory and Corporate Policy,

Addison-Wesly Publishing Company Inc. U.S.A., pp: 676-695.

Esosa, B. 0. (2004), Evaluating Mergers, Acquisitions and other Corporate , m

Investment Decisions, The SEC News: The Journal of Securities 1 and Exchange Commission (November) pp.8-9.

I

Leslie, C., and Donald K. (1 9951, Financial Management, Routledge London

pp. 151-155.

Okafor, M. C. (2006), Company Accounts, Incorporating Annual Reports and

Group Accounts, MioNelson Associates, Abuja.

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