Mergers and acquisition (M&A) is a critical vehicle in facilitating corporate growth and productivity. The reasons a firm may go the merger and acquisitions are many and diverse.
They range from tax planning efforts to expansion in a bit to enjoy economies of scale. The need to achieve legal compliance especially in capital intensive sectors like telecommunications industry and the financial sector the other major reasons.
There is also the factor of business considerations like is the case in a business environment where the one competitor has large capital outlay as compared to the other scores of small competitors. The small firms may merge in a bit to wrestle market share from the large company.
Whatever reason, the common denominator of all M&As is the focus on bottom line of the companies involved. M&A may be aimed at improving bottom line through increased efficiency or sustaining the same by staying afloat.
Defining M&A
Let’s attempt a simple definition of the terms. “Merger” is when two companies come together and the one company loses its identity afterwards.
“Acquisition” is when, in a manner of speaking one company (usually the big one) swallow another company (usually the small one). This result is such that the “swallowed” company’s operations are taken over by the other and the smaller company ceases to be.
For an acquisition to take place there must be in existence two companies upon which instance one integrates the operations of the other whose existence comes to an end as a result. Here we cite the Kenyan example of the recent taking over of operations of Mobil Oil Ltd by Oil Libya Limited.
Related to merger and acquisition is consolidation. “Consolidation” on its part occurs when two or more firms contribute (or pool together) their assets. The result is that they end up one Big company with a completely new identity’ under the law. Local example here is the still underway arrangement between the CFC Bank and Stanbic Bank which will yield CFC-Stanbic Bank.
Technical Meanings
Technically, these terms bear the same meaning but in more convoluted terminology. Thus a “merger” to lawyers is a transaction in which two or more corporations combine under the company law with the result that all but the one of the participating corporations loses its identity.”(Fox & Fox, 2004 Corporate Acquisitions & Mergers)
An acquisition is any transaction in which one corporation obtains another by purchase, exchange merger and consolidation.
“Consolidation” is sometimes used in place of both “acquisition” and “merger” but it is distinguishable in meaning from the two. A “consolidation takes place when two or more organizations combine to yield one legal entity.
Quite apart from the case in merger, in consolidation neither of the consolidated corporation survives. All the corporations cease to exist their operations being taken over by totally new venture.
Meanings under the Kenyan law
M&A in Kenya generally fall within the regulatory framework of competition laws. The main legal framework on competition in Kenya is Restrictive Trade Practices, Monopolies and Price Control Act, cap. 504 laws of Kenya.
This is an act of parliament whose aim, if its preamble is anything to go by, is to encourage competition in the economy. This it does, or proposes to do, by prohibiting restrictive trade practices, controlling monopolies, concentrations of economic power and prices and for connected purposes. It offers a negative outlook at M&A arrangements in that it seeks to control the tendency to abuse the same as a tool to restrict trade, whatever that means. No definitions of the terms defined above are offered.
With regard to companies listed in stock exchange in Kenya, the relevant legal framework on M&A is the Capital Markets Act, Cap. 485A Laws of Kenya. Although it wins a plus in looking at the positive side of M&A, it is limited in that it does not regulate merger and acquisition directly. Instead, it gives power under section 12 thereof, to the Capital markets Authority to make rules, regulations and guidelines on regulation of mergers and acquisitions among listed companies. Hence the enactment of Capital Markets (Take-Overs and Mergers) Regulations, 2002 which came to operation in the July of 2002. The rules define merger as “an arrangement whereby the assets of two or more companies become vested in or under the control of one company.” It does not offer legal definitions of the other terms.
Next we seek to fathom why a firm would opt to go the M&A way and what legal considerations the firm must grapple with as a preliminary to an M&A move.
Tuesday 20 November 2007
Monday 19 November 2007
Lets not politicise privatization!
This week, we witnessed the opening of the bids for privatization of Telecom(Kenya) Limited amid claims that the same was being orchestrated for politically expedient reasons. This claim is admittedly grave whether true or false.
If the claim is true, it sends a guilty verdict on the charges that the Privatization regime in the country is ineffective in guaranteeing the best interests of the country in privatization deals. With the massive privatizations lined-up, this would call for a quick fix or a suspension of the privatizations until matters are arrested. This would, in effect, invite suits and claims that will definitely put the state at a disadvantage. What with the the possible sky-high litigation expenses, high chances of losing the potential open and shut suits and and dented investment rating. There is need to re-evaluate the privatization framework in Kenya to ensure that it is not only water-tight and protective of the best interests of the country, but it also meets the challenges presented by privatization of basic public utilities like telecommunication. No one wants a repeat of the chaos that has attended privatizations so far.
If the claim be false, then this is a pointer to the need to insulate the privatization process from political happenings of the day. The proposed methods here include educating the public of the process involved in an attempt at bolstering the public confidence in the insulatedness of the process from political machination.
As matters stand, the public seldom knows who to believe-whether to believe the often-usurious allegations of the politicians or to go by the word of the investment secretariat whose objectivity and independence has oftentimes been put to question, with reason.
The underlying assumption is that the public interest in the privatization process cannot be dismissed. There is need for the public to be made to appreciate that it is not being robbed of its entitlement as this may risk the investment of the private investor. It is also good public relations especially considering that most of the privatised companies are public utilities and bank on the public for in-flow of business after the act of privatization.
On the whole, there is need for more publicity to the privatization process. This will guarantee the protection of public interest as well as ensure that the members of public are given a chance to stake legitimate claims on the privatization bids.
There is also need to utilise the local securities market root as opposed to placements. One would have thought that with the success of the KenGen Privatization and the positive public response on it, it would be taken as hitherto the way to go on all pending privatizations.
Clearly, no one in his right mind doubts that our stock market needs the flurry of activity and monumental attention that attend IPOs if it is to achieve requisite revitalization necessary to enable it compete for capital with its other established counter-parts in off-shore and developed markets.
One is forgiven for doubting the good intentions of the government in not going the IPO way. This more so when one reckons that the privatization of Telcom Kenya comes at one of those polarized times when its all systems go if a win in the elections will be the result.
The forgiveness comes more readily when one contends that the winning investor is from one of our development partners. We have definitely watched this scene before. The World Bank group puts pressure at the instigation an pricking of one of its indispensable shareholders. The guise is the need to privatise to cut on public spending and yield increased efficiency that comes with placement of utilities in private hands. The motivation is forfeiture of a loan or acceleration of a pending one. Which politician would not oblige?
One hence would hence take with a pinch of salt the "objective" advice of IFC on the value of the stake sold and its presence at the opening of the bids. Could this privatization be one more additions to the of instances when developing countries yield to behest of developing partners velvet-gloved as objective and economically sound advice of World Bank Group? We will never know as all was dismissed as a petty attempt at attracting political attention!
If the claim is true, it sends a guilty verdict on the charges that the Privatization regime in the country is ineffective in guaranteeing the best interests of the country in privatization deals. With the massive privatizations lined-up, this would call for a quick fix or a suspension of the privatizations until matters are arrested. This would, in effect, invite suits and claims that will definitely put the state at a disadvantage. What with the the possible sky-high litigation expenses, high chances of losing the potential open and shut suits and and dented investment rating. There is need to re-evaluate the privatization framework in Kenya to ensure that it is not only water-tight and protective of the best interests of the country, but it also meets the challenges presented by privatization of basic public utilities like telecommunication. No one wants a repeat of the chaos that has attended privatizations so far.
If the claim be false, then this is a pointer to the need to insulate the privatization process from political happenings of the day. The proposed methods here include educating the public of the process involved in an attempt at bolstering the public confidence in the insulatedness of the process from political machination.
As matters stand, the public seldom knows who to believe-whether to believe the often-usurious allegations of the politicians or to go by the word of the investment secretariat whose objectivity and independence has oftentimes been put to question, with reason.
The underlying assumption is that the public interest in the privatization process cannot be dismissed. There is need for the public to be made to appreciate that it is not being robbed of its entitlement as this may risk the investment of the private investor. It is also good public relations especially considering that most of the privatised companies are public utilities and bank on the public for in-flow of business after the act of privatization.
On the whole, there is need for more publicity to the privatization process. This will guarantee the protection of public interest as well as ensure that the members of public are given a chance to stake legitimate claims on the privatization bids.
There is also need to utilise the local securities market root as opposed to placements. One would have thought that with the success of the KenGen Privatization and the positive public response on it, it would be taken as hitherto the way to go on all pending privatizations.
Clearly, no one in his right mind doubts that our stock market needs the flurry of activity and monumental attention that attend IPOs if it is to achieve requisite revitalization necessary to enable it compete for capital with its other established counter-parts in off-shore and developed markets.
One is forgiven for doubting the good intentions of the government in not going the IPO way. This more so when one reckons that the privatization of Telcom Kenya comes at one of those polarized times when its all systems go if a win in the elections will be the result.
The forgiveness comes more readily when one contends that the winning investor is from one of our development partners. We have definitely watched this scene before. The World Bank group puts pressure at the instigation an pricking of one of its indispensable shareholders. The guise is the need to privatise to cut on public spending and yield increased efficiency that comes with placement of utilities in private hands. The motivation is forfeiture of a loan or acceleration of a pending one. Which politician would not oblige?
One hence would hence take with a pinch of salt the "objective" advice of IFC on the value of the stake sold and its presence at the opening of the bids. Could this privatization be one more additions to the of instances when developing countries yield to behest of developing partners velvet-gloved as objective and economically sound advice of World Bank Group? We will never know as all was dismissed as a petty attempt at attracting political attention!
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