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AN EVALUATION OF MERGER AND AQUISITION ON THE INSURANCE COMPANY ON THE NIGERIAN ECONOMY

Format: MS WORD  |  Chapter: 1-5  |  Pages: 68  |  2109 Users found this project useful  |  Price NGN5,000

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AN EVALUATION OF MERGER AND AQUISITION ON THE INSURANCE COMPANY ON THE NIGERIAN ECONOMY

 

CHAPTER ONE

INTRODUCTION

1.0  BACKGROUND TO THE STUDY

A business combination may take the form of either a merger or an acquisition. A merger is defined as the situation where two or more companies combine together to form a larger business organisation.  On the order hand, an acquisition involves the purchase of controlling share in another company. Klime Poposki defined acquisition as a combination of two or more companies in which the resulting firm maintains the identity of the acquiring company. A merger is defined in section 590 of CAMA, 1990 as “any amalgamation of the undertaking or any part of the undertaking of one or more bodies”. Akanikor, in his paper “mergers and acquisitions” defined acquisition as including “all business and corporate organizational and operational devices and arrangement by which the ownership and management of an independently operated properties and business are brought under the control of a single management”.

Mergers and Acquisitions have been the form of attention in the decades of the 1980 when such business activity was most prevalent. In today’s business world, the approach of business organization considering mergers and acquisitions will be more strategic and reasons procedure with special consideration of the ethical consequences on many parties that will be affected.

Corporations may seek external growth through mergers and acquisitions in order to achieve risk reduction, improve access to the financial markets through increased size, or obtain tax carry-forward benefits. A mergers and Acquisitions may also expand the marketing and management capabilities of the firm and allow for new-product development. The motives for mergers and acquisitions are both financial and non-financial in nature. Mergers and Acquisitions activities allow the acquiring firm to enjoy a potentially desirable portfolio effect by achieving risk reduction while maintaining the firms’ rate of reform. Risk-averse investors may then discount the future performance of the resulting firms at a lower rate and thus assign a high valuation than what was assigned to the separate firms. The second financial motive is the improved financing posture that a mergers and acquisitions can create as a result of expansion in size. Larger firms may enjoy access to financial markets and thus be in a better position to raise debt and equity capital. Greater financing capability may also be inherent in Mergers and Acquisitions itself. This is likely to be the case if the acquired firm has a strong cash position or low-debt equity ratio can be used to expand borrowing by the merging or acquiring company. The final financial motive is the tax loss-carry forward that might be available in a merger and acquisition exercise if one of the firms have previously sustained a tax-loss.

The Non-financial motives for mergers and acquisitions include the desire to expand management and marketing capabilities as well as the acquisition and development of new products. Particularly, popular industries in the latest mergers and acquisitions movement are companies realizing in manufacturing, oil and gas, retailing food product, telecommunications and financial services. While mergers and acquisitions may be directed towards horizontal integration (the acquisition of competitors) or vertical integration (the acquisition of buyers and sellers of goods and services to the company), anti trust policy generally precludes the elimination of competition. For this reasons, mergers and acquisitions are often with companies in allied but not directly related fields. The pure conglomerate mergers and acquisitions of firm in totally unrelated field is still undertaken, but less frequently than in the past.

 

Perhaps, the greater management motive for a merger and acquisition is the possible synergistic effect, synergy is said to take place when the whole is greater than the sum of the parts. This “2+2=5” effect may be the result of eliminating overlapping functions in production and marketing as well as meshing together various engineering capabilities. In terms of planning related to mergers and acquisitions, there is often a tendency to overestimate the possible synergistic benefits that might accrue.

Most of the academic discussions have revolved around the motives of the merging or acquiring firms that initiate a merger and acquisition. Likewise, the selling stockholders may be motivated by a desire to receive the acquiring company’s stocks which may have greater acceptability or activity in the market place than the stock they hold. Also, when cash is offered instead of stock, this gives the selling stockholders an opportunity to diversify their holdings into many new investments. The selling stockholders generally receive an attractive price for their stock that may well exceed its current market or book value. In addition, officers of the selling company may receive attractive post merger and acquisition management contracts as well as directorship in the acquiring firm.

In some circumstances, they may be allowed to operate the company as a highly autonomous subsidiary after the mergers and acquisitions process. The final motive of the selling stockholders may simply be the bias against smaller businesses that has developed in this country and around the world. Real clout in the financial markets may dictates being part of a larger organization. These motives should not be taken as evidence that all or even most managers of smaller firms would wish to sell out a matter that shall be examine further when we discuss negotiated offers versus take-over attempt. Mergers and acquisitions is a well-known phenomenon in the corporate world. It has changed the faces of business in most sectors of the economy. Sectors like oil and gas, manufacturing and banking. However, for the purpose of this study, my primary focus will be on mergers and acquisitions in the insurance industry and its effect on the Nigeria economy.

Recapitalization and consolidation of the insurance industry which started in September 2005 and ended in February 2007 was primarily embarked upon to throw up bigger, stronger and more viable and high-capacity insurance companies which would live  up to their names, playing their adequate risk management role in the Nigerian economy. The federal government which initiated the reforms had also envisaged that it would generate more premium income which would afford insurance firms better and reasonable reserves to provide short and long term funds as debt instrument to government and businesses, thus contributing more to rapid economic growth and development, while tremendously increasing the Gross domestic Products (GDP) through contributions of insurance sectors to the overall national development of the country. Government had also envisaged that the reforms would assist stem capital flight associated with offshore insurance, which had led to the loss of more than N70 billion insurance premium yearly, especially in the oil, gas, aviation, and marine industries where foreign insurance companies dominated and underwrite the build of the business risks in those industries for Nigeria.

The recapitalization exercise which was supervised by the regulatory agency, National Insurance Commission (NAICOM) ended in a good note as 49 of the firms (out of about 104 insurance firms that earlier existed) were able to meet the minimum capitalization of N2 billion for life business, N3 billion for non-life operations and N10 billion for re-insurance firms. It is expected that after this consolidation exercise, the insurance industry will be in a  better position to take its rightful place in the economic development of the nation as in the words of Chief Emmanuel  Chukwulozie, ex  - Commissioner for Insurance who said  the success of the exercise would best be measured by the performance of the firms that would scale through the exercise. However, taking stocks nearly two years after the conclusion of an exercise that generated so much interest from investors, analysts and other stakeholders project the firms that eventually emerged as having realized the government’s vision in embarking on the reforms. And no doubt, on the floor of the Nigerian Stock Exchange (NSE), equity investors have continued to express their appetite for insurance stocks by grabbing millions of shares daily to account for the bulk of the total volume of business in the Nigeria capital market. However, while most operators are quick to point at the successes recorded at the capital market as an indicator of a prosperous insurance industry in the view of citizens including the elite, many people are not embracing the insurance culture.

1.1     STATEMENT OF THE PROBLEM

Globally, insurance is seen as drivers of the economy of the developed nations providing the backbone that allows entrepreneur and business to take risk that would grow the economy. But, has the insurance industry being of such positive impact on the Nigerian economy after the reforms? Though, the awareness on the benefits of insurance and the percentage of Nigerians taking up insurance policies is still on the low-key in the country. These, however suggested the negative attitude of Nigerians towards insurance products as seen by the low patronage of insurance policies being taking up which still stood at a staggering less than 5%, even after the reform exercise.

Though, the industry had been in existence prior to the Nation’s independence, the country was yet to benefit from opportunities, which abound in the insurance industry. This was as a result of several problems/challenges facing the insurance industry. The major problem confronting the Nigerian insurance industry is the problem of insufficient capital base to support the yearning business opportunities opened to the operators and practitioners in the industry. The insufficient capital of all the insurance companies put together before the reform could not sufficiently accommodated and assumes the insurance of the assets of industries such as oil and gas, maritime and the aviation sectors. This however, led to the problem of premium flight out of the sector thereby robbing the industry and the nation of huge reforms as over N70 billions was recorded as being premium accountable from those sectors to foreign insurance firms who assume the risk bearing responsibilities of those sectors. Based on these problems, the federal government initiated the reform in September 2005.

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