3 January 2006

Nigeria: The Options of Merger And Acquisition in Consolidation Era

Lagos — As the various insurance companies make the last turn towards the February, 2007, deadline allowed for recapitalisation, the Director-General of the Chartered Insurance Institute of Nigeria (CIIN) MR. ADEGBOYEGA ADEPEGBA insists that mergers and acquisitions remain the most viable option. Excerpts.

In line with this policy, the Federal Government through the Honourable Minister of Finance, Dr (Mrs) Ngozi Okonjo - Iweala recently announced increases in the share capital of insurance and reinsurance companies operating in the market as follows:

Life Insurance Companies - N2 billion

General Insurance Companies N3 billion

Composite Insurance Companies - -

Reinsurance Companies N10 billion

These increases which stipulate a new capital regime for insurance and reinsurance companies, are coming barely two years after the increase of the capital base of insurers from the 1997 Act's N20 million, N50 million and N90 million to N150 million, N200 million and N350 million, for the respective categories of insurers in 2003.

It is now obvious that the entire Insurance Industry in Nigeria is bracing up to the unfolding challenges while the key operators are busy working out the different options aimed at meeting the capital requirements in order to remain in business.

Although a bitter pill to swallow, the idea behind the recent increase in capital base remain germane to economic growth and national development. Recapitalization and consolidation should be seen as Siamese twins whose major aim is to strengthen the insurance industry. The essence of consolidation is to ensure that the financial services sector of the Nigerian economy is driven by mega players with a capacity to play both within and outside the shores of Nigeria. With large sums of capital in their kitty, operators will not only be strong and reliable but also become global players.

It is pertinent to state that the Insurance Industry is privileged to be in a position to draw from the bankers' experience. For instance, banks like Zenith Bank PLC and Guarantee Trust Bank PLC have established their presence in the ECOWAS sub-region following their consolidation. We do not expect anything less from the insurance industry's consolidation exercise.

There are, however, contending forces which presently stand between the Insurance Industry and how to raise the N2 billion, N3 billion and N10 billion for the various segments in the Industry. Part of these forces include the palpable investor-lethargy occasioned by the recently concluded recapitalization of banks in the country as well as low insurance penetration in the country. It is in the light of these perceived problems, that I will like the industry to explore the option of mergers and acquisitions.

Adopting the merger and acquisition option remains a critical decision for business owners and, in most cases, requires strong will-power and a good understanding of the entire concept. Jack Welsh, acclaimed authority in mergers and acquisition captures the fears of most entrepreneurs in his book entitled 'Wining'. Welsh writes: " with the excitement, there's exhaustion too, and sometimes you don't look very hard to see it in the faces of the CEO's at center stage. They have been working around the clock for weeks, if not months fighting over every last nickel, not to mention who will run what".

The picture which Welsh has painted was clearly dramatized in the banking consolidation exercise. No one should expect a different scenario from the insurance industry. In some instances, a merger involve the 'marriage' of two or more companies with different cultures, different backgrounds and even different missions and vision. Welsh speaks bluntly of this when he says that "A merger can feel like a death. Everything you've worked for, every relationship you've forged - they're suddenly null and void".

Nevertheless, there are compelling reasons to believe in the merger and acquisition option which is why we recommend it to the insurance industry. In order to approach the subject matter objectively, we opt here to examine the definitions of the concept and the views of authorities on the subject.

Eugene Okwor, former Commissioner for Insurance in his paper titled "Merger and Acquisition: The Environmental and Practical Considerations" defines the concept of merger as a situation where, for many strategic and economic reasons, two or more companies or, in deed, organizations come together to form a larger company". Okwor defines Acquisition as "entailing a buy-over of one company by usually a bigger company". He further posits that in most cases, the company bought over usually loses its identity, stating that in the case of a merger, it may be agreed that the larger formed company may retain their individual names to form the final name of the merged company.

Professor G.A. Olawoyin (SAN), quoting M.A. Weinberg, describes a merger as "the emergence of a large corporate entity arising out of the combination of two or more hitherto separate companies. Preferring the term 'take - over', Olawoyin describes it as "the acquisition by one company of sufficient shares in another company to give the acquiring company control over that other company".

Relying on the benefits of research and experience, mergers and acquisitions represent critical managerial decisions which have led to huge business successes such as the strategic alliances which gave birth to the UK based Royal & Sun Alliance, Waymade Healthcare PLC and, indeed, our Nigerian examples such as the STB - UBA merger.

Despite the huge benefits of mergers and acquisition, it is unfortunate that most companies that have merged in Nigeria were compelled to do so by legislation. This ought not be the case since companies could be motivated to merge by considerations other than external regulation. As Okwor puts it in his paper referred to earlier, there are adequate environmental considerations to justify mergers and acquisition. He cites amongst others, the instances of the increasing rate of catastrophies worldwide, such as the event of September 11, 2001 in the United States of America, and our own Bomb blasts of 26th January, 2002 at the Ikeja Military Cantonment in Lagos, Nigeria. These happenings, according to Okwor, make the environment right for us to consider Mergers and Acquisition seriously.

While agreeing with the former Commissioner for Insurance, it is also pertinent to make references to other prevailing environmental and economic factors which justify the option of M & A. A good example is the Universal Banking Policy which has made it imperative for insurance companies to get out of their small shells and form conglomerates capable of stemming the tide of the in-road into insurance territories by banks because of their capacity. Perhaps a healthier attitude, which Okwor canvasses, is for insurance companies to merge and form conglomerates with some banks.

By all indications, the need has continually arisen for the restructuring of the insurance industry even long before the announcement of the new capital base. The merger option which this write-up canvasses will, no doubt, see the industry move away from its weak structure and a situation whereby the industry is unable to retain up to 5% of the business of the NNPC and its subsidiaries. Mergers and Acquisition will increase the national retention capacity and reposition the industry for the challenges of the blossoming global market.

By and large, mergers will ensure that the insurance industry experiences a smooth sail in its ongoing consolidation exercise. The prospects of building critical mass, acquisition of information technology (IT), increased capacity to retain risks and reduce reinsurance premium payments, better spread and improved revenue and economies of scale, amongst others, make the merger option the right choice for our industry.

No doubt, there is a lot to be done in the area of developing the right capacity in terms of Human Capital requirements. Though this may not be the exact priority of key operators at this point in time when it seems everyone is preoccupied with coming to terms with the recapitalization exercise, we at the Chartered Insurance Institute of Nigeria (CIIN) feel strongly that insurance operators should place more emphasis on the training and retraining of their workforce as it will be foolhardy for any company to meet the new capital base requirements only to entrust the huge investments to managers whose competence may be less than optimal.

It is pertinent to emphasize that the CIIN is poised more than ever before to support the insurance industry with all the faculties at its disposal in ensuring that the industry workforce are adequately repositioned for the tasks ahead. For instance, the Mandatory Continuing Professional Development (MCPD) programme of the Institute will continue to afford the teeming practitioners the opportunities for updating their knowledge on global trends in the business and practice of insurance. I like to assure practitioners that the Institute has carefully studied the situation occasioned by the new capital base and we have articulated training programmes that will adequately equip the workforce for the attendant challenges.

During the recently concluded Education Seminar held at Ibadan, deliberations were focused on "The Development of Top Brands for the Insurance Industry". Our decision to educate members on the concept of branding was to address the issue as a significant sign-post towards recapitalization and consolidation. If there is one area of a company's activity that can immediately benefit from branding, it is investor relations. Brand experts, David A. Aaker and Robert Jacobson discovered a positive correlate between brand equity and stock returns in a study on thirty-four stocks in the US between 1989 and 1992. The study showed that firms who experienced the largest gains in brand equity saw their stock return average 30% while firms with the largest loss in brand equity saw stock returns average 10%. The study also showed that there is a strong financial incentive to create a high level of brand equity, especially for companies that are going to do an IPO in the near future. Strong brand equity if properly conveyed to prospective investors will result in a higher initial offering price.

The Insurance Industry is now in a position of taking its destiny in its own hands by taking advantage of the provisions made by Government for the Industry to be able to build high level capacity of business. Operators should brace up by drawing up modalities for taking full advantage of the new business opportunities engendered by the 2003 Insurance Act. Section 64 of the Act makes the insurance of buildings under construction above two floors compulsory while section 65 also makes the insurance of every public building compulsory.

In a similar vein, reference could be made to the Federal Government's directive on local content under the NEEDS initiative. This policy has the potency of providing a large volume of business for the Insurance Industry in view of the fact that the sectors of the economy covered by the policy include Maritime transportation, Aviation as well as Oil and Gas.

According to Okunoren in a recent write up, there are major initiatives that should be taken to achieve the Federal Government directives on the increase in local content insurance from 10 per cent to 45 per cent in 2006 and, indeed, further increases in subsequent years. Okunoren enumerates these initiatives as follows:

-That the federal government should have the political will to implement the NEEDS initiative to the letter;

-That there should be consistent policy directives;

-That there should be effective monitoring;

-That the insurance industry should build adequate underwriting capacity;

-That the insurance industry should evolve insurance policies of international standards.

Okunoren goes on to list the attendant benefits to include:

-Increased job opportunities, especially in the long-run;

-Improved technical know how for the Nigerian market;

-Emergence of specialists within the insurance industry for Nigerians and Nigerian companies.

To conclude this write up, I wish to commend, on behalf of the Institute, the efforts of the National Insurance Commission in ensuring that the insurance industry recapitalization/consolidation is achieved with minimal stress for operators. In particular, I like to commend the palliatives put in place by the commission, notably:

-Tax incentives from the Federal Inland Revenue Services (FIRS)

-Incentives from Corporate Affairs Commission and negotiations with the Securities and Exchange Commission, the Federal Inland Revenue Service and the Nigerian Stock Exchange regarding soft-landing measures.

There is no doubt that the Nigerian Insurance Industry will come out stronger and more vibrant after the post consolidation exercises.

While ending my submission on the merger and acquisition option, let me urge key operators to commence the re-orientation of their Board members and shareholders on the need to change their mindset and embrace mergers and acquisition. For the insurance companies which will be able to muster funds to meet the new capital base, one can only congratulate them in advance and wish them all the luck to ensure returns on the huge investments.

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