Why do Nigerian companies neglect transaction value communications: A critical look at the aborted Zenon-AP merger and Bank PHB-Spring Bank acquisition.
In the four year period from January 2005 to January 2009 , the value of M&A transactions in Nigeria has far exceeded the total value of such transactions in the prior 20 year period. Yet, the content and quality of communications on the compelling reasons for a deal remains dismal. The recent cases of the aborted Zenon Petroleum & Gas - African Petroleum merger and the Bank PHB acquisition of Spring Bank provides classic studies on the attitudes of Nigerian companies to deal communications.
At the annual general meeting of African Petroleum (AP) held on April 28, 2008, shareholders overwhelmingly approved the merger of their company with Zenon Petroleum and Gas Limited, whose chairman, Femi Otedola, controlled over 50% of the company’s shares.
Speaking at the meeting, Sunny Nwosu, National Coordinator of Independent Shareholders Association of Nigeria (ISAN), declared that:
We [the shareholders] totally support the synergy between AP and Zenon because of the numerous benefits we are going to derive. We are authorising you to enter into agreements and /or arrangements pursuant to the proposed merger or scheme of arrangement, amalgamation or any other consolidated arrangement of AP Plc and Zenon Petroleum & Gas Limited.
In support of these shareholder expectations, Tunde Falasinnu, AP’s Chief Operating Officer, stated that:
Zenon has a turnover of over N300 billion and with AP’s turnover of N200 billion, we should be talking about N500bn by the end of the next financial year. There will be value added and capital appreciation to shareholders’ investments.
Curiously, it did not occur to the AP COO that for a deal of this size and cost to make the most elementary sense, it had to, at the very least, be accretive to earnings with a clear statement of when this would be realized. If 1+1=2 at the completion of the merger, then the merger would have failed to create any value for AP shareholders. More importantly, AP still needed to make a case why the merger made sense now, on which terms and what its anticipated measurable benefits were. No where did AP officials publicize their narrative on the value creating potential of a Zenon-AP merger.
If one compares AP’s inability to articulate a value narrative for the compelling need for a Zenon merger with the opposite approach taken by Carly Fiorina, the HP CEO during its merger with Compaq, one starts to appreciate the need for deal communications better. Similarly, it is instructive to compare the AP press release announcing the merger with the release announcing the HP-Compaq merger in 2001.
In December 2008, less than eight months after the shareholder approved merger, Zenon informed the House Committee on Capital Markets that it was withdrawing from the merger. On January 5, 2009, the management of AP informed the same committee that no tangible progress had been made on the integration of both companies.
A careful search on the Zenon and AP websites for news on the aborted merger yielded no results. It would seem that the managements of both companies feel they owe no one, not even investors in AP whose shares are still traded on the Exchange, an explanation. Whether by omission or design, AP does not list its website as a source of investor information on company events.
Zenon had built up its stake in AP by purchasing the NNPC Staff Pension Fund’s 28.7% holding in the company for N17 billion in May 2007. As a result, Femi Otedola, the Zenon chairman was appointed as chairman of the AP board on May 25, 2007.
Although eyebrows were raised, to put it mildly, at the speed of transfer of ownership of the NNPC Pension Fund’s shareholding to Zenon, the investment community was pacified by AP’s performance within a short period of control by its new majority shareholder. Consequently, the board of AP felt confident enough to approach the market to raise fresh funds through the sale of shares.
In the last financial year ending December 31st 2007, the company [AP] had from a near loss position declared a dividend of N7.05 billion profit before tax. That figure represented a growth of 188.93 per cent over N2.44 billion declared the previous year. Profit after tax also grew significantly from N2.10 billion recorded in 2006 to N5.10 billion during the year under review. . . Its half year result from January to June 30 2008, shows a 80% increase in profit after tax. AP’s market capitalisation has risen from N36 billion before the Femi Otedola-led board took over, to a record market capitalisation of N232.24 billion as at today. The company’s upward swing followed the reforms and restructuring initiated by the board. The sanitisation of the accounting system, restructuring of personnel and clear policy focus appear to have paid off.
Only recently at the completion board meeting, Mr. Osa Osunde, the Vice-Chairman of the company, posited that with the strong fundamentals AP now boasts of, investors stand a good chance of reaping bountifully from their investment, projecting that the share price might nudge the N500 mark. He declared triumphantly that AP was ‘back, better and stronger than before’. Following the performance, the company declared and paid dividend of N7 per share to its shareholders. That dividend payout represented a growth of 600 per cent in comparison to the N1 payment December 31 2006.
While Femi Otedola remains the chairman of AP, as its biggest shareholder with a stake of 55.3%, the structure of the relationship between the two energy companies going forward remains unclear. It is indeed strange that neither company has made an announcement on their websites or national newspapers stating the reasons for the cancellation of the merger. The companies should have explained why completing the merger had become untenable in the present circumstances.
Did the underlying economics for the merger change?
Were certain stakeholders resistant to the merger under current conditions?
Had certain facts come to light which erased the rationale for the combination?
Like in the HP-Compaq merger instance, a comparison of the dismal record of disclosure in the Zenon-AP [aborted] merger with that of Dow Chemical, the US chemical manufacturer, and Rohm and Haas, the specialty chemicals maker, sheds a lot of light on the disregard for investors in the Nigerian case. For instance, a press release by Dow Chemical, the chemical group, explaining its inability to complete the merger with Rohm and Haas states that ‘recent material developments have created unacceptable uncertainties on the funding and economics of the combined enterprise’.
In its turn, Rohm and Haas responded to Dow’s attempt to walk away with an insistence that the deal be completed as scheduled. Such disclosure assured shareholders of both companies that their respective boards were doing all they responsibly and legally could to ensure that they get the best terms possible for their companies.
So what information should Zenon and AP have provided that would have enhanced investor community understanding and support for the merger? We list a few below:
Since Zenon took the step of acquiring AP shares, the purchase must have made good sense to it from a strategic point of view. How does a controlling ownership by Zenon, an erstwhile competitor, and combination with it make strategic sense for AP?
What specific opportunities will this merger be taking advantage of?
What environmental threats is this merger a response to?
As Zenon is not a public company, what performance, financial and trading information did the board of AP have access to in their determination of the benefits of the merger? How soon will this information be disclosed?
What is Zenon’s balance sheet strength? How would it affect AP’s current corporate financing options?
What are the balance sheet implications of the merger for AP?
In what ways do Zenon and AP complement each other?
How will this merger affect the competitive, supply chain and pricing dynamics of the industry?
What would be the combined market share of the merged entity in each of their key product markets?
What are the projected cost savings that would result from the merger?
What would be the organizational structure of the combined entity?
What would be the ownership structure post-merger? How much of the combined entity would Zenon own? On what basis is this exchange being made?
What is the timeline for merger integration?
What would the combined entity be called?
What operational synergies would result from the merger?
What are the financial advantages of the merger?
Unfortunately, not a single one of these general questions was answered by either company in media publications or on their websites. Surprisingly, no reference is made to the merger in AP’s entire 2008 share offering prospectus.
In August 2008, the investment community was abuzz with rumours of stake building in Spring Bank by an unknown buyer. Within a week, about 3.5 billion shares, representing close to 30% of the bank’s shares were acquired in 373 deals by the mystery investor[s]. Considering that investors were, at the time, running for the exit as the stock market bubble burst, such bold buying attracted a lot of attention. Eventually, it would be known that Bank PHB was the buyer. By September, it had built up a 33% stake in Spring Bank.
In one of the rare public comments on the rationale for the merger, Francis Atuche, the CEO of Bank PHB, said that on the completion of the merger, Bank PHB would become one of the five biggest banks in the country. As no other reasons have been given, size, it would seem, is the real rationale for the acquisition.
As in the Zenon-AP merger, leaders of Nigerian shareholder associations declared their support for the transaction, as a guarantee of shareholder value creation. Unlike in the Zenon-AP case, where only one of the parties was a public company, both Spring Bank and Bank PHB are public companies. Therefore, one would have expected the shareholder association representatives to speak of the benefits of the acquisition to shareholders of both companies. Instead, they chose to focus on the immediate benefits to Spring Bank’s shareholders who tendered their shares. Those who did, they pointed out, would receive an instant premium of 25%. This, in a rapidly declining market, was good enough they said.
As shareholder and major stakeholders in the nation’s economy, we feel that Bank PHB offer, coming at a time when investors’ confidence in the market remains at lowest ebb following huge losses recorded from the listed stocks, is a technical bailout for shareholders of Spring bank. Technical in the sense that at the bid offer of N7 per share, the interested buyer has factored into consideration the cash and non-cash dividend, the shareholders of Spring Bank have suffered over the years. In perspective, Spring Bank had in the last three years maintained negative returns on investment even with the intervention of the Central Bank of Nigeria(CBN).
As minority shareholders of Spring Bank Plc, we wholeheartedly support the Bank PHB bid offer. For us, it represents the best opportunity for the elusive returns on our investment. In a period when the nation’s capital market capitalization has dipped by about 50 per cent and has sustained great losses in capital gains and confidence , we feel that the 25 per cent premium over the Spring Bank current market price of N5.59 per share remains an internal market driven mechanics that would in the medium and long term shore up the market.
No mention was made by either the leaders of the shareholder associations, or the management of Bank PHB, on the compelling merits of the acquisition, at such a high premium, to its own shareholders.
Meanwhile, it was generally agreed that if not for the technical suspension placed on its shares by the Nigerian Stock Exchange, which froze its share price at N5.59, the value of Spring Bank shares would very likely have dropped to below N3. Therefore, the real premium was closer to 133%. Even in booming economic times, such a valuation would be considered rich. To think that this valuation was given without a complete due diligence on the target’s books, must be the greatest leap of faith in Nigerian corporate history, or reckless irresponsibility by the board of Bank PHB.
One even wonders why this was an all-cash offer. In fact, this must be one of the rare occasions when a public company acquires another without any equity exchange consideration. The board of Bank PHB should have explained why it chose to offer Spring Bank shareholders an all-cash tender.
A search on the Bank PHB website provides no substantive or helpful information on the merits of the transaction from a Bank PHB shareholder perspective, or in fact, from any interested shareholder perspective. For instance, the Press Releases section of the site, makes only scant reference to the transaction, the approval of the acquisition by shareholders at an extra-ordinary general meeting, which by educated estimates, may have cost the bank as much as N45 billion in cash, in explicit and implicit costs already.
The only other reference to the transaction one finds on the site is under the Growth & Expansion section, where it is enthusiastically referred to as ‘the first hostile acquisition involving two listed firms on the Nigerian Stock Exchange (NSE).’ The information content of the Bank PHB announcement of the success of its mandatory tender offer, can be compared with another acquisition announcement, that of InBev, the Belgian brewer, and Anheuser Busch, the US brewer, to create the largest brewer in the world.
Let us compare this with another bank-bank transaction. A reading of the transcripts of analyst meetings with the executives of Bank of America, led by Ken Lewis, in the 2008 acquisitions of Countrywide, the mortgage lender, and Merrill Lynch, the financial management and investment banking firm, would leave no one in doubt that the management went in with their eyes wide open on the strategic fit, operational synergies, product complementarities and financial sense of the combinations.
Another example of clear-eyed consolidation was the acquisition of Abbey National, the UK savings and mortgage bank, by Grupo Santander, the Spanish banking group, in 2004. During the acquisition process, Abbey National set up a website at www.aboutabbey.com to provide information on the merits of the transaction as well as a repository of all regulatory filings. Shareholders of both companies are not left in doubt about the objectives of the combination and the advantages it would bring. For instance, in the analyst presentation below, given by Grupo Santander executives, the compelling rationale of the acquisition as well as Grupo Santander’s ability to successfully execute on the integration is succinctly and convincingly communicated.
Of equal concern, Spring Bank has issued no communication in the news media or on its website on the reasons why the merger is an unbeatable offer for customers, employees and shareholders. In fact, using the search tool on the Spring Bank site to query ‘Bank PHB’ yielded no results. Only a single reference to the objectives of the merger could be found on the entire site.
While a query of ‘Bank PHB acquisition of Spring Bank’ on Google yields several results, not a single one is an interview with a member of either bank’s executive management, a speech or a presentation on the compelling reasons for the combination. The poor M&A communications strategy of both banks is evident in the elementary questions that investors pose on this forum thread. A thoughtful FAQ page with prominent links on both banks’ sites would address concerns like these.
HBOS, the British lender, that was acquired by Lloyds TSB Group in 2008 provides a good example of how a target institution can provide information to shareholders on the acquisition process. The Lloyds TSB site also provided customers of both banks with information on how the acquisition would affect them.
In the following interview, Gerald Adolph, Senior Vice President of Booz & Company, the consulting firm, and leader of its global merger and restructuring practice, provides invaluable insights into the importance of communications to successful transactions.
In a sense, maybe Nigerian company executives have also listened to the interview and made a deliberate effort to ignore the advice of experienced practitioners. For instance, shareholders of both banks would have liked to the boards to provide answers to the following and then make the answers widely accessible:
Did Bank PHB consider other acquisition targets?
What was the attraction of Spring Bank?
What external and internal (Spring Bank) environment events make the acquisition compelling right now?
At what multiples of projected earnings was the valuation done? Can Bank PHB provide access to the models used for determining these projections or the analysts on whose consensus these figures are based?
Analysts estimate that the 33% stake-building by Bank PHB in August-September 2008 would have cost from N17 billion to N20 billion, based on market prices at the time. How much due diligence was done by the bank prior to committing these significant amounts? What books did Bank PHB or its advisers have access to during their due diligence?
Did Bank PHB enjoy the tacit support of the Spring Bank board during the acquisition?
It seems that the main objective of the deal is to acquire the branches of Spring Bank. The CEO of Bank PHB, Francis Atuche, is on record as saying that Bank PHB will become one of the five biggest banks in Nigeria at the conclusion of the acquisition. Is there a direct and necessary causal relationship between size and profitability or size and customer attraction/retention or size and return on invested capital?
There has been a lot of talk about branch expansion. How much branch spread overlaps exist between the two banks?
How come the focus has been on geographical spread rather than products, distribution and customer service?
What operational synergies does Bank PHB expect to realize from the acquisition?
When would the purchase turn accretive?
There have been reports that Spring Bank has a huge non-performing loan book and a significant portion of this is to insiders. What provisions is Bank PHB making for this?
What will be the immediate balance sheet and income statement effects of the acquisition?
There have been a number of sponsored notices in newspapers challenging the acquisition. What are these issues being raised by some shareholders of Spring Bank about the propriety of the acquisition of its shares on the floor of the Nigerian Stock Exchange?
The are a number of cases in court disputing the acquisition. What are the issues involved?
How much experience does Bank PHB have in integrating acquisitions? What are the potential risks and challenges of this particular one?
Is it true that the Spring Bank name and franchise will be unchanged? What are the risks of cannibalization?
What restructuring charges will Bank PHB be taking in this transaction?
These are some of the types of questions that the intelligent investor would have expected Bank PHB to address. But the bank has failed to do so. Rather, one reads about the transaction through the points-of-view of third parties as the primary source of information. This no-communications-strategy approach is too risky for a transaction that has cost the bank over N45 billion. In fact, it is absolute irresponsibility on the path of a public company.
Despite the current market troubles, consolidation is now a permanent feature of the Nigerian corporate landscape. As M&A takes off in Nigeria, companies need to pay more attention to informing the investment community about their plans and the transaction process. If they fail to do so, they risk two things:
Alienating the very investors whose support they need for the approval of the transaction
Losing the transaction when ‘interloper bids’ start to appear after a company is put in play. When that happens, the acquirer with the better communications machine will win the target.
Till now, companies, both acquirers and targets, have not suffered any material consequences for paying scant regard to the investment community during transactions. It is unlikely that this can last much longer. We hope that they soon realize that it is in their best interest to change. There is simply too much at stake.
One cannot help noticing how Niyi Meka Olowola, Oando's Head of Corp Comms, is nodding in approval. Maybe Goldman Sachs can learn lessons.04:47:49 PM January 25, 2012from HootSuite
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