Iran Fara Bourse or over-the-counter (OTC) has registered 237 cases of takeover, worth 120 trillion rials (approximately $3.5 billion at market exchange rate), the chairman of Iran Financial Center’s board of directors and managing director of Iran Energy Exchange (IEE), Ali Hosseini said on Monday.
Speaking at the first Mergers and Acquisitions (M&A) conference hosted by the Central Securities Depository of Iran (CSDI), Hosseini noted that since the M&A has not been clearly addressed in Iran’s statutory law, the M&A’s, especially the mergers, have not received due attention in the country.
A healthy economic environment is a prerequisite for successful mergers, said Hosseini, referring to innovation, productivity, and efficient markets, where all pertinent information is simultaneously accessible to all participants and the prices respond immediately to the available information, as the necessary features of a healthy economy.
Hosseini further reiterated that takeover is an inevitable strategy for companies in emerging economies like Iran, but referred to the legal loopholes as the most crucial challenge for the companies embarking on M&A in Iran.
If the takeover goes through, the acquiring company becomes responsible for all of the acquired company’s operations, holdings and debts. Moreover, if the acquired company is a publicly traded company, the acquiring company will make an offer for the entire outstanding shares of the acquired company.
CSDI head Hamed Soltani Nejad, delivering the conference’s opening speech, said the M&A has not been addressed in Iran’s law but for a brief section in article 44 of the Constitution which addresses privatization in Iran.
“M&A activities have intensified since 1998, when financial crisis plunged some companies into debts and forced them to avoid M&A,” said Soltani Nejad, adding: “Emerging economies such as Iran, the BRICS countries, and the Group of Eleven (G11) have turned into the target countries to have successful M&A, however, a variety of factors should be taken into consideration.”
BRICS is the acronym for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa. The G11 is a forum, constituted by mostly developing countries aimed at easing their debt burden, narrowing the income gap with rich countries, and lifting millions of people out of poverty. The members consist of Jordan, Croatia, Ecuador, Georgia, El Salvador, Honduras, Indonesia, Morocco, Pakistan, Paraguay, and Sri Lanka.
Speaking on the need for the M&A, Soltani Nejad noted that while competing for survival is an inevitable part of businesses and practical to some extent, cut-throat competition will lead to deterioration. “At this stage,” he said, “the M&A could be the optimum solution.”
Cost reduction, extended market shares, tax mitigation, synergy, higher profitability or Earnings Per Shares (EPS), financial leverage and exclusiveness were mentioned by Soltani Nejad as some of the main advantages of M&A, while he cited increased costs, cross-cultural differences, decline in equity pricing and investment value as some probable risks associated with M&A.
Merger and acquisition activities are initiated with the aim of improving the company’s financial performance for the shareholders. Two businesses can merge to form one company that is capable of producing more revenues than either one could have made independently, or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction. Because of this principle, the potential synergy is examined during the merger and acquisition process. If two companies can merge to create greater efficiency or scale, the result is what is sometimes referred to as a synergy merge.
