One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies, according to Investopedia. Two companies together are more valuable than two separate companies - at least, that’s the reasoning behind M&A.
But in Iran, M&As are not a way of doing business as ambiguous regulations make it hard to carry them out.
“We lack regulations for M&As of credit institutions, this has created a problematic process,” said Ali Rahmani, former CEO of the Tehran stock exchange, “the same goes for the merger of car manufacturers Saipa and Pars Khodro,” which created a host of management problems. In 2000, 51 percent of Pars Khodro’s shares were purchased by Saipa, but integration and cost cutting did not take place.
But there is also the issue of lacking financial data on both companies and their stakeholders.
“Market transparency must be increased before allowing M&As, as they influence the interests of non institutional shareholders,” said Hamed Soltaninejad, CEO of Central Securities Depository of Iran – which manages the registration, custody and transfer of securities ownership, and works out the clearing and settlement of securities.
M&A’s require expertise which is nonexistent in Iran. Now, Iran Financial Center is planning short training courses in M&As and is seeking to get foreign experts to teach in these courses, says its chairman, Ali Hosseini.
Despite these obstacles to M&As in the country, there was news of acquisitions at the first M&A conference hosted by CSDI.
Hosseini who is also the CEO of Iran Energy Exchange said on Monday, that Iran Farabourse – Iran’s Over-the-Counter market – had 237 takeovers registered in its filings. The acquisitions were worth 120 trillion rials (approximately $3.5 billion at market exchange rate). Though, “buying a majority stake in a company isn’t a takeover,” said Hossein Khezli Kharrazi, CEO of Noor-e-Anvar Financial Holding, commenting on Hosseini’s remarks about the takeovers at Iran Farabourse.
Regardless, “Iran as a developing country has a lot of opportunities for enhancing company performance via M&As,” Soltaninejad said.
There are over 100 small mutual funds in the equity market, but they can be run by a single management team using M&As, which reduces management costs considerably. “Small mutual funds can merge,” Rahmani said.
Cutting costs by staff reductions and creating economies of scale, along with improving market reach and industry visibility, and also acquiring new technologies are some of the reasons that make companies embark on the M&A path.
M&As are both aspects of strategic management, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help a firm grow more rapidly in its sector or location of origin, or a new field or location, without creating a subsidiary, other child entity or using a joint venture. M&A can be defined as a type of restructuring in that they result in some entity reorganization with the aim to provide growth or positive value. Consolidation of an industry or sector occurs when widespread M&A activity concentrates the resources of many small companies into a few larger ones, such as occurred with the automotive industry between 1910 and 1940.
This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
