Companies need to reinvent themselves in recession -Meristem head of corporate finance

The head of Corporate Financial Advisory Business unit of Meristem Securities Limited, Adejumoke Awolumate, in this interview with Bala Augie, explains why companies undertake corporate restructuring and the reasons behind their failures.

How long has Meristem Securities been in existence?

Well, it’s been about 15 years we started as Meristem Securities but it actually predates that because Meristem started as Great Africa Securities and later metamorphosed into Meristem Securities in 2013. Meristem started basically with stock broking and investment advisory services, and then metamorphosed into a bouquet of financial services ranging from Wealth Management Services, Trustee Services, Registrar Services and Corporate Finance Services.

How long has the advisory unit been in existence and how many deals have you brokered since listing it, can you give us an estimate?

For any advisory firm, putting a number to the deals is a hard call, but I can say that the advisory business is literally been there for as long as Meristem Securities existed because it always has been issuing out license. But in terms of numbers of deals, maybe if you say numbers of deals per year, I will give you a rough estimate but I will say that probably as many deals as you can count because we do not deal in just capital market transactions, we do small advisory businesses, we help to build private capital raising, we restructure businesses. So the mandates vary and they are quite numerous.

Despite the fact that your firm does not have any affiliation with any bank in the country, you are still among the top 10 players in the capital market, what can you attribute this to?

We see ourselves as financial inter-mediator generally and what that means is that we stand between those who need capital and those who have capital. So you may not necessarily need a bank affiliate to do that because what you then do is to ensure that those who need capital are properly linked to those who got the capital to invest. Now in being a financial inter-mediator the key driver is your ability to structure the intending deals to make them meet potential investors, so for Meristem I will say that the key success factor is the skills that we bring to bear and the kind of information that we harness in discharging our functions.

Why do companies fail? Basically, why do companies restructure?

Well, I will say that the reasons companies experience failure are myriad, it could vary from company to company. Sometimes it The head of Corporate Financial Advisory Business unit of Meristem Securities Limited, Adejumoke Awolumate, in this interview with Bala Augie, explains why companies undertake corporate restructuring and the reasons behind their failures. Adejumoke Awolumate Wednesday 09 November 2016 C002D5556 BUSINESS DAY 15 COMPANIES & MARKETS is a single most prominent factor and sometimes it is a mixture of various factors. For instance, a lot of companies are experiencing distress right now because of the economic situation that could actually give rights to failure of such businesses if certain proactive steps are not taken to reinvent the company to meet market demands. Some companies fail because there is improved technology, maybe there is a disrupt to technology in the market and they are unable to rise up to the new technological demand– some businesses collapse when their business proposition is no longer as relevant as it used to be and then some companies fail just because there is a new company in the market that has better value proposition and a very aggressive market penetration strategy. In such cases, the stronger firm then pushes them to the periphery and they are unable to withstand that competition, and some fail because there are regulatory pronouncements that have adverse effect on the businesses. Some fail simply because they cannot manage their cash flow situation, so they need more capital injection and if they cannot, they go into comatose because capital is like blood, if you cannot get capital into a company when it badly needs it, such company will struggle and before you know it that company might actually fail. So there are various reasons why companies can experience distress that could eventually lead to failure.

What do you suggest banks do to cope with cash flow problems?

That is like a whole syllabus on its own. Different banks again have different issues why they are struggling. Some are struggling because the loan granted in the first place either went through bad credits processes or those loans witness some industry issues like the oil and gas loans that has endangered because of what is happening whether globally or locally in that industry. It makes customers’ ability to meet up with their loan obligations quite difficult and of course the regulators are not going to say okay because this sector has a challenge then the bank do not have to make provisions, the provisioning will be there. What I am saying in essence is that banks will always have that challenge when there are issues of economic distress or when there are certain industry challenges or when their loan approval processes are not as thorough as they should have been. In such cases where loans are not well structured to suit the client, the client begins to have challenges in meeting up with obligations.

How can companies in Nigeria undertake corporate restructuring?

I think the first thing is to diagnose if there is a need for restructuring in an organisation. There are certain indicators that can point to this in a company. It could be in their day-to-day activities or in their books. These begin to show like when you have symptoms of a particular ailment; if you are able to diagnose properly, then you can say what the constituting factor is and what you need to do to rectify it. The best approach is that when there are challenges that require restructuring it is best you work with the professionals to do the restructuring. Let me also point out that restructuring is not only necessary when a company is challenged, restructuring can also be needed when a company is trying to expand, or move to new frontiers or when it is trying to do new things or grow its business. When a company is making such strategic moves, then its existence is remodelled and positioned to meet that objective. There are also times when the current structure does not project the value that a business wants to project and in order to take advantage of all the values that is inherent in the business, it may take restructuring such that you decide to make the business more visible in the environment. There are different reasons a company would want to restructure but it boils down to the type of restructuring.

There is a slowdown in mergers and acquisitions activities in the past year or two now, why?

Well, if you look at the history of mergers and acquisitions in Nigeria you will see that most of the time when you see an upsurge – possibly there is a regulatory pronouncement- for instance when it happened in the banking sector it was actually the increased minimum share capital that forced the then banks to look at the possibilities of coming together so that they can form a merger. In the insurance sector, we have also seen some of these amongst capital markets operators. Perhaps what you are seeing as a law is the fact that such regulatory pronouncement are not happening currently. Having said that, this does not mean that M&As are not happening even amongst companies that are below the radar. Companies are constantly looking at ways to expand their business, grow their business and then look at possible acquisition that they can either merge with or acquire, to be able to be in business.

Do you see more M&A deals next year?

Well, this is arguable but in the Nigerian economy I do not see as much M&As as we probably have seen in the global space for many reasons which may be outside the purview of this discussion but what you have seen before now is sometimes the promoters are more driven by their desire to retain their businesses and so the thought of either relinquishing that control to someone else in an M&A transaction or the thought of both companies involving and taking a new identity becomes something they find difficult. But the reality is that current environment suggests that for you to survive, you cannot remain as a small business, competition is getting harder, you are having foreign entrants that are changing the dynamics of many sectors and so for that reason, to survive, you will see situations when companies will begin to experience mergers and acquisitions. In this economic crunch, I see that M&A may be a survivor strategy to most businesses possibly to either backward integrate or forward integrate to overcome the challenges.

Recently there have been some kind of divestment in the oil sector especially in the downstream; do you see more divestment in the downstream sector?

Well, I think that is expected even though it is not like a caution for those that divested as you will find out that the economy’s direction may be one of the reasons why those divestments have taken place and I would dare say that – especially in the oil and gas sector given the regulatory pronouncement, the direction of the industry and the way local participants are more favoured, we may likely see that. Again, the challenges the IOC have witnessed and the direction of the economy plus the direction of the global oil market may be one of the things that are responsible. For me, if you were to try and analyse some of the reasons why some of these divestments are taking place you will find a little bit of local regulations, a little bit of global happenings being responsible and given the direction that the industry itself is heading, we will see more of such M&As.

How are players like you surviving despite the bad state of the market and the economy as a whole?

Well, I think it is basically being innovative. What we have tried to do is to be abreast of current realities and adjust in our value proposition to our clients whether internally- in the way we are structured. Also, at the end of the day, you want to be able to reengineer your core structure so that you are better adapted to meet the recession. You also want to make sure that your value proposition to your clients helps them come out of recession as well. So, generally speaking as advisers you want to be very innovative, you want to be very creative, you want to make sure whatever you are proposing to clients will be adapted to the environment they find themselves. We have been doing this successfully and our clients are happy with us.