The Use Of Merger And Acquisition As A Growth And Survival Strategy In A Depressed Economy

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Abstract

The Nigeria business climate has been adjustment by expect as one of the hostile, turbulent and volatile and vet challenging. It stands to reason, therefore, that for tangible success or survival (as the case may be ) to be recorded the active player must know his onion, be acquainted with the train of the Nigeria economy and be able to interpret accurately the hand writing of the inter playing force in the economy, some of which have taken renown financial analysts to their wits end. The volatility and vulnerability of the national economy, complete with fragment changes in government policies and legist ration have under accurate fore cast as a vital manegment tool an economic mizage.

Unfortunately through as the situation may seen it offers the “wise group’’ both corporate and individual to prove its mettle when chips are down.

The concept of merger and acqnisituation, which is the theme of the study is contemporary and throw up of many unfolding challenges of Nigeria depressed economy as the wise group of business companies scheme not only to stay afloat but also to flourish.

Chapter One

1.0 Introduction

1.1 Background of the Study

Growth is necessary to determine the performance and continual of any business organization. Without growth, a business can hardly attract good management to itself. The use of merger and acquisition as a growth and survival strategy in a depressed economy like ours appears to be on the increase in recent times. This is not surprising, considering the large number of business failures and foul-ups as result of advise micro and macro-economic climate. In the face of such hostile business climate , however, some business organization that belongs to the “wise group’’ started thinking of how to pull their resource together by the way of merger and acquisition as a survival cum growth strategy. Business merger and acquisition has played ad important role in the growth and survival of many firms in Europe, USA, and Nigeria. But before venturing into such a gargantuan adventure, financial managers should view it as organization or employers. Mergers and acquisitions (M&As) are a popular means of growth for companies. In 2005 alone, 29,585 deals were announced worldwide, accounting for an aggregate deal value of USD 1 trillion in the USA and USD 883 billion in Europe.1 There are various reasons why firms may choose to grow through M&A instead of expanding internally (e.g., Trautwein, 1990; Weston et al., 2001; Gaughan, 2002). Acquiring a target in a line of business in which the bidding company wants to enlarge is often a faster way to grow than via internal expansion because the target is an organization already in place, with its own production capacity, distribution network, and clientele. This also reduces the risk of investing for the growing company. Besides, growing through M&A may be a cheaper alternative than internal expansion, in particular when the replacement cost of assets is higher than the market value of target assets. Finally, and in contrast to organic growth, M&As can be (partly) paid for with stock. This may be interesting for firms that do not have enough cash reserves and/or have fully used their debt capacity. The finance literature to date has concluded that especially during booming stock markets, bidding companies tend to pay for M&As with stock (e.g., Martin, 1996; Faccio and Masulis, 2005). Yet, as M&As and internal growth are not mutually exclusive investment decisions, firms may consider them as complements rather than being substitutes.Consequently, firm size may spuriously capture the impact of industry concentration whereas the market-to-book ratio may reflect the ease of bidding companies to compensate target shareholders with stock in case of booming stock markets. In contrast, this paper pays careful attention to industry characteristics, such as the potential for economies of scale, industry concentration, sales growth and deregulation, and aggregate market variables, such as the historical volume of M&As, stock prices, GDP growth and the yield spread. Next, as M&As and internal growth are not mutually exclusive investment decisions, this paper analyzes their interrelationship. On the one hand, a growing company could choose to grow through M&As in addition to internal expansion. Firms with many investment opportunities and easy access to financial resources may engage in both internal and external growth in order to take full advantage of their competitive advantage(s) in the fastest possible way. Consistent with this idea, Hay and Liu (1998) argue that a firm that is seeking to grow aggressively will often viewacquisitions and internal growth as complementary strategies. Alternatively, external and internal growth could be substitutes if companies are financially constrained, for example. Finally, companies may specialize in either internal or external growth and these growth strategies, as a result, may be unrelated. Empirical research on the relation between external and organic growth is limited and has found conflicting results. Hay and Liu (1998), for example, examine M&As in the UK during the period 1971–1989 and conclude that M&As and internal expansion are complements. By contrast, Dickerson et al. (2003), using data on UK quoted firms in manufacturing during 1948–1970 and 1975–1990, find that the relation between internal growth and the likelihood of engaging in M&As is significantly negative, indicating that these growth strategies are substitutes.

1.2 Statement of Problem

In the high of the confusion and tumults of the modern business environment globally, some firms have flooded up while other only managed to keep afloat. It is but interesting to observe that in the midst of such unfavorable business environment, some enterprises do not merely survive but post super profit. The logical question is what factors could account for the divergent fortunes of some firm of identical size and status in the same industry and operating in the same economy?

While not pretending to have all the answers, I make bold to state, that business merger and acquisition has become one of the fashionable surviving strategy for many companies.

It is therefore, the intension of the study to investigate the effect merger and acquisition on the performance some selected companies in Nigeria.

Further more the study will also seek to establish any possible relationship as otherwise between profitability of a company or increase in its earning per share and its merger and or acquisition scheme.

At this junction, it may be pertinent to acknowledge the view of some expects that many business fusion and acquisition had often resulted in disappointment, as the profit level of the business organization took a nose dive. Should this be the organization wishing to diversity or expand its operation would be

1.3 Objectives of the Study

The broad objective of this study is to examine the use of mergers and acquisitions as a growth and survival strategy. However, the following specific objectives were raised;

Examine whether there is a difference between banks’ capital adequacy management before and post-merger.
Determine the difference in pre and post-merger return on performing loans of banks as a prerequisite for economic growth
Determine if there is a significant difference in banks’ return on asset pre-merger and post-merger.

1.4 Hypotheses of the Study

For the purpose of this study, the following null hypotheses were raised;

H0: There is no significant difference between Nigerian banks’ capital adequacy management before and after merger or acquisition
H1: There is a significant difference between Nigerian banks’ capital adequacy management before and after merger or acquisition
H0: There is no significant difference between banks pre and post-merger return on performing loans.
H2: There is a significant difference between banks pre and post-merger return on performing loans.
H0: There is no significant difference between banks pre and post-merger return on assets.
H3: There is a significant difference between banks pre and post-merger return on assets.

1.5 Research Questions

Based on the problems identified above, the following research questions were raised for the study;

Is there any significant difference between Nigerian banks’ capital adequacy before and after merger or acquisition?
Is there any significant difference between Nigerian banks’ return on performing loan before and after merger or acquisition?
Is there any significant difference between Nigerian banks’ return on assets before and after merger or acquisition?

1.6 Scope and Limitation of the Study

Numerous mergers and acquisitions of banks have taken place since the inception of banking in Nigeria in the year 1896. The most of the mergers and acquisition activities took place in the year 2004-2005 when the Federal Government of Nigeria through the Central Bank of Nigeria enforced a minimum capital base of ₦25 Billion on commercial banks operating in Nigeria. However, due to the distance in time, the mergers and acquisitions that occurred in that time will not be considered but latter M&A. For the purpose of this study, the acquisition and merger activities that occurred between the years 2011-2015 were reviewed.

Inadequate finance: As a student, financial difficulties limit the researcher from studying the activities of all banks and also limit the volume of data collection; e.g. the funds available will not be enough in transporting and facts findings.

Time constraint: There was no time to conduct an enormous research.

Inability to get access to some Microfinance banks to get more information about their records and some other useful information about the work also limit the research data collections.

Environmental constraint: The environment in which the research work was written restricted the researcher from going out and so the researcher was faced with the problems of how to reach out the field of research and coordinate activities as planned.

1.8 Definition of Terms

Mergers:

A merger is said to occur when two or more companies combine into one company.

There are two forms of merger; Merger through absorption is a combination of two or more companies into an existing company whereby only one company retains its identity and the rest loses theirs while merger through consolidation is a combination of two or more companies to form a new one. In this type of merger all companies are legally dissolved and a new entity is formed. In a consolidation, the acquired company transfers its assets, liabilities and shares to the new company.

Acquisition:

Acquisition may be defined as an act of acquiring effective control over asset or management of a company by another company without any combination of businesses or companies. It is also defined as the process of taking a controlling interest in a business (Dictionary of Finance and Banking).

Takeover:

A takeover can be said to be an acquisition. A takeover occurs when the acquiring firm takes over the control of the target firm. In some case it can be said to be an assumption of control of a corporation achieved by buying a majority of its shares (Encarta dictionary), a takeover can also be a conglomerate merger.

Corporate restructuring:

Corporate restructuring can also be termed business combination and it includes merger and acquisition (M&A), amalgamation, takeover, leveraged buyouts, capital reorganization, sale of business units and assets etc.

Return on asset:

Statistic calculated by dividing a company’s annual earnings by its total assets. It indicates how profitable a company is relative to its total assets (Encarta dictionary).

Return on equity:

The return on equity is net profit after tax divided by shareholders’ equity which is given by net worth. This is the net income of an organization expressed as a percentage of its equity capital, i.e. it indicates how well the firm has used the resource for owners (shareholders).

Recapitalization:

This is defined as the process of changing the balance of the debt (leverage) and equity financing of a company without changing the total amount of capital. Recapitalization is often required as part of reorganization of a company under bankruptcy legislation.

Consolidation:

Consolidation is a combination of two or more companies into a new company. In this form of merger, all companies are legally dissolved and a new entity is created. In a consolidation the acquired company transfers its assets, liabilities and shares to the new company for cash or exchange of shares.

1.9 Plan of the Study

This study comprise chapters one to five.

The chapter one is the introduction which entails the statement of problems, the objectives, the research questions as well as the hypotheses of the study amongst others. The second chapter is the relevant literature to the study.
The theoretical, empirical as well as the conceptual framework were examined in this chapter.
The third chapter, chapter three is the methodology in which the sample size and technique were highlighted. In this chapter, the method of data collection and analysis were indicated.
The second to the last chapter, chapter four is the data analysis, presentation and interpretation.
Lastly, chapter five comprise the summary, conclusion and recommendations of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to examine the effect of merger and acquisition on Nigerian banks.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of merger and acquisitions as a growth strategy in a depress economy.

5.2 Summary

Many companies find that the best way to get ahead is to expand ownership boundaries through merger and acquisition for others separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, merger creates synergies and economies of scale, expanding operations while reducing costs.

Investors can take comfort in the idea that a merger will deliver enhanced market power. However, it is worthy of mention that the underlining challenges before consolidation are still abound .The c challenges include poor portfolio risk management, poor corporate governance practices, avarice, over reliance on public sector funds, inadequate infrastructure, weak control mechanism, weak credit assessment skills, lack of professional acumen, fraud, corruption and favouritism.

5.4 Recommendations

It is recommended that the government and regulatory authorities should monitor the activities and encourage a free market economy of merging banks to be able to extend their operations to the highest level in the economy.

The government should stands as checks and balances to non-compliance of their laid down regulations. Secondly, The Pronouncement of merger and acquisition option recently by the regulatory organs such as Central Banks of Nigeria (CBN), Securities Exchange Commission (SEC) and Nigeria Deposit Insurance Corporation (NDIC) is highly appreciated for improving the profitability of Nigerian banks. Merger and Acquisition make the bank to have the ability to muscle with other international bank and withstand the rigors of doing business on the international market. Thirdly, it also recommended that Merger and Acquisition should be given a pride place in Nigeria economy as it remains one of viable tools for economic growth and sustainable development.

Merger and Acquisition assist to look how debt financing will be used and their level of competitiveness between the required banks. The viability of the banks is much important for growth of the national economy and sustainable development. Lastly, it was revealed in this study that Merger and Acquisition cannot pose any negative implications in the banking sector. Merger and Acquisition ensure sanity and stability in the sector and the economy at large. The implementation of merger and acquisition really improve management efficiency in banking industry

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