Abstract
This research takes a look at the adoption of merger and acquisition as a growth strategy in Nigerian organizations. There is no gainsaying the fact that many companies have been having financial problems due to mismanagement and economic meltdown. In order to save such companies from going into liquidation, merger and acquisition can be used to revive such companies if properly adopted. Even though merger and acquisition are always referred to as the same thing, they have some differences. A merger happens when two companies that have something in common such as the same line of production agree to go forward as a single new company rather than remain separately owned and operated. Acquisition on the other hand occurs when one company takes over another and clearly establishes itself as the new owner. This research work highlighted the benefits involved in the adoption of merger and acquisition. This work used two merger and acquisitions that occurred in the1980’s and two merger and acquisitions that occurred in the2000’s to analyze how merger and acquisition can be used to increase the profit of an organization. The organizations adopted for this work are the Nigerian Bottling Company, John Holt Plc, United Bank for Africa and Diamond bank.
CHAPTER ONE INTRODUCTION
1.1 CONCEPTUAL FRAMEWORK
The conceptual framework of this study falls within the business policy/strategy management theory. Business policy is the active process of guiding the course of a firm towards its objectives. Strategic management is the increasing responsibility of managers to respond to changes in the business environment through
. Strategic planning
. Capability planning
. Real time response to issue by management
. Management strategic change
The focus of business policy/strategic management is how to formulate strategies to respond to environmental changes.
Mergers and acquisition are aspects of strategy formulation. This study is investigating how merger and acquisition can be used as aspects of growth strategies.
1.2 BACKGROUND OF STUDY
Business combinations which may take forms of mergers, acquisitions, amalgamation and take-overs are important features of corporate structural changes. They have played an important role in
the external growth of a number of leading companies the world over. In Nigeria, mergers and acquisitions were not so common, until recently due to the economic melt down. The present economic climate in the country which is characterized by shortage of foreign exchange for the importation of goods, low exchange rate of the Naira, the restrictive credit policies coupled with the agenda of privatization and globalization worldwide have increased business risks and pose serious threats to their long term survival. As a result, previously autonomous businesses have recently, since the year
2000, been taking advantage of mergers and acquisitions, particularly in the oil and gas, textile, insurance, banking and conglomerates sectors of the economy to form larger concerns needed to reduce their risks and guarantee better chances of survival. At this instant let’s look at the definition of merge and acquisition. The term merger and acquisition according to (Belverd,
1999; 89)1refers to the aspect of corporate strategy, corporate
finance and management dealing with the buying, selling and combining of different companies that can aid, finance or help a growing company in a given industry to grow rapidly without having to create another business entity. Even though they are always referred to as the same thing, they have some differences. The term merger happens when two firms, often of about the same size agree
to go forward as a single new company rather than remain separately owned and operated. A merger contemplates a transfer of properties and liabilities of one or more companies to another, such transfer does not include rights and obligations, which are not transferable such as contracts of personal service. Thus, one or more companies may merge with an existing company through absorption or they may merge to form a new company through consolidation.
While acquisition is when one company takes over another and clearly establishes itself as the new owner. To explain further it is said to be an act of acquiring effective control by one company over assets or ownership and management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entity, but there may be change in control of the companies. In this regard, acquisition connotes a take-over, that is, the acquisition of control over the target company. And, in business and commercial terms, the expression ‘acquisition’ is properly used interchangeably with the term ‘take-over’ as distinct from a merger.
The adoption of merger and acquisition offers many benefits to the companies which includes increased value generation, increase in cost generation and increase in market share. Another
reason for this is the belief that synergies exist, allowing the companies to work more efficiently together than either would separately. Such synergies may result from the firms combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise and raise larger amounts of capital.
Through the adoption of merger and acquisition, company executives who suffered a lot while attempting to bring up sagging turnover figures are now able to solve some of the problems which were initial thought to be impossible. As a result of the above mentioned reason and the struggle by companies to survive the economic melt down, merger and acquisition are fast gaining prominence.
1.3 STATEMENT OF THE PROBLEM
As mentioned earlier, merger and acquisition can be adopted when an organization can no longer meet up with it’s financial responsibilities due to mismanagement or economic crisis or is in need of expanding its operative area. Dwindling companies that would have gone into extinction, can through the adoption of the strategy of merger and acquisition remain in operation and be successful.
However most people have argued that many mergers and acquisitions often lead to disappointing results as profitability of the company is often reduced.
It is therefore the intention of this study to investigate how some companies that adopted the strategy of merger and acquisition in the past in Nigeria has fared after the adoption. These findings will help in analyzing the potential benefits companies can get from the adoption of mergers and acquisition and also erase the negative doubts surrounding the adoption of merger and acquisition as a growth strategy in the Nigerian economy.
1.4 PURPOSE OF STUDY
The major purpose of this study is to find out the effect of merger and acquisition on the growth of selected Nigerian companies involved in the adoption of this strategy. The research will be focused on the following:
To find out whether the adoption of merger and acquisition has contributed to the growth and survival of the firms, drawing inference from their pre and post merger periods.
To find out whether the strategy offered the organizations other benefits apart from profit.
To find out if the organizations have encountered any problem due to the adoption of merger and acquisition.
To find out if the adoption of merger and acquisition has helped the management to actualize their objectives in the deal.
1.5 RESEARCH QUESTIONS
In order to achieve the objective of this study, the following research questions will be adopted:
1. Does merger and acquisition as a business strategy contribute to the growth and survival of a firm?
2. Is merger and acquisition indeed an effective and efficient tool for solving business liquidation problems?
3. To what extent will merger and acquisition affect the profitability and liquidity position of organizations adopting it?
4. Does merger and acquisition help to achieve the desired goals and objectives of management in the deal?
5. Did the mergers and acquisitions become a financial success?
1.6 HYPOTHESIS
The following hypothesis will be tested for verification
1. Mergers and acquisitions improves profit
2. Mergers and acquisition improves synergistic benefits
3. Mergers and acquisition improves structural growth and expansion.
1.7 SIGNIFICANCE OF STUDY
With the increase in the incidence of liquidation, economic meltdown and bankruptcy of companies, there is need for the examination of the effect of merger and acquisition on the performance of Nigerian organizations.
It is believed that with the study of the companies that are involved in the use of the strategy, one would be able to assess the possibility of the strategy being widely adopted in Nigerian business environment to prevent business failures, bankruptcy and survival of the economic meltdown.
1.8 LIMITATIONS OF STUDY
Some of the problems that were encountered during the period of this research work are:
Problems of data availability which required probing into financial record of companies which is a sensitive area. Problems in distributing the questionnaire and getting response to them within the time frame.
Lack of adequate time for the research and lack of resources.
1.9 DEFINITION OF TERMS
Mergers: According to (Alan, 1989; 923)2 merger is the combination or fusion of two or more formally independent and existing business entities into one merged corporate entity. This implies combining firms to now come under one management with a common ownership.
Acquisition: In their words (Ham and Marshall, 1999; 688)3
defined acquisition as the transfer of either whole or partial control of the assets, liabilities, employees, management, technical relationships and expertise from one firm to another. In most cases larger firms acquiring smaller ones usually result in the smaller ones relinquishing their controlling interest to become subsidiary or division of the larger firms.
Business growth: (Niels and Robert, 1996; 264)4 defined it as an
increase in size and activities of a firm or company. Corporate growth can be manifested in three key areas: increase in sales, profits and assets. However, growth can be internal or external. A firm experiences an internally activated growth when the sales and profit of the company increases as a result of expansion in its
production or operation. External growth occurs when a firm increases its activities in terms of sales, profit and assets by taking over the production of another firm.
Investment decision: According to (Niels and Robert, 1996; 268)5
this refers to the capital budgeting decision of the firms. This entails the capital resource planning. It is the process of evaluating and selecting long term assets to meet strategies.
Growth strategy: (James and George, 1988; 49)6 in their words
highlighted that growth strategy includes projected plans of action policies and financial decisions geared towards achieving the financial objectives of a firm which includes maximizing the value of the firm.
This material content is developed to serve as a GUIDE for students to conduct academic research
THE USE OF MERGER AND ACQUISITION AS A GROWTH STRATEGY IN NIGERIAN ORGANIZATIONS
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