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A RESEARCH OF THE ROLE OF MERGERS AND ACQUISITIONS AS AN AID TO ORGANIZATIONAL GROWTH

Abstract

Secondary data were collected from the firms for ten years period, 2007- 2016. Bank size, gross earnings and turnover were proxies for mergers and acquisitions. Profit after Tax was the proxy for the growth. Data were analyzed using multiple regression analysis. Results indicate that mergers and acquisitions has positive and significant effect on banks’ growth. The study recommends that Mergers and Acquisition should not be done out of desperation or necessity as was the case during the consolidation period but should be properly evaluated and carried out to ensure its success. The pros and cons should be weighed and it should be determined if that is the best option for the organization. Banks should be innovative in the development and marketing of their products in order to increase their market share and performance and also enhance the competitiveness of the banking industry. A strategically integrated acquisition programme should be put in place to ensure a successful merger/acquisition.

Keywords: Mergers, Acquisitions, Growth Strategy, Bank Size, Profit after Tax

1.1 Introduction

The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. The economies of all market-oriented nations depend on the efficient operation of complex and delicately balance systems of money and credit. Banks are an indispensable element in these systems. They provide the bulk of the money supply as well as the primary means of facilitating the flow of credit. Consequently, it is submitted that the economic wellbeing of a nation is a function of advancement and development of her banking industry (Obandan, 2010).

The financial deregulation in Nigerian that started in 1987 and the associated financial innovations generated an unprecedented degree of competition in the banking industry. The deregulation initially pivoted powerful incentives for the expansion of both size and the number of banking and non-banking institutions providing financial services led to increased competition amongst various banking institutions, and between banks and non-banking financial intermediaries.

As given in the address of Prof. Charles Soludo, Former CBN Governor in 2004, the economic adjustment in Nigeria had focused on structural and institutional reforms, which include the following (Soludo , 2005): Strengthened the institutional framework for the conduct of monetary policy, Bank recapitalization/consolidation, To possibly eliminate or reduce government ownership of any bank (to no more than 10 per cent), Improved transparency and corporate governance, Zero tolerance to misreporting and data rendition, Anti money laundering regulations, Implementation of based 11 principles and risk based supervision, Payments system reforms for efficiency-especially e-payment, Reforming the exchange rate management system (adoption of the wholesale), Restructuring Nigeria security Printing and Minting Plc.

Going by the main focus of the reform, bank recapitalization and consolidation stands out. The main method by which this aspect was achieved, was by directing individual bank to raise their capital base to a minimum of N25 billion or in alternative merge with other banks. This was achieved with the aid of mergers and acquisition. A merger refers to the combination of two or more organizations into one larger organization. Such actions are commonly voluntary and often result in a new organizational name (often combining the names of the original organizations). An acquisition, on the other hand, is the purchase of one organization by another.

Such actions can be hostile or friendly and the acquirer maintains control over the acquired firm. Mergers and acquisitions differ from a consolidation, which id a business combination where two or more companies join to form an entirely new company. All of the combining companies are dissolved and only one new entity continues to operate Okonkwo(2011). Gaughan(2007) also defines merger as ‘ a combination of two or more corporations in which only one corporation survives’ while section 590 of the Nigerian Companies and Allied Matters Act 1990 defines it as “any amalgamation of the undertaking or any part of the undertaking of one or more companies and one or more bodies corporate”.

1.2 Statement of the Problem

 The world is in a state of flux, being influenced by the prices of globalization and technological changes and as a consequence firms are facing intense competition. To face the challenges and explore the opportunities, firms are going for inorganic growth through the use of merger and acquisitions.

M&A are arguably the most popular strategy among firms who seek to establish competitiveness over the rivals. There are various reasons firms going into merger and acquisitions, the main corporate objectives is to gain greater market power, gain access to innovative capabilities, maximize efficiency, synergy effects etc.

Muya (2006) carried out a survey of experiences of merger and found out that merger do not add significant value to merging firms Straub (2007) carried out a confirmatory research and found that the merger and acquisition play significant role in merging firms. Owing to the afore-mentioned mixed and inconclusive results, this study seeks to establish the effects of merger and acquisition as a growth strategy in Business  organization with reference to Nigerian Banking institutions.

1.3 Objectives of the Study

The broad objective of this study is to appraise the concept of mergers and acquisition as a growth strategy in business organization focusing on the Nigerian banking sector. The specific objectives include the following:

1. To ascertain the effect of Bank Size on the profit after tax of the Nigerian banking sector.

2. To determine the effect of gross earnings on the profit after tax of the Nigerian banking sector.

3. To examine the effect of turnover on the profit after tax of the Nigerian banking sector.

1.4 Research Questions

The following research questions are formulated for the purpose of this study:

1. What is the effect of Bank Size on the profit after tax of the Nigerian banking sector?

2. What are the effects of gross earnings on the profit after tax of the Nigerian banking sector?

3. What is the effect of turnover on the profit after tax of the Nigerian banking sector?

1.5 Research Hypotheses

The following hypotheses are formulated for the purpose of this research project:

1. Bank Size does not have a significant effect on the profit after tax of the Nigerian banking sector.

2. Gross earnings has a significant effect on the profit after tax of the Nigerian banking sector.

3. Turnover does not have a significant effect on the profit after tax of the Nigerian banking sector.

REVIEW OF RELATED LITERATURE

2.1.1 Mergers

According to Anthony (2008); a merger refers to the combination of two or more organizations into one larger organization. Such actions are commonly voluntary and often result in a new organization name (often combing the names of the original organizations) Umar (2009), a Merger is a transaction involving two or more companies in which shares are exchanged but in which only on company survives. Okpanachi (2011); A merger entails the coming together of two or more firms to become one big firm. Thus, one can conveniently refer to a merger as the mixing of entities resources for growth and renovation.

More over according to the CAMA (1990) states that merger means any amalgamation of the undertakings or any part undertaking of two or more companies or bodies corporate.According to Lafferty and Ubesie (2010);

Merger in its broadest conception means the combination of two or more companies into one. Also in its narrower sense, merger is a formation of entirely new company to acquire the separate concerns necessitating the winding up of the latter company. Depamphilis (2011); is the combination of two or more firms in which all but one legally ceases to exists, and the combined organization continues under the original name of the surviving firms. Umoren (2007) defines a merger as an arrangement by which all the assets and resources of two or more companies and shareholders of the two companies are brought together under the control of one company which is owned jointly by the stakeholders of the original companies and shareholders of the two companies now become shareholders of the surviving company.

2.1.2 Acquisitions

According to Anthony (2008); acquisition is the purchase of one organization by another. Such actions can be hostile or friendly and the acquire maintains control over the acquired firm. Umar (2009) acquisition is the purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring company. Okpanachi (2011) defines acquisition as the taking over or purchase of small firm by a big firm, both of which are pursuing similar motives. Pandey (2005); defines acquisition as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in acquisition two or more companies may remain separate legal entities but the control of companies resides in one place.

2.1.3 Growth Strategy as it Relates to Mergers and Acquisitions

Growth Strategy is aimed at winning larger market share, even at the expense of short term earnings through diversification, product development, market penetration and market development.

a) Market Penetration: One growth strategy in business where a small company decides to market existing products within the same market it has been using. The only way to grow using existing products and markets is to increase market share.

b) Market Expansion: Often called market development, entails selling current products in a new market. Several reasons why a company may consider a market expansion strategy. First, the competition maybe such that there is no room for growth with the current market, if a business does not find new markets for its product; if cannot increase sales or profits. A small company may also use a market expansion strategy if it finds new uses for its product. For instance, a small soap distributor that sells to retail ones may discover that factory workers also use its product.

c) Product Expansion: A small company may also expand its product line or add new features to increase its sales and profits. When small company’s employ a product expansion strategy, also known as product development, they continue selling within the existing market. A product expansion growth strategy often works well when technology starts to change. A small company may also be forced to add new products as older ones become outmoded.

d) Diversifications: this is where a small company will sell out products to new markets. This type of growth strategy can be very risky, marketing research is essential because a company will need to determine if consumers in the new market will potentially like the new products.

2.1.4 International Financial Reporting Standard 3 Business Combination

Onyekwelu (2017) International Financial Reporting Standard (IFRS 3) tentatively specified the financial reporting by an entity when it undertakes a business combination; it specifies that all business combination should be accounted for by applying ACQUISITION METHOD. Under this standard the pooling of interest, also known as the uniting of interest method of acquisition is no longer allowed. The acquisition method prescribes nthat the acquirer should recognize the acquire identifiable assets and liabilities at their fair values at the acquisition date. IFRS 3 also specifies that non-controlling interest in an acquire is measured either at value or at the non-controlling interests proportionate share of the acquire net identifiable assets. It specified that any future economic benefits that arise from assets that are not capable of being individual identified and separately recognized as goodwill.

IFRS 3 has it as its objective to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statement about a business combination and its effects. To accomplish this objective, the standard established basic principles and requirements to guide the acquirer on how to:

Recognize and measure the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquire. How to measure the goodwill or a gain from bargain purchase that may result from a business combination. Determine what information to disclose to enable the users of financial statements to evaluate the nature and financial effects of the business combination.

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