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THE FFECT OF MERGER AND ACQUISITION ON RETURN ON INVESTMENT
- BACKGROUND OF THE STUDY
The framework of this study falls within the business policy and strategic management theory. Business policy is the active process of guiding the course of a firm towards its obligations, while strategic management is the increasing responsibility of managers to respond to changes in the business environment through:
- Strategic planning
- Real time response to issue by management
- Management strategic change
The focus of business policy and strategic management is how to formulate strategies to respond to changes. Mergers and acquisitions are aspects of strategy formulation. Business combinations which may take forms of mergers, acquisitions or otherwise takeover are important features of corporate planning and 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 down turn. The current 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 credit policy and globalization have increased business risks and this poses serious threats to their long term survival. As a result, previously autonomous business organization has recently been taking advantage of mergers and acquisitions, particularly in the banking and conglomerate sector of
the economy to form larger concerns needed to reduce their risks and guarantee better chances of survival
According to Belverd (1999), Merger is the aspect of corporate strategy, corporate finance and management dealing with the 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. One or more companies may merge with an existing company through consolidation. The new single company will inherit the assets and liabilities of the separately existing companies which are then wound up. Merger is consummated by exchange of shares among the merging company’s shareholders
Acquisition or takeover is the purchase of controlling interest in one company by another company such that the acquired company becomes a subsidiary or division of the acquirer (Nwude, 2003). A company is said to acquire a controlling interest in another company if the acquiring company (the acquirer) purchased and holds not less than 51% of the target company’s (the acquiree) issued and fully paid-up ordinary share capital. At this level of acquisition the acquirer company becomes the holding company while the acquiree company becomes the subsidiary of the acquirer (Nwude ,2003).
The adoption of merger and acquisition offers many benefits to the companies which includes management expertise, risk diversification, stock exchange quotation, increase market share, desire for growth, technological drive, profit. Another reason for merger and acquisition 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, share managerial expertise and raise larger capital.
In the words of Wole Adetunji, acting Director- General, Securities and Exchange Commission (SEC) at a seminar in June, 1997: “Mergers and Acquisitions are becoming common features of Nigeria’s Corporate landscape. Increased awareness and development within the economy have made such strategies very relevant in contemporary Nigeria. However, this study is investigating how merger and acquisition can be used as aspects of growth strategies.
1.2 STATEMENT OF THE PROBLEM
Merger and Acquisition can be adopted when an organization can no longer meet up with its financial responsibilities due to mismanagement or economic crisis or is in need of expanding its operative area. Companies that would have gone down or out of business, can through the adoption of the strategy of merger and acquisition remain in operation and be successful.
It is however, the intention of this study to investigate how some companies that adopted the strategy of merger and acquisition in the past in Nigeria have 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 business organization.
1.3 OBJECTIVES OF THE STUDY
The Objectives of the study are to:
- Find out the effect of merger and acquisition on the growth of selected Nigerian companies involved in the adoption this strategy.
- 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.
- Find out if the adoption of merger and acquisition has helped the management to actualize their objectives in the deal.
1.4 RESEARCH QUESTIONS
i. Do mergers and acquisitions have effect on the profit growth of the companies that adopted the strategy?
ii. Do mergers and acquisitions as a business strategy contribute to the growth and survival of a firm?
iii Do mergers and acquisitions help to achieve the desired goals and objectives of management in the deal?
1.5 RESEARCH HYPOTHESIS
- Mergers and acquisitions do not have significant effect on the profit growth of the companies that adopted it.
- Mergers and acquisitions do not contribute significantly to the growth and survival of a firm.
- Mergers and acquisitions do not help to achieve the management desired goals and objectives.
1.6 LIMITATIONS OF THE STUDY
In the process of carrying out this research work, some problems were encountered. The problems include the following:
- Time Constraints: The limited time involved for carrying out the research and meeting up with the approved academic calendar for the completion of the programme was not enough.
- Financial Constraints: Due to limited resources at the disposal of the researcher, he encountered financial constraints which militate against possible access to all the required information for the study.
- Attitude of Respondents: The evasive attitude of the respondents affected the research work. Some of the respondents were unwilling to co-operate with the researcher.
1.7 SIGNIFICANCE OF THE 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 also 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 adopted in Nigerian business environment to prevent business failures, and survival of the economic meltdown.
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