MERGERS & ACQUISITION AND NATIONAL DEVELOPMENT IN NIGERIA
Covenant University, Ota, Nigeria
The world is in a state of flux, being influenced by the forces of globalization and fast technological changes and as a consequence firms are facing intensive competition (Ahmed and Ahmed, 2014). To face the challenges, gain substantial profits and remain in business, firms have two options; internal expansion and external expansion. Internal expansion is possible by enhancing the internal sources of operation such as reinvestments of incomes, building of new plants, updating technology, improving work efficiency of human resource, alteration in the course of operation, introducing the new line of products or services that can be through capital restructuring or business restructuring (Owomoyela, 2012). Similarly, external expansion is possible in the form of mergers, acquisitions, takeovers and amalgamations. This expansion is done through absorption or consolidation. The new strategy of external expansion supports the globalization of business.
Merger is occurs when two or more firms to come together and function as a single firm for achieving strategic objectives like resource utilization, economies of scale achievement, cost minimization, resource sharing or any other financial advantage for both the firms (Badreldin and Kalhoefer, 2009). A merger is the combination of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock where one company or both loose entity.
The term “acquisition” is used to refer to any takeover by one company of the share capital of another in exchange of cash, ordinary shares, or loan stock Halpern (2003). The acquiring firm retains its name and identity, and it acquires all of the assets and liabilities of the acquired firm leading to none existence of the acquired firm. Thereby, mergers and acquisitions (M&A) are being increasingly used the world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale among other. The motives behind mergers and acquisitions are economy of scale, economy of scope, increase market share and revenues, taxation, synergy, geographical and other diversification.
On the other hand, national development is a process of reconstruction and development in various dimensions of a nation and development of individuals. It includes full-growth and expansion of industries, agriculture, education, social, religious and cultural institutions (Todaro, 2006). Moreover, national development can be best defined as the all-round and balanced development of different aspects and facets of the nation viz. political, economic, social, cultural, scientific and material.
To the national economy, mergers and acquisitions as means of corporate restructuring bring about structural adjustment which enables vast economic resources to move more quickly to their highest valued use. In the process, substantial benefits and competitive environment have been created. Corporate restructuring through mergers and acquisitions could also lead to the speedy adoption and/or transfer of new technologies. Technological change is an economic good and is the driving force of long-term economic growth. Since mergers and acquisitions are instrumental to technological change, they serve as engines of growth in both developed and developing economies through increase in productivity and profitability.
1.1 Statement of the Problem
Merger activity is expected to be stimulated by financial gains that can arise from economies of scale, diversification, reduced duplicative costs and technological complementarities etc. But mergers may also be driven by incentives to enhance market power, which allows firms to exploit anti-competitive gains and benefits producers at the cost of consumers’ welfare.
Despite the numerous research work on the effect of merger and acquisitions on organization performance, productivity, organizational effectiveness (Muia ; Fidelis, 2010; Okpanachi, 2006; Akpan, 2007; Firth, 1997; Adebayo ; Olalekan, 2012; Conyon, Girma, Thompson ; Wright, 1999) none of the studies examined the contribution of mergers and acquisition on the economy as a whole in Nigeria.
Consequently an important question of concern that arises is, whether the growth of performance of companies after merger and accusations affects macroeconomic indicators positively or not? Therefore, there is a need to examine the impact of merger and acquisitions on economic development using macroeconomic variables. Thus, the focus of this paper is to investigate the effect of merger and acquisition on the National development in Nigeria.
1.2 Research Objectives
The main objective of the study is to investigate the effect of merger and acquisition on the National development in Nigeria. The specific objectives of the study are;
i. To examine the trends of merger and acquisition in Nigeria
ii. To determine the effect of merger and acquisition on national development in Nigeria.
2.0 LITERATURE REVIEW
2.1 Merger ; Acquisitions
The concept of mergers and acquisitions were viewed differently by different scholars. For instance, Ernest and Young (1994) defined mergers as the fusing of two or more companies whether voluntary or enforced. Alashi (2003) suggest that alliances are more flexible unions of which, two or more organization combined by treaty agreement, memorandum of understanding (MOU) for a specific period or purpose. A merger is also a unification of previously separate companies into a single corporation in order to achieve a synergistic effect (Oye, 2008).
To Anyanwu and Agwor (2015) mergers is a form of “strategic alliance” whereby two firms work together in pursuance of similar objectives. In the same vein, Ahmed and Ahmed (2014) described mergers as an amalgamation that involves the combining of two previously independent entities subsequently into a sole entity. This can be achieved through “Absorption or Consolidation”. Moreover, Companies and Allied Matters Act (CAMA) 2004, states that merger means any amalgamation of the undertakings or any part of undertaking or interest of two or more companies.
Conversely, an acquisition which is often used interchangeably can be referred to as “take –over”. Akinbuli and Kelilume (2013) defined an acquisition as a form of combination whereby one firm “takes over” the assets and liabilities of the other in return for a consideration. Thereby, acquisition is a situation where one company acquires successfully control of the asset and management of another. In acquisitions, the combining entities may retain their legal entities, but however, control is vested in one (Omoye ; Aniefor, 2016).
Mergers and acquisition transaction are often driven by regulatory economic and financial consideration. As in most business decision, one or all parties to the amalgamation can perceive value in the linkage of the business being combined or targeted. Furthermore, mergers and acquisition is the aspect of corporate strategy, corporate finance management dealing with the buying and selling, dividing and combining different companies and similar entities that can aid, finance or help an enterprise to grow rapidly in its sector or location of origin or a new location without creating a subsidiary (Olagunju ; Obademi, 2012).
2.1.1 Trend of Merger ; Acquisitions in Nigeria
Mergers and acquisitions are a global business terms used in achieving business growth and survival. The concept of mergers and acquisitions came into focus in Nigeria as a result of the country’s dampen economic fortunes brought about by the various austerity and restructuring programmes implemented by the government for the sake of good governance (Abdul and Ojenike, 2014). In addition to this was the global economic meltdown which has compelled individuals and corporate bodies to embark on various restructuring programmes and diversification operations as regards their businesses so as to ensure survival, growth and soundness of the economy (Walter and Uche, 2005).
The year 1982 was a landmark year in the history of mergers and acquisitions in Nigeria. There were mergers and acquisitions deals in the manufacturing, pharmaceutical, banking and oil industries. The First merger attempt was between United Nigeria Insurance Company Limited and United Life Insurance Company Limited, which was, however, not consummated. Between 1982 and 1988, the Stock Exchange Commission (SEC) supervised thirteen mergers –including the mergers of Lever Brothers Nigeria Limited and Lipton Nigeria Ltd; SCOA Nigeria Limited and Nigeria Automotive Components Ltd; Nigeria Company Ltd and Leventis Technical Ltd; Sterling Product Nigeria Plc and Smithkline Beecham Nigeria Plc; John Holt Ltd and John Holt Investment Ltd; Akintola Williams and Adetona Isichire private; United Insurance Company and United Nigeria Life Insurance Company; AG Leventis Company Nigeria and Leventis Stores Limited; Total Motors Plc and West Coast Fisheries; International Telecommunication (ITT) and Hannin Spinning Mill Limited; John Holt Ltd and Bauchi Bottling company Ltd; Nigeria breweries Plc (NB Plc), Schweppes International and Diamond Breweries Ltd; Nigeria Match Company Ltd, United Match Company and Star Match Company Ltd; John Holt Limited and Ogbemudi farms; AIICO Insurance and NFI Insurance Company. In 2002, there was a merger of two important petroleum companies: Agip Nigeria Plc and Unipetrol Plc to form Oando Plc (Fabian, 2011; Abdul and Ojenike, 2014)
The prospects of mergers and acquisitions in Nigeria have continued to evolve since then different legislation have been passed to regulate business combinations, including the Companies and Allied Matters Act of 1990 and the Investment and Securities Act of 2007, as well as some sector –specific Acts, such as the banking and other Financial Institution Act (BOFIA) of 1991, the Insurance Act of 2003 and Electric Power Sector Reform Act of 2005.
However, the most striking activities in mergers and acquisitions in Nigeria were undoubtedly the 2005 mergers that took place in the banking sector. The mergers were driven by the Central bank of Nigeria’s 2004 directive to all Nigerian banks to increase their shareholders’ fund to minimum of NGN25 Billion (Twenty –five billion Naira), from the previous minimum shareholders fund of NGN2 Billion (Two billion naira). The deadline for this increase was December 31, 2005. Few Nigerian banks had this view minimum capital base, as a result, several mergers and acquisitions emerged, with only 25 out of 89 banks surviving the conditions and operating after 2005. Some of the banks formed as a result are Unity Bank Plc, Fin Bank Plc, Sterling Bank Plc, Fidelity Bank Plc, IBTC Chartered Bank Plc, Skye Bank Plc, Bank PHB and the United Bank for Africa.
2.1.2 Types of Merger & Acquisitions
According to Udoidem and Acha (2012), mergers and acquisitions fall into three categories; the horizontal merger, vertical merger and conglomerate merger.
Horizontal merger: Horizontal mergers are mergers between two or more firms in the same industry. Companies in the same line of business often look for various strategies to remain on the competitive edge. Such companies explore strategic alliances, which would grow their business and keep them afloat. Such strategic alliances include horizontal mergers, which have become quite common in the banking industry, financial services sector, telecom industry and in the pharmaceutical industry as is the case of GlaxoSmithKline. In a horizontal merger, the acquisition of a competitor could increase market concentration and increase the likelihood of collusion. The elimination of head-to-head competition between two leading firms may result in unilateral anticompetitive effects.
Vertical merger: Vertical Mergers occur when firms that had been operating at different stages in the production and distribution of a product combine to form a single firm. That is, vertical mergers represent combinations between firms in which supplier or buyer relationships may exist. Such mergers will occur where a big manufacturing company may form a strategic alliance with the firms, which supplies its raw materials, or does its distribution, mainly driven by the desire to drive down costs, or ensure undisrupted supply of raw materials or supply chain. Vertical mergers are common in the manufacturing industry, given the whole relationship between raw materials, warehousing, manufacturing and distribution (Oye, 2008).
Conglomerate merger: In Conglomerate Mergers the merging firm belongs to different sectors, different types of business and unrelated business combinations. That is Conglomerate mergers occur among firms in different lines of business. Diversification of risk is the major motive behind conglomerate mergers (Geddes, 2006 cited in Udoidem and Acha, 2012). A merger between a bank and a telecom company would be seen as a conglomerate since these are two companies, in different industries, merging for some strategic benefits. Conglomerate mergers often result into big monopolies, which if not well regulate can kill competition and create huge companies which become economic powers in the world.
2.1.3 Reasons for Merger & Acquisitions
Many reasons have been identified for embarking on mergers and acquisitions. These include diversification, increase in the market share, acquisition of needed technology and synergy. Akinsulire (2002) gives the motivating factors for mergers and acquisitions as: Operating economies (purchasing and marketing), management acquisition, diversification, finance and production. Cherunnilam (2002) posits that the most important objective of mergers and acquisitions is to fill the growth gap i.e. the gap between the company’s sales potential and its current actual performance. Other reasons for mergers and acquisitions are to facilitate the raising of finance; to react to technological development; to react to developments in the market; to strengthen management and to achieve economies of scale.
Increase in market share is also one of the reasons for mergers and acquisitions. This increase in share of market is that of an existing market. In other words, the emerging (new) company would want to remain a market leader and also increase its market share. Akele (2004) asserts that the increased pace of mergers and acquisitions activity has been instrumental in effecting changes in the world economy and also that these changes have been in such areas as acceleration of technology, among other areas. To acquire modern technology, a company might decide to go for merger or acquisition as an external growth strategy.
Further, Akinsulire (2000) explained that a company may purchase or merger with another company if the latter has aggressive and competent management. This would mean the injection of fresh ideas for better projects and enhancement of shareholders’ wealth.
2.2 The Concept of Development and National Development
Development as a concept is a victim of definitional pluralism. It is a difficult word to define. However, attempts have been made by erudite scholars to conceptualize development. Some of these definitions will be explored for the purpose of this study. Gboyega (2003) captures development as an idea that embodies all attempts to improve the conditions of human existence in all ramifications. It implies improvement in material well-being of all citizens, not the most powerful and rich alone, in a sustainable way such that today’s consumption does not imperil the future, it also demands that poverty and inequality of access to the good things of life be removed or drastically reduced. It seeks to improve personal physical security and livelihoods and expansion of life chances.
Naomi (1995) believes that development is usually taken to involve not only economic growth, but also some notion of equitable distribution, provision of health care, education, housing and other essential services all with a view to improving the individual and collective quality of life (Naomi, 1995). Chrisman (1984) views development as a process of societal advancement, where improvement in the well-being of people are generated through strong partnerships between all sectors, corporate bodies and other groups in the society. It is reasonable to know that development is not only an economic exercise, but also involves both socio-economic and political issues and pervades all aspects of societal life.
National development, according to Longman dictionary of contemporary English, refers to a phenomenon that embraces a whole nation. National development therefore can be described as the overall development or a collective socio-economic, political as well as religious advancement of a country or nation. This is best achieved through development planning, which can be described as the country’s collection of strategies mapped out by the government.
2.2 Theoretical Framework: Industry shock theory
Based on the focus of the study, the theoretical framework considered applicable for this study is the Industry shock theory of Merger. Industry shock theory holds that M&A activities within an industry are not merely firm – specific phenomena but the result of the adaptation of industry structure to a changing economic environment or “industry shocks” such as changes in regulation, changes in input costs, increased foreign or domestic competition, or innovations in technology. Mitchell and Mulherin (1996) argue that corporate takeovers are the least costly means for an industry to restructure in response to the changes brought about by economic shocks but that post – takeover performance of firms should not necessarily improve, compared to a pre – shock benchmark.
Notably, the merger and acquisitions in the banking industry in Nigeria was due to the regulation in the industry. The capital base in banking industry changed from N2billion to N25billlion. Similarly, insurance industry had similar experience. Thus, the theory is applicable in this study as attention is on the effects of merger and acquisition at industry level and the economy as a whole.
2.3 Empirical Review
From the available literature reviewed by the researcher, studies on M&A and national development are still scanty. The available studies on the theme of the study were carried out by Jaroslav (2011) and Samridhi (2016). Jaroslav (2011) carried out a study on the analysis of merger and acquisition development in the Czech Republic in 2001 -2010. The result of the analysis proved a positive correlation between the developments of the economic environment and activities in the field of mergers and also changes in the development of ownership structure of transformed companies.
In the study carried out by Samridhi (2016) on the impact of mergers and acquisition on India’s economy. The findings revealed that merger and acquisitions is an important tool for company growth and economic growth at large.
In this study, explanatory research design was adopted. Explanatory research is a style of research in which the primary goal is to understand the nature or mechanisms of the relationship between the independent and dependent variable (Robson, 2002). The procedure for estimation adopted in this study is the Ordinary Least Square (OLS) single equation method. This was used to estimate the model under study. The estimation of the data was done using Statistical Packages for Social Sciences (SPSS) version 21. In the analysis the period covered from 2004 -2010 representing post –merger era.
3.1 Model Specification;
Based on the adopted inferential statistics (Simple Linear Regression), the model specification can take the following functional relationship mathematically as;
Y = f(x) ……………………………………………………………………………. (i)
Where; Y is the dependent variable used to captures national development
X is the independent variable used to capture the merger and acquisitions
Further specification of equation (i) gives the equation (ii) where the model is specified econometrically as;
Where; ND = National Development (Dependent variable)
MA = Merger ; Acquisition (Independent variable)
?0 = Constant term
?1, ?MA = Beta coefficient
= error term
3.2 A Priori Expectation
A “priori Expectation” refers to the sign and the size of the parameters of economic relationships in a study. Thereby, the a priori expectation of the relationship between the variables is POSITVE (+). The growth of the companies after merger should leads to an increase in the economic growth and national development.
3.3 Measurement of Variables
The research study consists of two variables, dependent variable and independent variable. The dependent variable is National development, while the independent variable is merger and acquisitions. Since the variables cannot be measured directly, their proxy is shown in Table 1;
Table 1 Measurement of Variables
Nature of Variable Variables Measurement Sources
Dependent Variable National Development Gross Domestic Products (GDP) CBN Statistical bulletin (various series)
Independent Variable Merger ; Acquisitions Total Asset of Banks After Adoption of Merger and Acquisition CBN Statistical bulletin (various series)
Source: Researcher’s Compilation, (2018)
4.0 DATA ANALYIS
The test of hypothesis in this research was tested at a 0.05 level of significance. P value was used to test for the significance of variables.
The decision rule: If the P –value (Probability value) less than the value of significance level (0.05); reject the Null Hypothesis (Ho). If otherwise, accept the Ho.
Ho: Merger and acquisition has no significant effect on National development in Nigeria.
H1: Merger and acquisition has significant effect on National development in Nigeria.
Table 2. Regression Output (Model Summary) Hypothesis
Parameters Value of the parameters
R Square .879
Adjusted R –square .855
F –Statistics 36.372
Durbin –Watson stat 1.615
F –Sign (P –value) .002b
– Beta Coefficient
Source: Adapted from Researcher’s Regression Output (Appendix IV)
a. Dependent Variable: GDP
b. Predictors: (Constant), Merger ; Acquisitions
Interpretation of Results
Table 2 shows the result of the regression analysis conducted to determine the extent to which merger ; acquisition impact on National development in Nigeria. It is observed that the constant value (8806.511) has positive relationship with GDP. The Beta value (MA) has positive value (.002) showing a positive relationship with the dependent variable. That means that an increase in the value of M;A will lead to an increase in National development (GDP).
Further, a critical examination of the result as reported above shows that about 88% of the total variation in the dependent variable (GDP) can be explained by the independent variable. This is indicated by the coefficient of determination (R Square) value of .879. The result is a very good fit as it shows that only a small percentage (about 12%) of the total variation in GDP cannot be explained by the independent variable.
In addition, an examination of the F-statistic value of 36.372 for overall significance shows that the overall model is significant at 5% (0.05) level of significance i.e. F(1,7) = 36.372, P ; 0.05 implies that the model is fit and all the coefficients in the regression different from zero. Thereby, the null hypothesis must be rejected and accept the alternative hypothesis.
Following the results above the Durbin Watson statistic of 1.615 (close to 2) reveals that the model is free from the presence of auto correlation.
From the above results ( 0 =8806.511; R2 =.879; F =36.372; DW = 1.615; p –value = 0.002), the null hypothesis is rejected and we conclude that merger and acquisition has significant effect on National development in Nigeria.
5.0 CONCLUSION AND RECOMMENDATIONS
On the basis of the foregoing findings, the study concluded that Merger and acquisition has significant effect on National development in Nigeria. Historical statistical data confirm the interpretation of the development of merger and acquisitions in waves. Thereby, the conclusion indicates that M;A facilitates company’s growth which resulted in the growth of the economy.
Based on the findings, the following recommendations have been made;
i. It is recommended that merger and acquisition should be encouraged and adopted by government as a strategic plan to achieve both internal growth with industries and the Nigerian economy at large.
ii. The investors should be enlightened on the gains of merger and acquisition of firms.
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Table 3: Total Asset of Banks After Adoption of Merger and Acquisition and GDP: 2004 – 2010 (N’Billion)
Year Total Asset of Banks (N’Million) Gross Domestic Products (GDP)
2004 3,753,277.8 11,673.6
2005 4,515,117.6 22,269.98
2006 7,172,932.1 28,662.47
2007 10,981,693.6 32,995.38
2008 15,919,559.8 39,157.88
2009 17,522,858.2 44,285.56
2010 17,331,559.0 54,612.26
Source: CBN Statistical Bulletin (Various series)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .938a .879 .855 5430.64396 1.615
a. Predictors: (Constant), MA
b. Dependent Variable: GDP
Model Sum of Squares Df Mean Square F Sig.
1 Regression 1072667897.835 1 1072667897.835 36.372 .002b
Residual 147459469.110 5 29491893.822
Total 1220127366.945 6
a. Dependent Variable: GDP
b. Predictors: (Constant), MA
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 8806.511 4562.344 1.930 .111
MA .002 .000 .938 6.031 .002
a. Dependent Variable: GDP