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MERGER AND ACQUISITION AS A GROWTH STRATEGY IN BUSINESS ORGANIZATION
ABSTRACT
This research takes a look at the adoption of merger and acquisition as a
growth strategy in business organization. There is no gainsaying the fact that
many companies have been having financial problems. The reason is not far
fetched. This is as a result of mismanagement and economic meltdown. In order
to save such unhealthy situation in 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 used interchangeably, they have
some differences. A merger occurs when two or more separately existing
companies come together to form a new single company. Acquisition or takeover
on the other hand is the purchase of controlling power or interest in one
company by another company, such that the acquired company becomes a subsidiary
or division of the acquirer. This research work highlighted the benefits
involved in the adoption of merger and acquisition as a growth strategy in
business organization. The population of the study consists of all the Nigerian
companies that have adopted merger and acquisition at one time or the other.
Four (4) organizations were selected as sample for the study using convenient
and judgmental techniques of sample selection. Data were collected from primary
and secondary sources and subsequently analyzed using chi- square
statistics. The finding of the study
shows that merger and acquisition is an effective and efficient growth strategy
in business organization. However, the study concluded that organizations can
achieve the desired growth rate by the adoption of merger and acquisition.
Finally, the study recommends that organizations that are not doing well should
adopt mergers and acquisitions as the strategy will help the management to
overcome developmental and environmental challenges in business especially in
this era of economic crises.
CHAPTER ONE
1.1 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 (Nwude, 2003).
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
i.
Mergers
and acquisitions do not have significant effect on the profit growth of the
companies that adopted it.
ii.
Mergers
and acquisitions do not contribute significantly to the growth and survival of
a firm. iii. 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:
i.
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.
ii.
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.
iii.
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.
1.8 DEFINITION OF TERMS
Amalgamation (Business):
This is the mergers
and acquisitions of smaller Companies into much larger ones. (Wikipedia Dictionaries).
Acquisition:
According to Nwude
(2003), Acquisition 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 .
Integration: Onodugo (2002),
defines it as a business growth strategy aimed at maximizing the use of
unexploited avenues in the organizations wider environment.
Merger:
According to Nwude
(2003), a merger is the amalgamation of two or more separately existing
companies to form a new single company. 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.
N S E: Nigeria Stock Exchange.
Risk: This is exposure to damage or financial loss.
Strategic Management:
This is the
organization’s process of defining its strategy or direction and making
decisions on allocating its resources to pursue this strategy, including its
capital and people ( Wikipedia ).
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