Effect Of Merger And Acquisitions On Firms Performance In Nigeria

1.0 Introduction

1.1 Background information to the Study

Firms once established has the sole responsibility of survival up to an unforeseeable future. Most likely, the environment under which these firms operate may be unpredicted. These environments include economic, international, technological, socio-cultural, legal, etc. The interactions of these environmental factors within firms usually affect such firm’s corporate and overall performance especially in the area of corporate image, corporate growth, and profitability. Therefore, such firms keep adjusting at every stage to remain relevant and productive within the industry. This situation has called for almost all organizations to develop survival plans. Firms have been combining in various ways since the early days of business operations. The most popular form of business combination strategies includes: Integration, Mergers, Acquisition and/or Consolidations (Kajo, Bello & Audu, 2018). Mergers and Acquisitions involve corporate restructuring processes embarked upon by a firm to enhance the firms’ returns or to increase the flexibility and efficiency of their operations. There are many benefits attached to Merger and Acquisition and this factor has maximized their attractiveness in the market hence the current trend towards Merger and Acquisitions across industries. Firms merging together perform similar operation in the same industry or under same market conditions and structures. Christine and Ambrose (2018), argued in his study that firms that merge increase their bargaining power over suppliers in order to persuade the suppliers to supply inputs, goods and services to the merged firm at a more favorable cost. As a result of higher prices being charged to customers and low cost inputs enable the merging firms to make abnormal profits which lead to their success. The dynamic operating business environment makes firms that are shortage of the needed strengths realize their incompetency to compete favorably and survive in the industry where they are established. This realization sometimes coupled with the fact that opportunities present themselves to firms but, only for a limited time waiting for the aggressive firm to make use of it and capitalize on them. Firms that take this opportunity will benefit immensely from the Merger and Acquisition. Therefore, with such realization, firms search for target firms with the appropriate and needed capabilities and strategic strengths and acquire them. Due to changes in the operating environment, many licensed institutions, especially money deposit banks, have had reasons to merge (combine their operations in mutually agreed terms) or one institution takes over another institution’s operations (acquisitions). Some of the reasons for mergers and acquisitions are: to gain greater market power/share, to gain access to innovative capabilities, thereby reducing the risks attached with the development of a new product or service, to maximize efficiency through the benefit of economies of scale and scope and finally in some instances, to reshape a firm’s competitive orientation (Hitt et al., 2007) as cited (Christine et al., 2018). Other reasons include a short-term solution to finance problems that companies face due to information asymmetries (Fluck and Lynch, 1999) as cited (Christine et al., 2018), to revitalize the company by adopting new knowledge to ensure long-term survival, and to achieve synergy effects (Christine et al., 2018).

Global markets have continuously experienced increased in merger and acquisition of businesses. The concept of Mergers is a situation where for many strategic and economic reasons, two or more companies or indeed, organizations come together to form a larger company (Mazimpaka & Claude 2021). The need for survival of the local firms and the need to participate fully in the local and the global market have resulted to mergers, takeovers and buyouts. According to Kemal (2011) as cited (Christine et al., 2018), Merger and Acquisitions is now being considered as new norms used globally for enhancing competitive ability of firms through increased market share, broadening and widening the business portfolio to minimize business risk for penetrating new markets and geographical areas and focusing on economies of scale, etc. The rationale behind any corporate merger is that combination of two firms is better than one because they increase shareholder value over and above that of the two separate firms, Sharma (2009) as cited (Christine et al., 2018). The aim of adopting Merger and Acquisition strategy for businesses is to grow, expand, and improve performance. Merger and Acquisition refers to cases of joint activities where minimum two or more, separate legal entities combined to form a single entity. The performance of Merger and Acquisition strategies determines the future of the newly formed organization. Different scholars had describe three dimensions to measure the Merger and Acquisition performance which includes financial (market and accounting performance), non-financial (operational and overall performance) and mixed (Meglio & Risberg 2011). Business competition is experienced by all firms across the globe, this force firms to develop strategies to maintain their existence and position and to improve their performance in order to survive in the industry and to be able to achieve their set goals, which include, generating enough and maximum business returns every year. There are many strategies available to firms to keep them growing and developing during market or industry competition and improving its business performance to be better. One of the developments that can occur to a firm is business expansion as a business strategy. Business expansion can either be internal or external. A firm’s internal expansion can be done by adding new divisions within the firm, like: expanding plant capacity, and increasing production units. The external expansion often done by most firms include mergers and acquisitions. Mergers and acquisitions represent a tool for business expansion, getting competitive edge against rival and synergy (Gupta, 2012) as cited (Edi & Leony 2019). Mergers and acquisitions are generally secured for synergy or added value, not only in short term but for a long term, while increasing economies of scales and economics of scope and financial strength (Mardianto, Christian, & Edi, 2018). Mergers and acquisitions that affect the firm’s performance and result in changes in the firm’s performance and finances will show in the financial statements. The success or failure of mergers and acquisitions can be seen and assessed from the financial performance of the two companies after mergers and acquisitions.