AN EVALUATION OF THE IMPACT OF MERGERS AND ACQUISITIONS ON FIRMS’ EARNINGS. A CASE STUDY OF OANDO PLC.

ABSTRACT

 This research work captioned ‘An Evaluation of the Impact of Mergers and Acquisitions on Firms’ Earnings. A Case Study of Oando Plc’ involves the trend analysis of three year pre-merger and three year post-merger financial statements of a case study with mergers and acquisitions experience chosen from the downstream sector of oil and gas.

The study was embarked on with the following objectives;   

-To ascertain whether there is positive change or otherwise on the Earnings Per Share of Oando Plc after the adoption of mergers and acquisitions strategy.

-To measure the changes in the dividend per share of Oando Plc between pre and post merger periods under review.

-To examine the merger effects on the firm’s or company’s profitability.

-To find out general performance of Oando Plc in Nigerian economy in the post-merger periods under review.

-To make necessary recommendations to companies in Nigeria on the need to either adopt or neglect mergers and acquisitions option as corporate survival strategy in a bad economy base on the findings made in the study.

In order to achieve these objectives, the researcher formulated research questions in accordance with the set objectives.

      The data used in the study were purely secondary data which were analysed using ratio model and descriptive method of analysis which include percentages and standard deviation. Hence, research questions were majorly used rather than hypotheses testing.Table interpretations were also adopted for clearer understanding of the analysis.

     The major findings of this study include;

–  most of the profitability ratios of Oando Plc declined in the post-merger period under review due to the aggressive restructuring activities carried out by the company over the years.

–   mergers and acquisition benefits are not enjoyed instantly but in the long   run.

–   the earnings per share and dividend per share of the company improved over the post-merger years despite the decline in the profitability ratios.

      Based on these findings, the researcher made recommendation that companies should adopt mergers and acquisitions as a corporate business strategy but should follow the necessary steps meticulously in order to reap the underlying benefits because, like other business stratagies, mergers and acquisitions are not risk free.

TABLE OF CONTENT

CHAPTER ONE

1.0     INTRODUCTION                                                                           PAGE

1.1    Background of Study-            –           –              –           –           – 1      

1.2    Statement of the Problem-     –           –           –           –           –           –           – 3

1.3    Objectives of the Study-        –           –           –           –           –           –           – 4

1.4    Research Questions-  –           –           –           –           –           –           –           – 5

1.5    Research Hypotheses-           –           –           –           –           –           –           – 6

1.6    Significance of the Study-     –           –           –           –           –           –           – 7

1.7    Scope of the Study-    –           –           –           –           –           –           –           – 8

1.8    Limitation of the Study-        –           –           –           –           –           –           – 8

1.9    Definition of Terms-  –           –           –           –           –           –           –           – 10

         References-      –           –           –           –           –           –           –           –           – 14

CHAPTER TWO

2.0   A REVIEW OF RELATED LITERATURE

2.1    An Overview of Mergers and Acquisitions-          –           –           –           – 15

2.2    Distinction Between Mergers and Acquisitions-   –           –     16

2.3    Typology of Mergers-    –      –           –           –           –           –           –           – 19

2.3.1 Horizontal Merger-    –           –           –           –           –           –           –           – 19

2.3.2 Vertical Merger-         –           –           –           –           –           –           –           – 20

2.3.3 Conglomerate Merger-          –           –           –           –           –           –           – 20

2.4    Reasons for Mergers and Acquisitions-      –               –           – 21

2.5    Basic Consideration in Mergers Arrangement-     –         –           – 25

2.6    Methods of Consummating Mergers and Acquisitions-   –         – 28

2.6.1.Pooling of Interest Method-  –           –           –           –           –           –           – 28

2.6.2.Purchasing Accounting Method-     –         –           –           –           – 28

2.7      Market Reaction to Acquisition Announcements-        –           – 30

2.8      Steps for a Successful Merger-       –           –           –           –           –           – 31

2.8.1.Steps Needed for a Successful Merger Outcome- –           –           – 31

2.9     Modalities of Exchanging Mergers-                  –           –           – 34

2.10   The Impact of Mergers and Acquisitions on Firms Financial  Statement and Ratios-           –          –           –           –           –           -34

2.10.1.  The Positive Impact when Cash is Used-           –           –           –           -35

2.10.2.  The Negative Impact-        –           –           –           –           –           –           -36

2.10.3. The General Impact if Equity is Used-    –           –           –           –           -36

2.11.    Regulatory Issues on Mergers and Acquisitions-  –           -37     

2.11.1. Reasons for Mergers and Acquisitions Regulation-          -37

2.11.2.The Regulatory Framework for Mergers and Acquisitions in Nigeria-    –          –           –           –           –           –           -39

2.11.3 The Recent Development in the Investments and Securities Act (ISA)-       –    –           –           –           –           –           -45

2.12    A Brief History of the Case Study    –        –           –           –           –           -47

           References   – –           –           –           –           –           –           –           –           -50

CHAPTER THREE 3.0    RESEARCH METHODOLOGY

3.1    Research Method –     –           –           –           –           –           –           –           -53

3.2    Source Of Data-          –         –           –           –           –           –           -53     

3.3    Method of Data Collection-  –           –           –           –           –           –           -53

3.4    Sample Size-    –           –           –           –           –           –           –           –           -54

3.5    Data analysis Model- –           –           –           –           –           –           –           -54

         References-      –           –           –           –           –           –           –           –           -58

CHAPTER FOUR 4.0   DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1   Data Presentation-       –           –           –           –           –           –           –           -59

4.2   Research Questions Analysis-           –           –           –           –           –           -67

4.3   Interpretation of Results-       –           –           –           –           –           –           -72

CHAPTER FIVE

5.0   SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1   Summary of Findings-            –          –           –           –           –           –           -74

5.2   Recommendations-     –           –           –           –           –           –           –           -77

5.3   Conclusion-      –           –           –           –           –           –           –           –           -78

BIBLIOGRAPHY-  –           –           –           –           –           –           –           –           –79

APPENDIX

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF STUDY

   As a result of changes in information technology, the need to restructure and reposition business organizations and most especially, the increasing rate of global economic crisis currently nicknamed ‘economic meltdown’, companies have begun to embrace the corporate strategy of mergers and acquisitions in an increasing rate as one of the most viable survival alternatives.

The aforementioned economic meltdown has almost kept the global business environment in jeopardy to the extent that most companies, banks inclusive, had phased out of the global market due to the inability to meet up with the financial requirement expected of them. It has become the survival of the fittest. In order to tighten their financial belt as a result of the problem, most companies have undertaken the global phenomenon of mergers and acquisitions. This business strategy has been in existence for a very long time in most developed countries of the world, where as, in slow developing countries like Nigeria, it is still new. For instance, USA adopted mergers and acquisitions as far back as 1890s but in Nigeria, the first successful mergers took place in 1983. That is, the merging of AG Leventis and Co Ltd with Leventis stores Ltd.

    Subsequently, in recent years, there have been records of successful mergers and acquisitions in Nigeria most especially, in the banking industry as a result of new economic reform undertaken by Central Bank of Nigeria in 2004 which has left the country with few ‘but’ strong banks that can stand the test of time.

However, in the oil and gas sector of Nigerian economy, only few records of mergers and acquisitions have been made over the years, viz, the merging of ELF Nig Ltd and Total Nig Plc in 2001, the acquisition of Agip by Oando Plc formerly known as Unipetrol Nig Plc, etc.

    Since mergers and acquisitions have become famous weapons (tools) to combat economic recession both in Nigeria and other countries of the world, there should be more records of that in oil and gas industry and other industries in Nigeria just as it is in the banking industry over the years. Hence, this research becomes necessary to ascertain whether this corporate strategy of mergers and acquisitions have helped increase firms’ earnings or not, using the key player in the downstream sector of oil and gas industry, Oando Plc, as a case study .

The findings made would help the researcher know if the few records of mergers in non bank sectors of the Nigerian economy is as a result of discouragement from the overall performances of the firms that have already adopted the strategy or not.

1.2        STATEMENT OF RESEARCH PROBLEM

As earlier said, the global problem of economic recession and stiff competition in the world market have really opened the eyes of most business organisations towards the adoption of some corporate survival strategies which include loan syndication, leasing, re-capitalisation, mergers and acquisitions, etc. Among these, mergers and acquisitions seem to be the most adopted strategy in the recent years. They are taken as drastic survival measures in business world with the alchemy, “one plus one makes three”.McClure(2009:1).

 Not only smaller companies unable to compete favourably with bigger ones adopt these measures, bigger and successful companies also embark on them in order to remain profitable and to consolidate on their operation by taking over smaller ones.

    Hence, the synergy effect of mergers and acquisitions to the acquiring firms is one major factor that propels firms to adopt the strategy. No wonder, the Central Bank of Nigeria through its former chairman, Prof. Charles Soludo, instigated banks to merge and / or acquire the weaker ones by upward reviewing their capital base as one of the thirteen (13) points agenda aimed at engendering a healthy, robust, strong and reliable banking sector that will ensure the safety of depositors’ funds as well as play active role in Nigeria and global financial markets.

Not only in banking industry, other sectors of the Nigerian economy such as oil and gas sector, etc have recently adopted the strategy in order to stand the test of time in the recent global economic crisis.

     Consequently, the research on the topic “An Evaluation of the Impact of Mergers and Acquisitions on Firms’ Earnings” becomes necessary to ascertain its earnings benefits to the firms that have adopted this strategy using Oando Plc as a case study.

1.3     OBJECTIVES OF THE STUDY  

The researcher, having identified the increase in the adoption of mergers and acquisitions as a corporate survival strategy in the recent years by some sectors of Nigerian economy and its decrease in other sectors of the same country, embarks on this research work with the following objectives:

-To ascertain whether there is positive effect or otherwise on the Earnings Per Share of Oando Plc after the adoption of mergers and acquisitions strategy.

-To measure the changes in the dividend payout of Oando Plc between pre and post merger periods under review.

-To examine the merger effects on the firm’s or company’s profitability.

-To find out general performance of Oando Plc in Nigerian economy in the post-merger periods under review.

-To make necessary recommendations to companies in Nigeria on the need to either adopt or neglect mergers and acquisitions option as corporate survival strategy in bad economy base on the findings made in the study.

1.4     RESEARCH QUESTIONS

Since this study is focused on the evaluation of the outcome of mergers and acquisitions on the earnings of firms that adopted the strategy using Oando Plc as a case study, it calls for this problematic questions. Viz

i) Was there any change in the Return on Capital Employed (ROCE) of Oando Plc in the post-merger period?

ii) Does merger and acquisition have a significant effect on the Earnings Per Share of Oando Plc ?

iii) Did the Gross Profit Margin of Oando Plc appreciate after the mergers and acquisitions experience?

1.5     RESEARCH HYPOTHESES

 The researcher wishes to state the following hypotheses, though the nature of the study does not call for their testing:

Ho:    There is no change in the Earning Per Share of Oando Plc in the post-merger period.

H1:    There is a change in the Earning Per Share of Oando Plc in the post-merger period.

Ho:    Merger has no significant effect on the dividend payout of Oando Plc.

H1:    Merger has a significant effect on the dividend payout of Oando Plc.

Ho:    The Return on Capital Employed of Oando Plc’s did not appreciate as a result of mergers and acquisitions.

H1:    The Return on Capital Employed  of Oando Plc appreciated  as a result of mergers and acquisitions.

1.6 SIGNIFICANCE OF THE STUDY

          Mergers and Acquisitions as a survival strategic tools are meant to benefit the acquiring or/and merged companies in different ways such as risk diversification, synergy, economies of scale, excess cash utilization to mention but a few. Nevertheless, firms still need to carry out a feasibility study to know the possible outcome of a given merger option before adopting or accepting it in order to avoid unfruitful venture.

    Therefore, even if this research is not a comprehensive and exhaustive one as a result of the unavailability of some vital information, limited time and financial constraint, all aspect of the work is very relevant in one way or the other to the Nigerian firms who wish to maintain their ground or survive in the midst of the ongoing global economic crisis by adopting or planning to adopt the mergers and acquisitions strategy.

Secondly, it would go a long way in educating the stakeholders in Nigerian firms on the impact of mergers and acquisitions on firms’ earnings. This would motivate them to invest properly and wisely.

Finally, the study is primarily designed for all the people who may be interested in carrying out further research on mergers and acquisitions as a vital and viable corporate strategy.