THE EFFECTS OF STRATEGIC MERGERS

AND ACQUISITIONS ON CORPORATE

PERFORMANCES IN NIGERIA.

A CASE STUDY OF UNILEVER PLC AND

ITS ASSOCIATED COMPANIES.

A PH.D PROPOSAL

SUBMITTED BY

ADEFISAYO MARTINS OLADELE

1.0 BACKGROUND OF THE STUDY
Companies have engaged in mergers and acquisitions for some reasons.
These reasons have been identified by various authors and they generally include
increased market shares, risk diversification, tax relief, coping with pressure of
market competition and gaining access to the financial market (Akinsulire
2000:332; Gbede 2005: 47-53). Mergers have also been entered into by some
other companies in order to gain entry into international market (Gbede
2005:49).
On the world scene generally, mergers are on the increase. Nigeria has also
had its own share of mergers. The earliest recorded merger was between the
Anglo African Bank (established in 1899) and then British Bank of West African
(established in 1892). This merger produced what metamorphosed into today’s
First Bank of Nigeria Plc. This merger took place in 1912, and since then, other
companies have been very active in the terrain of mergers and acquisitions
(Gbede 2005:42).
In more recent times, particularly in 2005, we had some mergers and
acquisitions in the banking industry due to the Central Bank of Nigeria (CBN)
directive to banks to bring up their capitalization base to N25 billion by December,
2005, (Gbede 2005:42).
Mergers and acquisitions are done in the face of the new economic realities
which emphasize the synergy of resources for maximum profitability. The urge to
merge, combine or acquire a competitive or complementary firm came into focus
because of the failure of several industries, especially financial institutions, to
meet their performance targets.
2.0. STATEMENT OF THE PROBLEM
Mergers and acquisitions have become very popular in the Nigerian
corporate environment. While reasons have been given for mergers and
acquisitions and these reasons range from meeting the legal capitalization
requirement, gaining more market share, diversification, to following the example
of foreign parent companies, gains from mergers and acquisitions have not really
been measured and adequately explained by writers on these popular business
concepts. A quantification and an explanation of the effects of mergers and
acquisitions on corporate performance is the concern of the present study.

3.0. JUSTIFICATION FOR THE STUDY

This research study provides a good understanding and indepth knowledge
about celebrated mergers and acquisitions, their benefits and attendant
problems. It therefore, provides background to individuals and companies who
and which intend to adopt the strategy as a means of improving their
performances.
The study will also be of benefit to policy makers who regulate the Nigerian
business environment or economy. It will provide them with knowledge with
which they could formulate well-meaning policies for the survival of the economy.
A notable example is the merger/acquisition wave, which is currently sweeping
the Nigerian banking industry. Though, our focus is on a manufacturing company,
however, the principles and practice remain the same.
This research study will also be of immense benefit to the people in the
academics that is, researchers and students. The study will stimulate further
research into this popular area of study.
4.0. OBJECTIVES OF THE STUDY
 The main purpose of this study is to critically examine the effects of
mergers and acquisitions on the performances of companies in Nigeria. In the
light of this, the following specific objectives are to be accomplished:-
(a) To identify the effects of mergers and acquisitions on the performances of
companies in Nigeria.
(b) To ascertain if mergers and acquisitions are effective strategies for
achieving improvement in companies’ performances. This would be based
on the opinions of practitioners and experts;
(c) To identify some reasons why firms go for mergers and acquisitions;
(d) To form an opinion concerning the attitudes of Nigerian businessmen
toward mergers and acquisitions and
(e) To look into why some mergers and acquisitions are not successful in
Nigeria, and to proffer workable solutions.
5.0. STATEMENT OF THE HYPOTHESES (TENTATIVE)
The following hypotheses will be tested in this study.
HYPOTHESIS 1
Ho: Mergers and acquisitions do not have positive effects on corporate
performances.
HI: Mergers and acquisitions have positive effects on corporate
performances.
HYPOTHESIS 2
Ho: Mergers and acquisitions do not guarantee adequate return on
investment to investors of companies in Nigeria.
HI: Mergers and acquisitions guarantee adequate returns on investment
to investors of companies in Nigeria.

HYPOTHESIS 3
Ho: Mergers and acquisitions do not affect the market share prices of
emerged companies.
HI: Mergers and acquisitions affect the market share prices of emerged
companies.
HYPOTHESIS 4
Ho: Differences in organizational cultures do not affect success of mergers and
acquisitions in Nigerian companies.
HI: Differences in organizational cultures affect the success of mergers and
acquisitions in Nigerian companies.

HYPOTHESIS 5
Ho: Nigerian businessmen do not have positive attitude towards mergers and
acquisitions.
HI: Nigerian businessmen have positive attitude toward mergers and
acquisitions.

HYPOTHESIS 6
Ho: Mergers and acquisitions are not effective strategies in improving
corporate performances.
HI: Mergers and acquisitions are effective strategies in improving corporate
performances.

6.0. SCOPE OF THE STUDY

It is evident that the Nigerian Business environment experienced or
witnessed a considerable number of mergers and acquisitions in the recent times.
However, this study is not intended to exhaust all these mergers and acquisitions
which have taken place in Nigeria in order to reach a reasonable conclusion. The
scope is therefore limited to the effects of mergers and acquisitions on
companies’ performances. In testing for these effects, the study is focused on the
series of mergers engaged in by the Unilever Nigeria Plc.
 Corporate performance is measured using accounting measures of
performance. The accounting measure of performance to be adopted in this
study is the growth in profitability. The trend is considered, which is to include
the periods before and after a particular merger process. Profitability therefore is
measured using ratios such as Return on capital employed (ROCE), Earning Per
Share (EPS), Dividend Yield Ratio and New Profit Margin. The ratios of period
before a merger activity are compared with ratios after a merger activity, to see if
there is a positive growth as a result of the merger.
7.0. OPERATIONAL DEFINITION OF TERMS
The following terms are used in the present study.
Strategy:- Strategy is the formulation of basic organizational missions, purposes
and objective and also of the policies and programmes to achieve them.
It is a pattern in a stream of actions or decisions.
Mergers:- A merger is an amalgamation of the undertakings or interests of two or
more companies. It is a form of business combination whereby two or more
companies join together to form new company.
Acquisitions:- An acquisition is the buying over of a company by payment of cash
to its shareholders by another company.
Corporate Performance:- Corporate performance is measured using Accounting
measures of performance. It is the growth in profitability that is emphasized.
Profitability is measured using ratios such as return on capital employed (ROCE),
Earning per share (EPS).
Return on Capital Employed (ROCE)
This ratio indicates the percentage return generated by total funds
employed to finance the operations of a company during an accounting year.
Operation Profit 100
ROCE = Capital Employed
x 1
%
Earning Per Share (EPS):- This ratio indicates the net return attributable to each
ordinary share. It is calculated thus:
Profit After Tax
EPS = Number of Ordinary Shares
Target Company:- A target company is a company which is the object of a take
over bid.
Take over Bid:- This means an offer by one company to buy all the shares of
another, thereby gaining control of the target company.
Predator Company:- This is a company to make a take over bid. It offers to
purchase all the shares of the target company.
Holding Company:- A holding company is a company that exists to own shares in
other companies that are depending on the level of shareholding, its subsidiaries.
Subsidiary Company:- Subsidiary company is a company which is wholly or partly
owned by another, called the parent company.
Synergy:- Synergy is an idea that the whole is greater than the sum of its parts
within an organization. Symbolically, it is expressed as 2+2 = 5
Therefore, synergic effect may result from a merger or acquisition.
Diversification: Refers to a strategy in which growth objective is achieved by
adding new products to the existing product line. It may be a reason for a
merger or an acquisition.
Stars: are products which are characterized by high market share and high growth
rate, but limited cash flow due to investment required to maintain their growth.
Question Marks:- are products which have a low share of a fast growing market
and need more cash than they can generate themselves in order to keep up with
the market.
Dogs:- are businesses or products which have a low share of a slow growth
market. They may be profitable, but only at the expense of cash investment.
They generate little or nothing for other projects.
Cash Cows:- are products which have high market share but slow growth rate.
They usually generate a very positive cash flow, most of which can be used to
develop other business products.
The relationship among stars, cash cows, dogs and question marks has
been illustrated by the Boston consulting group in their growth-share matrix. This
matrix is as shown below.

Relative Market Share

High Low
Market Growth Rate High STAR QUESTION
MARK

Low CASH COW DOG

FIGURE 1. BCG Growth –share matrix.

8.0. REVIEW OF LITERATURE

Mergers and acquisitions take different forms. Peterson and Lewis

(1999:516-17) write about three categories of mergers viz- horizontal mergers,
vertical mergers and conglomerate mergers. These categories are briefly
discussed as followed:-

Horizontal Mergers :- involve firms that directly compete for sales of similar
products or services.

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. A
vertical merger occurs if a firm acquires a seller of its output. This is then
otherwise known as down stream integration. While an upstream integration
occurs when a firm of a supplier of resources or components needed for a
product is acquired by a firm which is making such product.

Conglomerate Mergers: Involve the coming together of firms producing

unrelated products. Oghojafor (2006: 169) however identifies another form of
merger which he calls congeneric merger. According to him, congeneric merger
involves related companies but not producers of the same product or firms in a
producer seller relationship. In other words, it is neither vertical or horizontal
merger. It is “allied in nature or action”. An example is a bank acquiring or
merging with a lending company.

Some other varieties of mergers have also been identified. These include
market – extension merger and product - extension merger
(www.investopedia.com/university/mergers). In a market – extension merger,
two companies that sell the same product in different markets are brought
together as one. In a product – extension merger, two companies selling different
but related products in the same market are brought together as one.

Akinsulire (2002:321) identifies two methods o f acquisition namely holding

company and total absorption. A holding company is a company formed with the
purpose of controlling shares in acquired company. Under total absorption, the
predator company becomes the holding company while the target company
becomes the subsidiary.

Mergers and acquisitions could take any form, the most important thing to
note is that it must promote the achievement of the organizational objectives and
be strategically justified.

8.1 REASONS FOR MERGERS AND ACQUISITIONS

 Before there could be a form of merger and acquisition between two
companies, there must be concrete and adequate reason(s) upon which such
strategic approach to external growth would stand.

Many reasons have been identified for embarking on mergers and

acquisitions. These reason include diversification, increase in the market share,
acquisition of needed technology and synergy (Aborode 2005:429). Akinsulire
(2002: 231) gives the motivating factors for mergers and acquisitions as:
Operating economies (purchasing and marketing), management acquisition,
diversification, finance and production.

Cherunnilam (2002:197) 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. Umukoro
(2001:143) gives five reasons for mergers and acquisitions. These 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
economics of scale.

It has been observed that the writers’ views on the reasons for mergers and
acquisitions are similar. Therefore, these factors would be explained together as
follows:- Diversification is one of the reasons for mergers and acquisition. Clark
(1999:111) defines diversification as the extension of the range of goods or
services offered into new areas, either material or geographical. Diversification
can, therefore be achieved through mergers and acquisitions.

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.

Technology is changing in this dynamic environment of ours. 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.

Furthermore, “operating economies” has been identified as one of the

reasons for mergers and acquisitions. Akinsulire 1 has explained it to be
elimination of duplicate and competing facilities. He asserted further that
purchasing and marketing, as well as other areas can be consolidated.

Akinsulire2 also 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.

Moreover, Okwor (2005:8) asserts that the bigger a company is, the more
funds it will have. Such a company would be able to use the funds for investment
opportunities. Such big size can be achieved through merger or acquisition.

8.2. FACTORS TO BE CONSIDERED IN MERGERS AND ACQUISITIONS

It has been asserted that mergers and acquisitions have some benefits.
Mergers and acquisitions often result in a number of social benefits
(www.answers.com/merger). Despite the existence of these benefits, a merger
or acquisition may be a failure. Writing on consolidation in the Nigerian Banking
Industry, Nwokoma (2005) asserts that not all mergers and acquisitions succeed
in leading to the emergence of a more viable enterprise.

Furthermore, not all applications made for merger to the Securities and
Exchange Commission usually succeed. 22 applications, for instance were
received by the Securities and Exchange Commission (SEC) between 1982 and
1992, 19 of them were successfully merged (Yomere 1995).

For various reasons, proposed mergers and acquisitions may fail. It is

therefore important that certain factors be considered before the proposal is
actually accentuated.

Legal consideration is one of the factors. The Nigerian Economic Society

(NES) in its “Newsletter” of April 2005 asserts that the only legal modes of
consolidation allowed are mergers and outright acquisition/takeover (page 6).
This is in connection with the N25 billion bank capitalization requirement. The
legality of any transaction has to be taken seriously. In other words, the steps
required under sections 100-122 of the investment and securities Act Cap 1 24
LFN 2004 must be followed strictly.

Organizational Culture of the two companies that want to merge is one of

the factors to be considered by the parties involved in the merger/acquisition.
Organizational culture is defined by igbinosa (2005) as “a total system of shared
values and beliefs that produces norms of behavior and establishes an
organizational way of life”. Cultural differences might lead to the failure of a
merger/acquisition. Care should therefore be exercised so that right candidates
are merged.
 Writing on mergers and acquisitions in the Nigerian Banking Industry,
Nwude (2005) opines that mergers and acquisitions can cause union of
incompatible individuals which would be calamitous to the progress of the bank.

Akinsulire (2002: 333 – 34) gives certain factors as factors to be considered

in mergers and acquisition. Among these factors are consideration of valuation,
attitude of the target company’s shareholders, taxation implication, age of assets
and new dividend policy after merger, among other factors.

8.3. Mergers and Acquisitions Procedure

Gbede (2005:171-190) identified five(s) steps involved in mergers and

acquisitions. These are filling a pre-merger notification, review of scheme
documentation, formal approval, post-approval documentation and post merger
inspection.

Companies undertaking mergers should seek and obtain independent

advice. To ensure this and also to ensure that respective shareholders in the
different companies have been taken into consideration, the securities and
Exchange Commission (SEC) requires that each company must be represented by
a different issuing houses (Aborode 2005:432).
8.4. STRATEGIC ISSUE IN MERGER PROCESS
Osaze (1998: 79-80) asserts that the management of both merging
companies must clarify the following strategic issues about their merger partners
before setting the final legal paper work in motion:-
(a) Obtain details of the history, business and general profile of the company
(b) Clearly define the business portfolio of the company.
(c) Study and analyse the business portfolio of the company.
(d) Clearly identify the business opportunity in the company and delineate the
cash cows from the question marks, the dogs and the Stars;
(e) Study in detail the competitive strengths and weaknesses of the company
as well as its organizational structures;
(f) Make a forecast of the future of the company, its plans, programmes of
action and prospects; and
(g) Identify and note the company’s business reward systems, culture, human
resources system, decision support system, business strategies as well as
the nature and strengths of its products and services.
8.5 FINANCING MERGERS AND ACQUISITIONS
Osaze (1998:91) identifies the following method of financing mergers
and acquisitions – share, excess share, earn – out and borrowing.
Aborode (2005:437) also identifies exchange of shares (ordinary), cash
acquisition and acquisition through preference shares or debentures as
financing options for mergers and acquisitions. These can be discussed briefly.
Exchange of share is a common method of financing a merger/acquisition.
It is convenient and creates very little strain for the acquiring company if the
exchange ratio is right. However, it leads to the dilution of control and earning
per share.
Excess cash is a method that has little cost and no dilution is created by the
exercise. It has however funding impact on liquidity. Borrowing to finance the
merger and acquisition is another method. It is easy and convenient. The
disadvantage is that it has impact on liquidity. Acquisition through preference
shares or debentures brings additional fixed obligation to the acquiring
company. The ability to service the fixed obligation without impairing the yield
expectation of the shareholders is of concern to the shareholder.
9.0 METHODOLOGY
 The phenomenon being studied is mergers and acquisitions. People
who really have the knowledge (with varying degrees) are many. The
population from which the respondents to the questionnaire to be used in the
study, are taken is infinite. However, Unilever Plc is the many study case. This
is chosen because it has been involved in a series of mergers.
The sampling techniques to be employed here are convenience sampling,
also known as accidental sampling (Asika 19991:45). Accidental sampling is
used when a researcher administers the questionnaire on everybody whom he
sees and seems to have knowledge of the phenomenon or concept being
discussed. The researcher here will administer the questionnaire on people
who seem to have the knowledge of merger/acquisition.
To complement this, the researcher will also employ judgment sampling.
Judgment sampling (Asika 1991:46) is used when the researcher is guided by
what he considers typical cases which are likely to provide him with the
requisite data or information. Because of this a sizable number of targeted
respondents will be drawn from Unilever Plc. Since the population of the
people with knowledge of mergers/acquisitions is infinite, I intend to have 1000
respondents as my sample from this infinite population. This number is chosen
arbitrarily, however, I consider it large enough to represent the opinions of the
infinite population on mergers/acquisitions.
9.1.SOURCES OF DATA
Data for this research study will be collected from both primary and
secondary sources. The primary source is through the use of questionnaire to
be administered by the researcher on the respondents. The questionnaire
contains questions that elicit opinions of the respondents on the effects of
mergers and acquisitions, on alternatives to mergers and on the future of
mergers in Nigeria.
 The secondary source of data is through the Unilever Annual Reports and
Accounts for several years from which accounting figures are to be obtained
and used for calculating accounting measures of performance. The methods to
be used for analyzing the data include chi-square test for the data generated
from the questionnaire, as well as simple trend, ratios and percentages on the
data generated from secondary sources

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Perspective, “ The Nigerian Banker, July – Sept 2005
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INTERNET SOURCES
www.answers. Com/merger
www.investopedia.com/university/mergers