AN  EVALUATION OF THE IMPACT OF MERGERS AND ACQUISITIONS ON FIRMS’ EARNINGS

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.
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

1. i) Was there any change in the Return on Capital Employed (ROCE) of Oando Plc in the post-merger period?
2. 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.
 
1.7     SCOPE OF THE STUDY
In pursuant of excellence and the achievement of the best possible result, the best option would have been to make this research in all sectors of Nigerian economy where mergers and acquisitions strategy have been adopted. But such a large population is likely to pose numerous problems hence, the researcher centered on oil and gas industry with the hope of generalizing any findings made to all other firms in the country that have involved in the above corporate strategy.
Therefore, the research encompasses the pre and post mergers financial analysis of Oando Plc. The findings made in this analysis would help the researcher to provide solution for answers to the research questions.
In other words, this is based mostly on the use of secondary data.
 
1.8     LIMITATION OF THE STUDY
The study is based mostly on the use of secondary data which include journals, news papers, internet information, text books and most importantly, the Annual Reports of Oando Plc.
However, in the research process, the researcher encountered some problems that tried to mar the research efforts. Some of these include financial constraint, unavailability of all the Oando Plc’s Annual Reports needed for extensive work, time factor and most importantly, not-on-seat syndrome of the librarian in the Banking and Finance departmental library (UNEC) due to other official assignments.
Success of any venture depends on the capital outlay or the extent to which the venture is financed. In other words, financial constraint was responsible for the researcher’s inability to gather all the required information for elaborate study. Sourcing materials or information from the internet involves huge amount of money these days coupled with series of interruption in the power supply.
Again, the required number of Annual Reports of Oando Plc needed for extensive financial analysis of the firm’s performance before and after merger periods were difficult to get. However, the researcher laid hands on the available ones only.
Not only these, the issue of time factor should not be overlooked. Shortness of the academic session coupled with four months industrial action by the Nigerian Universities staff during the research period was unfavourable to the researcher in the research process.
The worst of all was the issue of the aforementioned librarian not usually on seat most of the time to attend to students who were in need of the available text books and journals in the library due to other official engagements he had. This was partly because he did not have any assistant as at the time of this research. However, the researcher was deprived of the ample opportunity needed to gather enough information for the literature review.
All these posed problem in the research process since the research was basically on the use of secondary data. Nevertheless, the researcher, through ceaseless effort, was able to come up with a valid and reliable result.
 
1.9 DEFINITION OF TERMS
The following words used in the context of this research report are defined alphabetically to the understanding of a lay reader with no intention of repetition.
 Alchemy: Medieval form of chemistry.
Amalgam: In this context, it is the combination of two or more firms.
 Asset: An accounting balance sheet item that constitutes the total value of an organization/firm.
 Capital Market:  A market where long term financial instruments such as shares, bonds, etc are bought and sold.
Consolidation: This means the combination of business group/ activities into a single unit with the aim of strengthening the group’s success or position. It can also be defined as the strength, stability or depth of group’s success.
Correct Ratios: More reliable ratios needed for the evaluation of a firm’s earnings.
Dividend: A percentage of a company’s profit which is given out to its shareholders as their own share of the profit.
Downstream Oil Sector:  This is a term commonly used to refer to the refining of crude oil and the selling and distribution of natural gas and products derived from crude oil such products include liquefied  petroleum gas, LPG, gasoline or petrol, jet fuel, etc.
Economic Meltdown: The going down of the rate of economic activities of a country.
Equity: Stock that entitles the holder to profits. It is the share of stock in a corporation that pays the holder some of its profits. It is the ordinary share capital plus general reserve.
Equity Financing: The sale of share capital of a company in order to raise money for use in the business.
Leverage Ratios: The group of ratios that measure the activity of a firm to meet with its long term debt obligations. E.g. Total Debt to Equity Ratio.
Liquidity: An ability to convert an asset to cash quickly. It can also be defined as the degree to which an asset can be bought or sold in the market without affecting the asset’s price.
Predatory Practices: Unfair deceptive or fraudulent practices of some lenders during the loan origination process. It is the imposition of unfair and abusive loan terms on borrowers.
Synergy: This can be defined as the working together of two or more people or organisation especially when the result is greater than the sum of their individual efforts or capabilities.
Take Over: According to CAMA 1990, take over is defined as the acquisition of one company of sufficient shares in another company to give the acquiring company control over the other company. It is a forceful acquisition of control interest in a business enterprise.
Target Firm: A firm to which an offer to be acquired or bought is made by another firm (acquiring firm) or individual.