CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Mergers and Acquisitions (M & A)
continue to be a highly popular form of corporate development. However,
in a paradox to their popularity, acquisitions appear to provide at best
a mixed performance to the broad range of stakeholders involved. While
target firm shareholders generally enjoy positive short-term returns,
investors in bidding firms frequently experience share price
underperformance in the months following acquisition, with negligible
overall wealth gains for portfolio holders (Agrawal and Jaffe, 2000).
The complex phenomenon which mergers and
acquisitions represent has attracted the interest and research
attention of a broad range of management disciplines encompassing the
financial, strategic, behavioural, operational and cross-cultural
aspects of this challenging and high risk activity. While in recent
years research into the human and psychological aspects of M&A have
increased in prominence, the M&A literature continues to be
dominated by financial and market studies (Cartwright, 2005).
M&A research has tended to develop
along discipline-based lines and this has brought detailed insights into
a number of important aspects. However, it is arguable that this
specialization has been at the cost of developing a more holistic
understanding of what determines their performance and what consequences
they bring.
For the purpose of this research work,
focus will be made on merger and acquisition that has taken place in the
Nigeria telecommunication companies. The challenges will be identified
and viable solutions will be suggested.
1.2 STATEMENT OF PROBLEM
Despite the goal of performance
improvement, results from mergers and acquisitions (M&A) are often
disappointing. Numerous empirical studies show high failure rates of
M&A deals. Studies are mostly focused on individual determinants. A
book by Thomas Straub (2007) "Reasons for frequent failure in Mergers
and Acquisitions" develops a comprehensive research framework that
bridges rival perspectives and promotes a modern understanding of
factors underlying M&A performance.
Merger and Acquisition in the Nigerian
telecommunication industry has not really made wave in the industry
unlike the banking industry. Most of the merger and acquisition deal of
the telecommunication industry end at the pre-merger stage, those being
acquired still perform below expectation. Econet has been acquired six
times since inception, and lately acquired by Airtel yet still on the
bottom list of the performance chart of GSM in Nigeria. The merger and
acquisition of Multilinks (a CDMA operator) by Starcomms, Visafone, and
other bidders also failed several times, not until recently it was
acquired by Visafone. For the past seven months after the deal, Visafone
has not synchronized the two network. Subscribers of multilinks still
recharge with multilinks card.
It is obvious that there is a great
challenge with merger and acquisition in the Nigeria Telecommunication
industry. It is on this note, the researcher sees the need to
investigate on the challenges faced by this sector in term of merger and
acquisition.
1.3 OBJECTIVE OF THE STUDY
The aim of this research work is to
investigate the challenges of merger and acquisition with special
reference to the telecommunication industry. Objectives of the research
work includes:
- Examine the performance and underperformance of telecommunication industries after merger or acquisition.
- Examine the merger and acquisition deals that has been transacted in the Nigeria telecommunication industry.
- Identify the benefits of merger and acquisition in the telecommunication industry.
- Investigate the functions of the performance / underperformance after merger and acquisition in the telecommunication industry.
- Proffer suggestions/solutions to challenges of merger and acquisition in the Nigeria telecommunication sector.
1.4 RESEARCH QUESTIONS
Research questions are meant to generate
possible answers to different aspects of the research problem and they
should be clearly stated such that they act as guides in identification,
collection and analysis of relevant data. In order to achieve the
purpose of this research study, the study will attempt to provide
answers to the following research questions.
- Does merger and acquisition improve the operating performance of the acquirer companies?
- Is the net earnings at the post merger and acquisition period
significantly different from the pre merger and acquisition period?
- Do Merger and Acquisition techniques have any impact on the performance in the telecommunication industry?
- Does Merger and Acquisition improve the quality of service of telecommunication companies in Nigeria?
- Does Merger and Acquisition transactions facilitate the
consolidation of asset management and provide better means and
reputation in the telecommunication industry?
1.5 STATEMENT OF RESEARCH HYPOTHESES
The objective of this research work is
to investigate and identify the challenges of merger and acquisition in
the Nigeria Telecommunication industry. To provide answer to the
research questions the following two-sided hypotheses are formulated.
HYPOTHESIS ONE
H0: There is no significant change in the operating performance of the acquirer following merger and acquisition deals.
H1: There is a significant change in the operating performance of the acquirer following merger and acquisition deals.
HYPOTHESIS TWO
H0: Merger and Acquisition will not improve the contribution of the telecommunication sector to Nigeria GDP.-
H1: Merger and Acquisition will improve the contribution of the telecommunication sector to Nigeria GDP.
1.6 METHOD TO BE USED IN CARRYING OUT THE RESEARCH
Research methodology deals with the
procedure used by the researcher to conduct the study. It contains the
different activities performed and methods employed by the researcher in
the study. For the purpose of collecting necessary data for this
research work, primary and secondary data collection method will be
used. The primary data collection method will be through the following:
1. Structured questionnaire
2. Personal unstructured interview
3. Observation
The secondary data will be collected
from reports and documents from the company. Also, reports outside the
company and from library and desk research literatures will be used.
In this study, descriptive method will be used to analyze data and also in resting hypothesis, chi-square (X2)
will be employed. Findings from this research study will be discussed
in the light of the research problem hypothesis, purpose research
questions, literatures of the research and other relevant issues
conclusions will be drawn and recommendations and suggestions also will
be made.
1.7 SIGNIFICANCE OF THE STUDY
As M&A research has developed
largely along disciplinary lines, finance scholars have primarily
focused on the issue of whether acquisitions are wealth creating or
wealth reducing events for shareholders. The weight of evidence shows
that while takeovers unambiguously bring positive short-term returns for
shareholders of target firms, the long-run benefit to investors in
acquiring firms is more questionable. Agrawal and Jaffe’s (2000)
comprehensive review of this literature suggests that in aggregate the
abnormal returns accruing to acquiring firms in the years following an
acquisition are negative or, at best, not statistically different from
zero. Importantly, these studies will also highlight the wide variation
in acquisition performance at the firm level.
However, explanations of M&A
underperformance cannot be sufficiently accounted for by the “goodness
of the strategic fit” alone without account being taken of the wider
integration process. Hence the researcher sees it important to
investigate the performance and underperformance of merger and
acquisition in the telecommunication industry, also identifying the
challenges hindering the performance.
1.8 SCOPE AND LIMITATIONS OF THE STUDY
As there are great deals of factors
determining Merger and Acquisition like the percentages of market share,
growth in revenue competitive strength, technology capability, return
on investment and overall size and the degree of satisfaction. It is
very important to state that this research study will be focusing on the
challenges of Merger and Acquisition in telecommunication industries as
a means of survival in a distressed economy with empirical evidence
from the Industry.
Limitations
In the course of conducting this
research work it is expected that the following will constitute
impediments to the effective conduct of the study
a) Time constraint within which the study must be completed.
b) Financial constraint
c) Inaccessible and inadequate data
d) Also, combining project work
with several other activities is another stressful task that may not
allow me to cover research materials extensively.
Nevertheless, I believe the above limitations will in no way affect the reliability and validity of the research study.
1.9 DEFINITION OF TERMS
MERGER: Is the
combination of two or more companies to share resources in order to
achieve common objectives. A merger implies that, as a result of the
operation, only one entity will survive.
ACQUISITION: Is
a business transaction between unrelated parties based on terms
established by the market where each company acts in its own interest.
The acquiring company purchases the assets and liabilities of the target
company. The shareholders of the target company can no longer claim any
ownership. In some cases, the target company becomes a subsidiary or
part of a subsidiary of the acquiring company;
DE-MERGER OR CORPORATE SPLITS OR DIVISION: De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
STATUTORY MERGER: Statutory
merger relates to the business combination where the merged (or target)
company will cease to exist. The acquiring company will assume the
assets and liabilities of the merged company. In most cases, the owners
of merged companies remain the joint owners of the combined company.
SUBSIDIARY MERGER: Subsidiary
merger relates to an operation where the acquired company will become a
subsidiary of the parent company. In a reverse subsidiary merger, a
subsidiary of the acquiring company will be merged into the target
company.
CONSOLIDATION: Consolidation
is a type of merger which refers to a business combination whereby two
or more companies join to form an entirely new company.
VERTICAL COMBINATION: A
company would like to takeover another company or seek its merger with
that company to expand espousing backward integration to assimilate the
resources of supply and forward integration towards market outlets. The
acquiring company through merger of another unit attempts on reduction
of inventories of raw material and finished goods, implements its
production plans as per the objectives and economizes on working capital
investments. In other words, in vertical combinations, the merging
undertaking would be either a supplier or a buyer using its product as
intermediary material for final production.
HORIZONTAL COMBINATION: It
is a merger of two competing firms which are at the same stage of
industrial process. The acquiring firm belongs to the same industry as
the target company.
CIRCULAR COMBINATION: Companies
producing distinct products seek amalgamation to share common
distribution and research facilities to obtain economies by elimination
of cost on duplication and promoting market enlargement.
CONGLOMERATE COMBINATION: It
is amalgamation of two companies engaged in unrelated industries. The
basic purpose of such amalgamations remains utilization of financial
resources and enlarges debt capacity through re-organizing their
financial structure.
TAKE-OVER: Is a
form of acquisition where the acquiring firm is much larger than the
target company. The term is sometimes used to designate hostile
transactions.
REVERSE TAKE-OVER: An
operation where the target company is bigger than the acquiring
company. However, mergers of equals (in size or belonging to the same
sector of activity) may also result in a hostile take-over.
DIVESTMENT: Selling of
the parts of a company due to various reasons : a subsidiary or a part
of a company may no longer be performing well in comparison to its
competitors.
AMALGAMATION: It is a
combination under a single head or a portion of the assets or
liabilities of two or more industries unit by merger or consolidation.
TELECOMMUNICATIONS: The science and technology of communication at a distance by electronic transmission of impulses
GSM: Global System for Mobile communications
CDMA: Code Division
Multiple Access (CDMA) describes a communication channel access
principle that employs spread-spectrum technology and a special coding
scheme
NETWORKS: A group of interconnected (via cable and/or wireless) computers and peripherals that is capable of sharing software and hardware resources between many users. The Internet is a global network of networks. See also local area network and wide area network.
SHAREHOLDERS: One who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors.
OFFEROR: A person or entity who makes a specific proposal to another (the offeree) to enter into a contract
OFFEREE: Person or corporation to whom an offer is made to make a contract
COMMUNICATIONS: A system that enables users of telephones or data communications lines to exchange information over long distances by connecting with each other through a system of routers, servers, switches, and the like.