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Reasons for Business Consolidation

Mergers and acquisitions together form one of the most important aspects of consolidation of a business. Mergers and acquisitions have been taking place among financial institutions and various other businesses for well over a decade specially in the developed countries such as the UK, USA, and many others (Economist.com, 2018). There are various reasons which goes into play for the consolidation between businesses. Businesses engage in consolidation for quite a number of reasons, such as for improving its marketing potential, market share, reduction of the overall marketing costs. Companies have consolidated with other companies and organisations for centuries together in many forms. Modern conglomerates resort to consolidation for a variety of purposes, ranging from the reasons mentioned above as well as for the purpose of hiding any business from failing in the near future. In these kinds of scenarios, a strategic consolidation between the failing business organisations with another business, eventually helps in saving the business from failing in an untimely manner. In this report, a closer look has been taken into the various cases, where the act of consolidation of two businesses have led to the hiding or stopping of an imminent business collapse.

After the recessionary financial crisis, which had shook the world back in the, had some sever long term repercussions felt across the banking sector of the United States. Many of the banks of that period had failed due to the failures of the post crisis period and various other reasons. From a whopping, banks in the 1980s, it had declined to a minimal 5600 as of today (Serdar & Erel, 2013). During the period of 2011 to 2014, the United States had seen a spur in the consolidation of the banks, which trend had helped various loss making and inefficient banks from closing down their businesses (Kowalik et al., 2015) There are a lot of reasons, which had led to this, such as achieving economies of scale, reduction of the operating costs of the business, entering new markets, enhancing the growth of the banks and market importantly, saving themselves from an imminent failure. The graph shown below shows that there had been more mergers, compared to the number of failures which had taken place at the same time period.

(Source: Kowalik et al., 2015)

The mergers generally included merging of a strong efficient and big bank, with another failing business, such mergers were very important for the failing banks, which helped them in saving themselves from their imminent extinction. Such consolidations used to help the failing business by reducing its risk of extinction, by diversifying its asset portfolio, sources of funding and income generation activities. There arises significant differences in the characteristics of the acquired banks, such as there exists a difference between the size, profitability and efficiency. Due to the mergers and acquisition, the a lot of changes takes place in the financial position, which is reflected in the balance sheet of the company, along with changes in the profit and loss account (Masulis & Simsir, 2015). Generally, the acquired companies have low levels of profitability, because of their low levels of net interest and non-interest income. In such cases of mergers and acquisitions, generally, the acquiring company commonly breaks down their consolidated statements by division or subsidiary, for helping the investors in assessing the actual picture.

Mergers and Acquisitions as a Strategy for Saving Failing Businesses

Mergers and consolidations have been at the very heart of financial progress for various organisations around the world. The consolidation procedures have helped organisations across the world, from failing and collapsing and have even helped various other companies and organisations, from expanding their market or entering into new ones (Lebedev et al., 2015). Nigeria is no exception to this. Nigeria is no exception to this. The present article evaluates the impact of consolidation on the performance of various banks in Nigeria. The present study had been conducted across a period of twelve years from 2000 to 2011, consisting of six years of pre and post merger and acquisition era.  Mostly secondary data have been used obtained from the annual reports of the organisations and from the CBN banking supervision. Historically, speaking the concept of mergers and acquisitions is a foreign concept to the banking industry in Nigeria. It is not a commonplace affair as it is in the developed countries of USA or the other similar countries (Olayinka & Farouk, 2014). However the banking system in Nigeria had faced a series of problems in the form of a series of fluctuations in the foreign exchange market and various kinds of insider abuses in the banking industry. This led to the massive close down of banks mainly because of lack of proper corporate governance, non-compliance with regulations, weak management, decreasing profits, high rate of insolvency, and large amounts of non-performing assets. Hence a need for a larger scale of reforms was the need of the hour (Stahl et al., 2013). This paved the way for the introduction of the mergers and acquisitions procedures for bailing out failing banks. Here it can be seen that after the introduction of the consolidation procedure, the failings of the banks could be terminated, because of the takeovers and mergers with much stronger banks. This had helped in the resurrection of the banking industry of Nigeria. In this case, the new merged entity becomes much stronger, with no fear of imminent collapse or failing. Some significant results had also come out derived from this article, which said that consolidation as a policy had gained prominence when it was introduced by the Government of Nigeria, in the year 2005 (Agnello et al., 2013). It had positive implications upon the return on assets and the net profit margin, but it does not have any kind of positive impact on the banks’ return on equity. Thus it can be said that the consolidation had impacted the performance of these banks in Nigeria in a positive way. It has also been recommended that both the government and the central banks support such kind of policies of consolidation in the long run for the betterment of the health of the banking industry (Auerbach, 2013).  

Impact of Mergers and Acquisitions on Financial Performance of Banks in Developed Countries

This article was based on a study which was conducted for the purpose of determining the impact of the consolidation of the businesses in the form of mergers and acquisitions, upon the financial performances of the banks of the country of Ghana. For the successful conduct of this research, descriptive as well as correlational research design had been framed. Two reputed banks had been chosen for this particular study, namely Ecobank Ghana Limited and the Access Bank Ghana Limited. In order to judge the impact of the mergers and acquisitions, the annual report of the two companies from the pre (from 2009 to 2011) as well as the post-merger period (from 2012 to 2015) had been used. Two specific analysis techniques had been used, which consisted of ratio and regression analysis (for measuring the impact created) and the net profit method as well as the return on capital employed (were used as proxies for financial performance. The table provided below takes a closer look into the impact of the consolidation process on the four important financial indicators, which were the aggregate revenue, aggregate assets, net profit margin and the return on capital employed.It could be clearly seen that the total revenue had increased from 231.5 million to 1025.8 million, the total assets had increased from 2128 million to 6587.5 million.In the same way, the net profit margin as well as the return on capital employed had also increased after the wave of mergers and acquisitions (Poku & Frimpong, 2017). An important observation here is the fact that, after the completion of the entire consolidation process, the revenue assets have been shown in a combined manner. Similarly, after finishing of the consolidation process, the two different business entities become a single business entity (Lubatkin, 2013). Thus, in this regard, consolidated financial statements are prepared, containing the profits, revenue, assets, liabilities and other aspects of the financial statements in a combined manner. In this way, the business which is to be acquired is able to hide any kind of imminent financial loss, which could lead to the collapse of the business entity. It becomes a part of the acquiring business organisation, which helps in avoiding any kind of financial loss, which would otherwise had been evident, if such kind merger had not taken place, provided the acquired entity was suffering from such financial collapse (Agnello, Caporale & Sousa, 2013)..

One of the most important results revealed by this particular study was that the mergers and acquisitions had resulted to the growth of at least 80% of the growth in income and the net assets immediately after acquisition (Poku & Frimpong, 2017). It was seen that there had been a positive impact of the mergers and acquisition on these two companies, and on the basis of this an aerial view of the general impact of consolidation among business organisations, upon the financial sector of the banks of the Ghana economy could have been made.  An indication of the financial results between the pre and the post-merger time frame has been provided below. It can be seen from the chart provided below, that the total revenue of both the companies had been aggregated and had been shown in an accumulated manner, by combining the revenues.

Impact of Mergers and Acquisitions on Financial Performance of Banks in Nigeria

(Source: Poku &Frimpong, 2017)

It has also been seen that the mergers and acquisitions generally have a significant as well as a positive impact on both the net profit margin as well as the return on capital employed of the banks in question.

Conclusion:

Thus it can be said that mergers and acquisitions is one of the most effective methods in reviving any failing business from its eventual collapse or for expanding businesses, market, entering into new markets and developing new avenues of business. The process of mergers and acquisitions helps in forming a new organisation which is much stronger in nature, financial power and with a much efficient management and workers, which helps the acquired business to revive its fortunes, by working in tune with the much stronger and efficient organisation or the acquirer. In most of the cases, the management and the owners of a failing organisation or the owners of any established organisation takes the decision of merging with another organisation. The former for the purpose of preventing its business from failing and the latter for expanding its business, entering into new markets and other developmental activities. While an important observation remains, where the consolidation process helps in hiding any kind of imminent business collapse, by preparing consolidated financial statements.

References:

Agnello, L., Caporale, G., & Sousa, R. (2013). Fiscal adjustments and business cycle synchronization.

Agrawal, A., Cooper, T., Lian, Q., & Wang, Q. (2013). Common advisers in mergers and acquisitions: Determinants and consequences. The Journal of Law and Economics, 56(3), 691-740.

Amankwah-Amoah, J. (2018). Global consolidation of industries and business failures: insights from brick-and-mortar and online outlets. International Journal of Comparative Management, 1(2), 185-201.

Auerbach, A. J. (Ed.). (2013). Corporate takeovers: Causes and consequences. University of Chicago Press.

Economist.com (2018). Too much of a good thing. Retrieved from https://www.economist.com/briefing/2016/03/26/too-much-of-a-good-thing

Joash, G. O., & Njangiru, M. J. (2015). The effect of mergers and acquisitions on financial performance of banks (a survey of commercial banks in Kenya). International Journal of Innovative research and development, 4(8).

Kowalik, M., Davig, T., Morris, C. S., &Regehr, K. (2015). Bank consolidation and merger activity following the crisis. Federal Reserve Bank of Kansas City Economic Review, 100(1), 31-49.

Lebedev, S., Peng, M. W., Xie, E., & Stevens, C. E. (2015). Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), 651-662.

Lubatkin, M. (2013). Merger strategies and stockholder value. In Mergers & Acquisitions (pp. 43-57). Routledge.

Masulis, R. W., & Simsir, S. A. (2015). Deal initiation in mergers and acquisitions.

Olayinka, T. T., & Farouk, M. A. (2014). The impact of consolidation on the performance of banks in Nigeria. Global Advanced Journal of Management and Business Studies, 3, 479-485.

Poku, H. M. R. D. J., &Frimpong, K. (2017). BUSINESS CONSOLIDATION AND ITS IMPACT ON FINANCIAL PERFORMANCE: EVIDENCE FROM THE GHANAIAN BANKING INDUSTRY. European Journal of Accounting Auditing and Finance Research, 5(8), 62-76.

Serdar Dinc, I., & Erel, I. (2013). Economic nationalism in mergers and acquisitions. The Journal of Finance, 68(6), 2471-2514.

Stahl, G. K., Angwin, D. N., Very, P., Gomes, E., Weber, Y., Tarba, S. Y., ... & Durand, M. (2013). Sociocultural integration in mergers and acquisitions: Unresolved paradoxes and directions for future research. Thunderbird International Business Review, 55(4), 333-356.

Trautwein, F. (2013). Merger motives and merger prescriptions. In Mergers & Acquisitions (pp. 14-26). Routledge.

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