DEPARTMENT OF BANKING &FIANCE, PROJEECT TOPIC, MERGER AND ACQUISITION AS A CORPORATE STRATEGIES OPTION FOR GROWTH AND SURVIVAL IN NIGERIA ECONOMY

MERGER AND ACQUISITION AS A CORPORATE STRATEGIES OPTION FOR GROWTH AND SURVIVAL IN NIGERIA ECONOMY

TABLE OF CONTENTS

Contents Pages

Title page i

Certificate ii

Dedication iii

Acknowledgements iv - vi

Table of contents vii - ix

Chapter one: introduction

1.1 Background of the study 1 - 7

1.2 Statement of the problem 7 - 8

1.3 Justification of the study 8 - 9

I.4 Objective of the study 9

1.5 Significance of the study 9 - 10

1.6 Research questions 11 - 12

1.7 Scope and limitation of the study 12

1.8 Plan of the study 12

Chapter two: Literature Review

2.1 An overview of merger and acquisition 13 - 18

2.2 Sources of value 18 - 21

2.3 Risk and fitfalls in corporate mergers 21 - 22

2.4 Legal and negotiation process 22 - 23

2.4.0 valuation methodology 24 - 27

2.4.1 Financing corporate mergers 27 - 28

2.4.2 Merger accounting treatment 28

2.5 Merger and acquisition: a Nigeria experience 28 - 32

2.5.1 Roles of statutory bodies 32 - 33

2.6 companies with special features 33

2.6.1 Prospect 33

2.6.2 Firms with low capacity utilization 33 - 34

2.6.3 Firms with declinning market share of their

products or services 34

2.7 Potential adverse effect of mergers 34 – 36

2.8 Mergers and acquisition in the contemporary

World 36

2.9 Historical background of total Nigerian plc 36 - 39

Chapter three: Research Methodology

3.0 Introductions

3.1 Historical background of total Nigeria plc 40 - 41

3.2 Research design 41

3.3 Population of the study 42

3.4 Sample and sampling technique 42

3.5 Sample size 42 - 43

3.6 Sources of data collection 43

3.7 Method of data collection 43 - 44

3.8 Method of data analysis and presentation 44 - 46

3.9 Justification for using ratio 46

Chapter four

Data Presentation and analysis 47

4.1 Introduction 47 - 48

4.2 Data analysis based on purpose 48 - 50

4.3 Result presentation of graph 50 - 58

Chapter five

Summary, recommendation and conclusion 59

5.1 Summary of the finders 59 – 60

5.2 Conclusion 60 - 61

5.2 Recommendation 61 - 63

References 64 - 65

Appendix 66 - 67

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Ogundele (1999), observed that the desire to grow is a district trait has been identified with most corporate bodies in laissez faire economy. In any competitive business sphere, the corporate firms are always characterized by a restless urge to do better, to charge the condition. This urge becomes more pronounced in the recessionary phase of trade cycle as has been the case in Nigeria over the pas and half decades (Ogundele 1985).

The Nigeria economic sector is experiencing a period of restructuring. Trends such as the structural adjustment programmed (SAP), deregulation polices and privatilization and commercialization policies have tremendously affected the viability of corporate bodies. The emerging integrated global world market has posed serious challenges to the business world. However the advent of changing information technological system also created opportunities in the world market, as the whole world is clustered into a global village. The Nigeria society has had to cope with a series of threat and challenges over the years. There shocks have emanated from economic and financial volatile circumstances, socio-political unrest and debt burdens. Critically analyzed, the harsh economic terrains, with its attendant poverty and or social insecurity are caused by the hostile economic condition as well as political unrest.

In spite of the success case reported by corporate ‘chief executive, losses and eventual liquidation are also a common reality Ogundele (1985) asserted that most business fail due to their poor financial planning and loose management control system. Also the volatility of the key economic indicators (i.e. inflation rate interest rate and exchange rate significantly affects management projection).

The sensibility of the economic to the recent implementation of the deregulation policy particularly in the oil and gas sector has triggered up the adoption of merger techniques these policies and multilateral agreement made by the Obasanjo regime are intended to level the playing field and increase competition thereby rendering the oligopolistic oil and gas sector more contestable.

Iyiegbuniwe (1998), observed that the side effects of government policies and reform like SAP have made it pertinent for private companies to look for resources to enable them meet cost of operation. The effect of government policies also have reflected in the purchases of public corporation by individuals. Ogundele (1985) viewed it that, while public outfits are being privatized or commercialized, what has gained ground in private sector is cooperate mergers has a means for new market entry due the struggle for survival Those firms with stronger financial strength perform the smaller and weaker ones in terms of their ability to cope with re advertising, stringent listing requirement and charging information society hence, continuity can only be guaranteed by merger.

Given that the corporate firm is the building block of an industrial organization, and of an economy as a whole, and given also that very nature of the economy is defined to some extent in the terms of kind of firms that compose it, their size and the way in which they are established and growth it becomes imperative to evaluate such now development that could and the 1ization to the Nigerian industrial objective (Ogunleye, 1998).

The concept of merger and acquisition is a worldwide phenomenon, which has advance into various degrees of sophistication and intricate maneuverings in the highly industrialized and corporate capitalist economics. It has been merited as the eryine of growth, a global means for ce1eration growth and resources diversification. The world business report (2003) had it that over 30,000 merger cases occur annually in the new millennium, cutting across all sector. It is equivalent to one deal every 17 minutes and valued at U.S $3500bn, altogether in year 2000 relatively a substantial increase of over U.S $500bn lend us l500bn recorded in 1991 and 1997 respectively.

In spite of the hundred of million of naira profit after tax (PAT) reported by corporate bodies on dailies, many business owners and directors fail to part some proportion of their holding. Nwankwo (2004) observed that

I high volume of commercial and industrial activities, companies in Nigeria (especially the financial sector) have generally not embraced merger d acquisition as a sector. This might not be unconnected with the entrenched culture of one-man or family outfits, where an owner would prefer to hold tight to 100% of N100 than 50% of Nl00 (the percentage implies his share in the business and the hypothetical naira value means the value of the firm, based on wider share ownership) Soludo (2004), advised that merger strategy is the only option left salvage the financial sector in particular and the economy as ‘a whole from total collapse. It is a bad culture for wholly holding to a small concern even when it apparent that such outfit trends the path of collapse.

The Securities and Exchange Commission (SEC) report (1990) had it that, within the Nigeria context and precisely between 1982 and 1985, there were thirty-one (31) merger moves, out of which twenty-nine (29) were successfully. These moves cut across all sector except the oil and gas industry unilever (Nig). Plc. Has emerged the product of the most celebrated complemerate merger in Nigeria. This involved lever Brother (Nig) and Lipton (Nig) Ltd, which was approved in 1994 and finally consummated in 1995, however the petroleum industry witnessed the First Total Oil Nigeria Plc. And ELF oil (Nig). Ltd in2O01.

Recently, the financial time reported the alarm and also give a warning that between 65% and 75% of business combination would fail. The information resource added that one in two merger cases may likely fail.

Ndanusa (2004), affirmed that it would amount to an underestimation of reality to imagine a non-risky and uncertain business marriage. But merger could be a better alternation resolution to liquidation.

1.2 STATEMENT OF THE PROBLEM

The researcher will critically examine and focus his attention on in an how merger and acquisition as a corporate strategies options for growth and survival in Nigeria economy, this problem will be resolved.

According to Ajayi (2001) asserted that the various macroeconomics problem (poverty, declining, employment) are on the increase resulting from the show pace of economics growth and capacity under-utilization. Various monetary and fiscal measure solution has been used to absurb these shocks. But such problem seen to have defined solution. However, this study has attempted to consider on alternative strategy with aspect to merger, could accelerated growth and other synergies accrue to oil firms that take to combination of resources in order to exploit the deregulation policy opportunities.

1.3 JUSTIFICATION OF THE STUDY

Recent government pronouncement and policies relating to the oil and gas sector, and by the fact Nigeria economic is mono-culture, with this sector dominating over 90% of the annual nation income, research into their sector is timely, ideal and imperative.

1.4 OBJECTIVES OF THE STUDY

Merger scheme is expected to create value. Hence the investigation of the impact of this technique on the firm performance relates the cardinal objectives of this study efficiencies as management, resources utilization and so on are major motives of merger.

1.5 SIGINIFICANCE OF THE STUDY

The fact that size can be a great advantage to companies with regard to the financial muscle to generating funds. Required to sustain investment opportunities form the significance of the study for effective and efficient risk-return management of concern, which determine the real worth of the owners stake in the outfit, could influence by the size and nature of the business.

Mergers would make since only if it could value; the synergistic effects preserve its merits. The fact that if two or more oil firm get integrated, accelerated growth would be achieved as well as wider marketing routes were created. This thereby would result into improves supply to meet consumer’s demands

Efficiency and efficacy of merger could be appreciated from its ability or potential to improve turn-over.

Increased revenue generation for the entered entity directly would improve government income base.

It is known fact that the foreign exchange is largely accruable from the oil industry. Capacity building and industrialization are cardinal objectives of the National Economics Development Plan (NEDP). Merger and acquisition means could be a viable vehicle.

1.6 RESEARCH QUESTIONS

The following question would be attempted in the cause of this study. Answer to such question would help in evaluating the impact of merger.

1. What are the rationale behind combination of business as an alternative for external expansion?

2, How is merger candidate evaluated?

3. What management and legal procedure is involved in merger decision.

4. Why do merger occur more frequently some time than at other times?

5. It merger really a force for investment diversification?

6. How can merger provide the realization of the Nigeria industrialization objectives.

1.7 SCOPE AND LIMITATION OF THE STUDY

The bulk of this would lover the pre and post-merger performances of the Total (Nig) Plc and ELF oil (Nig). This study only embrace merger scheme the oil industry limitation of this study is time and financial restrictions.

1.8 PLAN OF THE STUDY

The research work have been divided into five chapter for easy presentation of the facts and figures, gathered.

Chapter one contain the background of the study, statement of the problem, justification of the study, objective of the study, significance of the study, research questions, scope and limitation of the study, plan of the study.

Chapter two consisted the literature review

Chapter three highlighted research methodology

Chapter four discussed data presentation, analysis of data

Chapter five dealt with summary, conclusion, and recommendations.

CHAPTER TWO

LITERATURE REVIEW

2.1 AN OVERVIEW OF MERGERS AND ACQUISITIONS

Mergers and acquisitions have in recent times a major influence on contemporary business expansion. The history or major wave and the fact that merger frequencies have fluctuated sharply overtime, is now well known. A great number of leading world companies are product of mergers or acquisitions.

Business consideration have shown much prevalence in unrelated or indirectly related industries. These occurrences have presented further challenges to traditional economic theory levy (1990) affirmed that the traditional mergers frame work has f tiled to absorb the shock posed by the rapid rise of merger cases among the inter-industry conglomerates giants.

Business external expansion by means of horizontal, ‘vertical, farmed or backward may create significant economic of scale by optimum resources utilization, research and development (R&D), improved management efficiency, as well as enhanced centralized administrative capacity utilization. However, the case of a conglomerate marriage (levy 1990).

The port folio diversification and valuation model offers a convenient vehicle for analysis the potential g tins from conglomerate growth. The thrust of port-folio approach lies in the fact that merger between unrelated firm can help stabilize overall corporate income. Levy (1990) concluded it is because of the variability of the combined income streams will b e reduced following the combination of the statistically independent or negatively correlated income streams.

Although, in real life situation, capital market may not be perfectly efficient, in that substantial economics of scale still exist in the new issue mantes where large firm have better access to the capital funds and still enjoy cost savings.

Corporate growth can be viewed from two perspectives internal and external. Internal dimension existed when a firm had exploited such factor that related to the existences of unutilized and underutilized resources in the course of organization expansion, this would result into diverse activities as development of new product c r processes, geographical expansion into new markets or internal vertical integration. But all these are dependent upon the nature of the used capacity that existed (lyiegbuniwe 1998).

Van Home (2003), viewed corporate growth form external dimension and could take the form mergers, acquisition, absorption or consideration. But pandey (1983), observe external growth from the perspective of horizontal, vertical forward on backward and conglomerate mergers. Still Gitman (1992), viewed merger from domestic and cross border.

Avkiran (1998), however, asserted that horizontal and vertical mergers are know for increased performances and cost efficiency respectively. However, non-nation if negatively correlated firms where as systematic risk are best death with on the platter of cross-border combination

Olowe (1998), and pandey (1982), observed that business combination forms an important feature of corporate structural changes.

Merger is characterized by fairness and equity; where both firms agree unite and to do so on equal terms. It succeeds bilateral consent of mutual agreement of the parties involved: Acquisitions entails acquiring to give the aquirer, takeover as a force means where by the acquiree is acquired against its will. Stanley (2000), defined takeover as hostile means of acquisitions ‘s-here the management of target firm would opposed the move. Section 590 of the company and Allied matter, acts, (CAMA) 1990, defines merger as any amalgamation of the undertakings or any’ part of the undertaking or interest of two or more companies or the undertakings or parts of the undertaking of one or more companies and one or more bodies corporate.

Avkiran (1993), postulated two classes of merger takeover theories: value maximization theory merger or takeover are being consistent with the criteria expected economic gains are accrued or at least a normal rate of return are earned by the acquire

Merger reap resources diversification and utilization of idle cash.

The costs of negotiation and co-ordination, the expanding empire may result into an overall economic loss. Non-value maximizing behaviours by management of acquirer are geared towards growth in sales, or assets or to control a large empire, acquisition of control in the target firm is the objective of this scheme.

2.2 SOURCES OF VALUE

Mergers and acquisitions have a number of benefits since it cardinal purpose is value creation.

Ogundele (1999), observed that, for successful merger to take place, the acquire must still possess significant going concern value such that the interest economic and synergies can be realized. Lyieglouniwe (1998), advised the corporate merger would make sense only if it is has the potential to increase returns and (or) reduce risks. Pandey (1983), added that a merger would create value if it has accelerate growth that is required to sustain the viability, dynamism and value. Enhancing capability of the enlarged entity. However, any combination that close not has any valid source of potential value generation would turn out to be a negative undertaking.

Ogundele (1998), identified significant relationship between the size of firms and their growth rate and such relationship could form bases for merger viability. Growth is vital to sustain improved profitability and efficiency arising from economics in production, distribution and finding and greater monopolistic domination of the market portion are two coordinal determination of enhanced profitability. According to levy (1990), the guest for efficiency is perhaps the most general and straight forward of all mergers motives.

Pandey (1983), emphasized that of all mergers motives economics of scale is most valid which arise from the ability to spread over head costs over a large volume of output and this yield declined average cost. Economics of scale arise from higher utilization of centralized resources such as management, information technology and integrated distribution channels. Uncertainties are reduced by improved market-power and reduced competition. More efficient management and replaced incompetent man power are achieved by virtue of domestic combinations. The thrust of merger lies in its ability to create synergistic value, (2 + 2 = 5) hypothesis where the value of the combined entity exceeds the sum of the two parts separately. Levy (1990) pointed out two kinds of synergy VIZ operating and financial operating synergies are enhanced, which are achieved under cross- border integration under a conglomerate mergers post-folio diversification is possible at reduced risks. This implies financial synergy.

Section 27, of companies income tax act 1979 provides and unused tax should arising from tax-loss carried formed from the previous poor accounting years. Also, with effect from 1993 section 32A of the capital gain Tax Acts 1967 exempts capital gain arising from takeover, abortion or merger from tax payment, provided on cash payment is made in respect of shares disposal or acquired.

Home (2003) summarized merger motives as follows: improved management efficiency: higher utilization of centralization to administrative resources.

Levy (1990) added that risk diversification is the most potential gain from merger of unrelated forms

2.3 RISK AND PITFALL IN CORPORATION MERGERS

Home (2003), observed that external expansion could be expensive if the acquire pays an excessive price for merger. Hence, the rate of returns should exceed the costs, then expected benefit is maximized.

Agenda (1985) observed that all companies are exposed to one risk or other, but smaller and weaker firm are more primed to failure due to their inability to cope with the horse economic conditions. This is a time for survival of economics and financial fittest enterprises. There is possibility of ;y small improvement or negative return on the share price, accruing to real owner of the acquire as a result of aggressive cost-saving or revenue enhancement (Home, 2003).

Risks in mergers can be grouped into two classes VIZ.

Systematic and non-systematic. Systematic risks therefore entails nonrsifiab1e market related risk can only be managed by cross-border merger. Non-systematic risks represent company. Related risks that are manageable by investments diversification.

According to Pandey (1983) the total risks (Beta) would be reduced if

combined operations of the enlarged entity are negatively correlated.

LEGAL AND NEGOTIATION PROCESS

Investment bankers — financial institution that are specialized in merger strategy and are hired by the prospective participants to find suitable partners and assist in negotiations.

The companies and Allied matters acts (CAMA) 1990 specified the a1 procedure for merger activity VIZ

i. The scheme must be contained in the memorandum of association of both parties, otherwise due permission by virtue of shareholders ratification and director approval is required.

ii. Board approval

iii. Share holder’s ratification

iv. Securities and Exchange Commission (SEC) approval.

v. Due approval must be drafted by both boards

vi. Filling of the draft proposal for court sanction

vii. Filling of the court order to the Corporate Affair Commission (CAC)

viii. Transfer of assets and liabilities of the acquire

ix. Settlement by cash share or both.

2.4.0 VALUATION METHODOLOGY

Ogunde (1985) pointed out that the determination of the value of a merger opportunity equates the estimation of the estimation of the expected incremental after tax cash flow less the computed aggregate costs of the scheme. The aggregate cost consists of the exchange value cost of transaction and operation value can either be by book value, the market value methods or a blend of the two.

This is only applicable to a quoted company.

Lyiegbuniwe (1998), opined that the book value techniques measures the network of the acquire based on the historical figures and does not reflect :he earning generating potential of the target firms. The variance between :he book value of the assets and liabilities indicates the net-worth. This method ignores the firm’s future potential. This problem can be solved by adjusting the balance sheet items to refer the current market-disposal value.

A more sophisticated replacement approach may be a better determinant of the network, because it adjusts all items for change in price level.

The market valuation techniques presumes that the market price of the shares, assets and liabilities of the acquire reflect the concensus of the capital market; with respects to its earning potentials and the associated risks. Here, the assumption of project market efficiency and active trade of shares on the floor may not always hold, this is a short coming. Also the varieties of price (actual, average e.t.c) may pose a price choice problem. The post merger price of the enlarged entity may not actually reflect the full merger scheme is’ by discounting the incremental cash flow of the firm at an appropriate cost of capital that reflects the total risks of the scheme.

Pandey (l83), asserted that, the market value of approach applies to quoted firms and it is the best determinant of the real worth of the acquirer’s future earning capacity and the associated risks.

Home (2003), identified four (4) merger methods

a) The acquirer but the acquire assets for each consideration; the company would be paid up and the share-holders would receive the proceeds.

b) The acquirer buy the shares of the acquire for cash but the acquire retains its identity.

c) The acquire the share of the target firm in exchange for share consideration.

d) The company forms — holding company and its subsidiaries’ levy (1990), identified two options open to merger parties;

Outright purchases of assets of the acquire and assumption of responsibility of asset and liabilities of the target firm by purchasing its stocks. Hence, settlement is either by cash consideration or by shares (merited for tax department) and or both.

2.4.1 FINANCING CORPORATE MERGERS

According to Pandey (1983), consideration for merger scheme can be by cash, common stocks, preference shares, debenture or a mixture. However, an outstanding merger financing means is leveraged buy-out LBO), which involves substantial debt option ranging between 70 — 90 percent of the required consideration. Home (2003), also identified a form of leveraged buy-out LBO) means, management buy-out (MBO). MBO method entails a large proportion of debt in financing the scheme and where by the management of the acquire by the firm at a very high premium up to 100% from its shareholders to pay for the associated total risks.

2.4.2 MERGER ACCOUNTING TREATMENT

The international accounting standard (lAS) 22 recommends two methods VIZ. purchase and merger, the purchase methods relates the identifiable assets and liabilities to their fair value creating a need for adjustment of goodwill and capital reserve.

Valuation of the assets and liabilities of the acquire at the nominal value is the thrust of the pulling of interest (merger) methods.

2.5 MERGERS AND ACQUISITION A NIGERIA EXPERIENCE

Prior to 1960, the Nigeria nation was under the British colonial rule and as such the British constitution as well ‘as their legal frameworks applied to Nigeria. Due to this common tie, the Nigeria companies were regulated by the companies acts of 1948 and 1968, and the corporate bodies in both countries shares similar features. However, the companies and Allied Matters Acts (CAMA) 1990, the bank and other\ financial institution act (Bofia) 1999 as well as other relevant statutory professional frameworks now guide and regulate corporation in Nigeria.

International trades, bilateral and multilateral agreements are among the crucial factors that led to multi-national affiliates multi-lateral conglomerates as well as trans-border corporations. The development of partnership business, joint ventures and corporate sales are products of globalization. Many indigenous firms and companies are characterized with monopolistic structure with little or competition. A successful local merger is more or less and extension of combination of concern that had already taken place abroad of multinational firms, therefore compelling the local affiliates to follows suit.

According to Ogundele (1999), mergers in Nigeria are evidently quoted companies taking over the unquoted ones. Mergers are activities in Nigeria have involved several dimension of combination. Recent government pronouncements have triggered off unilateral effects especially in the oil industry. The N25bn and 2bn minimum capital bases for banks and insurance companies respectively is creating a wave in the financial sector. The implementation of these policies (N25bn base, withdrawal of public funds from these banks and so on) by the central bank of Nigeria has sent a signal for an impending war of survival of the fittest. According to the central bank report (2004), opined that this analysis points to a general weakness of the most of the operating banks and thus pose a series of challenges to the regulatory bodies. Thereby, it prompts in recent time trenchant call for merger or acquisition.

However, various moves and strategies a consideration new issues of shares, leverages and merger are considered towards achieving improved efficiency, growth and liquidity as well as capacity building.

The government has put in place necessary frameworks and reinvigorated the statutory bodies, various concession such as reduced tax payment, free negotiation and legal services and also and opportunity to manage proportion of the external reserves of the government by any bank that can exceed N25bn base available to encourage business consolidation.

The most critical problem of banks in Nigeria is fraud and money laundering CBN (2004) reported that 1036 fraud moves valued at 3.6b were le out of which N1.5b. the inability of the financial sector to meet its core objectives cannot be divulged from the fact that the system is under-capitalized. This sector bedeviled by the nature of the entrenched culture of one man show.

It would amount to an understatement to say the banking sector is not the life wire of the economy. An improved financial sector would amount to an increase capacity building.

2.5.1 ROLE OF STATUTORY BODIES

The securities and exchange commission (SEC) is empowered by it legal status to approval and merger before it fina1 consumption.

The companies and Allied matter acts S. 590 and 591 (CAMA) 1990 through the corporate affairs commission regulates any business amalgamation.

5.7 of the banks and other financial institution acts (BOFIA) 1999 empower the CBN governor to approve to disapprove any merger scheme. S. 23A of the Nigeria deposit insurance corporation (NDIC) of 1997 regulates any organization restructuring.

The high court us vested with much power to sanction any merger scheme.

2.6 COMPANIES WITH SPECIAL FEATURES

Giwa (1997), classified from with potential problem that are manageable by mergers in order to earn the synergistic values.

2.6.1 COMPANIES WITH FINANCIAL STRENGTH BUT DECLINING FUTURES PROSPECTS

There would be a balance up when companies ‘A’ with financial strength and maltered cash streams, but with declining future prospects merger with companies ‘B’ which has good product portfolio. This simply implies a combination of strength to eliminate weakness (GIWA, (1990).

2.6.2 FIRMS WITH LOW CAPACITY UTILIZATION

Transfer pricing could be avoided and benefit all retained in the enlarged if company ‘A’ with low capacity utilization integrate with company ‘B’ which supply needed raw materials. Thus a ready market for more unit is provided and idle capacity is eliminated. This merger is either forward or background.

2.6.3 FIRMS WITH DECLINING MARKET SHARE OF THEIR PRODUCTS OR SERVICES.

Dealing market share apparently depicits soft competition firms in the same line of operation, with similarly related customers, human resources and reward system would find their combination of the resources achieved economics of scale. An integrated compatible marketing strategy would yield increase market potential and bind competitive edge (Giwa 1990).

2.7 POTENTIAL ADVERSE EFFECTS OF MERGER

The united state federal trade commission (1982) identified some potential adverse competitive effects of merger scheme.

Ø Closeness of the products of the merging firm may understate their competitive effects, there’s rarely product differentiation.

Ø Although competition i the market may be reduced, the enlarged firm may engage in coordinated interactions behaviour or activities that may not supervene illegality

Ø A merger or unilateral effect may not necessarily lead to increased product price if a rival seller in the same market replaces any lost localized competition as a response to such move, through repositioning their product hires. Thus the intended competition edge may be lost.

Ø Coordinating behaviour in form of price elevation and suppressed output may be a convenient action to improved profitability. However other factors can distort the primary intention that distinguishes the firm and the nature of competition retargeted

Ø Unilateral effect from merger may not be reality unless a significantly larger portion of customers of the merged firm would not be able to find economics alternative sources of supply.

2.8 MERGER AND ACQUISITION IN THE CONTEMPORARY WORLD

Avkiran (1997) viewed merger and acquisition device as a strategic option for a rapid growth a global phenomenon which are common in times of boom as well as recession involving companies of varying sizes and lives of operations. Global business have expanded and chalking up billions of U.S. Dollars transaction via merger.

According to the world business report (2003) merger and acquisition is widely welcomed by corporate chief executive globally. The report had it that the world largest oil and gas mergers scheme Alberta energy Co. and pan Canadian corporation value at U.S. $27bn.

2.9 HISTORICAL BACKGROUND OF TOTAL NIGERIA PLC

Total (Nig.) Plc. Emerged as a product of the merger and acquisition scheme between the total plc. And ELF oil Nigeria ltd. Approved in year 2000. Total final ELF (Nig.) plc, which was later renamed total (Nig.) plc. In 2003 was capitalized with a total fully paid up ordinary shares of 287,082,000 units at 50k each.

The ownership structure comprises of total final ELF, owns 45.24%, ELF acquaintance S.A holds 16.48% and Nigeria hold 38.28% acquities respectively.

Total was incorporated as a private limited liability company on 1st June, 1956 and was quoted on the Nigerian stock exchange floor in April, 1979. with authorized capital of N1 million (50,000 share of the N20 each). The company had, as a marketer of oil product. 336 net work outlets nation wide, 10 LPG plant; 22 LPG trucks and over 400,000 LPG cylinders of various sizes and also a marine storage facility plant. It markets all ranges of petroleum products.

Prior to the merger scheme ELF oil Nigeria ltd as a petroleum marketer, was incorporated on 20th November, 1981 with an authorized capital of N1,000,000 (2,000,000 shares at 20k each). Prior to 31st December, 2000 the firm issued and fully paid up equalities were 802,000,000 share at 50k each ELG Aquitaine S.A owned 67% while Enifor ltd 33% of the stakes. ELF had maintained 152 branches nationwide dealing with a wide range of lubricants, care products and supermarket products.

Total (Nig.) plc, the enlarged company is a subsidiary of total S.A France, a multinational oil explore and marketer.

The company assumed the responsibility for all the assets and :abilities of ELF oil (Nig.) ltd. In 2001. the purchase consideration was either by cash, share option or both. The company paid N65 .00 for each of the acquirer’s shares. Total also exchanged 100 units at 50k for 821 ordinary shares of 50k each in ELF oil (Nig.) ltd. The merger scheme has resulted in 297,082,000 unit at 50k each capitalization.

Article 129 of the company’s article of association empowered the directors to recapitalize, at the end of 2003 accounting year, the directors transferred N2 1,220, 114 from the reserves alc for capitalization, and appropriation were made to the registered members of 42,422,288 share of 50k each in proportion of 1 units at 50k for every 7 shares of 50k each fully paid up thus the capital base had been raised from N148,540,804 to N 169,760,918 fully paid.

Total (Nig.) plc has maintained 500 net works across the country, 10 PLG plants, 3 blending plants and a large marine storagewww.facebook.com/obinotech

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 HISTORICAL BACKGROUND OF TOTAL NIGERIA PLC

Research has been described as an investigation under taken in order new facts get additional information. Research as its name implies has various definitions pending on the viewpoint of the person defining it.

Osuala (1993) viewed research has a process of arriving a0t dependable solution to the problem through the planned and systematic collection, analysis and interpretation of data. Thus research can be concluded as being a subject matter. It is also a process of acquiring relevant information in order to solve of a given subject problem it indeed involves of logical steps for the developments of generalization of principles or theories.

A good research involves the construction is instrument used to collect relevant data, designing of sample procedure and establishing causal relations with factors, which will aid the research. Research methodology therefore, contains these key factors: -

· The population to be studies

· The sample type

· The sample size

· The type of instrument

· The various statistical tool

· The types of tool for result presentation

3.2 RESEARCH DESIGN.

The approach adopted for the study is descriptive survey design. Merger and acquisition as a corporate strategic option for growth’ and survival in Total Oil Nigeria Plc and ELF Oil Limited.

This intends to make a. descriptive analysis of the merger and eventually acquisition in the oil company in the recent.

3.3 POPULATION OF THE STUDY

The population for the study comprised and be represented by the total assets and liability of the two oil company involved in merger and acquisition scheme. On acquisition Total Nigeria Plc. Has maintained 500 networks across the country, 10 LPG plants, 3 blending plants and a large marine storage capacity facility.

3.4 SAMPLE AND SAMPLING TECHNIQUES

Random sampling techniques was adopted, the targeted population comprised mainly the function area offices, and corporate office. Financial ratio analysis before, during and after merger scheme.

3.5 SAMPLE SIZE

Sample size is representative of a given population. Total Nigeria Plc merger case has been chosen because it is one of the piover oil firms as well as the leading oil marketer in Nigeria in term of its share price. Also, the case study is selected being the first oil firm merger coordinate in the country.

3.6 SOURCES OF DATA COLLECTION

Relevant data are extracted from the published annual report and the merger scheme of both merger candidates. The secondary data were extracted from the bucks of the company meet the objectives of this study. More so, the audited financial statement despites the truth and fairness of the underling facts behind the figures. The merger scheme document provide reliable information since it has a statutory approval of the securities and exchange commission (SEC), and also sanctional by the federal high court in Lagos in year 2000.

3.7 METHOD OF DATA COLLECTION

Due to the nature of the study objectives viz: the impact of merger on the company profitability and market value, sourcing re1eant’ information indirectly from the publish manual reports and statement is considered more commercial and most convenient.

3.8 METHOD OF DATA ANALYSIS AND PRESENTATION

For the purpose and clarity of this work, series of relevant rations are employed to investigate the efficiency of merger as a strategic alternative for enhanced market growth. Simple percentages are also used for relative comparism of performance.

Statistically, tables and graphs are most conveniently adopted in result presentation. This is to facilitate results at glance and enhance qualitative judgment.

1. EFFICIENCY: - This simply tests optimal utilization of company’s resources at the management disposal. Return on capital is the key indicator. The formula for return on capital employed is computed

Thus, ROCE = PAT/TA

Where: ROCE = Return On Capital Employed

PAT = Profit After Tax

TA = Total Asset

2. STOCK MARKET: - It relates the growth of the firms share price overtime as computed on the floor of the Nigeria stock exchange.

Market — earning per share and price earning ration are vital indication.

EPS = Pat — Preference Dividend

No of Ordinary Share Ranging For Dividend

P/E = price _ MPS

EPS

P/E = Price Earning

MPS. = Market Price per Share

EPS = Earning Per Share

3. LIQUIDITY: - It indicate how solvent the company is in meeting its short — term obligations.

Current Ratio = Current Assets

Current Liabilities

4. LEVERAGE: - It measures the extent of debt portion in the capital structure of the company.

Debt Ratio = Long — Term Debt

Total Asset

3.1 JUSTIFICATION FOR USING RATIOS

The above ratios are used for the following reasons

i. To summarized large qualities of financing data.

ii. To evaluate the company’s performance.

iii. To make quantitative judgment about the company’s worth.

3.2 STATISTICAL ANALYSIS

Simple percentage is useful for relative performance analysis also; table and graphs are work conveniently employed to aid good result presentation.

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

In this chapter, the data collected are presented and the results are shown with regards to the impact of merger scheme on the company’s performance. As earlier mention, the research is conducted for two periods. The first accounting period cover the result of the company before merger/acquisition and the scheme. Thus, the scheme would be based on the available data for the companies since each company was operating separately them. However, the enlarge entity was study in the case of post merger period.

The result derived would therefore be used to compare what is obtained before the scheme, the result of pre-merger would be projected five years before the scheme and three year post merger (2009 —2011).

4.2 DATA ANALYSIS BASED ON PURPOSED

Relevant ratio as efficiency, market value, liquidity leverage basis for analyzing the extracted data. The impact of the scheme is best evaluated on the variability and real worth of the company. Hence, this ratio is adopted in other to make this purpose.

The table 4.1 above shows an eight-year financial data of Total

Nigeria Plc between 2009 and.2011, from the table it can be easily seen that there was a noticeable increase in the company profitability immediately after the scheme in 2009. This resulted in substantial increase in the Return on Capital Employed (ROCE) from 40% - 70%.

TABLE 4.2 RESULT 0F COMPUTATION FINANCIAL RATIO BEFORE AND AFTER MERGER.

Indicator	Year 2009	2011 total final elf	%changes
Turn over N100	12,173,478	51,229,141	25.35
Pat (N1,000)	265,525	2,499,300	79.10
Dividends (100)	120,000	1,782.490	75.44
Shareholders (1000)	430,468	3,573,994	25
EPS (KOBO)	44	8.41	3.5
ROCE (%)	62	70	43
Current ratio	0.9	1004	(63)
Earning ratio	32	-	-
P/E	-	-	-
Dividend per share	50	600	32

SOURCE: RESEARCHER’S COMPUTATION 2009 Appendix 1

The table 4.2 relates the relative percentage change in performance immediately after the merger scheme. A reliable conclusion could be made from this table by the fact that all indicators except liquidity ratio show a positive change.

4.3 RESULTS PRESENTATION ON GRAPH

Graphs are employed to present the result at a glance as to enhance readability.

DIAGRAM 1: PROFITABILITY AND EFFICIENCY

SOURCES: ANNUAL REPORT (2009 - 2011): see Appendix.

From the above graph, turnover increased by 25.35% immediately after the scheme in year 2009. Hence, it could be reasonable that the scheme resulted in the enlarged company gained a substantial proportion of the petroleum market.

DIAGRAM 2: PROFIT AFTER TAX (PAT)

SOURCES: ANNUAL REPORT (2009 — 2011): see Appendix 1

This graph shows a justifiably high risk in the PAT by 79.10% over year 2009. The return oh the Investment diversification actually earned the synergistic in Naira.

DIAGRAM 3: RETURN OF INVESTMENT

SOURCE: ANNUAL REPORTS (2009 - 2011: see Appendix 1

Diagram 3: relates the relative profitability and the earn capital of the owner’s net book value investment. ROCE increase from 49% (2009) to 70% (2011) showing a positive net present value in investment.

DIAGRAM 4: EARNING PER SHARE

SOURCE: ANNUAL REPORTS (2009 - 2011): see Appendix 1

It could be deduced that EPS from N6.23k to the Nigeria stock exchange report in November, 2009. Total Nigeria Plc the largest marketing aid distribution of petroleum products and emerged the 8th most capitalized stock company with N47.9Obn

DIAGRAM 5: DIVIDENDS PAYMENT

SOURCES: ANNUAL REPORTS (2009 - 2011): see Appendix 1

Cash dividends to the owners increase by 75.44% immediately after the integration. At the AGM in December, 2009, the company issue bonus shares of 1 unit for 7 shares of 50 kobo each fully paid to the true of N148,540,804. This altogether raised the owner’s confidence about its viability.

DIAGRAM 6: DIVIDENDS PER SHARE (DPS)

SOURCE: ANNUAL REPORTS (2009 — 2011): see Appendix 1

DPS shows the amount of gross dividend declared on every issued ordinary share ranking for dividend and it related the relation policy and also influence the decision of risk — adverse investors.

DIAGRAM 7: SHARE HOLDERS FUND

SOURCE: ANNUAL REPORTS (2009 - 2011): see Appendix 1

The total assets of the company rose by 25% immediately after the scheme. This represents the fundamental basis end — worth of the concern

DIAGRAM 8: LIQUIDITY AND SOLVENCY

SOURCE: ANNUAL REPORTS (2009-. 2011): see Appendix 1

The effectiveness of working capital management is indicated in the risk-return model. Post merger current ratio fell 1 — 04 in years 2009, but the company is still safe and its survival is not threatened.

DIAGRAM 9: PROPORTION TO CAPITAL STRUCTURE

SOURCE: ANNUAL REPORTS (2009 - 2011): see Appendix I

From the above presentation, the debt of the company capital structure rose from 14.4% to 20% after the merger, thus financial by 80% equities. Hence, it can be concluded that the company has an access to retained earning as an internal source of finding.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARY

This study has examined the development of business combination in the Nigeria oil and gas industry, with specific interest on the performance of total Nigeria plc and ELF oil (Nig.) Ltd after the Merger scheme.

The petroleum industry plays a significant role in Nigeria economy bearing in mind the huge revenue accrued into the government coffer. The deregulation of the downstream would not have better been implemented them when the integrated world oil market has created opportunities for the oil players. This policy has leaved the playing ground for both local operators and the multinational oil companies, whereby their business objective could be realized. Business combination among the oil firm could be a strategic means needed to take advantage of economics of scale that would arise from putting in place centralized operation and managements.

The performances of the enlarged entity were evaluated based on the data, collected. Which include sale turnover, operating profit aid assets employed

The profitability and market related ratio are used in order to measure charges or trend of performances.

5.2 CONCLUSION

The results of the merger scheme are consistent with the value maximizing behavior on the part of the acquirer. Empirical evidence have shown a positively significant abnormal return to the enlarged entity conclusively, it was deduced from the analysis of data (chapter four) that the turnover rose by 25% in 2001 while the result effect was reflect on the return on capital employed (ROCE of 70% increase over year’ 2000. EPS has indicated an improved 35% still over year 2000.

There was prior to the scheme, 4.7% market share maintained by ELF, while Total Plc, controlled 10.8% market share now, total company has maintained over 16% of the market share. The company has also maintained on average market price per share of N199 and has emerged the largest oil dealer in Nigeria with over 500 branches networks across the country.

Dividend distribution to the real company owners was increased from N1 O2bn to l.78bn, in 2001. the right issue of 1 ordinary share of 50k for every 7 shares of 50k fully paid up to the registered members would enhances their confidence level about the company.

5.3 RECOMMENDATIONS

It is not possible to proffer precise and standard prescription for merger and acquisition exercise as each has its own set of peculiarities. But generally would be better if business with broadly similar policies. Organization structure and market (not necessary identical but preferably compatible products) combine. This would in turn make it easier for the management to cope and be able to make optimal used of the enlarged assets. The judicious, as it is the only means by which all the economics of scale can be enjoyed.

The realization of the inherent synergies from merger could be a function of effective risk-return management. Timing of merger scheme and good binding on candidates work together to earn return on the inherent potentials of the entities.

A merger technique has much benefits especially to the business owners, the management, the employees, the customers and the government. Thus, it should be welcomed as a means of new market entry. Furthermore, making merger move, it is prudent to for see a high probability of repairing the embedded potentials. It is pertinent of the directors to make efficient bidding and negotiation.

The government needs to put in place political will and law that would empower the statutory bodies like CBN, SEC, NDIC, and CAC. This would make those agencies to make proactive moves to resolve economic distress.

The merger candidates ought to communicates to all relevant parties and also haste up operation integration after the scheme.

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APPENDIX

COMPUTATION OF THE RATIO RETURN ON ASSETS