CHAPTER TWOLITERATURE REVIEW2.1 INTRODUCTIONThe most preferred top-notch executive approach employed by multinational enterprises (MNEs) and nationwide title holders in the transformative world market is Mergers and Acquisitions (Ferreira et al., 2014; Shimizu et al., 2004).
This capital-intensive development plan does not only captivates the interest of the popular international press, but also the equity analysts and portfolio managers (The Economist, 2012; Financial Times, 2014; Forbes, 2015). For instance, the world’s financial state has documented nearly 100 thousands of cross-border M;A deals between 2005 and 2014, with a measure over US$5 trillion (UNCTAD, 2015; UNCTAD, 2014). Dealings in M;A is driven by the motivation to bring about benefit. While M;A tactical plans is based on generation of benefits with respect to business administration, they are mostly established in an interdisciplinary dialogue that involves economics, accounting, finance, strategy, international business (IB) law, marketing, human resources and sociology.
Therefore, existing M;A study has vastly furnished the finance and accounting literature since the break of the 20th century. In this study, three essential points are distinguished pertaining to literature research. Firstly, the driving force of mergers and acquisitions.
Secondly, the underlying change contracts after mergers and acquisition. Lastly, how to manage these changes and finally how mergers and acquisitions affect the performance of banks.2.2 MERGERAccording to Town (1992), a merger refers to the coming together of businesses to invest and share their resources to achieve common objectives. In other words, the term “merger”, relates to the blend of two isolated entities to create a new, joint body and operate under a common vision (Piloff and Santomero, 1998). Under the instance of merger, the two organizations unite to make up a new enterprise and the proprietors of the united organizations continue as partners of the novel enterprise (Sudarsanam, 1995).2.
3 ACQUISITIONAn acquisition on the other hand is when an organization assumes or acquires ownership of another organization, a legal subsidiary of another organization or certain assets of another organization (Town, 1992). This activity may perhaps involve the buying of another organization’s stock or assets (DePamphilis, 2008). The term “acquisition” implies the attainment of assets by one business from another business. In an acquisition, both businesses may continue to exist (Evans, 2000).2.4 CLASSIFICATION OF MERGERS AND ACQUISITIONSMergers and Acquisitions may be categorized as horizontal, vertical or conglomerate (Gaughan, 2010, Chen and Findlay, 2003).
Relating to the horizontal M&A, the acquiring and target organizations are contending firms within the same business. Horizontal M&A has developed rapidly over time as a result of worldwide reconstitution with respect to numerous businesses in response to technological alteration in addition to liberalization (Chen and Findlay, 2003). Vertical M&A are blends of businesses in client-supplier or buyer-seller associations.
The aim of businesses involved in vertical M&A is to limit unpredictable transaction expenses by upstream and downstream linkages in the value chain in addition to benefiting from economies of scope (Cheng and Findlay, 2003). Finally, an organization may seek to expand risks and achieve economies of scope by partaking in conglomerate M&A deals in which companies involved run different businesses. For instance, Philip Morris is a tobacco company which acquired General Foods in 1985 for US$5.6 billion (Gaughan, 2010).
Another category in which M&A could be placed is ‘friendly’ or ‘hostile’ (Cheng and Findlay, 2003). An M&A deal can be said to be friendly when the board of the target organization concurs to the transaction. On the other hand, an M&A transaction is hostile when the offer made is against the bidding of the target company since the board declines the offer. In addition, pertaining to where organizations are located and run, M&A transactions could be classified as either domestic or cross-border. A cross-border M&A deal involves two companies that are situated in different financial states or two companies running within the bounds of one financial state but belongs to two different states (Chen and Findlay, 2003). Consequently, in domestic M&A deals, the organizations involved emerged from one state and runs in that financial state.2.5 MERGERS AND ACQUISITIONS IN GHANAAcquisitions and Mergers are viable tactics to increase the return to shareholders if managed properly.
Ghana has had a fair share of mergers and acquisitions, although it may be small relative to developed countries. However, it remains a strategic option that can and should be explored by the relevant stakeholders (Owen, 2006). The head of mergers and acquisition counselling bureau at Stanbic Bank, Rodrigues Randolph shares the opinion and even predicts an increase in mergers and acquisitions movement in the country due to the status on local ontent across sectors of the country. Additionally, with larger foreign owned enterprises looking for joint venture prospects to partner native businesses to enable its expansion to attract a larger market; there would be the need for the smaller stakeholders to acquire or merger. Furthermore, with increasing growth and maturity of the economic sector of Ghana, most of the native businesses must have visionary prospects of increasing outside the borders of Ghana.
Hence, mergers or acquisitions would be key in that regard (Nkrumah, 2017).There are some notable mergers and acquisitions in Ghana. Some include the merger of Ecobank and Trust Bank, Access Bank merging with Intercontinental Bank. At the later part of april 2014, Universal Merchant Bank (UMB) became the new brand name of Merchant Bank Ghana. This was instituted by Fortis Equity Fund Ghana right after taking over the bank through acquisition. One major shareholder of HFC Bank since December 2012 is the Republic Bank Limited after spending a sum of $8 million to acquire 8.7% fairness stake in the bank.
In June 2013, the bank bought extra 23.3% shares which were previously under the domain of Aureos Africa Fund and this increased its stake from 8.7% to 32.
02%. Additionally, in 2013, it attained 7.9% held by the Union Bank of Nigeria. This therefore raised Republic Bank Limited’s shareholding in HFC Bank to the present 40%.
Other outstanding M;A dealings comprise the acquisitions of Express Life and Provident Life by Prudential Plc and Old Mutual respectively, in the sector of insurance. Abraaj, a classified equity company with a huge influence in sub-Saharan Africa, has witnessed tremendous growth mainly through acquiring FanMilk International who produces various fruit drinks and especially dairy products, Aureos Private Equity Fund, and Danone (international front runners in baby food, dairy and water products). The agricultural sector has as well experienced acquisitions and mergers in Ghana. Wilmar Group acquired the Benso Oil Palm Plantation and the company has seen improved development after mergers.
The mining sector has vibrantly demonstrated mergers and acquisitions activities in Ghana with AngloGold acquiring Ashanti Goldfield and the PMI Gold and Keegan Resources merged (Nkrumah, 2017). The peaceful political atmosphere and the optimistic press highlights about Ghana provides a good market for the economy and presents it positively to the world making it more attractive to foreign investors outside the country. The active and ever-growing telecommunication sector of Ghana cannot be left out of the business wind of mergers and acquisition. Spacefon settled initially in Ghana but was acquired by Areeba and was later taken over by MTN till date.
This chain acquisition has made the MTN company a huge communication giant in Ghana and Africa as a whole. Zain Communication Company was also acquired by Airtel. Ghana Telecom and its One-touch mobile network were taken over by the foreign company Vodafone (Nkrumah, 2017). In the year 2004, Ghana Breweries Limited was acquired by Guinness Ghana Limited, as well as Societe Generale acquiring Social Security Bank the same year. UT Holdings Ltd also acquired BPI Bank in 2008. The latest merger and acquisition in Ghana, September 2014, is the acquisition of ProCredit Savings and Loans Company by Fidelity bank.
This merger will expand the Fidelity bank if the pact is fully acknowledged by the central bank of Ghana (Bank of Ghana). This was the first time a local bank is acquiring a foreign savings and loans company in the country. This merger improved the service offered by Fidelity bank through its expansion in the branch size nationwide with readily and more availability of its Automated Teller Machines (Nkrumah, 2017). 2.6 DETERMINANT OF ACQUISITIONSPredominantly, literature on the features of targets in bank takeovers concentrates on US banks, with quite a number of the research studies emphasizing on takeovers of publicly traded organizations. A study conducted in the US which is nearly affiliated to this paper was authored by Hannan and Pilloff (2007) which indicated that, most studies carried out on banks in US either concentrated on limited subsets of banks, such as publicly traded banks, or they encountered difficulties determining alterations in authority. Hannan and Pilloff (2007) eluded mistakes in recognizing changes in control by employing the use of a US commercial bank merger data set from SNL Financial which stresses specifically on takeovers where there was a difference in control.
They also divided their sample into in-market and out-of-market acquisitions, a split that approximately denotes our split between domestic and cross-border deals. A couple of recent papers also investigated the determinants of takeovers in Europe. Molyneux (2003) expressed the desire to prevent regulatory, information and other setbacks as the primary intention for overseas enlargements. However, assessing a sample of M;As that occurred in Europe between 1995 and 2000, he also identified that domestic deals are more enhanced by cost efficiency considerations, whereas earnings diversification may be more significant for cross-border bank deals.
Lanine and Vander Vennet (2007), probed the causal factors of Western European bank takeovers of targets in Central and Eastern Europe over the 1995 through 2002 period as a part of a wider subject area of the effects of bank takeovers in that field. Pasiouras et al. (2007) deduced that, takeover targets and acquirers in the EU-15 over the 1997–2002 period, focused on the role of dynamism in regulation. This study is in line with studies conducted by Lanine and Vander Vennet (2007) and Pasiouras et al. (2007) in that, it takes into consideration traded and non-traded banks over more than one European country. Nevertheless, this varies from the European bank takeover studies in two important ways. First, this paper assesses both domestic and cross-border takeovers employing the same model.
Lanine and Vander Vennet (2007) focused basically in cross-border takeovers as Pasiouras et al. (2007) did not differentiate domestic from cross-border takeovers. Our study of both types of takeovers in the same model permits us to address the European Commission’s dissatisfaction with the degree of cross-border consolidation. Secondly, the sample of banks better falls in line with the roles of the EU as this study is deduced from the entire EU-25 set of countries, whereas both prior studies used divisions of the EU-25. This section analyses the literature on the factors responsible for bank takeovers, with much focus on the results in Hannan and Pilloff (2007), Lanine and Vander Vennet (2007), and Pasiouras et al. (2007).
The section revolves around the various components typically noted to be the most likely determinants of bank acquisitions.2.6.1 Target operating performanceOne of the intentions inherent to acquisitions is to enhance the efficiency of the target. These benefits are more likely to be attained if the target bank is underperforming. Therefore, signs of performance should contain explanatory power on the likelihood of being acquired. Specifically, banks with lower profitability might be more captivating for acquisition.
Admittedly, whiles underperforming banks render greater chances for improvement, they are also speculative, mostly if the origin of the underperformance is due to high level of bad loans. In this case, a local acquirer may be in a right position to rectify the issues that need to be fixed than an out-of-market acquirer. Thus, signs of performance should a priori be more important to explain in-market acquisitions. Hannan and Pilloff (2007) found that, less profitable banks in the US are more likely to be acquired, irrespective of the type of acquirer (except that the coefficient for large out-of-state acquirers is insignificantly negative), and a measure of inefficiency is found to have a positive relation with the probability of acquisition for the total sample. The results from the two European studies vary.
The coefficients on the expense ratios in equations determining targets are insignificant in Lanine and Vander (2007). Conversely, the coefficient on the return on average equity is significantly negative and the one in the cost to income ratio significantly positive in Pasiouras et al. (2007). 2.6.2 CapitalizationThe capitalization of the target is usually hypothesized to be associated to its probability of being acquired but not all of the hypotheses have the same empirical effects.
Several hypotheses indicate a positive correlation between banks’ capitalization and the probability of being a target. First, if acquirers encounter regulatory pressure to enhance capitalization they may desire highly capitalised targets. Secondly, if high capitalization shows the unfitness of a bank to broaden assets, more capitalized banks would be preferred for better diversified acquirers. Thirdly, the managers of banks with high capital dividends may be operating further below their profit potential because of lessened pressure to acquire high earnings. Also, some hypotheses indicate a negative association.
Firstly, if capitalization is seen as an exponent of managerial efficiency, then better capitalized banks would be less appealing to potential buyers, since the potential profits from a better management are smaller. Secondly, if a bank’s capitalization is very small, an acquisition by a well-capitalized acquirer might be nurtured by the supervisor. Lastly, Hannan and Pilloff (2007) established that, buyers choose high leveraged (poor capitalized) targets as it assists them to maximize the magnitude of post-merger operation gains relative to the cost of attaining those gains. For a given asset size, if the purchase price premium of the acquisition is particularly low, the higher capitalized the bank. Akhigbe et al. (2004) indicated a positive association between capital and the chance of being acquired in their sample of publicly traded banks in the US.
However, most studies, including Hannan and Pilloff’s (2007), whose results for their whole sample, and that of Lanine and Vander Vennet (2007) analysis of Central and Eastern European countries, none of which were members of the EU before 2004, indicated that, banks with higher capital-asset ratios are less likely to be obtained. Using a sample from the EU-15, the coefficient on the capital to asset ratio is insignificant in Pasiouras et al. (2007).2.
6.3 Prospects for future growthBanks with high growth may be highly appealing targets, as the potential profits arising from enhanced management are likely to be larger in targets that run in extended markets. In line with this hypothesis, some U.S. researches from the 1980s, including Hannan and Rhoades (1987) and Cheng et al. (1989), showed that, the probability of acquisition has a positive effect on the growth rate of the assets of the target bank. However, Moore (1996) suggested that, slow growing targets may be attractive to buyers looking forward to a rise in the target’s growth rate.
Agreeing with Moore (1996), Pasiouras et al. (2007) proved a negative coefficient on the past growth rate. Hannan and Pilloff (2007) and Lanine and Vander Vennet (2007) did not include a growth variable. 2.6.4 SizeSmaller banks may be preferred by acquirers to the extent that these banks are simply merged into an acquirer’s operations.
Small banks are also the least to raise interest by the competition authorities. Also, if the acquiring organization is searching for economies of scale or market power via the acquisition, then obtaining one large bank may obtain those economies or market power faster and possibly lower cost than a series of small acquisitions. Hannan and Pilloff (2007) suggested that, large banks are likely to be obtained when they evaluate their model using their full sample. Lanine and Vander Vennet (2007) and Pasiouras et al. (2007) also had a significantly positive coefficient on total assets.
Also, when Hannan and Pilloff (2007) centred on acquisitions by small acquirers they realized that, large banks are the least to be acquired, in line with the hypothesis that post-merger integration is not simple for relatively large targets.2.6.
5 Industry concentrationThe level of banking concentration possibly influences the chances of acquisitions through its impact on bank competition. Elevated concentration may raise the attractiveness of the target banks in that market. However, takeovers that would further raise concentration may conflict with antitrust authorities. The result may be that, elevated concentration in the target’s market heightens the bank’s attractiveness to both domestic and cross-border acquirers. Likewise, the chance of being acquired by a domestic bank may reduce in more concentrated markets due to conflicts raised by the antitrust authorities. Hannan and Pilloff (2007) could not find any statistically significant prove that competition problems are a determinant of takeover targets.
The coefficient on their measure of market concentration is systematically insignificant and the sign of the coefficient on their measure of size is not altered between in-market and out-of-market acquisitions. However, Pasiouras et al. (2007) found a significantly negative coefficient on the five firm concentration ratio in their sample of European takeovers, perhaps designating changes in concentration with Hannan and Pilloff’s US sample. 2.
6.6 Management incentivesTo a level that managers of the target banks may lose their positions or, at least, may suffer a decline in their executive autonomy or in their job responsibilities, they may conflict with takeover bids even if the deals are value maximizing for their shareholders. For instance, Hadlock et al.
(1999) found that, banks with increased rate of management ownership are less likely to be obtained, mostly in acquisitions where target managers opt out from the banking organization due to the acquisition. In this paper, we do not investigate the role of management incentives due to insufficient appropriate data.2.
6.7 Other target characteristicsAbsence of proper and quality data also inhibits us from including in our empirical research other bank level potential determinants of bank acquisitions that have been studied in the US literature. First, Wheelock and Wilson (2000) regarded diverse types of asset quality and found that, some proxies for suspect loans are negatively associated to the chances of acquisition. This type of ratio has not been taken into consideration primarily, as a result of varying regulatory standard among countries and within countries over the study period. Second, Hannan and Pilloff (2007) studied the function of the composition of the target’s clientele and they found that, as the local nature of deposits increased, so did the likelihood of being acquired (Akhigbe et al., 2004). They reasoned that this result may demonstrate the chance of cross-selling new products to newly acquired local depositors.
Finally, both Wheelock and Wilson (2000) and Hannan and Pilloff (2007) took into account the bank’s age to represent the consequences of length of time since opening in the probability of being acquired. They generally found a negative cue which they explained as the age variable capturing an unobservable element of bank success. 2.7 DETERMINANTS OF ACQUISITIONConcerning acquisition, a few variables have been submitted consistently as antecedents to mergers. These items are explained below;2.7.1 Stock priceThrough the neoclassical and behavioural theories, research works have established stock prices as an effector.
More light will be thrown on the controversies surrounding the implications of stock prices on merger as this thesis makes use of the neoclassical strategy per the neoclassical theory. A component that is of much essence when it comes to this topic is the degree of stock exchange as it has been addressed in most extant literature. Also, a clue that a nation’s financial state is developing can be seen when there is increment in the prices of stock and this is succeeded by the attainment of raised benefits for most organizations (Owen, 2006). This has been backed by financial hypothesis which states that, merger activity is at its highest when there are increment in share prices and fast financial development. According to McGowan (1971), most single organizations that have the incentive take advantage of the market situation and start putting up mergers during times of elevated share prices and when the state’s finances is flourishing. Merger deals have virtually associated with stock prices positively (Melicher et al., 1983).
Furthermore, when dealing in takeover deals, the most unrefined outcome that has been postulated is the operation of stock exchange (Mitchell and Mulherin 1996). Counted among the firsts to account for stock price-merger activity relationship being positive were John and Ofek (2003) and they came by their result by utilizing the time period between the two world wars. Nelson (1959) later asserted the possibility of share prices causing a merger pattern. Nelson’s result was based on the quarterly information from 1895-1904, which showed a solid association existing between the power of commercial share prices and the quantity of mergers. Gort (2008) and Steiner (2005) also accounted for the positive association between stock exchange and merger deals.
Mueller (2013), elaborated on merger deals and he first established that merger deals had sudden occurrences and just like that, they have a positive correlation with prices of stock exchange. A similar assertion made by Schleifer and Vishny (2003) was that merger occurrences associated with the flourishing of stock exchange. A later research by Rhodes-Kropf and Viswanath (2004) also states that merger deals are caused by stock exchange.
Stock exchange turned out to be the most important element that helps in identifying combined merger deals (Choi and Jeon, 2011). Kvalen (2014) also looked into local parameters which brands South Africa appealing to merger and acquisition deals. Overseas direct investments were thoroughly investigated, although it is also important when it comes to local parameters. Depending on variable, a negative binomial regression model was employed. Based on the results, it was said that, stock exchange, industry size, rate of return and macroeconomic stability serve an important purpose in M;A deals. It was discovered that there was an increment in stock exchange which is an indication of a flourishing business and an improvement in M;A deals. Another establishment is that, although both positive and negative trends in security prices raised the distribution in ratings, they influenced merger occurrences in opposite ways (Gort, 2008). Findings on stock exchange’s implication on merger deals are demonstrated in conformity with the behavioral view.
Merger occurrences are in line with elevated stock exchange evaluations and as result of business overvaluation and financial timing, models have been put up. In Mueller (2013) the positive correlation between merger and stock exchange activity was proved. The findings suggested that, the disposition of managers in their quest to improve the operation of acquired businesses, and a general state of hope among investors lead to high stock exchange. The historical record further demonstrated that the degree of stock exchange, as the business blossoms, reflects a striking over-optimism on prospective gains and bonuses (Shiller, 1981). Acquiring organizations may have managers that are involved in a similar over-optimism that is influencing all stockholders during a stock exchange flourish (Mueller, 2013).2.7.
2 Interest rateInterest rate is another essential component ascertaining the degree of merger and acquisition deals. Kvalen (2014), noted that interest rates have mixed clues but are necessary. Merger deals have been found to be linked to interest rates in a positive manner. Rate of interest was purported to drive merger deals (Steiner, 2005). Similarly, Beckenstein (1979) postulated the positive influence minimal rate of interest had on mergers.Another essential factor in determining the level of merger and acquisition activity is the interest rate. Interest rates have been noted to be significant, but with mixed signs (Kvalen, 2014). Majority of researchers have found interest rate to be linked positively to merger activity.
In the study by Steiner (2005), interest rate was purported to explain merger activity. Along the same line, Beckenstein (1979) found that, the minimal interest rate had a positive and significant influence on mergers. Also, Melicher et al. (1983) and Guerard (2017) described that merger transaction is highly associated with rates of interest and figured out a positive association.
In the study by Yagil (2016), he established the association between macroeconomic components and merger deals quantified in terms of both the dollar value of the acquisition and the quantity of mergers. The argument he made was that, the impact of the two macroeconomic parameters, interest rate and investment rate in the financial state, on merger deals are positive. The findings obtained from his research showed that, the two macroeconomic components are keen description of the variation in the rate of merger deals over time. The necessary degree of the interest rate was higher than that of the alteration in the investment rate. Research done by Wilson (2013) revealed that, rate of interest influenced merger deals positively. Wilson, who analyzed local parameters that made South Africa appealing to M&A transaction realized that, with rate of interest as an evidence of rate of return from investment, it benefitted M&A deals as the rate of interest elevated. It has also been noted in other studies that rate of interest influenced merger deals negatively. Becketti (1986) was the first to note this negative influence.
Yagil (2016) followed by stating that, mergers are positively influenced by the size of the state and also rate of interest may have negative influence.2.7.3 InflationThere is minimal empirical information on mergers that has considered inflation to be an effector. It can however be evaluated that inflation is a valuable financial component that has an influence on merger deals.
With respect to merger deals, Wilson (2013) established that the rate of inflation played a key role in the constancy of macroeconomics. He proved with his results that with decreases in inflation rate comes better merger deals. In a follow up research, he made use of data from previous study but the dependent variable with this new study was the value of M&A’s, rather than the quantity of M;A. Using rate of inflation as a measure of business risk, it showed that increased inflate rate means decreased financial prospect. The result was not different from the previous study as rate of inflation did have a negative influence.
Fishman (2010) also asserted that, financial development may influence merger deals at a rate that it can decrease the opportunity cost of funds compared to other funding sources. The argument is supported by the concept that possible business rivalry appear to be weaker after funding due to irregularities. The chances of the possible buyer is disputed in an assumption of higher liquidity, motivating a positive connection between M;A and development in funding (Fishman, 2010). These literary arguments are also linked to inflation, because rate of inflation definitely be dependent on a rise in funding. In previous literatures, both Gross Domestic Product (GDP) and Gross National Product (GNP) have been utilized as independent variables elaborating merger deals. What has been demonstrated is that, merger deals is at its peak in times of financial shocks in the form of general economic expansion.
Business enterprises are motivated by economic expansion to enlarge their businesses so as to meet the needs of the financial state. Organizations have to take decisions on how to meet the needs, and as merger is a faster form of expansion than internal organic growth, an increased rate of merger deals in the midst of financial shocks is often witnessed (Gaughan, 2011). Also, it is much simple to seek such transactions in a large financial state rather than in a small one. When a business enterprise is contemplating indulging the market for corporate control, it is not difficult to find an eligible partner for a merger or a target for an acquisition when there are multiple enterprises to decide on (Owen 2006). It is typical of merger deals to accelerate in times of expansions and in times of recessions, decelerate. However, the quantity of mergers have proven to be procyclical. The rise in merger deal is seen to be at its peak, before the peak of the business cycle expansion; that is, merger deals begins to reduce before GNP reaches its peak (Fishman, 2010).
Generally, GNP and GDP have mostly related positively to merger deals (Yagil, 2016). Guaghan (2011), with his ‘economic disturbance theory of mergers’ indicated that, economic development is associated with a higher level of irregularities in the business and therefore mergers would more likely occur. Steiner (2005) postulated that, GDP has a significant positive influence on mergers.Moreover, GDP was found to have a positive and significant effect on mergers by Beckenstein (1979) and Guerard (2017). Boone and Mulherin (2007) established that, economic, regulatory and technological changes are affiliated to merger deals. Chung and Weston (2010) found that, mergers were positively and significantly related to the growth rate of GDP. Choi and Jeon (2011), stated that GDP is one of the most important components of identifying total merger deals.
In the research of Wilson (2013), she found that a growth in GDP leads to a high merger deals. This result affirms the role of market size encouraging merger transactions. GDP also had a positive and statistically significant effect on M;A activity, by a follow up research done by Vencatachellum and Wilson (2013).
Becketti (1986) found that actual GNP negatively affected mergers, but his statistical significance was insubstantial. 2.7.
4 Unemployment rateRate of unemployment is another aspect that is given less consideration in most studies. From former findings and through logical reasoning, it is hypothesized that unemployment might have an influence on mergers as this reflects on organizations that conform to altering operating situations and effect alterations so as to develop new growth. In Fishman (2010), the effect of industry shocks on takeover and restructuring activity was investigated.
They found that employment shocks relates positively to merger deals. It was deduced that employment shocks had a significant association between industry mergers and the restructuring activity. On the other side, it is often argued that mergers and acquisitions lead to employee layoffs (Yaghil, 2016) thus merger deals may to result in increased rate of unemployment. 2.7.5 Change in assetsA necessary caveat to all of the theories relating to financial components and the rate of merger and acquisition theory is that they all predict that, external components are able to promote decision making within the organization and, if necessary, overtake internal concerns.
This may, indeed, be the situation but there will always be circumstances in which internal conditions will either promote or inhibit an organization’s entry into the business for corporate control (Owen 2006). We have therefore added the change in assets variable to our model, as slow growth in assets is an internal component encouraging merger. Various accounting variables have been included in regressions as measures of business development. Lakonishok et al. (2005) employed growth in sales, Titman et al.
(2004) included development in capital investment, used accruals, and Hirshleifer et al. (2004) used a cumulative accruals measure (net operating assets). However, the organization asset growth rate is the strongest measure of future returns, with t-statistics of more than twice those acquired by other previously documented predictors (Cooper et al., 2008).
Cooper et al. (2008) used change in assets as their major test variable, and it is a basic and comprehensive estimation of firm asset development, the year-on-year percentage change in total assets.2.
8 CHANGES AFTER MERGER AND ACQUISITIONMergers and acquisitions are associated with substantial change constructs in the organization. This section takes into consideration a number of change constructs which are of importance to the study. 2.8.1 Employment levels A result common to both cross-border and domestic acquisitions is that, in the immediate consequence of an acquisition, the joint firm often partakes in significant cost-cutting by consolidating the activities of the merging partners. Businesses hope to earn synergistic benefits from the acquisition by engaging in workforce consolidation. Prior studies found that, M&As, whether domestic or foreign, end in a decrease in administrative and managerial personnel levels (Shleifer and Summers, 1988; Lichtenberg and Siegel, 1987). This is accompanied by the Shleifer and Summers’ (1988) ‘breach of trust’ hypothesis, which states that, mergers and acquisitions serve as a way for owners of the business enterprise to go back on implicit contracts with workers, thereby declining extra-marginal wage payments.
A small set of empirical studies of the labor market effects on mergers and acquisitions exist. McGuckin and Nguyen (2001) studied plant-level data from the U.S. manufacturing sector and found that, ownership changes are followed by rise in both employment and wage levels in the target businesses. Contrastively, O’Shaughnessy and Flanagan (1998) found that, operational integration succeeding acquisitions often entails significant decrease in employment level. Harjes (2007) documented decrease in employment levels following private equity sell outs. Also, Conyon et al. (2000) reported substantial reductions in post-acquisition employment levels for a sample of 433 U.
K. firms involved in 240 acquisitions from 1983 to 1996. Another study by Conyon et al. (2002) expanded their 2001 research to cover the period 1967–1996 and differentiated between related and unrelated acquisitions. The authors documented significant decreases in both employment and output.
The evidence on the impact of mergers and acquisition on employment seems mixed. However, the bulk of the empirical evidence offers support for the contention that M&A activities in general lead to integration of employment levels following the consummation of mergers. For cross-border mergers and acquisitions, structural improvements that mostly result in contractions of employment levels are likely to be intensified (Lehto and Bockerman, 2008). Due to their lack of loyalty to the host country, management and stockholders of foreign organizations may be more willing to renege on the implicit contracts that maintain pre-acquisition employment levels. Therefore, cross-border acquisitions may imply even higher employment losses than domestic acquisitions. Indeed, Conyon et al.
(2002) and Girma and Görg (2002) rendered some evidence of decreased employment growth in U.K. businesses that were acquired by foreign firms. Later on, a study by Girma (2005) found no influence of foreign acquisitions on employment levels in acquired domestic firms.
Although theory proposes that cross-border targets will see higher reductions in employment as compared to domestic targets, the empirical information on this question remains mixed.2.8.2 Wages Comparative to the employment level effects, the wage effects of M&As are theoretically arguable and empirically under-researched (Conyon et al., 2004).
Auerbach’s (2013) breach of trust hypothesis suggests that, merging organization’s income from the opportunity to renege on implicit labor contracts, which results in decrement of wage payments. However, there are counter arguments to the breach of trust hypothesis surrounding the effects of mergers and acquisitions on wages. Maksimovic and Phillips (2001) came up with a theoretical model, which showed that, obtaining firms enhance productivity of their targets in the post-acquisition period by benefitting to the acquired firm new capital, technology, competencies, and synergies. With a great surplus to be distributed between labor and capital ex-post, wages will rise owing to the merger as employees share in the surplus. Relatively, wages might increase for a different reason. As an incentive tool, wages might incline if the new proprietors seek to increase productivity and efficiency levels in their newly obtained subsidiary. Owing to this development, employee wages will reflect marginal productivity in a competitive labor market.
Empirical work in line with the positive influence of mergers on wages. For instance, in their study of domestic acquisitions, Ouimet and Zarutskie (2010) noted that, wages rise for mergers with the highest expected productivity gains, demonstrating employees indeed share in the merger surplus. Based on this literature which examines the relationship between foreign ownership and wages, we make hypothesesthat applies to cross-border acquisitions. If multinationals are expected to bring with them competitive advantages that are then used to offset any pros of incumbency possessed by domestic firms, then the inward shift of these competitive assets could manifest in increased productivity of the obtained target. Therefore, a greater productivity would be anticipated to enhance a greater surplus and hence higher wages.
Again, we hypothesize a different effect: ceteris paribus, higher wages may be paid to the remaining employees to incentivize them to achieve higher productivity. Using U.K. data, Conyon et al. (2002) found that, foreign firms pay equivalent employees 3.4% more than domestic firms, an increase that is due to high levels of productivity in foreign-owned targets.
The existence of foreign-ownership wage premium is in line with other prior studies including Conyon et al. (2004) and Lipsey and Sjoholm (2004).2.
8.3 Employee productivityA raise in productivity can show in high wages, however increment in wages might also be a strategy used by management to incentivize employee to attain high productivity (Zhu et al., 2011). Conforming to this argument, several research studies have established information that, cross-border mergers and acquisitions entail larger increases in productivity compared to domestic transactions. Example, Arnold and Javorcik (2005) showed that, foreign acquisitions enhanced the productivity of target firms in Indonesia. Also, Bertrand and Zitouna (2008) studied cross-border acquisitions of French firms and found that, the acquisitions promoted the productivity of target firms. With U.K targets in the limelight, Conyon et al.
(2002) found that, firms that are acquired in cross-border transactions achieve a 13% increase in labor productivity. We propose that cross-border acquisitions will promote incremental productivity earns for the targets based on these prior studies.2.8.4 Employee efficiencyThe reallocation of production across organizations is more essential for the foreign acquirer because merging associates are more likely to vary in their marginal production costs. The target organization may benefit from savings in transaction costs and better access to markets overseas (Bertrand and Zitouna, 2008).
However, to attain efficient benefits, firms must spread their production activities geographically across countries, which might partake in forgoing gains from economies of scale. Moreover, cross-border acquisitions permit targets to have an upper hand over economies of input purchasing, which causes a decline in input costs. However, the market for corporate control is characterized by a high asymmetry in information, a problem enhanced in the cross-border takeovers (Gioia and Thomsen, 2004; Zhu et al., 2011). Foreign acquirers encounter a ‘double lemons’ problem in that, they have a declined monitoring capacity and face asymmetrical information problem due to variations in accounting standard or the judicial and/or institutional environment (Bertrand and Zitouna, 2008).Therefore, there are countering forces that might reduce the efficiencies that can be achieved in cross-border acquisitions (relative to domestic acquisitions). Deviating from the empirical work on cross-border M&As and productivity, there is very little work that assesses the efficiency ramifications of foreign takeovers. Lichtenberg and Siegel (1987) analyzed the repercussions of ownership changes on U.
S. manufacturing plants and monitored a relative rise in the efficiency of merging firms. More recently, Bertrand and Zitouna (2008), using French firm-level data to analyse the effects of horizontal acquisitions on the performance of target firms in the 1990s found that, while profit levels do not increase, efficiency increases after merger consummation are stronger for cross-border acquisition transactions.
We look forward to the efficiency of the firms acquired in cross-border acquisitions to increase in the post-acquisition period and also to be greater than that of targets of domestic acquisitions.2.9 MANAGING CHANGEFrom the perspective of a number of studies, the most outstanding strategies for change management during mergers and acquisition are;2.9.1 Integration Plan and Clear visionThe first step should be the establishment of a team comprising senior executives from both organizations. Instead of paying attention to daily routine activities, they should be charged with the carrying of post M&A activities smoothly (Auerbach, 2013). It is best that they communicate with employees early. They can do it via webcast, intranet or group meetings.
Informing all the employees at the same time will reduce the chances for gossip and spread of misinformation (Chung et al., 2010). They should bring to the realization of the employees the importance of this marriage. After the declaration of merger, both firms must at all times have executive owner present and participating. The senior executive in both the organization should set goals, values, vision and policies of the new company.
It must be clearly communicated to the organization. 2.9.2 Understanding Cultural differencesCulture plays a key role in the success and failure of new structure especially in the case of cross broader M&A. Cultural variation accounted for the downfall of merger between Chrysler and Daimler.
Daimler and Chrysler employees had different views on pertinent things like travel expenses and pay scale; and also had a different approach towards life; Daimler supported a more formal and structured style while Chrysler was for a more relaxed and freewheeling style. This cultural misunderstanding played a big role in the failure of merger of Daimler and Chrysler. In that case, leaders should be able to motivate people to forfeit their comfort zone and accustomed norms and accept the new ones. And to attain this, leaders must be in constant touch with the employees. Spending time with them, getting to know them, their peeves and what excites them will help leaders in making people embrace the new culture.2.9.
3 Employees Involvement This gives both sides the chance for employees to build their knowledge of other’s organization. When they interact, they share knowledge about their respective process, systems, budget, headcounts and operations. Trust is key to building knowledge. Till the two sides trust each other, they will remain secretive, hiding essential details.2.9.4 Customer FocusIn today’s competitive world, it is very essential that a company shares its future roadmap with the existing customer and promises the customer that they will continue to provide service, personnel support and sales person who will continue to assist them as they were doing earlier. This will ensure that customers are safe about their purchase order.
And as a matter of urgency, the merged unit can create helpdesk also. Heeding to this will decrease the number of unsatisfied customers and thus raising customer base and profitability. 2.
9.5 Human Resource (HR) RestructuringHuman resource restructuring is an important part in M&A. M&A have the potential of changing the below things: Change of geographical location, Change in perks, Change in earnings and compensation packages, Change in Career paths and Changes in job – new roles and assignment.Employees are mostly concerned about their career opportunities, new roles they will be designated to, or whether they will be transferred to new location post-merger. It is very important that HR discusses the aforementioned issues with the employees to the best of their understanding. This might involve HR conducting management training, individual counselling, and offering other professional assistance to employees. They need to communicate to the employees reasons why these changes are taking place, and why the changes are vital.
Maintaining top notch employees from both the companies is always important. A team can be set up with human resource representatives from both organizations, whose main role is to recognize valuable human resources only. This will create loyalty and commitment to the new company and also offer employees the acquired company a deep sense of equality. 2.
10 PERFORMANCE OF BANKS AFTER MERGER AND ACQUISITION The financial state of an organization has been influenced positively by the activities of merger especially in areas such as lucrativeness, purchase and exchangeability. In analyzing the operation of mergers, it is very crucial to rate the merger deal (Pandit and Rajesh, 2016). In order to efficiently deliberate on merger deals, evaluation is a relevant part that should not be overlooked.
Using information obtained from administrators of merged organizations, Pandit and Rajesh studied the secondary information of fiscal proportions. Pandit and Rajesh came to the conclusion that, merely an average evaluation responsible post-merger direction is capable of producing synergies and irrefutable influence on an organization’s operation. Arikan and Stulz (2016) considered numerous hypotheses and proved that, newer businesses stand a chance of worthful and well-distributed merger compared to older ones.
Findings from the work of Arikan and Stulz (2016) are in conformity with neoclassical hypotheses that indicated that, acquired organization operated more effectively and also produced affluence via attainment of non-public organization. Moreover, the determinations of their work are coherent with business hypotheses and this is due to determinations of their work which indicated that, older businesses have disconfirming stock price responses for public organizations. With the intention of assessing partnered ventures, mergers and acquisitions, and bonds as information, Drees (2014), used meta-analysis on 204 research works to evaluate the business approaches.
Drees reasoned that, partnered ventures and mergers and acquisitions promote essential operation. It was realized that merger deals positively influenced accounting based and market based operation compared to partnered ventures and alliances. Andreou et al. (2012) delved into the evaluation consequences of merger deals in the conveyanceindustry considering a sample distribution of 59 merger for the duration of 1980–2009.
Andreou et al.(2012) research also proved that, mergers promote synergy, particularly biddings which are coherent with thefinding that conveyance of mergers occur for synergistic purposes instead ofadministration’s quest for incentive expenditure. They further asserted that, although both types ofstakeholders, that is, target and bidder organization’s stakeholder are well off, with the target organization’s stakeholders enjoying greater portion of the synergistic benefits.
Later, they discovered that vertical mergers have higher evaluation implications than horizontal mergers and the economic influence of bidders are massive for open mergers.Leepsa and Mishra (2012) investigated the impacts on post-merger economic operation inenterprises involved in manufacturing in India. It was also witnessed that, the semi-permanent alterations in post-merger operation of organizations investigated. This research study span for a duration of 4-yearsunder consideration using accounting based approach and employing three varying economic factors that are liquidity, profitability, and leverage. Average of before and after merger financial ratios were compared to determine if there were any noteworthy change in financial performance due to mergers, using paired two sample t tests. The liquidity stand of the firms was noted to be improving so does the profitability of firms which also improved in terms of return on capital and declined in terms of return on net worth of firms.
The improvement was noticed in Al-Sharkas et al. (2008) study which looked into the impacts of cost and profit efficiency of banking sector merger events on the US banking sector by using the Stochastic Frontier Approach (SFA) and Data Envelopment Analysis (DEA) to evaluate the production structure of merged and non-merged banks. The results immense raise in cost efficiencies and profit efficiencies after a merger deal. Also, their results showed that non-merged banks have higher costs than merged banks because merged banks were focusing on technical efficiency as well as allocative efficiency.
Frederikslust et al. (2008) assessed the wealth creation and redistribution theories of mergers in their study by taking a sample of 101 merger events (1954-1997). They showed that over 50% of the buying companies had a positive response to share value at the announcement of merger, while 82% of the merger deals showed that share price performance for target firms was enhanced.
Vanitha and Selvam (2007) analyzed the financial state of 17 merged entities out of 58 manufacturing firms in India (2000-2002) by using ratio analysis and t-tests. They realized that it was possible for the merged firms to get success in financial performance as the merging firms were overtaken by those firms that had good repute and efficient management. Also, Pawaskar (2001) studied the financial position of firms using data for 36 merger deals. He looked into the state of operating performance before and after merger of the companies. Relevant changes in the financial performance of the firms involved in merger activity were observed. In relation to his findings, the mergers seemed to lead to financial synergies and a one-time development only.
