EFFECTS
OF MERGER AND ACQUISITION ON OANDO OPTIMAL GROWTH
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
A
critical analysis of the business environment in Nigeria today shows that most
of the companies in operation to survive, for instance companies like, Kingsway
stores, UTC, Chanri, FAMAD (formally known as Baba) AG Leventis, just to
mention few, that were the toast of the town in the 1980s have either folded up
or are now merely a shadow of their former states.
The
rate of corporate failure in Nigeria
has been very high and could even get worse if nothing drastic and urgent is
done about it. Ewubare (2003); Simulating corporate Growth and Survival through
mergers and acquisitions, opined that the reason some of these companies could
not survive or let alone not grow could be attributed to a plethoral of reasons
one of which is unfavourable operating environment. In his words, lithe
business mode of Nigeria
came under attack when the Babangida administration uncoupled the naira from
the prior fixed exchange rate regime and introduced a measure of volatility and
uncertainty in the Nigeria Economy”. This he added” Let the crashing
devaluation” of the naira on a clative basis” Furthermore, Ewubare
stated that why companies in Nigeria have a low corporate growth rate is due to
the absence of vision & imagination i.e. his view most companies in Nigeria
lack the innovation ideas and creative spirit to grow in the midst of an
unfavourable environment. British petroleum and Amaco oil during oil companies
also dropped significantly, had the foresight to merge for survived. Their
mergers created the largest company in the UK in terms of share price return
in investment and market share. (New York times, 2000) This single merger
success story in the oil industry created a foot print for other oil companies,
world over to follow almost immediately. Ironically,
in spite of this and successful consolidation stories it is
discouraging to know that merger failure rate (in terms of increasing share
holders value) was put at a 83% and the general failure rate put some between
40 – 80% in a 1999 survey (Porter, and Warsh 2002) suggests that up to 65% of
failed mergers and acquisition are due to “people issue” i.e.
intercultural difference causing communication breakdowns that results in poor
productivity.
Inaddition, Leis
(2002) opined that sever factors contribute to this dismal statistic. These
failures are not usua.lly caused by outside factors like the market
competition, high purchase premium or excessive beverage, rather, the failure
has three primary causes disparate management styles organization, culture
difference and clashes in decision – making processes. According to him, the
biggest challenge in handling the human side of the merger equation. People
issues ultimately drive performance can censure a majority of operating cost.
Business
combination in Nigeria until recently are not a major feature although a couple
of companies compelled by their global affiliations have been involved in
merger schemes, however the consolidation drive of the central bank of Nigeria
(CBN) is increasingly, popularizing the practice of mergers and acquisition in
Nigeria both in the banking and corporate sector. In view of this current
trend, it would help prevent the high rate of consolidation failures while helping
to enhancing corporate failures.
1.2 STATEMENT OF THE PROBLEM
The
harsh and dwindling economic conditions today have created a bleak growth
prospect for most corporate organizations in Nigeria. These harsh economic
condition which include high interest rate, increasing devaluation of the
naira, restrictive credit policies, low exchange rate of the naira for some
major world currencies among other conditions have led to companies in Nigeria
operating a very high costs, unable to secure adequate funds for their
operations, increase working capital requirement among others, This ugly trend
has really hampered corporate growth in Nigeria. Hence, there is urgent need
for companies in Nigeria
to craft strategies to enhance their growth in the light of these harsh
economic conditions. This research work seeks to evaluate mergers and
acquisition as a way of corporate growth can be achieved in Nigeria.
1.3 RESEARCH QUESTIONS
This
research work will find answers to the questions below:
i.
Does mergers and
acquisition lead to increase in profit – ability?
ii. Does
mergers and acquisition lead to increase in firms’ value per-ordinary share?
iii.Does
mergers and acquisition lead to increase in market shares?
1.4 OBJECTIVE OF THE STUDY
1. To
investigate how mergers and acquisitions can bring about an increase in the
firms market share as a result of increase in turnover in the post merger
performance.
2. To
determine how mergers and acquisition can enhance corporate growth in Nigeria and how
profitability can be achieved.
3. To
examine how merger and acquisition can bring about an increase in firms value
per ordinary share.
1.5 SCOPE OF THE STUDY
The
scope of the research work will be limited to the period 2000 – 2005. For the
purpose of this study the merger between Agip & Unipetrol would attract the
highest emphasis. All other mergers and acquisition will, only be generally and
indirectly referred to especially under the sub – topics.
1.6 SIGNIFICANCE OF THE STUDY
1. Operation
savings that could rest in combination of companies with similarities in
investment plans, organizational structures and market.
2. Means
of gaining economies of scale and increasing income and profitability.
3. Means
of saving companies from ultimate collapse and liquidation.
4. The
activities are cost effective and the company has larger security.
5. The
borrowing capacity of a combined company is enhanced.
1.7 LIMITATIONS OF THE STUDY
This
research work shall examine the background, meaning, objective and importance
of mergers and acquisitions in relation to corporate growth in Nigeria it is important to note that not many
cases of mergers and acquisitions have taken place in Nigeria
recently. This explains the reasons why only Oando Nigeria Plc is taken as a
case study.
Another
constraints of the research work is absent of the manager in Kakuri branch.
This has limited our sources of information to the company’s annual reports,
(for pre merger and post merger) scheme and other related works.
–
Lack of adequate
information to get annual reports of balance sheet.
–
Financial problems
–
Lack of inadequate
materials
–
Time constraints form
the mergers.
1.8 HISTORICAL
BLACKGROUND OF CASE STUDY “OANDO NIGERIA PLC.
Unipetrol
(Now Oando Pic) the company commenced business, operations as petroleum marketing
in Nigeria under the name
“ESSO West Africa incorporated a Subsidiary of EXXON comp oration of the USA. The Nigeria
government ‘Bought ESSO’ S interest and thus became the 100% owner of the
Company. The company was then rebranded” Unipetrol Nigeria ltd on
the 1st March, 1991, the company became a public limited company and
changed its name to Unipetrol Nigeria Plc. In the same year 60% of the
company’s share holding was sold to the Nigerian pubic under the first phase Of
the then privatization exercise. In February 1992, the company was quoted on
the Nigeria Stock Exchange. Ocean oil services ltd was founded to supply and
trade petroleum products within Nigeria.
Ocean oil limited was found to supply and trade petroleum products worldwide.
Unipetrol acquired 40% in the equity to Gaslink Nigeria limited to utilize its
exclusive gas sale and purchase Agreement with Nigeria Gas Company. The later
increased its skate to a controlling 51 % in 200.1. Under the second phase of
the Federal Government of Nigeria privatization programme, ocean and oil became
a core investor in Unipetrol by acquiring 30% of the company firm the Federal
Government of Nigeria, the balance 10% of the FGBNIS holding was sold to the
Nigeria public. In the year 2002 the company bid for and acquired 60% in the
equity of Agip Nigeria Plc from Agip petrol international. Unipetrol Nigeria Plc
merged Agip Nigeria Plc and ‘was re-branded “Oando” Oando marketing
emerged as Nigeria
largest downstream energy group in 2003. Oando is trading arm was re-energized
by the incorporation of Oando trading limited (Bermuda)
and Oando supply and trading limited. This move consolidated the group is
trading operations Worldwide and in Nigeria respectively. Oando power
emerged as a synergy of Oando’s customer relationship management expertise and
Gaslinks exclusion gas distribution franchise to provide reliable power to
industries. In 2005, Oando energy services company to achieve the groups AFS
objectives in the upstream services industry.
On
the 25th November, 2005, Dando Plc became the first African company to
accomplish a cross border inward listing on Johannesburg stock of exchange ((JSE). Oando
Exploration and production limited bid and won oil & Gas fields to boost
upstream activities. In 2007, Gaslinks completed laying of 100km gas
distribution pipeline in Lagos state, today, Oando energy services acquired two
oil drilling rigs for approximately $100million for use in the Niger Delta of
Nigeria. (www.oandoplc. com/Nigeria/about –Oando).