CHAPTER TWO

REVIEW OF LITERATURE
2.1 Introduction
This chapter captured the concept of M&A, definitions of terms relevant to the study
such as Mergers, Acquisitions and Performance. The conceptual framework of the study as well
as the history, motives, processes, occurrences, and post M&A performances among others were
reviewed.

2.2 The Concept of Mergers and Acquisitions

The merger of two separate entities into one firm or the acquisition of one firm by
another have increasingly become a common phenomenon in the organizational life especially in
the 21st centenary. The literature on mergers and acquisitions (M&As) reveals that they are
classified into horizontal, vertical, and conglomerate as proposed by some researchers. Others
additionally proposed a concentric type of merger. The terms merger or acquisition are often
used interchangeably. In lay parlance, both are viewed as the same. Academics however have
pointed out few differences that determine whether a particular activity is a merger or
acquisition. It is however noted that, mergers and acquisitions (M&As) failure range from a
pessimistic 80% to a more optimistic, but still disappointing, 50% (Cartwright, 1994).
On the other side, empirical research evidence indicate that, mergers and acquisition portray a
neutral effect on profitability and a positive indicator on cost efficiency, this is mainly attributed
to restructuring costs that usually comes with mergers and acquisitions in the short-run hence
affecting its profitability prospects, but in the long-run as a result of improved cost efficiency,
long-term profitability prevail, this paradox of mergers and acquisitions is further envisaged
when comparing merging banks and non-merging banks, (Behr, 2008) ,where on average the
value of mergers and acquisitions is not economically viable and statistically significant although
these mergers and acquisitions continue to prevail and happen, the answer only lies on the
fundamental challenge of examining the underlying factors that influence the propensity of banks
to merge and their correlation to bank’s efficiency and profitability.
Mergers and acquisitions are considered to be the best competitive way to put together strengths
and capabilities to well compete in the market. The biggest and the wealthiest companies also
agree that for a company to be successful, it needs new skills, resources, technology, and
capabilities than they can gather and run with (Hamel, 2002).
2.3 Operational Definition of Terms
2.3.1 Merger
A Merger can be descried as a combination of two companies and their resources
together into one larger company to achieve a common objective; such activities are normally
voluntary in nature and involve a stock swap or cash payment to the target organization. In a
merger, both firms combine to form a third entity and the owners of the combining firms remain
as joint owners of the new entity (Sudarsanam, 1995).
2.3.2 Acquisition
An acquisition is an activity where a firm takes a controlling ownership interest in
another firm, a legal subsidiary of another firm or selected assets of another firm. This may
involve the purchase of another firm’s assets or stock (DePamphilis, 2008). Acquiring all the
assets rather than acquiring stocks or shares of the selling firm will avoid the potential problem
of being the minority shareholder. However, the cost of transferring the assets is generally high
(Ross, 2004). This activity is what transpired between Procredit Savings and Loans taken over by
Fidelity Bank Ghana.
2.3.3 Acquisition
The term acquisition is used to describe different activities. It is a broad term which
sometimes refers to hostile transactions or to either friendly or unfriendly mergers (Gaughan,
2007). Acquisition is slightly different from an acquisition; however, the meaning of the latter
remains the same. When an acquisition is forced and without the will of the target firm’s
management then such an activity is known as a acquisition. Acquisition normally undergoes a
process whereby the acquiring firm directly approaches the minority shareholders through an
open tender offer to purchase their shares without the consent of the target firm’s management.
In scenarios involving mergers and acquisitions, the terms merger, acquisition, acquisition,
consolidation, or amalgamation can be used interchangeably (Chandra, 2001).
2.3.4 Performance
Venkatraman and Ramanujam (1986) argued that performance is the time test of any
strategy as it centres on the use of simple outcome-based financial indicators that are assumed to
reflect the fulfilment of the economic goals of the firm. Performance as defined by Neely Y,
(1994) is defined as the set if metrics used to quantity both the efficiency and effectiveness of
actions. According to Barney (2001), organizational performance is achieved by comparing the
value that an organization creates using its productive assets with the value that owners of these
assets expect to obtain.

2.4 Conceptual Framework

2.4.1 The Mergers and Acquisitions Concept
Mergers and acquisitions (M&A) are broadly classified into horizontal, vertical, and
conglomerate (Green, 1990; Gaughan, 2007). Other researchers refer additionally to concentric
mergers as a different type of mergers and acquisitions (Straub, 2007). The study therefore
adopted the horizontal type of M&As.
2.4.1.1 Types of Mergers and Acquisitions
The horizontal M&A type is subdivided into two more groups. The first group covers
mergers within the same product line but allocated to different countries. Consequently, the
acquiring firm gains market shares and power through the merger in new geographical areas, for
instance. The second type consists in mergers of companies with slightly different product lines.
As a result, the acquiring firm increases its product line through the merger. However horizontal
mergers are highly controlled by market and governmental regulations, which limit the value
creation in some cases such as restraining the formation of monopolies (Green, 1990; Straub,
2007).
In contrast, in a vertical merger, companies do not acquire firms with the same product
line, but firms connected to their own production chain. Also, this type of merger can be
subdivided into two different groups: merging vertical backward or forward. The purpose of the
forward vertical acquisition for the acquiring company is to have a sure buyer to which it can
provide its own products. On the other hand, acquiring vertical backwards means to ensure a
constantly guaranteed supply of raw materials that are needed for the acquirer’s production. In
general, a vertical merger leads to a rise of the acquiring company’s value (Green, 1990; Straub,
2007).
In its simplest form, vertical integration is the process of manufacturers merging with
suppliers or retailers. Major production companies obtain supplies of goods and raw materials
from a range of different suppliers. Vertical integration is basically an attempt to reduce the risk
associated with suppliers. Note that vertical integration can run in both directions, as shown in
Figure 1.1.
Figure 1.1

Retail customers

Forward integration

The Acquirer

Backwards integration

Raw materials
The concept of vertical integration
Forward integration refers to vertical integration that runs towards the customer base,
whereas backward integration refers to vertical integration that runs towards the supplier base.
Vertical integration offers several obvious advantages. Some of these advantages are listed
below.
 Combined processes. The production processes of most organisations carry fixed price
overheads. Typical examples include human resources and IT sup- port. Where
integration allows these overhead functions to become combined, there is, theoretically,
the prospect of increased support function efficiency.
 Reduced risk and/or enhanced risk management. Vertical integration allows some of
the risk associated with suppliers to be removed. Obvious examples are sudden supply
price increased and late and/or defective deliveries. In many ways, the control of supply
products and raw materials passes to the acquirer.
  Configuration management. The concept of configuration management is covered in
the EBS text Project Management. Configuration management is primarily concerned
with the efficient and effective flow of information both within and outside an
organisation. Information is generally much more easily and effectively controlled within
an organisation and vertical integration, therefore, acts to enhance the configuration
management system operated by a given organisation.
 Quality management. This is an increasingly important consideration for most
organisations. A fully integrated production system provides the opportunities for an
enterprise-wide quality management system covering everything from raw mate- rials,
through production to sales. As with risk management, quality management is more
easily executed where supplies, production and sales are contained in-house rather than
externally.
 Reduced negotiation. As suppliers are acquired the necessity for complex and
competitive negotiations decreases. The acquiring company is no longer required to
negotiate the best deals with suppliers as the suppliers become part of the parent
organisation. The obvious downside is that the acquired suppliers may lose their
competitive edge as they now have a guaranteed market and no longer need to compete at
the same level.
 Proprietary and intellectual property protection. This can be an important
consideration in sectors that are characterised by rapid change and innovation.
Organizations that operate under these circumstances must give away a certain degree of
their organizational knowledge when specifying exactly what they want suppliers to
produce. In some cases, such specifications can be very revealing, and an uncontained
supplier could release proprietary and intellectual property to a third party.
 Individualisation. Complete control of suppliers and customers can lead to a particular
classification of trading known as brand. To achieve and maintain brand status,
organisations must achieve and maintain a close degree of control over all aspects of
production and sales so that quality and image can be maintained. The evolution of a
brand allows organisations to charge a premium rate for their products.
Vertical integration also implies some disadvantages. By acquiring suppliers, the acquirer also
eliminates the direct competition that existed previously in the supply market. This can be
addressed to some extent by partial vertical integration, where selected key suppliers are
integrated while remaining non-key suppliers remain outsourced and open to competitive
pricing. There are also brand implications in vertical integration. Some companies have
successfully integrated along all sections of the production and distribution process. In fast food,
for example, a company might integrate all outlets and then award outlets operation to selected
and approved subcontractors through a system of controlled franchises. This practice protects the
brand from the point of manufacture through distribution and right up to the point of sale to the
consumer. Vertical integration is sometimes extended beyond suppliers to include customers as
well. Examples of this are particularly pronounced in the interaction between the entertainment
and fast-food industries. It is common practice for manufacturers of fast foods and drinks to
integrate with outlets such as cinemas and fast-food restaurants so that only their brand of food
or drink is offered for sale in that outlet. This practice, if successful, guarantees a steady and
depend- able outlet for the food or drink product concerned.
M&A is conglomerate if there is no connection, neither in the production line nor in the
production chain between the involved companies. This merger can occur mainly because
diversified companies try to reduce their risk. They aim is to build an efficient distribution
network as a fundamental for their strategy (Green, 1990). For instance, a telecommunication
company merging with a bank. According to Evans, Frank C and bishop, David M., 2001.
However, a concentric M&A affects the knowhow such as production technology and
delivery service as well as improvement and research capabilities of the participating companies.
Especially firms from emerging countries show big interest in the knowhow of enterprises from
developed countries (Straub, 2007). Significant is the financial acquisitions which is
uncommonly discussed when classifying M&As. Such acquisitions are driven by the financial
logic of transactions. They generally fall under Management Buyouts (MBOs) or Leverage
Buyouts (LBOs) (Ross, 2006).
2.5 Motives for Mergers and Acquisitions
There are several theories related to acquisition motives. Most of these theories are
closely related to each other and give most of the time similar motives for acquisitions. Ojanen,
Salmi and Torkkeli (2008) have classified the motives of M&A with the perspective of an
acquirer company:
i. Expansion and development which involve geographic and/or product expansion, client
following and redeployment of resources to or/and from target.
ii. Increase internal efficiency includes economies of scale.
iii. Improved competitive environment encompasses increase market share and power, gain size
to face global competition, defense mechanism, acquire a competitor, create a barrier to market
entry, decrease industry overcapacity, and benefit from cost disparities (for instance, labour).
iv. Financial motives comprises diversify risk; invest in fast-growth markets, and turnaround of a
failing target.
v. Personal motives include increased sales and asset growth, gain personal power and prestige,
cashing in on short-term stock market reactions (incentive system).
vi. Others include benefit from exchange rate differentials, and bypass protective tariffs, quotas,
among others.
Obviously, M&A may be motivated by more than one of those motives. Those motives
may also vary depending on the industry and the firm objectives (Ojanen et al., 2008).
Other factors affecting M&A change with changing political, economic, socio-cultural,
technological, and legal environments (Kaushal, 1995). Business organisation literature has
identified two main reasons associated with M&A that is efficiency and strategic rationale
(Neary, 2004). Efficiency gain means the merger will result into benefits in the form of
economies of scale and scope. Economies of scale and scope are achieved due to the integration
of the volumes and efficiency of both firms forming the combined entity. Next, strategic
rationale is derived from the point that M&A activities would lead to change in the structure of
the combined entity which would have an affirmative impact on the performance of the firm.
2.6 Merger and Acquisition Process
Considering different theories about the M&A process, a model had been proposed.
However, merging companies do not all the time compulsorily go through all the stages of the
process. The model is divided in three different major categories: Pre-merger process, during the
merger activities and post-merger integration. Each of these stages can be subdivided again into
two different steps. Hence the M&A process consist in six main steps (Paulsen and Huber, 2001)
which are depicted by the figure below.
Figure 1.2

Pre-merger process
 Research and decision
 Strategy

During the merger activities

 M&A selection
 Due diligence

Post -merger integration

 Closing
 Post-merger integration

Source: Adapted from Paulsen and Huber (2001)

2.6.1 Research and Decision

The pre-merger process is the timeframe before the announcement of the deal and
involves a long process of decision-making. First, the decision for an acquisition must be made.
This will be done normally by the Chief Executive Officer (CEO) of the company in
collaboration with the top management team after thoroughly analyzing the opportunities
available (Kusstatscher and Cooper, 2005). However, the game theory of Nash (1950) that is the
mathematical study of strategies and decision-making, explains a merger in most of the cases
creates a reaction of the other market players. Therefore, the top management and the
consultancies must be aware of the reaction following the decision of M&A deal of the own
company. Nevertheless, if the decision is considered as right, a long list of potential targets will
be created to get an overview and more information on the companies fitting with the acquirer’s
strategy (Sudersanam, 2003).
2.6.2 Strategy
In this stage a first strategy concept and a business plan will be developed to reduce the
number of potential candidates. Due to the same reason a first evaluation of financial and
strategic fit will be done. Additionally, a strategy depending on the complexity of the acquisition,
the strength as well as the ambitions of the target companies and their managers will be
developed in this period. Nevertheless, beside the importance of the further strategy, the CEO
and the negotiation team should be open- minded for new opportunities and to be flexible to
react to new problems occurring out of the negotiations with the potential targets (Sudersanam,
2003).
2.6.3 Merger and Acquisition Selection
In this stage, potential candidates must be screened and a final group of maximal five
target companies should be selected. This will be done through two main criteria in addition to a
direct contact. The first criteria regard choosing the final target company depending on the
forecasted benefits of an acquisition of the observed company that could be realised and the
strategic matches in terms of products, markets geographical position. This stage consists mainly
in bidding and negotiating between the acquiring and the target company. Therefore, confidential
agreements are imperative (Kusstatscher and Cooper, 2005).
2.6.4 Due Diligence
In the so-called due diligence process the financial shape and the potential strategic
match of the target company will be checked more in details by a selected team of accountants,
consultants, and lawyers (Kusstatscher and Cooper, 2005). The biggest problem of the due
diligence process is that the target company wants the acquiring company to feel comfortable
with the postulated price and the quality offered but on the other hand the target company does
not want to present all information about financial, marketing or sales aspects for fear of a late
failure of the deal. These secret information are disclosed in the due diligence process, the
introduction of an interim step, in which the acquiring company gets access to certain
information about the target company, can be helpful. There is also the possibility of a non-
disclosure agreement, which protect the secret needs of the involved company. Nevertheless, not
all information honestly is delivered every time. Bad surprises can occur later in the deal
(Paulson and Huber, 2001). During the merger, it is crucial to find the right balance between
emphases to speed and diligence in the decision-making process. The consequences of moving
too slow as well as doing the wrong decisions mean losing a lot of money and reducing
shareholder value.
2.6.5 Closing the Merger
The timeframe to close the merger may last few hours until a few weeks depending on
the complexity of the deal and the accuracy of the work done. Final negotiations about the
acquisition price and a binding letter of intent will be signed together with the closing contracts.
Nevertheless, mistakes can be made during the final meeting, where the contracts are signed,
which may cause delays in the closure or in the worst case the failure. Hence, according to Reed
et al. (2007), there are several points to keep in mind for the closing meeting; all lawyers and
other people involved in the deal, such as consultants, should be present all the time during the
final meetings, in case of changes through last minute documents. All time constraints such as
desk opening hours of involved banks for instance, must be taken into consideration and if
necessary, in consultation with them, extended. Emphasis on speed should not influence the
quality. Every single change made in the closing meeting, caused by late arrival documents or
any other reason, must be thoroughly proved in all layers concerning the deal.
2.6.6 The Integration Process
Each of these six steps is very important and requires a maximum of concentration to
succeed in merging two companies. Therefore, after closing the merger, the final goal is not
reached yet, and the integration process must be treated with the highest possible amount of
concentration and accuracy. Indeed, mistakes in the integration process of M&A are one of the
main reasons of failures in acquisitions. Most time the post-merger integration process executes
the plans that have been done before the integration stage. Consequently, there are different steps
which are mainly planned before, but should be taken into consideration and controlled to make
the acquisition successful (Paulsen and Huber, 2001).
First, an integration plan must be developed, including every step, starting at the day of
signing the contracts. The plans must be already done until the final signatures will be given,
otherwise there will be too much time wasted. It can be also helpful to have an integration
manager. The task of the manager is to focus only on aspects concerning the integration of the
different cultures, both national and corporate culture. He/she also must evaluate the employees
of both companies as objective and fair as possible. Therefore he/she should not have been
involved in one of the companies before, to maintain the credibility towards the workforce.
Furthermore, the integration manager must be involved in all activities and information from the
first day of the merger decision (Light, 2001). Decision about the top management and the
workforce must be done. There must be a strong management structure to create a secure
environment for the workforce, because already the announcement of the deal creates a lot of
uncertainty between all the layers of the company and led to outflow of the talents who are
needed for the future (Light, 2001). The different corporate and national cultures bring a lot of
risk with them, because they can easily be a reason of failure for the deal if they are not handled
in the right way. Therefore, it is important to create as fast as possible a new common culture,
which helps to understand the cultural differences between each other. Succeeding in merging
two cultures together can be a big opportunity to create unforeseen added value. Therefore,
communication is one of the most important points in the integration process. Bringing the
different cultures together requires a big communication effort. Communication takes place in
every step from the beginning of the M&A process (Ashkenas and Francis, 2001).
2.7 History of Mergers and Acquisitions
The history of M&As goes back more than 110 years and is divided in different periods
or so-called waves (Sudarsanam, 2003). While most economic researchers speak about five
major M&A waves in the history of the US and later the UK and Western Europe, others like
Moeller and Brady (2007), as well as we do refer to a sixth wave which affected a big range of
economies all over the world.
2.7.1 The First Three Merger and Acquisition Waves
The first M&A wave took place between 1890 and 1905 after a long stagnation of the
economy. The mergers were mainly horizontal, what made the concerned industries extremely
concentrated. Hence that wave is also considered as the time of merging for monopoly. The
second wave came up in the 1920s after the First World War and a market collapse. The
monopolies, which developed during the first wave, were forbidden and consequently more
vertical than horizontal merger was accomplished, which confer the second wave the title of
merging for oligopoly. The third wave of M&A started to evolve after the Second World War in
the 1960s. The aim of mergers at that time was mainly growth and therefore the relation between
the companies´ businesses did not really matter. For this reason, the period of these conglomerate
M&As is also generally known as merging for growth. In comparison with each other, all these
three waves show similarities. All three of them emerged in a persistent period of economic
prosperity and mainly after tremendous changes in the economic infrastructure, such as the
introduction of an electricity grid or a railroad system (Sudarsanam, 2003; Moeller and Brady,
2007).
2.7.2 The Fourth and Fifth Waves
The fourth wave occurred after a deep recession in the middle of the 1980s and was a bit
different compared to the other three waves before. This wave started to also concern Europe and
was supported by a trend of divestitures. At this time, the word corporate raider was introduced
in the business world. A lot of hostile acquisition bids were made by companies, which were
behaving like raiders, because they sold off different parts of a company after acquiring it. Also,
the average size and value of the acquired companies increased strongly among others due to
leverage buyouts as a financial mechanism, which involved big debts. With a six times bigger
added value than the wave before, the fifth wave was in terms of value and number of deals by
far the biggest at this moment. This wave emerged in the 1990s and was strongly supported by
the introduction of new technologies, such as cable television, satellite communication and
Internet. Especially, technology-based industries gained fundamental growth at that time.
Furthermore, this period was shaped by a reorganisation of major industries like the automobile
and the food industry as well as the bank and finance sector, what led to significant deals for the
M&A history, like Mannesmann-Vodafone or Daimler-Chrysler. Additionally, governmental
regulations against deregulations in some markets contributed to the huge dimension of this
wave (Sudarsanam, 2003; Moeller and Brady, 2007).
2.7.3 The European Wave
 As mentioned before, these waves originated in the US. But the EU shows similarities in
the M&A development. The European economy had displayed only two waves, but the
connections with the American waves are undisputed, also because the timeframes of the two
European waves match quite well with the fourth and the fifth wave in the US. Beside the facts
responsible for the occurrence in the US and of course the globalisation, which has created
dependence between the EU and the US, the EU waves were influenced by the developments on
their own continent, too. The late 1980s and the 1990s were quite turbulent times, which evoked
a lot of changes in the political, the economic as well as the social area. Hence the reunion of
Germany in 1989 - 1990, the foundation of the European Union in 1992 and the introduction of a
common currency, the EURO, in 1999 are among others, important issues for the M&A
development on the continent. The UK was ahead in terms of M&A activities, compared to the
other European countries, not at least because of their longer history of merger transactions. In
the United Kingdom, M&A activities are registered already in the late 1890s and 1920s. Also,
for that reason the UK were involved in 26% of all international mergers with European
involvement in 1999 (Sudarsanam, 2003).
2.7.4 The Sixth Wave - A Global Wave
The sixth M&A wave occurred between 2002 until the financial crises hit the world
economy in the end of 2007 (Moeller and Brady, 2007). In this period there was an apparent
upward tendency for M&A within developed as well as emerging countries. In terms of value
and volume of M&A deals, the sixth wave was the biggest one compared to the waves before.
This can be explained through increasing globalisation, which has created much more
dependence between countries all over the world as well as through a tremendous change of the
type of acquisitions in the last 10 years. While in 1999 after the Asian financial crises, the
western companies which were in better financial shape acquired well know Asian companies
for dumping prices (ALB, 2009), emerging countries started to become an equal market player
and began also to look for acquisitions in the developed countries in the last years. In the period
between 2002 and 2007 the USA was the most active country in acquiring other enterprises, as
well as the biggest target for acquisitions. Almost every fifth acquisition of firms in emerging
countries was done by the US. On the other hand, the USA was the target in around 23% of
acquisitions through companies from emerging countries. In the same period, India was the
major acquirer in emerging countries, followed surprisingly by Malaysia. This can be explained
through a big support of the government, such as tax incentives, to invest in high technology
business deals and to strengthen the export. On the third place behind these two was China.
Contrary to them, the Chinese government did not prepare the way for acquisitions done by
private companies. Sometimes deals also had to challenge a lot of governmental obstacles.
Nevertheless, the governments of emerging countries, also the Chinese government, had and still
have a big interest in acquisitions in developed countries to get access to the developed market.
On the other side, China was by far the biggest target for acquisitions through companies from
developed countries. The second most companies were acquired in India between 2002 and 2007
(Moeller and Brady, 2007). Besides the increasing globalisation and the influence of the fast-
growing economy of the emerging countries, the sixth M&A wave was characterised by new
regulations, caused by the corporate governance scandal in the beginning of the millennium. In
this period, strategic issues as merging for new market access, improved deals selection, better
deal governance and post-merger integration on the M&A process were valid as the key for
success (Moeller and Brady, 2007).
2.8 The Occurrence of Mergers and Acquisitions
There are various theories for the occurrence of these M&As waves. According to Gorts´
Economic Disturbance Theory of Mergers, waves always emerge in periods of strong growing
economy and a rise in the stock market in the US and Western Europe. To a greater extent, a
rising economic activity creates an imbalance in the product markets. Investors have different
estimations for the future demand and therefore some of them evaluate the target companies
higher than the others. M&As are the result of the effort to benefit from these value
dissimilarities. If then leading companies make the first M&A movement, the competitors will
follow them for fear of being left behind and in this way the impulse for a wave is created (Gort,
1969; Sudarsanam, 2003). Political, Economic, Social and Technological issues are considered
in another theory, the so-called PEST model, which is used to describe the external environment
of a company and its constraints. Technological breakthroughs, such as railway system,
electricity grid or evolution of the Internet had a tremendous influence on the development of
these M&A waves. Also, political influences like changes in the tax regime or in pension policy
of the government are stimulators for the occurrence of a wave. In Germany, for instance,
announced capital gains tax reliefs for big banks and insurance companies such as Deutsche
Bank or Allianz, to react against the slowdown of its acquisition activities. The pension policy
was influenced by social issues such as the ageing profile of the population. Hence, social issues
as well as economic issues, such as interest rate or inflation rate, often influence the emergence
of a wave indirectly through governmental regulations (Sudarsanam, 2003).
2.9 Post-Mergers and Acquisitions Performances
Several researchers have tried to study the performances of acquiring firms’ post the
M&A. Nonetheless, there has been no concrete conclusion regarding the above. Accounting
studies, event studies, clinical studies and executive studies were the most popular studies
conducted. From most of the studies conducted till date, it appears mergers do not improve the
financial performance of the acquirers. Event and accounting studies point out to the fact that
these gains are either small or absent (Kumar, 2009). The studies conducted concluded that post-
merger performance largely depends on the sector or industry and hence cannot be generalised
(Matravadi and Reddy, 2008).
Performance measurement of mergers and acquisitions could not have been the exception
in these debates. Researchers investigating the outcomes of the M&A activity have employed a
variety of indicators. Most academics have utilised objective measures or financial indicators
including the acquirer’s stock market returns (Malatesta, 1983; Carper, 1990; Jensen, 1988;
Sudarsanam and Mahate, 2003; 2006) or profitability gains (Hopkins, 1987; Chatterjee and
Meeks, 1996; Sharma and Ho, 2002; Zollo and Singh, 2005). Others have employed subjective
financial performance assessments or non-financial indicators obtained from managers involved
in the acquisition using different methodologies (Walter and Barney, 1990; Hitt et al., 1998;
Brock, 2005; Kavanagh and Askanasy, 2006) or from external expert informants (Canella and
Hambrick, 1993; Brush, 1996; Hayward, 2002). Performance measurement is necessary to
clarify the mission and vision of an organisation and assist in translating its strategies for
achieving goals into measurable objectives, thus allowing the organisation to not only measure
its progress, but also understand what improves results. Other benefits include improved
accountability and decision-making, an alignment of operational activities and resources with
strategic objectives, a share understanding of activities planned to deliver objectives and clear
communication of expectations to all organisational levels. Venkatraman and Ramanujam (1986)
argued that performance is the time test of any strategy as it centres on the use of simple
outcome-based financial indicators that are assumed to reflect the fulfilment of the economic
goals of the firm. To other academics, organisational performance is achieved by comparing the
value that an organisation creates using its productive assets with the value that owners of these
assets expect to obtain (Barney, 2001).
2.9.1 Event Study
An event study measures the abnormal returns to the shareholders during the period
surrounding the announcement of the merger. This abnormal return is essentially the difference
between the raw returns which is simply the change in share prices and the benchmark index
(Krishanmurti and Vishwanath, 2008).
It has been seen that often the stock market performance of acquiring firms have been
below expectations or negative. These returns turned to vary by the time horizon being studied.
Studies of one year returns post-merger by Jensen and Ruback (1983) showed that returns
averaged -5.5%. Longer time frame studies by Magenheim and Mueller (1987) concluded that
three-year post-merger studies showed a -16% return. The share returns of acquiring companies
tend to be fairly positive prior to the announcement of mergers. But then, on the announcement
the returns are mixed. In general, it can be concluded that on the announcement of merger, the
acquiring firms’ shares decline and this process may sometimes continue for a few years
(Mussat, 1995). These returns may also vary by the characteristics if the acquiring firms and the
mode of financing the transaction. Lougeran and Vijh (1997) indicated that cash financed
mergers do better than stock financed ones.
Studies on short terms performance reveal that the target shareholders are clear winners.
On surveying the performance of acquiring and target shareholders, it is seen that over a period
of three days bridging from one day prior to one day post the announcement, the share
performance of the target firms tend to show affirmative returns consistently across decades as
compared to the acquiring firms (Andrede et al., 2001). Rau and Vermaelen (1998) stipulated
that value acquirers out-perform the glamour ones.
2.9.2 Accounting Study
This method involves the study of financial statements and ratios to compare the pre- and
post-merger financial performance of the acquiring company. It is also used to study whether the
acquirers out-perform the non-acquirers (Gaughan, 2007). Various ratios like return on equity or
assets, liquidity and so on are studied.
Whether a merger improves the operating performance of the acquiring firm is uncertain,
but mostly leads to the conclusion that mergers do not really benefit in improving the operating
performance. Meeks (1977) studied the impact of mergers on UK firms and indicated that in the
long run, the profitability reduces extremely below the pre-merger levels, sometimes to the
extent of 50%. Similarly, a study conducted by Ravenscraft and Scher (1987) on US firms also
pointed at the same result, wherein the profitability post-merger declines or at best showed
marginal improvement. Dickson et al. (1997) in their study on a cross-section of UK firms
opined that the acquisitions have an unfavourable effect on a firm’s performance and lead to
additional and permanent reduction in profitability. Correspondingly, a study conducted on
Indian firms from 1999 to 2002 also showed no real signs of better post-merger operation
performance of the acquiring firm (Kumar, 2009).
2.9.3 Executive Survey
This method is a primary source of information collection whereby the managers are
asked about the success or otherwise of the merger. Standardised questionnaires are
administered, and managers are asked to respond to them, and views are generalised (Bruner,
2004). Often the views of the management and the executives are not giving the due importance.
Nevertheless, it must be noted that views of practitioners are equally essential to add up to the
large sample scientific studies (Bruner, 2001).
In a survey of 50 executives concerning the success of mergers, an average number of
respondents indicated that only 37% of the deals created value for the buyers and only 21%
achieve the buyers’ strategic goals (Bruner, 2001). However, a study conducted by Ingham et al.
(1992) opined that 77% of the 146 CEOs surveyed believed that there was an increase in the
short-term profitability after the merger and 68% believed that the profitability increased in the
long term. This frame of reference has a major impact on the response either due to the better
information or just ego, executive opinions are much more positive in the case of mergers where
the executive is involved (Bruner, 2001).

2.9.4 Clinical Study

A small sample is studied in great depth and insights are derived from field interview
with executives and knowledgeable observers. A clinical study is an inductive form of research
whereby researchers often induce new insights (Bruner, 2004). The purpose of clinical studies is
to fill in the gaps left by the study of the stock returns and accounting performances (Jensen,
1986). Various clinical studies conducted over the years have led to uncovering the truths behind
the success or failures of mergers. Failure of M&A could be because of three factors. First,
management objectives were not consistent with maximising shareholders’ wealth. Second was
managerial overconfidence and thirdly, ignorance of available information. The tempted merger
of Renault and Volvo failed because of disbelief in merger synergies and transfer of control to
Renault (Bruner, 2001). This is an example of how a clinical study often helps in revealing the
truth behind the failures of mergers.
2.10 Causes of Failures of Mergers and Acquisitions
There could be many causes of failed M&As. It is most likely that a failed merger would
be a because of poor management decisions and overconfidence, overpayment, integration
issues, selecting target, strategic issues amongst others. They could be personal reasons
considering which consolidation tend to enter many activities and hence tend to ignore the
primary motives of M&As, creating shareholder values, but good decisions may also boomerang
due to wholesome business reasons.
2.11 Outline of the Ghanaian Banking Industry
The economy of Ghana can be described largely as a developing economy with several
sectors of which the banking sector plays an important role in the development of the economy.
The banking sector in Ghana has seen tremendous growth and development from the colonial era
through to independence in 1957 to date. Banks were established to mobilise financial resources
from savers and make these resources available to borrowers for investment. In general, the
evolution of the banking system in Ghana may be seen as a response to certain perceived credit
needs of some sectors in the economy at different point in time (Gockel, 1995). Banking
emerged in the colonial era with the aim of providing banking services for the British trading
enterprises and the British colonial administration. The British Bank of British West Africa,
which later became known as Standard Chartered Bank, was established in 1896 followed by
Barclays Bank DCO, now Barclays Bank Ghana Limited (BBG) in 1917. Despite their
objectives of providing banking and currency services to expatriate companies and the colonial
administration, the bank attracted the patronage of some indigenous Africans. This therefore led
to the establishment of an indigenous bank called the Bank of the Gold Coast in 1953, to operate
for the benefit of the indigenous private sector. After independence, however, Ghana left the
West African Currency Board (WACB) and split the bank of the Gold Coast into two, that is, the
Bank of Ghana (BOG), taking on central banking activities and the Ghana Commercial Bank
(GCB) now Ghana Commercial Bank Limited taking commercial banking activities. For
financing the purchases of cocoa, the co-operative bank was established in 1935 by the farmers’
co-operatives and the colonial government. To cater for medium and long-term financing needs
of the manufacturing and agro-business sectors, the National Investment Bank (NIB) was
established in 1963 to provide long-term credit facilities. In 1965, the Agricultural Credit and
Co-operative Bank now Agricultural Development Bank (ADB) was established to provide
finance for the development of the agriculture sector. The Bank for Housing and Construction
(BHC) was also established by government decree in 1972 to undertake mortgage-financing
activities, facilitate the participation of domestic or foreign private capital in the construction
sector and enter joint venture projects in this sector. The Security Guarantee Trust Limited
(SGT) and after a year it became Social Security Bank (SSB) now SG-SSB Bank limited was
established in 1975 to allow salaried workers to acquire consumer goods. It was also tasked with
the operation of development finance scheme for small-scale industrial and agriculture projects.
Merchant banks emerged to accept deposits and open checking accounts for only corporate
bodies and individuals trading under business names with high net worth and with relatively
substantial turnovers as well as for individuals (non-traders) who have big deposits or whose
incomes are substantial. The individual banks in the merchant banking business in Ghana were
the Merchant Bank of Ghana Ltd., Ecobank Ghana Ltd., CAL Merchant Bank Ltd., and First
Atlantic Bank Merchant Bank. In addition, specialised banks were established to cater for
various credit needs in the rural sectors.