ANALYTICAL STUDY OF MERGER AND ACQUISITION IN THE NIGERIA INSURANCE INDUSTRY
ABSTRACT
Merger and acquisitions continues to enjoy importance as strategies among insurance companies for achieving firm growth, improve efficiency and profitability are among the key benefit sought for mergers and acquisition.
The objective of this research project is to establish the effect of merger and acquisition on the firm performance of insurance firms in Nigeria, the study was limited to a sample of pair insurance companies that merged/ acquired between the year 2012 – 2016. The data required was drawn from association of Nigeria Insurers database, public disclosure and annual report of the respective companies, comparisons were made between the mean of two (2) years pre- merger and acquisition and two years post – merger and acquisition financial ratios. The study use financial ration analysis and paired t- test study. The financial ratio analysis/ t-testing review the dwindling profitability after the merger for all the firm with the t-test showing significantdifferent in profitability before and after the merger. And this indicate that merger and acquisition had has significant negative effect on the profitability of the firm. It is therefore imperative that, merger and acquisition are properly planed, executed and evaluated. Specifically, effort should be made to attract and retain key personnel of the merged firms through performance contract or bonuses. Proper conflict resolution measures should be put in place and conscious effort made to reap the expected benefit of the merger, this is because gains from merger and acquisition do not just occur.
TABLE OF CONTENT
CHAPTER ONE
INTRODUCTION
1.0     BACKGROUND OF THE STUDY    -    -    
1.1     MERGERS AND ACQUISITION    
1.2     FINANCIAL PERFORMANCE    -    -    -    -    -
1.3        EFFECTS OF MERGERS AND ACQUISITIONS ON FINANCIAL
PERFORMANCE    -    -    -    -    -    -    -    -
1.4     STATEMENT OF PROBLEM    -    -    -    -    -    -
1.5     OBJECTIVE OF THE STUDY-    -    -    -    -    -    -    
1.6     RESEARCH QUESTIONS    -    -    -    -    -    -    
1.7     STATEMENT OF HYPOTHESIS    -    -    -    -    -
1.8     SIGNIFICANCE OF THE STUDY    -    -    -    -
1.9     DEFINITION OF TERMS    -    -    -    -    -    -    
CHAPTER TWO
LITERATURE REVIEW
2.0     INTRODUCTION    -    -    -    -    -    -    -    -    -    -    -    -    -
2.1     THEORITICAL REVIEW    -    -    -    -    -    -    -    -        -    -
2.2     DIFFERENTIAL EFFICIENCY THEORY    -    -    -    -    -    -    -    -
2.3     SYNERGISTIC MERGERS THEORY-    -    -    -    -    -    -    -    -
 2.4.    FREE CASH FLOW THEORY    -    -    -    -    -    -    -    -    -    -
 2.5     OLIGOPOLY THEORY    -    -    -    -    -    -    -    -    -    -    -    -
2.6     DETERMINANTS OF FINANCIAL PERFORMANCE    -    -    -    -
2.7     WHY MERGERS AND ACQUISITIONS    -    -    -    -    -    -    -    -
2.8    METHOD OF MERGERS AND ACQUISITIONS    -    -    -    -    -    -
 2.9     TYPES OF MERGERS AND ACQUISITIONS    -    -    -    -    -    -    -
2.10     STATUTORY PROVISION FOR MERGERS AND ACQUISITIONS    -
2.11    INSURANCE DECREE OF 1991 ( NO. 58, SECTION 21-27)    -    -    -
2.12     IMPACT AND ROLE OF GOVERNMENT BODIES
    ON MERGER AND ACQUISITIONS    -    -    -    -    -    -    -    -    -
2.13    BENEFITS OF MERGERS AND ACQUISITIONS    -    -    -    -    -    -
2.14     EMPIRICAL REVIEW    -    -    -    -    -    -    -    -    -    -    -    -
2.15    THE GAP IN KNOWLEDGE    -    -    -    -    -    -    -    -    -    -    -
2.16     SUMMARY OF LITERATURE REVIEW    -    -    -    -    -    -    -    -
CHAPTER THREE
RESEARCH METHODOLOGY
3.1    INTRODUCTION    -    -    -    -    -    -    -    -
3.2     RESEARCH DESIGN    -    -    -    -    -    -    -        -    -    -    -    -
3.3     POPULATION SIZE    -    -    -    -    -    -    -    -    -    -    -    -    -
3.4    SAMPLE DESIGN    -    -    -    -    -    -    -    -
3.5     DATA COLLECTION    -    -    -    -    -    -    -    -    -    -    -    -    -
3.6     DATA ANALYSIS    -    -    -    -    -    -    -    
3.7     RATIO ANALYSIS APPROACH    -    -    -    -    -    -        -    -    -
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
4.1        INTRODUCTION    -    -    -    -    -    -    -    -    -    -    -    -    -
4.2        DATA ANALYSIS    -    -    -    -    -    -    -    -    -    -    -    -    -
4.3     RELATIONSHIP AMONG STUDY VARIABLES    -    -    -    -    -    -
4.4     CORRELATION ANALYSIS    -    -    -    -    -    -    -    -    -    -    -
4.5     DISCUSSION OF RESEARCH FINDINGS    -    -    -    -    -    -    -
 4.6     CORRELATION ANALYSIS    -    -    -    -    -    -    -    -    -    -    -
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1        INTRODUCTION    -    -    -    -    -    -    -    -    -    -    -    -    -
5.2     SUMMARY OF FINDINGS    -    -    -    -    -    -    -    -    -    -    -
5.3     CONCLUSION    -    -    -    -    -    -    -    -        -    -    -    -    -
5.4     RECOMMENDATIONS    -    -    -    -    -    -    -    -    -    -    -    -
5.5     LIMITATIONS OF THE STUDY    -    -    -    -    -    -        -    -    -
5.6     RECOMMENDATIONS FOR FURTHER RESEARCH    -    -    -    -    -
REFERENCES    -    -
CHAPTER ONE
INTRODUCTION
1.0    BACKGROUND OF THE STUDY    
Mergers and acquisitions have acquired increasing societal importance in recent years owing to the presence of well-developed financial markets; mergers are a common occurrence in the advanced economics of the world, with a particularly high level of activity in the United States. Usually mergers and acquisitions are procedures conducted in order to maximize returns of the firm's or generally enhance their operations.
The rise of merger activity worldwide has been eminent in that with increased competition, technological advances together with increased globalization, businesses are looking for ways to remain competitive as well as achieve non-organic growth (Radovic,2008) organizations are striving for strategies that are not too costly, risky and technologically advanced in order to become reputable along with a vision to maximize market share and future growth (Christensen,2013) growing business confidence, consumer demand and improving economic conditions in the region have whetted business executives appetite for firms in the technology,mining,and financial services sector.
The Nigerian insurance industry is a vital part of the entire financial system. Apart from commercial banks, insurance companies contribute significantly to financial intermediation of the economy.as such their success means the success of the economy, their failure means failure to the economy (Ansa-Adu,Andoh,and Abor,2012; and Agiobenebo and Ezim,2002). Mergers and Acquisitions are continuously being adopted for progressive company competitiveness by expanding market share and also to diversify the company's portfolio as a risk management strategy.
Additionally to enable companies penetrate to new geographical markets to support growth by capitalizing on economics of scale and increase on customer base among other reasons (kemel,2011).The logic behind any corporate merger is the synergy effect two is better than one.Martynova and oosting (2007) state that the overarching reason for combining with another organization is that the union will provide the attainment of strategic goals in a cheaper and quicker way rather than on its own. Organizations are able to merge stand in a better position to flexibility, leverage competencies,share resources and create opportunities that otherwise will be inconceivable. Companies believe that by either merging or acquiring another company,the performance would be better than a single entity. This is attributed by the fact that shareholders, value would effectively be maximized (Sharma,2009).
Acquisitions bring operational efficiencies which may arise from economics of scale, production economics of scope, consumption economics of scope,improve the resource allocation like moving to an alternatively less costly production technology,improved use of information and expertise,a more effective combination of assets and improvements in the use of brand name capital (Piaskoki,2004).
Over the last decade, the insurance industry worldwide experienced a large number of merger and Acquisitions transactions. The economic rationales for these operations include the insurer's will to increase their geographical reach, their products range and benefit from scale and scope economics (Cummins, Tennyson and Weiss,1999).
Furthermore, insurers could have initiated these transactions in order to benefit from financial synergies according to Tennyson and Chamberlain (1998) or reduce the riskiness and/or improve the amount/timing of their cash flow streams (Cummins, Weiss, and zi, 2003).
1.1     MERGERS AND ACQUISITION
A merger is a combination of two or more companies in which the resulting firm maintains the identity of the acquiring company. In a consolidation,two or more companies are combined to form an entirely new entity. A consolidation might be utilized when the firms are of equal size and market power. Companies may seek external growth through mergers in order to achieve risk reduction, improve access to the financial markets through increased size or obtain tax carry-forward benefits.
According to Horne (1991), a merger is a combination of two corporations in which only one survives. The merged corporation goes out of existence, leaving its assets and liabilities to the acquiring corporation.
Kovacich and Halibozek (2005) describe an acquisition also known as a takeover or buy-out or a purchase business combination as a situation where one company known a predator or acquirer takes over another company known as the target firm cease to exist.A firm that seems to acquire another firm is known as the acquiring firm and the one that it seeks to acquire is known as the target company.
Lole (2012) states that in most acquisitions,one firm simply decides to buy another company negotiate a price with the management of the target firm,and then acquire the target company.Nakamura (2005) asserts that an acquisition takes place when a company attains all or part of the target company's assets and the target remains as a legal entity after the transaction where as in a share acquisition a company buys a certain share of stocks in the target company in order to influence the management of the target company. In acquisitions one firm proposes the purchase of another firm in the same industry,where if it accepts,it becomes subject to the acquirers management (McLaughlin,2010).
There are many motives behind merger and Acquisitions in line with achieving organizational strategy. According to Myers and Marcus (2002), managers believe their firm will have a competitive edge by being bigger and through economics of scale,an organization is able to lower cost per unit of output. Mergers and acquisitions are intended to add shareholder value through economics of scale. The combined company can often reduce duplicate departments or operations hence lowering the costs of the company relative to theoretically the same revenue stream,thus increasing profit (Boff and Herman,2001). Another motivation for merger and Acquisition is synergy. synergies can be operational, financial or managerial.
        Karenfort (2011) argues that company will have synergy benefits when the value of the combined firm is greater than the stand alone valuation of the individual firm and acquisitions produce synergy,hence better use of complementary resources leading to geographical or other diversification.This smoothens the earning of a company, which over the long term smoothens its stock price, giving conservative investors more confidence in investing in the company (Marks and Marvis,2011). Other motivation's to merge include increase customer base,gain access to funds,tax advantages,and growth.The study seeks to situate mergers and acquisitions in Nigeria insurance industry. Inorder to achieve this effectively,the study also seeks to uncover the relationship that exist between mergers or acquisitions and the financial performance of the resulting merged firm. In examining mergers and acquisitions and in revealing these relationships, the study draws on financial data gained from audited books of accounts of merged insurance companies.
        The study will enable a better understanding of whether a firm's current approach to management of its operating arrangement is sufficient in aiding it success in its current operating environment.
1.2     FINANCIAL PERFORMANCE
Healy and Ruback (1992) define financial performance as a measure of how well a firm can use assets from its primary mode of business and generate revenues. In addition financial performance is essentially a measure of an organizational financial health over a given period of time,used to compare similar firm's across the same industry or to compare industries or sectors in aggregation. Lole (2011) states that the fundamental aim of merger and acquisition is the generation of synergies that can,in turn,foster corporate growth, increase market power, improve production efficiencies, boost profitability and improve shareholders wealth. There are many different ways to measure a company's financial performance,for example, cash flow based measures,stock based measures and accounting based measures. Companies’ performance can be evaluated by way of performing analytical reviews. Ratio is the simple mathematical statement of the relationship between two items listed in financial statements (Akgue,1995). Through ratios,it is possible to measure the power of the company's liquidity, solvency and its profitability. Profitability reflects a company's ability to manage their economic exposure to unexpected losses. The ratio represents the potential impact on capital and surplus of deficiencies in reserves due to financial claims (Adams and Buckle, 2000). Three measures of profitability are employed which include; return on asset,gross profit margin and earning before tax. Liquidity refers to the degree to which debt obligations coming due in the next twelve months can be paid from cash or assets that will be turned into cash (Mwangi and Murigu,2015).The rise of merger activity worldwide has been eminent and continues to increase at a phenomenal rate climbing from 1.9 trillion dollars in 2004. (Susan catwright and Schoenberg, 2006)
1.3 EFFECTS OF MERGERS AND ACQUISITIONS ON FINANCIAL PERFORMANCE
Mergers and acquisitions are used in improving company's competitiveness and gaining competitive advantage over other firms through gaining greater market share,broadening the portfolio to reduce business risk, entering new markets and geographic and capitalizing an economics of scale (Saboo and Gopi,2009). The success of any mergers is defined by the core competencies generated to create value or enhance value. It is measured using the parameters such as market attractiveness, competitive positioning because of cost leadership and product differentiation. This results in the long-term profit sustainability and the creation of shareholders wealth (Huderbrandt, 2005).A long term decline in shareholders wealth after a merger and acquisition can term the combination process to be a failure (Straub,2007). Managers of firm's undertaking mergers and acquisitions offer anticipate an improvement in production efficiency. However, profitability still remains the most influential variable in determining growth of firm's through merger and acquisition in Nigeria.The main motive behind merger and acquisition is to improve revenues and profitability (Gachanja, 2013).
1.4 STATEMENT OF PROBLEM
The world is in a state of regression being influenced by the forces of globalization and fast technological changes and as a result firms are facing intense competition.Merger and Acquisition to firm's performance has been little developed. Hence how mergers influence firm's performance lacks empirical backing as the few studies that have been conducted on the same provide mixed results, mergers are on an increasing trend in the Nigeria insurance industry. As per republic of Nigeria budget statement for the fiscal year 2012/2013,the trend globally is towards converging of financial services where banking, insurance and stock brokerages are being offered under one roof.In addition, insurance companies to have consolidated supervision to enhance oversight in this part of the financial system and itsplayers.
1.5     OBJECTIVE OF THE STUDY
To analyze the effects of mergers and acquisitions on the financial performance of insurance companies.
This analysis will therefore give an insight into mergers and acquisitions in insurance Companies on the financial performance.
It is also the objective of this research work to show the recapitalization and profitability of insurance companies in Nigeria.
1.6     RESEARCH QUESTIONS
Do mergers and acquisitions contribute positively towards the financial performance of insurance companies?
What are the relationship between mergers and acquisitions in insurance companies?
Are the effects of mergers and acquisitions on financial performance of insurance companies made it to be unprofitable?
1.7     STATEMENT OF HYPOTHESIS
Neeka igbara (2004), posit that it is a statement of the expected relationship between independent dependent variables. In light of the above, the findings May be true and accepted or not true and rejected. The null hypothesis is denoted by Ho, while the alternative is denoted by  
The hypothesis of the study will therefore read as follows
Ho: mergers and acquisitions does not contribute positive towards the financial performance of insurance companies.
H1: mergers and acquisitions contribute positively towards the financial performance of insurance companies.
Ho: There is no relationship between mergers and acquisitions in insurance Companies?
H1: There is a relationship between mergers and acquisitions in insurance companies.
Ho: The effects of mergers and acquisitions on financial performance of insurance companies made it not to be unprofitable.
H1: The effects of mergers and acquisitions on financial performance of insurance companies made it to be unprofitable.
1.8     SIGNIFICANCE OF THE STUDY
Very few studies have been conducted on mergers and acquisitions besides the same having generated inconclusive and mixed results. This study would therefore be of interest to scholars, customers (policy holders), shareholders, employees, managers, the regulator, reinsurers and government.
To the scholar the study would be a source of empirical reference and literature review;it will provide a ground of further research to the scholar.
To the policy holder, mergers can create monopolies and affect customer welfare through reduction of competition and hence unfair prices to the policy holder. Thus the study will bring out the positives and negatives and enable policy holder’s welfare union e.g. the policy holder compensation fund for insurance companies to air their views when faced with a merger.
To the regulator, the study will help theInsurance Regulatory Authority (IRA) understand how better to mitigate the risks that engrosses the insurance industry in Nigeria.
To the shareholders the study will help to widen their knowledge when faced with decision on mergers and acquisitions.
To the employees the study will enable will enable them to assess the stability of the firm and hence their job security. To the managers the study will enable them understand the importance of engaging in joint operations which will put the merged entity in a competitive position not only in Nigeria but also across borders, covering the Wider region which no will in turn enable that company effectively mitigate risk (especially political risk) and boost profitability.
To the reinsurer the study will enable them understand the need of increased underwriting capacity, treaty and facultative as a result of increased capacity of its underlying underwriter as a consequence of the merger.
1.9     DEFINITION OF TERMS
MERGER: A merger connotes the combination of two companies into one larger company for some economic or other strategic reasons.it is defined as a transaction in which corporation of relatively equal size combine. Sherman and Hart describe a merger as a combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm.
ACQUISITION: the term acquisition has been described to mean a transaction in which a large corporation purchases a small corporation.it could be the purchase of an asset such as a plant,a division or even an entire company.
MERGERS AND ACQUISITIONS: it has been referred to as the aspect of corporate strategy, corporate finance and management dealing with the buying, selling,and combining of different companies that can aid,or finance,or help a growing company in a given industry grow rapidly without having to create another business entity.
INSURANCE: insurance can be defined as a system of to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large groups in return for a premium.