Unveiling the Endogenous Relationship Between Technical Efficiency and Value Creation in Mergers and Acquisitions in Nigeria

• Published date: 01 March 2020
• Author: Mfon Akpan,Zhongfei Chen,Peter Wanke,Jorge Moreira Antunes
• DOI: http://doi.org/10.1111/saje.12233
• Date: 01 March 2020

© 2019 Economic Society of Sout h Africa

South African Journal of Economics Vol. 88:1 March 2020

doi : 10.1111/ saje .122 33

40

UNVEILING THE ENDOGENOUS RELATIONSHIP

BETWEEN TECHNICAL EFFICIENCY AND VALUE

CREATION IN MERGERS AND ACQUISITIONS IN NIGERIA

MFON AKPA N†, PETER WANKE‡, Z HONGFEI CHEN§,* AN D JORGE MOREIRA A NTUNES‡

Abstract

There is a growing literature on how the beneficial impacts of horizontal mergers and acquisitions

(M&A) should be measured. Thus far, however, there have been few studies addressing

endogeneity between technical efficiency and value creation: they tend to present a bidirectional

and simultaneous relationship. This research contributes to the debate by investigating the impact

of voluntary horizontal M&A on these metrics in Nigeria between 1995 and 2012, in light of

the individual performance of bidders, targets, and the resulting corporate companies. First,

technical efficiency, technology gap ratio, and returns-to-scale estimates were computed based

on a meta-frontier DEA approach, together with a set of contextual variables that encompass

performance indicators which reflect the value creation process. Then, robust regressions were used

to discriminate these efficiency estimates in terms of such business-related variables, correcting for

endogeneity and controlling for industry and trend effects. The results reveal that these contextual

variables significantly impact virtual efficiency and returns-to-scale levels, and that there is a

trade-off between efficiency and value creation at some point in the merging process. Managerial

implications are derived.

JEL Classification: O16, O55, C14

Keywords: Mergers a nd acquisitions, Nigeria, technical eff iciency, value-creation, en dogeneity

1. INTRODUC TION

Every firm’s prime objective is to grow profitably, which can possibly be obtained in

domestic and foreign markets (Gupta, 2012). The internal growth ca n be a result of

developing new products, by increasing the capacity of exi sting products, or through sus-

tained improvement in sales (Mallik arjunappa and Nayak, 2007). External growth can

be realised by acquiring e xisting firms (Ghosh and Das, 2003). Mergers and acquisitions

(M&As) are signif icant forms of external growt h (Mallika rjunappa and Nayak, 2007).

Hence, the business world is characterised by increasing M&A with a number of strate-

gic business motives. M&A has become an extensive global phenomenon as a possible

path for business re structuring.

* Corresponding author: School of Ec onomics, Jinan University, Huangpu West Road No. 601,

Guangzhou, Gua ngdong 510632, China. E-mail: hongyec zf@163.com.

† Faculty of Accounta ncy & Management, Universiti Tunku Abdul Rahma n (UTAR).

‡ COPPEAD Graduate Business S chool, Federal University of Rio de Janeiro.

§ School of Economics, Institute of Re source, Environment and Sustainable Development

Research, Jina n University.

South African Journal

of Economics

41South African Journal of Economics Vol. 88:1 March 2020

© 2019 Economic Society of Sout h Africa

Broadly speaking, the term M&A refers to the process of merging two companies’ prop-

erty rights or the acquisition of all or part of one company’s property rights by another.

An M&A is conducted under certain conditions to obtain controlling rights (Theron,

2001; Song and Chu, 2006; Kiesel et al., 2017). A merger or acquisition is an import-

ant strategic move made by a company to improve the management performance of its

enterprise. Successful mergers can produce many gains as verified in different economic

sectors such as cost savings, increased profits, upscaling and abundant resources (Fried et

al., 1999; Weber and Dholakia, 2000; Johnes and Yu, 2008; Halkos and Tzeremes, 2013;

Grimbeek et al., 2013; Peyrache, 2013; Kiesel et al., 2017; Chen et al., 2018).

Consequently, there have been numerous studies in many developed economies exam-

ining the potential gains to be made from mergers (Bogetoft and Wang, 2005; Bogetoft

and Otto, 2010; Gattoufi et al., 2014; Shi et al., 2017; Chen et al., 2018). However, to

decrease the high failure rate of M&A activities, one of the critical steps that should

be taken by a bidding company trying to identify suitable target companies prior to

an M&A is to determine whether the prospective partner can offer synergies and the

relevant attributes needed to complement those of the takeover company. The need to

make such M&A predictions has d rawn the attention of many researchers in many in-

dustries around the world (Gale and Shapley, 1962; Dietrich and Sorensen, 1984; Powell,

2001; Pasiouras and Gaganis, 2007) including those focused on efficiency measurement

(Chow and Fung, 2012) and value creation (Meglio and Risberg, 2011).

In fact, within the ambit of M&A, the synergistic gains e xpected in terms of tech-

nical eff iciency and value creation can come from increased operationa l performance,

greater economies of scale, eff icient management and the removal of overlapping facil-

ities (Zollo and Meier, 2008; Sudarsanam, 2010a,b; Grimbeek et al., 2013; Chen et al.,

2018). Additionally, internal investment brings about the growth of the enterprise glob-

ally by relocating funds or operational capacity to serve new market s abroad.

Thus far, however, previous studies have neglected the endogenous relationship be-

tween technical efficiency and value creation. Not only do they present a bidirectional

relationship, but there is also a simultaneous one when exploring synergy ga ins. Very

often predictions with respect to the likelihood of success of an M&A and its drivers

are based exclusively on one perspective to the neglect of the other. Precisely, technical

efficiency is the effectiveness with which a given set of inputs is used to produce an

output. A firm is said to be technica lly efficient if it is producing the maximum output

from the minimum quantity of inputs, such as labour, capital and technology. On the

other hand, value creation is the ultimate result of corporate actions that increase the

worth of goods, services or even a business. Companies focus on value creation both in

the context of creating better value for customers purchasing its products a nd services, as

well as for shareholders in the business who want to see their sha re value increasing. This

study innovates in this context by collecting from different sources and time spans com-

prehensive primary dataset s that allow not only the computational of technical efficiency

and value creation effects of M&A in Nigeria, but also their endogenous relationship.

Broadly speaking , it is hypothesised in this rese arch that there is not a direct causation of

one to another, but rather a feedback process over the course of time between technical

efficiency and va lue creation that explain the synergistic gains from ama lgamation.

When studying thi s phenomenon in Nigeria, it is worth mentioning that in this coun-

try horizontal M&A s can increase market concentration. Economic sectors are not only