ACT503 - Consolidation's Role in Obscuring Imminent Business Failure

This essay explores the role of corporate consolidation, specifically mergers and acquisitions, in obscuring or preventing imminent business failures. It analyzes three articles focusing on bank consolidation in the United States after the 2008 financial crisis, the impact of consolidation on Nigerian banks, and the effect of consolidation on the financial performance of Ghanaian banks. The analysis reveals that consolidation can help failing businesses by providing access to resources, diversifying risk, and improving financial performance metrics. The essay concludes that mergers and acquisitions can be an effective strategy for reviving struggling businesses and expanding market reach, while also acknowledging that consolidated financial statements can sometimes obscure the true financial state of acquired entities.

Running head: CORPORATE ACCOUNTING
CORPORATE ACCOUNTING
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Article 1: Bank Consolidation and Merger Activity Following the financial crisis of 2008:2
Article 2: The Impact of Consolidation on the Performance of Banks in Nigeria:....................3
Article 3: Business consolidation and its impact on financial performance evidence from the
Ghana banking industry:............................................................................................................5
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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Executive Summary:
Mergers and acquisitions have become the norm of the financial system and survival in the
ever competitive and dynamic business environment. Be it the banking industry or any other
industry including transport, real estate entertainment, consolidation of business, has been
one of the most important measures for expanding businesses and saving failing businesses. It
has been seen that major businesses enter into consolidation deals for improving and
expanding their businesses or for saving any failing business from their eventual collapse.
With this in mind the following project report has aimed to look into the role of mergers and
acquisition of businesses with regards to hiding any kind of imminent business failures.

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Introduction:
Mergers and acquisitions together form one of the most important aspects of
consolidation of a business. Mergers and acquisitions have been taking place among financial
institutions and various other businesses for well over a decade specially in the developed
countries such as the UK, USA, and many others (Economist.com, 2018). There are various
reasons which goes into play for the consolidation between businesses. Businesses engage in
consolidation for quite a number of reasons, such as for improving its marketing potential,
market share, reduction of the overall marketing costs. Companies have consolidated with
other companies and organisations for centuries together in many forms. Modern
conglomerates resort to consolidation for a variety of purposes, ranging from the reasons
mentioned above as well as for the purpose of hiding any business from failing in the near
future. In these kinds of scenarios, a strategic consolidation between the failing business
organisations with another business, eventually helps in saving the business from failing in an
untimely manner. In this report, a closer look has been taken into the various cases, where the
act of consolidation of two businesses have led to the hiding or stopping of an imminent
business collapse.
Discussion:
Article 1: Bank Consolidation and Merger Activity Following the financial crisis of
2008:
After the recessionary financial crisis, which had shook the world back in the, had
some sever long term repercussions felt across the banking sector of the United States. Many
of the banks of that period had failed due to the failures of the post crisis period and various
other reasons. From a whopping, banks in the 1980s, it had declined to a minimal 5600 as of
today (Serdar & Erel, 2013). During the period of 2011 to 2014, the United States had seen a

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spur in the consolidation of the banks, which trend had helped various loss making and
inefficient banks from closing down their businesses (Kowalik et al., 2015) There are a lot of
reasons, which had led to this, such as achieving economies of scale, reduction of the
operating costs of the business, entering new markets, enhancing the growth of the banks and
market importantly, saving themselves from an imminent failure. The graph shown below
shows that there had been more mergers, compared to the number of failures which had taken
place at the same time period.
(Source: Kowalik et al., 2015)
The mergers generally included merging of a strong efficient and big bank, with
another failing business, such mergers were very important for the failing banks, which
helped them in saving themselves from their imminent extinction. Such consolidations used
to help the failing business by reducing its risk of extinction, by diversifying its asset
portfolio, sources of funding and income generation activities. There arises significant
differences in the characteristics of the acquired banks, such as there exists a difference
between the size, profitability and efficiency. Due to the mergers and acquisition, the a lot of
changes takes place in the financial position, which is reflected in the balance sheet of the
company, along with changes in the profit and loss account (Masulis & Simsir, 2015).

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Generally, the acquired companies have low levels of profitability, because of their low
levels of net interest and non-interest income. In such cases of mergers and acquisitions,
generally, the acquiring company commonly breaks down their consolidated statements by
division or subsidiary, for helping the investors in assessing the actual picture.
Article 2: The Impact of Consolidation on the Performance of Banks in Nigeria:
Mergers and consolidations have been at the very heart of financial progress for
various organisations around the world. The consolidation procedures have helped
organisations across the world, from failing and collapsing and have even helped various
other companies and organisations, from expanding their market or entering into new ones
(Lebedev et al., 2015). Nigeria is no exception to this. Nigeria is no exception to this. The
present article evaluates the impact of consolidation on the performance of various banks in
Nigeria. The present study had been conducted across a period of twelve years from 2000 to
2011, consisting of six years of pre and post merger and acquisition era. Mostly secondary
data have been used obtained from the annual reports of the organisations and from the CBN
banking supervision. Historically, speaking the concept of mergers and acquisitions is a
foreign concept to the banking industry in Nigeria. It is not a commonplace affair as it is in
the developed countries of USA or the other similar countries (Olayinka & Farouk, 2014).
However the banking system in Nigeria had faced a series of problems in the form of a series
of fluctuations in the foreign exchange market and various kinds of insider abuses in the
banking industry. This led to the massive close down of banks mainly because of lack of
proper corporate governance, non-compliance with regulations, weak management,
decreasing profits, high rate of insolvency, and large amounts of non-performing assets.
Hence a need for a larger scale of reforms was the need of the hour (Stahl et al., 2013). This
paved the way for the introduction of the mergers and acquisitions procedures for bailing out
failing banks. Here it can be seen that after the introduction of the consolidation procedure,

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the failings of the banks could be terminated, because of the takeovers and mergers with
much stronger banks. This had helped in the resurrection of the banking industry of Nigeria.
In this case, the new merged entity becomes much stronger, with no fear of imminent
collapse or failing. Some significant results had also come out derived from this article,
which said that consolidation as a policy had gained prominence when it was introduced by
the Government of Nigeria, in the year 2005 (Agnello et al., 2013). It had positive
implications upon the return on assets and the net profit margin, but it does not have any kind
of positive impact on the banks’ return on equity. Thus it can be said that the consolidation
had impacted the performance of these banks in Nigeria in a positive way. It has also been
recommended that both the government and the central banks support such kind of policies of
consolidation in the long run for the betterment of the health of the banking industry
(Auerbach, 2013).
Article 3: Business consolidation and its impact on financial performance evidence from
the Ghana banking industry:
This article was based on a study which was conducted for the purpose of determining the
impact of the consolidation of the businesses in the form of mergers and acquisitions, upon
the financial performances of the banks of the country of Ghana. For the successful conduct
of this research, descriptive as well as correlational research design had been framed. Two
reputed banks had been chosen for this particular study, namely Ecobank Ghana Limited and
the Access Bank Ghana Limited. In order to judge the impact of the mergers and acquisitions,
the annual report of the two companies from the pre (from 2009 to 2011) as well as the post-
merger period (from 2012 to 2015) had been used. Two specific analysis techniques had been
used, which consisted of ratio and regression analysis (for measuring the impact created) and
the net profit method as well as the return on capital employed (were used as proxies for
financial performance. The table provided below takes a closer look into the impact of the

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consolidation process on the four important financial indicators, which were the aggregate
revenue, aggregate assets, net profit margin and the return on capital employed.It could be
clearly seen that the total revenue had increased from 231.5 million to 1025.8 million, the
total assets had increased from 2128 million to 6587.5 million.In the same way, the net profit
margin as well as the return on capital employed had also increased after the wave of mergers
and acquisitions (Poku & Frimpong, 2017). An important observation here is the fact that,
after the completion of the entire consolidation process, the revenue assets have been shown
in a combined manner. Similarly, after finishing of the consolidation process, the two
different business entities become a single business entity (Lubatkin, 2013). Thus, in this
regard, consolidated financial statements are prepared, containing the profits, revenue, assets,
liabilities and other aspects of the financial statements in a combined manner. In this way, the
business which is to be acquired is able to hide any kind of imminent financial loss, which
could lead to the collapse of the business entity. It becomes a part of the acquiring business
organisation, which helps in avoiding any kind of financial loss, which would otherwise had
been evident, if such kind merger had not taken place, provided the acquired entity was
suffering from such financial collapse (Agnello, Caporale & Sousa, 2013)..
One of the most important results revealed by this particular study was that the
mergers and acquisitions had resulted to the growth of at least 80% of the growth in income
and the net assets immediately after acquisition (Poku & Frimpong, 2017). It was seen that
there had been a positive impact of the mergers and acquisition on these two companies, and
on the basis of this an aerial view of the general impact of consolidation among business
organisations, upon the financial sector of the banks of the Ghana economy could have been
made. An indication of the financial results between the pre and the post-merger time frame
has been provided below. It can be seen from the chart provided below, that the total revenue

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of both the companies had been aggregated and had been shown in an accumulated manner,
by combining the revenues.
(Source: Poku &Frimpong, 2017)
It has also been seen that the mergers and acquisitions generally have a significant as
well as a positive impact on both the net profit margin as well as the return on capital
employed of the banks in question.
Conclusion:
Thus it can be said that mergers and acquisitions is one of the most effective
methods in reviving any failing business from its eventual collapse or for expanding
businesses, market, entering into new markets and developing new avenues of business. The
process of mergers and acquisitions helps in forming a new organisation which is much
stronger in nature, financial power and with a much efficient management and workers,
which helps the acquired business to revive its fortunes, by working in tune with the much
stronger and efficient organisation or the acquirer. In most of the cases, the management and
the owners of a failing organisation or the owners of any established organisation takes the
decision of merging with another organisation. The former for the purpose of preventing its
business from failing and the latter for expanding its business, entering into new markets and
other developmental activities. While an important observation remains, where the
consolidation process helps in hiding any kind of imminent business collapse, by preparing
consolidated financial statements.

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References:
Agnello, L., Caporale, G., & Sousa, R. (2013). Fiscal adjustments and business cycle
synchronization.
Agrawal, A., Cooper, T., Lian, Q., & Wang, Q. (2013). Common advisers in mergers and
acquisitions: Determinants and consequences. The Journal of Law and
Economics, 56(3), 691-740.
Amankwah-Amoah, J. (2018). Global consolidation of industries and business failures:
insights from brick-and-mortar and online outlets. International Journal of
Comparative Management, 1(2), 185-201.
Auerbach, A. J. (Ed.). (2013). Corporate takeovers: Causes and consequences. University of
Chicago Press.
Economist.com (2018). Too much of a good thing. Retrieved from
https://www.economist.com/briefing/2016/03/26/too-much-of-a-good-thing
Joash, G. O., & Njangiru, M. J. (2015). The effect of mergers and acquisitions on financial
performance of banks (a survey of commercial banks in Kenya). International
Journal of Innovative research and development, 4(8).
Kowalik, M., Davig, T., Morris, C. S., &Regehr, K. (2015). Bank consolidation and merger
activity following the crisis. Federal Reserve Bank of Kansas City Economic Review,
100(1), 31-49.
Lebedev, S., Peng, M. W., Xie, E., & Stevens, C. E. (2015). Mergers and acquisitions in and
out of emerging economies. Journal of World Business, 50(4), 651-662.
Lubatkin, M. (2013). Merger strategies and stockholder value. In Mergers &
Acquisitions (pp. 43-57). Routledge.

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Masulis, R. W., & Simsir, S. A. (2015). Deal initiation in mergers and acquisitions.
Olayinka, T. T., & Farouk, M. A. (2014). The impact of consolidation on the performance of
banks in Nigeria. Global Advanced Journal of Management and Business Studies, 3,
479-485.
Poku, H. M. R. D. J., &Frimpong, K. (2017). BUSINESS CONSOLIDATION AND ITS
IMPACT ON FINANCIAL PERFORMANCE: EVIDENCE FROM THE
GHANAIAN BANKING INDUSTRY. European Journal of Accounting Auditing and
Finance Research, 5(8), 62-76.
Serdar Dinc, I., & Erel, I. (2013). Economic nationalism in mergers and acquisitions. The
Journal of Finance, 68(6), 2471-2514.
Stahl, G. K., Angwin, D. N., Very, P., Gomes, E., Weber, Y., Tarba, S. Y., ... & Durand, M.
(2013). Sociocultural integration in mergers and acquisitions: Unresolved paradoxes
and directions for future research. Thunderbird International Business Review, 55(4),
333-356.
Trautwein, F. (2013). Merger motives and merger prescriptions. In Mergers &
Acquisitions (pp. 14-26). Routledge.