THE IMPACT OF MERGERS AND ACQUISITIONS ON BANKS IN NIGERIA

THE IMPACT OF MERGERS AND ACQUISITIONS ON BANKS IN NIGERIA

ABSTRACT

Mergers and Acquisitions is the current trend that is spreading throughout the world. The various financial sector reforms of the past two decades in Nigeria brought about some changes in terms of the number of institutions, ownership structure, as well as depth and breadth of the market. The recent reform (2005) prompted regulatory induced restructuring and engendered the alignment of banks to ensure a sound, responsive, competitive and transparent banking system suited to the demands of the Nigerian economy and the challenges of globalization. The study was set out to examine the effect of Mergers and Acquisitions on banking fundamental indices using CAMELS analysis. To test the impact of mergers and acquisitions on banks in Nigeria, we used the annual reports of five banks namely Zenith Bank Plc, UBA Plc, Oceanic Bank Plc, Afribank Plc and Access Bank Plc from 2001 to 2007.Furthermore, it was seen that the CAMEL positions on banks has greatly improved due to the positive effect of mergers and acquisitions. There exist vast potential for cross border merger within the West African sub-region.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF STUDY

Nigerian banking reform is a product of the global efforts at revamping the world economy. First it was a Millennium Development Goals (MDG), next it was New Partnership for African Development (NEPAD), before the National Economic Empowerment and Development Strategy (NEEDS). All these have one thing in common the economic development of Nigeria. For a long time in the history of policy reforms in Nigeria, developing the banking sector was given priority attention. Various directives were given to the banking sector with the aim of developing other sector, thus propelling the entire economy. The directive of raising the minimum capital of each bank to twenty-five billion naira (N25b) was mostly achieved through banks consolidation by the instrumentality of mergers and acquisitions (M & A). Implicit in the capitalization directive is the belief that stronger banks would act as spring board for the growth and development of the other sectors of the economy especially cottage industries and other small and medium scale enterprises (SMSE).

Over the years, the banking industry was in a dwindling state, until the then governor of Central Bank of Nigeria, Charles Soludo came up with the idea of reforming the Nigerian banking industry through mergers and acquisitions. The interest to undertake the study on mergers and acquisitions is to enable the researcher to examine the benefits of the subject to the organization concern, the shareholders and the economy. To this end, will mergers and acquisitions on banks brings about stability in the banking industry; enhances high assets quality, increases the shareholders funds, improves the quality of service render to the customers through technological advancement as well as promoting the banking public confidence?

Further more, in the area of our national economy, will mergers and acquisitions in banks generate more employment, mobilization of foreign savings accessibility of small scale funding and above all provide solid financial institutions that can finance major projects that will enhance the country’s economic development? All these will be revealed on the course of this research work.

1.2       STATEMENT OF PROBLEM

The problem this study is set to address is that there seems to be conflicting opinions on the merits and demerits of the bank consolidation on the bank. Some said that since the consolidation was carried out in a rush, consequently it warranted marriages of strange Bedfellows, reduction in staff strength in the banks, and others which are likely to increase the risk content of banking in Nigeria.

Mergers and acquisitions is viewed with skepticism. Business management executives dislike the idea, therefore a lot of disagreement on the benefits associated with the concept. Management experts said that mergers and acquisitions do create five general problems, such as complex accounting, repositioning downsizing and legal tussle.

1.3       PURPOSE OF THE STUDY.

The purpose of this study is to examine the impact of mergers and acquisitions on banks in Nigeria in relation to the recently concluded consolidation exercise carried out by the Central Bank of Nigeria (CBN) on banks. The objectives of the study among others include;

1. To determine the quality of banks assets
2. To evaluate the banks earning performance
3. To determine the liquidity ratios of the banks
4. To determine the level of bank capital adequacy.
5. To determine the management efficiency of the banks.
6. To make recommendations based on observations and findings.

1.4       RESEARCH QUESTIONS

The purpose of the study is to examine the impact of mergers and acquisitions on Banks in Nigeria. For realization of the above objective, great efforts were made to proffer answers to the following research questions.

1. Do Mergers and Acquisitions improve the capital adequacy on Banks in Nigeria?
2. What impact does mergers and acquisitions has on the bank’s earnings.
3. Do Mergers and Acquisitions improve the Assets quality of banks in Nigeria?
4. What impact does mergers and acquisitions has on the liquidity level on banks in Nigeria?
5. C – Capital Adequacy
6. A – Asset Quality
7. M – Management Expertise
8. E – Earnings
9. L – Liquidity Levels
10. S – Sensitivity to Market risk

1.5       STATEMENT OF THE HYPOTHESIS

1. Ho: Mergers and Acquisitions did not have any effect on the banks capital adequacy
2. Ho: The assets quality of banks did not improve after mergers and acquisitions.
3. Ho: Mergers and acquisitions did not lead to the increase in banks earnings.
4. Ho: The liquidity level of the banks did not improve after mergers and acquisitions.
5. Ho: The Mergers and acquisitions did not improve management expertise in banks.

1.6       SCOPE OF THE STUDY

The research work is based on five (5) consolidated banks in Nigeria. It examined the mergers and acquisitions on banks in Nigeria. The research depended on primary data collected from five (5) banks in Nigeria with fabulous performance; Oceanic Bank Plc, Untied Bank of Africa Plc, Zenith Bank Plc, Afribank Plc and Access Bank Plc all located within Lagos metropolis in other to have broader base to draw conclusions from and justify the research topic.

1.7       SIGNIFICANCE OF THE STUDY

It is not clear whether the recently concluded mergers and acquisitions have impacted on the fundamental of the banks. At the end of the study, the different types of mergers and acquisitions would have been discovered and their various pros and cons.

The study has a lot of useful information which include;

1. The research will educate both individual and financial sector on mergers and acquisitions.
2. It will also enable any reader of this research work to gain insight on the health of the banks after mergers and acquisitions.
3. It will be helpful to those who want to go into further research on mergers and acquisitions.
4. It will also favour the banking public as it will give them a clue on how sound a particular bank is after mergers and acquisitions.
5. It will benefits the investors who wishes to invest in the equities of these consolidated banks, it serves as a guide in determining the viability of their investment in these bank will be.
6. It will be beneficial to financial analyst and practitioners to evaluate the strength of a particular bank and advise their clients on the opportunities and threats of individual banks and to make recommendations.

 1.8       LIMITATION OF THE STUDY

This research work was carried out alongside with other academic work in the school and office work. Initially, the study encountered some problems as there were some difficulties in getting some of the banks previous year financial reports and some other important information and materials. Some of the bank staff contacted were reluctant to give out the financial reports, while some were using come today, come tomorrow system. The researcher was introduced to archive assistant who demanded money before he can assist. This was only applicable to a particular bank.

1.9       DEFINITION OF (UNFAMILIAR) TERMS

This research work appraises the definition of certain terms that need or make it to be very comprehensive, these include:

1.9.1 MERGER: – A merger is the amalgamation of two or more separately existing companies to form a new single company. The new single company will inherit the assets and liabilities of the separately existing companies which are then wound up. (Chuke Nwude (2003) Financial

Management, First Edition).

1.9.2 ACQUISITION:- Acquisition is the purchase of controlling interest in one company by another company such that the acquired company becomes a subsidiary or division of the acquirer (Chuke Nwude, (2003) financial Management, First Edition).

1.9.3 SYNERGY: A synergy is a situation by which a firm, after a takeover, looks for a combined result that reflects a better rate of returns than was being achieved by the resources used independently before the takeover as a separate operation (Brealey A, Myers third edition).

1.9.4 LIQUIDITY: This refers to the ability of banks to meet current financial obligations.

1.9.5 CAPITAL: This is the total
fund contributed by bank shareholders for its operations.

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