CHAPTER ONE

INTRODUCTION

3.0: RESEARCH METHODOLOGY

This study was undertaken to carefully define and examine the impact of bank consolidation on

the performances of Banks in Nigeria. This chapter highlights the methodology employed in

carrying out this project. It includes: research design, the sources of data, the procedures used in

gathering data, the sampling method and the method of data analysis.

3.1 Background

Mergers and Acquisitions (M&As) are considered to be an important and sound vehicle for

corporate growth and enhanced productivity. Even in today’s unstable economic environment, it

is a common component of business landscape. There usually exist various reasons for

organizations to embark on Mergers and Acquisitions, (M&A) and these ranges from operational

expansion to tax advantage purposes and enhancement in profit. Romanek and Krus, 2002

argued that Mergers and Acquisitions, (M&A) is propelled by a number of strategic factors,

including competition, rationalization of business, technological evolution and globalisation.

However, one of the primary motives of Mergers and Acquisitions, (M&A) is to maximize

shareholders’ wealth through operational scale expansion and this has continued to be the major

attraction among business leaders rather than having to rely on organic growth alone.

Mergers and Acquisitions, (M&A) have a unique potential to transform firms and contribute to

corporate renewal (Angwin, 2001) and hence are a vital medium for corporate evolution and

economic development. They can help a firm renew its market position at a speed not achievable

through internal development (Harrison, 2002). Sherman and Hart, 2006 identified Mergers and

Acquisitions, (M&A) as a vital part of any healthy economy and most importantly the primary

way that companies are able to provide increased returns to owners and investors.

There has always been a substantial level of Mergers and Acquisitions, (M&A) in developed

economies (Salama et al, 2003) as well as developing economies. There was a record wave in

Mergers and Acquisitions, (M&A) activity in the 1990s and this continued at an intense pace.

During these period aggregate announced values of Mergers and Acquisitions, (M&A)

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transactions total trillions of dollars. Worldwide in 1991, there were only three deals completed

valued at US$ 5 billion. This grew to 47 announced transactions valued at over US$ 50 billion in

1999 (Romanek and Krus, 2002) and the total deal volume between 1995-2000 exceeded US$ 12

dollars (Papadakis 2007). Balmer and Dinnie (1999) portends that the remarkable increase of

Mergers and Acquisitions, (M&A) in recent years is typical of the current business environment

and is occurring in every industry and every country. Although this is more rampant in

developed nations, there have been some occurrences in developing nations such as Nigeria

cutting across all industries even in a highly government regulated sector such as banking.

However, most mergers have occurred in Asia, America and Europe with very little from

developing nations like Nigeria. The banking mergers stimulated by the regulatory authority

opened a new chapter in Mergers and Acquisitions, (M&A) activity in the Nigerian business

environment in 2005.

The European banking landscape is currently characterised by an ongoing consolidation even in

the wake of the current economic crises. Banks seek to expand their activities to maximise the

interest of all stakeholders. Consequently, some weaker banks striving to survive have engaged

in Mergers and Acquisitions, (M&A) transactions with stronger banks to avoid collapse and

safeguard their better financial position. Hence, multinational banks in Europe have emerged as

an effect of the restructuring that occurred in the mid 1980s which resulted in the emergence of

some banks within the European Union. The Nigerian banking sector in an attempt to mirror the

events in the European Union experienced Mergers and Acquisitions, (M&A) for the first time

due to the forced consolidation brought about as a result of increased capital requirements. This

was aimed at achieving a minimum capital base of equivalent of the U$ 1 billion by the Nigerian

banking regulatory authority, the Central Bank of Nigeria (CBN) in 2005.

1.2 Nigeria Banking Sector

Prior to the period of banking reform in Nigeria in 2005, the sector was grossly underdeveloped

leading to a set back to the Nigerian economy. Public perception of the industry was of very

risky business; hence people were not willing to deposit their funds in banks. In the early 1990s,

the sector witnessed the collapse of several banks resulting in both shareholders and depositors

losing capital value. The CBN instituted a major reform to strengthen the competitive and

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operational capabilities of banks with the aim of returning global and public confidence to the

Nigerian banking sector as well as the economy in general. Professor Soludo (the incumbent

CBN governor) 2004, stressed that the sole objective in moving the Nigerian economy forward is

to proactively position the banking system to become a sound and reliable catalyst for

development through M&As. Succinctly put, the forced mergers were aimed at strengthening the

competitive and operational capabilities of banks in Nigeria with a view towards returning global

confidence in the Nigerian banking sector and the economy in general.

During the consolidation exercise more than fifty Mergers and Acquisitions, (M&A) transactions

took place, leading to a reduction in the number of commercial banks from 89 to just 25.

However, the transactions were mostly mergers rather than acquisitions. The following four

commercial banks; United Banks of Africa, Zenith Bank, Union Bank of Nigeria and First Bank

acquired other commercial banks that could not meet the Central Bank’s capital requirement.

Although other commercial banks acquired others that could not meet the capital requirement,

the above mentioned commercial banks will be considered in this study. A brief introduction of

the four commercial banks is made below.

According to the CBN Governor, Soludo (2007), the objectives of the consolidation policy are

being achieved. He claimed that the Nigerian banking was now more secure with deposits and

credits more than doubled and individual banks capable of financing large projects valued at

hundreds of millions of dollars and particularly operate in the oil and gas sector. This was

sustained in the post merger period up until early 2008 prior to the current global economic

meltdown.

In view of the current economic recession, there has been some pressure in existing banks to

further consolidate to more effectively position themselves on global competition to prevent

against any future collapse.

1.2.1 INTRODUCTION OF FOUR COMMERCIAL BANKS

1. Zenith Bank International Plc (ZBI) –

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ZBI is one of the biggest and most profitable banks in Nigeria. The bank was established in May

1990, became a public limited company in June 2004 and was listed in the Nigeria stock

exchange in October, 2004. The total number of branches increased from 170 branches in 2008

to 315 branches in 2011 with branches in five African countries and the UK.

For the Bank, total deposits was N1.29 trillion for the year ended December 31, 2010,

representing a 16 per cent increase over the previous year's figure of N1.11 trillion. Profit after

tax similarly jumped by 127 per cent, from N14.69 billion (annualized) in 2009 to N33.34 billion

in 2010. During the same period, total assets of the Bank grew by 14 per cent, N1.57 trillion to

N1.79 trillion; while shareholders' fund rose by seven per cent, from N328.38 billion to

N350.41billion. Gross earnings however dropped from N203.32 billion (annualized) in year

2009 to N169.37 billion in 2010.

2. First Bank of Nigeria Plc (FBN)

FBN evolved from the former Bank of British West Africa and its history dates back to 1894 to

be the first major financial institution in Nigeria, hence the name. The bank has restructured

several times and was officially listed on the Nigerian Stock Exchange in 1971. It has

experienced phenomenal growth with the 520 branches throughout Nigeria and branches in the

UK and Paris. Gross Earnings of N139.7 billion, an increase of 14.2% compared with the

equivalent period in 2010 (N122.3 billion June 2010) as lending rates and yields improved.

Operating income of N120.9 billion, up 41.8% on the prior year (N85.6 billion June

2010). Net Interest Income of N88.2 billion, up 53.5% on the prior year (N57.5 billion June

2010) · Non-Interest Revenue N32.6 billion, up 16.2% on the prior year (N28.1 billion June

2010) · Profit Before Tax of N35.7 billion, up 12.8% on the prior year (N31.7 billion June 2010)

· Profit After Tax of N31.3 billion, up 23.3% (N25.3 billion June 2010) · Total Assets of N2.9

trillion, up 28.8% (N2.3 trillion June 2010) · Deposits of N1.9 trillion, up 34.6% (N1.4 trillion

June 2010) · Loans & Advances of N1.2 trillion, up 13.0% (N1.1 trillion in June 2010) ·

Shareholders’ Funds of N321 billion, up 4.1% (N308 billion in June 2010) · Basic Earnings per

Share (annualised) of 192 kobo (174 kobo June 2010). The bank offers a wide range of services

which includes retail and corporate banking.

3. United Bank of Africa (UBA)

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UBA commenced operations in 1961 and has witnessed several

restructuring over the years. Today’s UBA which emerged at the time of consolidation in Nigeria

and is the product of the merger of Nigeria’s third (3rd) and fifth (5th) largest banks, namely the

old UBA and the Standard Trust Bank Plc (STB) respectively. Today, the consolidated UBA is

the largest financial services institution in West Africa with total assets in excess of N1.6 trillion

(over USD$14b) and more than six million (6m) customer accounts. It operates in the West,

Central and East African sub-regions with a total of 700 retail distribution centres across Nigeria

which is its main operational base as well as 16 branches in Ghana, 5 branches in Uganda and 5

branches in Cameroon. Outside Africa, it also has presence in New York, Paris, Cayman Island

and London.1

4. Union Bank of Nigeria Plc (UBN)

UBN was established in 1917 as a Colonial Bank. It was initially called Barclays Bank

(Dominion, Colonial and Overseas). In 1969 the name of the Bank was changed to Barclays

Bank Nigeria Limited. The Bank became a Public Limited Company in 1971 and was listed on

the Nigerian Stock exchange the same year. It has shareholders’ funds of N119.160 billion

(USD$ 0.79 billion) and operates through 405 network of branches that are well spread across

the country. As at 31st March, 2008, the Bank's gross earnings was N112.988billion (USD$ 0.75

billion); profit before tax was N33.012billion (USD$ 0.22 billion); total assets was N

1,128.890 billion (USD$ 7.5 billion); and shareholders' fund was

N119.160billion,(USD$ 0.79).

1.3 Importance of Study

Mergers and Acquisitions, (M&A) activity in any economy represents enormous reallocations of

resources both within and across industries and has an impact on stakeholders of both acquiring

and acquired companies. However, diverse arguments have been drawn from different studies on

net wealth gains of M&As. Different views are shared on whether acquiring company

shareholders experience a wealth effect. This is an ongoing debate among managers, academic

researchers and business leaders. Measuring value creation (or destruction) resulting from

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Mergers and Acquisitions, (M&A) and determining how this change in value is distributed

among merger participants are two central objectives in merger research (Andrade et al, 2001).

This research focuses on the Mergers and Acquisitions, (M&A) activities that occurred in the

Nigerian banking sector. Since the net effect of Mergers and Acquisitions, (M&A) activities

remains inconclusive among research studies in developed economies, the Nigerian Mergers and

Acquisitions, (M&A) experience among these selected banks is another opportunity to contribute

to the on-going debate on the value derived from M&A. Hence, there is a need to conduct an

investigation on whether stakeholders in the banking industry in Nigeria have experienced net

gains or losses.

1.4 Aim and Objectives

The aim of this project is to consider the impact of Mergers and Acquisitions, (M&A) on

shareholders of acquiring companies by examining Mergers and Acquisitions, (M&A) that

occurred in the banking sector in Nigeria in the period 2005-2008. To date most of the available

knowledge on Mergers and Acquisitions, (M&A) comes from researches in the US and UK

markets with little or no research conducted on the Mergers and Acquisitions, (M&A)

transactions that took place after the consolidation exercise in Nigeria. This study attempts to

contribute to the literature on Mergers and Acquisitions, (M&A) with special emphasis on the

Nigerian banking sector by determining whether shareholders of acquiring firms experienced a

positive value in gains as a result of the Mergers and Acquisitions, (M&A) activities that

occurred. The related objectives are as follows:

Objectives

To establish if shareholders in acquiring banks experience

positive wealth effects as a result of M&A.

To critically evaluate the impact of merger announcements on

acquiring bank’s equity share price.

To analyse if the objectives set by the Central Bank of Nigeria

were strengthened by bank Mergers and Acquisitions, (M&A)

activities, thus, increasing shareholders value.

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REFERENCES:

Adeyemi K. (2005). “Banking Sector Consolidation In Nigeria: Issues and Challenges”.

Anqwin D. (2001). “Mergers and Acquisitions Across European Boarders. National Perspective

on Pre-Acquisition Due Diligence and Use of Professional Advisers”. Journal of World

Business,

Balogun D. (2007). “A Review of Soludo’s Perspective of Banking Sector Reforms in Nigeria”

Salama A., Holland W. and Vinten G. (2003). “Challenges and

Opportunities in Mergers and Acquisition: Three International Case Study– Deutshe Bank-

Bankers Trust; British Petroleum –Amoco; Ford-Volvo”. Journal of European Industrial

Training.

Soludo C. (2004). “Consolidating the Nigerian banking industry to meet the development

challenges of the 21st century”.

http://www.ubagroup.com/web/group/genericpage

http://www.firstbanknigeria.com

http://www.unionbankng.com

http://www.zenithbank

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

Mergers and Acquisitions, (M&A) have been one of the most extensively researched areas in

finance with the most recent studies documenting empirical evidence that merger activity comes

in waves (Petmezas, 2009). Mergers and Acquisitions, (M&A) represent part of a business

strategy used by many firms to achieve various objectives. For example, they can be used to

penetrate new markets and geographical regions and gain management or technical expertise.

Consequently, they have been increasing significantly and the considered value has been a

contentious issue. Whilst some studies have argued that Mergers and Acquisitions, (M&A)

create value through economies of scale (Imeson 2007; Sudarsanam, 1995; Pablo and Javidan ,

2004) others have argued that these transactions are motivated by managers seeking to build

empires (Penrose, 1995: Lubatkin & Shrieves 1986; Trautwein, 1990) or overconfident (Arnold,

1991). Regardless of this debate, Mergers and Acquisitions, (M&A) continues to be an important

way by which wealth can be maximized.

2.1 TYPES OF MERGERS

Mergers and Acquisitions, (M&A) can be broadly and generally divided into horizontal, vertical

and conglomerate types (Hakkinen et. al., 2004). More detailed classifications are given below.

Horizontal Merger – A merger is said to be horizontal when the two

merging companies produce similar products or services in the same industry. It is the merger

occurring between two equally sized companies that are in the same line of business and offering

similar services. It is often a combination of two competitors (Gaughan, 2005). Horizontal

mergers happen as a result of the companies trying to achieve a major part of the market. The

principal anticipated benefits from this type of merger are economies of scale in production and

possible increases in

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market power in a more concentrated industry (Lorange et al., 1994). An example is the merger

between Exxon and Mobil in 1998 (Gaughan, 2005).

Vertical Merger – This involves firms that operate at different stages of the same industry

(Hakkinen et. al., 2004). However Gaughan, 2005 further described vertical mergers as those

occurring between two companies manufacturing different goods, rendering dissimilar services

or working at different stages for one specified finished output. In vertical transaction, a

company might acquire a supplier or another company closer in the distribution chain to

consumers.

Conglomerate Merger – Conglomerate mergers are a combination of companies that do not

have a direct business relationship with each other in that they do not have a buyer-seller

relationship and they are not competitors. It usually occurs between two firms operating in

different industries (Gaughan, 2005). According to Lorange et al., 1994, these transactions are

not aimed explicitly at shared resources, technologies, synergies or product-market strategies but

rather the focus is centered on how an acquired entity can enhance the overall stability and

balance of the firm’s total portfolio in terms of better use and generation of sources.

Forward Triangle Merger – This is a type of merger that occurs when the subsidiary of the

parent company (acquiring company) merges with the target company. The equity stock of the

acquiring parent corporation only is issued (Hunt, 2004).

Reverse Merger – This occurs when the acquiring company merges with, and into, the target

and the target becomes the only surviving entity (Hunt, 2004).

Cross Border Acquisition – This occurs when the target and the acquiring company are in

different geographical locations or

environments. (Bishop and Kay, 1993). One of such examples was the acquisition of Banco

Real, one of the biggest Brazilian banks, by the Dutch bank ABN AMRO. There many problems

associated with this kind of acquisition such as finding the right target companies with high

value creation abilities, the scope for high premium payments and hazardous problems of post

integration (Kohler, 2009).

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Leveraged Buyouts (LBO) – This is a form of acquisition in which the acquiring company

finances the deal using borrowed funds (Gaughan, 2005). One of the problems which LBOs

generally is that the buyer takes on substantial debt (Gaughan, 2005).

Management Buyout (MBO) – This is said to occur when a management group acquires the

company from the public shareholders (Grant, 2006).

Recent studies by Bower, 2001 further classified the different types of Mergers and Acquisitions,

(M&A) which is based on different motives, including:-

Overcapacity MERGERS AND ACQUISITIONS, (M&A) – This is common when there is

substantial overcapacity and hence inefficiency in a certain industry leading to an opportunity to

gain from restructuring. This kind of industry consolidation can increase the acquirer’s market

power and form entry barriers for competitors. According to Bower 2001, overcapacity Mergers

and Acquisitions, (M&A) account for 37% of recent deals.

Product or Market Extension MERGERS AND ACQUISITIONS, (M&A) – This merger is

used to extend into new markets or products. Internationalization through cross-border mergers

is one main sub- motive in this group. The number of cross-border mergers has rapidly

increased, especially in Europe since the beginning of the European integration process. Cross

border mergers are a valid option when seeking to become international as they may provide

quicker access to new markets and more effective local contacts than start-ups. Extension

Mergers and Acquisitions, (M&A) account for 36% of M&As.

Geographic Roll-up Mergers and Acquisitions, (M&A) – This is used to seek growth and

efficiency gains by buying out competitors in geographically fragmented markets.

This type has many similarities with both overcapacity and extension mergers but unlike

extension Mergers and Acquisitions, (M&A) they usually occur domestically and the acquirer is

typically larger than the target. Apart from expanding its market presence, these mergers allow

the acquirer to benefit from economies of scale and scope.

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Research and Development Mergers and Acquisitions, (M&A) - This aims at obtaining R&D

capacity and/or transferring R&D knowledge. This type is common especially in high-tech

industries.

Industry Convergence Mergers and Acquisitions, (M&A) –This type of Mergers and

Acquisitions, (M&A) aims at creating a whole new industry by culling resources from declining

industries. However, Bower, 2001, does not give any clear boundaries of what can be classified

as a new industry. Also these Mergers and Acquisitions, (M&A) are hard to analyze as well as to

manage successfully.

2.2 DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

The terms Mergers and Acquisitions are often used interchangeably to mean any transaction that

forms one economic unit from two or more previous units. (Lubatkin & Shrieves, 1986). Hence,

the distinction is important for specific context Sundarsanam, 1995).

A merger is said to occur when two business entities combine together under common

ownership. Sherman and Hart (2006) defined a merger as a combination of two or more

companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying

firm. Although the buying firm may be a considerably different organization after the merger, it

retains its original identity. According to Epstien (2004), mergers of equals, such as J. P. Morgan

Chase, involve two entities of relatively equal stature coming together and taking the best of each

company to form a completely new organization.

According to Wall and Rees (2001) a merger is the result of a mutual agreement of the

management of two or more companies to form a new joint legal entity through the exchange of

shares or other funds. An acquisition or a take-over takes place when the management of one

company makes a direct offer to the shareholders of another company to acquire controlling

interest of this firm.

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Acquisitions can be defined as the purchase of an asset, a plant, a division or even an entire

company (Sherman and Hart, 2006). Sundarsanam, 1995 also described acquisitions as a

situation where one firm purchases the assets or shares of another and the acquired firm’s

shareholders cease to be owners of the enlarged firm.

Hakkinen et. al., 2004, described a merger as a result of the mutual agreement of the

management of two more companies to form a new joint legal entity through the exchange of

share or other funds while an acquisition on the other hand occurs when the management of one

company makes a direct offer to the shareholders of another company to acquire controlling

interest of the firm. Sherman and Hart, 2006 further distinguished mergers and acquisition by

identifying mergers as two companies joining together usually through the exchange of shares as

peers to become one and acquisitions as one company (buyer) that

purchases the assets or shares of the seller with the form of payment being cash, the securities of

the buyer or other assets of value to the seller.

For the purpose of this research the terms are used interchangeably to mean any transaction that

forms one economic unit from two or more previous examples.

2.3 DRIVERS OF MERGERS AND ACQUISITION

Mergers and Acquisitions, (M&A) are driven in many cases by a key trend within a given

industry such as fierce competition (Sherman &Hart, 2006). Salama et al, 2003, identified the

driver surrounding the growing popularity of Mergers and Acquisitions, (M&A) as a strategy

that centers on factors such as global presence, deregulation, cost of finance and technological

innovation. Furthermore, Altunbas and Marques, 2005, suggested a number of other reasons such

as improvements in information technology, globalisation of real and financial markets increased

shareholder pressure and financial deregulation.

Mitchell and Mulherin, 1996, also report that Mergers and Acquisitions, (M&A) has been driven

by companies wanting to meet both financial and industrial needs. Consequently, Ahammad and

Glaister, 2008 emphasised that government policies related to investment liberalisation,

privatisation and regulatory reform are increasing the number of, and access to, industrial targets

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for cross boarder M&As. However for the purpose of this research the following will be

considered as drivers for M&A.

GLOBALISATION

The dominant contemporary discourse on Globalisation, however, asserts that this trend of

business is a radically new phenomenon driven by recent advances in digital technologies

(Arnold and Sikka, 2001). Andrade et al, 2001 states that globalisation is one of the main drivers

for M&A. Fundamental changes have occurred in the world economy during the late 20th and

the beginning of the 21st century (Rugman and Hodgetts, 2003). These changes increased the

integration of world markets combined and reduced cross-border and investment barriers

(Rugman and Hodgetts, 2003).

The process of globalisation and the movement of capital through

multinational companies have contributed to the expansion of the

international business activities of multinational financial institutions (Moshirian, 2007).

Globalisation has increased firms opportunities to grow, expand and increase their profit by

moving their business operations to countries where the cost of operations is cheaper (Hill,

2007).

Deregulation

According to Andrade et al, 2001, deregulation has been a key driver of merger activities in the

last ten years. Deregulation precipitated widespread consolidation and restructuring of industries

in the 1990s, frequently accompanied through Mergers and Acquisitions, (M&A) (Andrade et al,

2001).

Consequently, Mulherin and Boone (2000), in their work on acquisition and divestiture, opined

that acquisition activity is greater in industries undergoing deregulation. Deregulation according

to Gaughan (2005), creates new opportunities for companies as deals that are previously

unachievable due to prior state regulation preventing such transactions become achievable after

deregulation. Though deregulation was an important factor in previous periods of Mergers and

Acquisitions, (M&A) activities, it has become a dominant factor in Mergers and Acquisitions,

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(M&A) activity since the late 1980s and accounts for nearly half of the merger activity to date.

(Andrade et al, 2001).

Cost of Capital and Stock Market

Variations in share price can act as a strong driver for M&A. Mergers and Acquisitions, (M&A)

activities and stock market activities appear correlated. A stock market boom tends to make

Mergers and Acquisitions, (M&A) activities more appealing because it becomes easier to use the

bidder’s share as the basis for the transaction instead of cash, on the other hand a falling stock

market may advance the possibility of targets being valued lower and consequently become more

attractive to a cash purchaser (Marcial 1997; Globe & White 1995). As a result to the

availability of capital to fund the takeover activities is vital. If the stock market is viewed as

strengthening, the level of Mergers and Acquisitions, (M&A) activities will increase as well

because more firms will have access to funds needed to finance M&A. The intensity of Mergers

and Acquisitions, (M&A) activities and the size of firms that are acquired swells with the ability

to make use of public markets for leveraging finance (Mitchell & Mulherin, 1996).

Shleifer and Vishny, 2003, showed the importance of cash and stock value in M&A. According

to the means of payment hypothesis, if managers are better informed about the firm's prospects

than the market, they use stock value to acquire firms when it is overpriced and use cash

otherwise. In the model, both the decision to acquire and the means of payment derive from

market timing. Stock acquisitions are used specifically by overvalued bidders who expect to see

negative long-run returns on their shares but are attempting to make these returns less negative

Shleifer and Vishny, 2003).

Technological Advancement

Industries react to shocks by restructuring. Examples include

technological innovations which can create excess capacity and the need for industry

consolidation (Andrade et al, 2001). The technological innovations of the 1980s in mass

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production and transportation as well as innovation in informatics technology in the 1990s

boosted the merger wave, according to Soubeniotis et al, 2006.

Recent Economic Crises

The recent global economic crisis has added a new dimension to the factors that drive M&A. The

financial crisis affecting the U.S. economy has changed the landscape for financial services

companies, especially banking institutions. For some banks, the crisis is a time of opportunity

but for others, a time of reckoning. For example, HBOS, the biggest British mortgage lender, is

being acquired by Lloyds TSB Group on the grounds that it may not survive the combination of

financial market turmoil and a weakening global economy. Conversely, the financial crisis

has also brought mergers and acquisitions in the automobile industry to a virtual halt. This is

marked in contrast with the situation in 2007, when the market boomed with a global disclosed

deal value of US$57.1 billion and hopes for more activity in 2009.

DRIVERS OF MERGERS AND ACQUISITIONS, (M&A) IN THE BANKING SECTOR

This wave of consolidation has been attributed to many factors, both macro and micro (Berger et

al, 1999; Jones and Critchfield, 2005). At the macroeconomic level, consolidation has been

influenced by exogenous in the banking industry’s economic environment and these changes

have often worked in concert to encourage consolidation (Jones and Critchfield, 2005). Factors

such as the increasing globalisation of the international financial system, the liberalisation of

capital movements across borders

and financial deregulation within countries, technological advances particularly in transaction

processing, and greater competition contribute to the macroeconomic reasons for consolidation

(Lambkin and Muzzellec, 2008). From a microeconomic perspective, a bank's decision to

consolidate reflects the management strategy for maximising or preserving firm value in the face

of increased competitive pressure (Jones

and Critchfield, 2005). For example, a merger strategy can be based on value-maximising

motives, such as exploiting economies of scale and scope, or increasing profits through

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geographic and product diversification. In a survey of bank management, value-maximising

motives were cited as the principal reason to undertake a merger (Group of Ten, 2001).

Consequently, financial institution mergers are rapidly becoming a global phenomenon and have

been integrated by the globalisation of the financial industry. Mergers and Acquisitions, (M&A)

in the banking and financial services sector are a driving force behind, and a consequence of,

globalization.5 A recent phase of consolidation in the global banking industry is attributed in part

to the effect of geographical deregulation which has enabled banks to expand their activities

across state lines (Amihud &Miller, 1998). Also, technological innovations and thorough-going

deregulation have prompted a wave of mergers in the banking industry throughout the world,

starting in the United States in the 1980s and reaching Europe in the 1990s (Focarelli and

Pozzolo, 2001).

2.4 MOTIVES BEHIND MERGERS AND ACQUISITION

The motive for an acquisition is important in that it will influence the degree of required

interaction between members of each organisation (Salama et al., 2003). Economic theory has

provided many possible reasons why mergers might occur ranging from efficiency-related issues

which may involve economies of scale or other synergies and attempts to create market power

(Papadakis 2007). According to Hakkinen et. al., 2004, each Mergers and Acquisitions, (M&A)

has its own set of motives. The majority of Mergers and Acquisitions, (M&A) activities that

directly impact on shareholder value are initiated for the purpose of economies of scale,

increased revenues, cross selling, synergy and taxes (Sherman &Hart, 2006 and Dobbs et. al.,

2007). However, there appears to be three general accepted motives of M&A, namely, economic,

personal and strategic motives (Brouthers et al., 2002). Also taking into account Neary’s (2007)

work on cross-border mergers, two areas of motives are suggested, namely, an efficiency motive

and a strategic motive for the purpose of this research merger motives will be categorized into

four broad categories, namely, economic motives, synergy motives, strategic motives and

managerial motives.

Economic Motive

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Economic motives include increasing profits, achieving economies of scale, risk spreading, cost

reductions, obtaining a ‘bargain’ due to market valuation differentials, taking a defensive stance

or responding to market failures (Brouthers et al., 2002). In an attempt to increase profit, achieve

economies of scale and reduce cost, efficiency has been considered an essential motive for

M&A. Cost efficiency is usually achieved by the ability to reduce costs due to redundant

resources of two firms merging in the same or closely related industry. Thus, if a firm is

acquiring another in the

same or a closely related industry and there is substantial overlap

between the two businesses, there may be ample opportunities to reduce costs (Hopkins et al

1999). In response to fundamental changes in regulation and technology, financial institutions

have attempted to improve their efficiency (Amel, et al 2003). This can be in the form of

managerial, operational or financial efficiency. A company in its quest to achieve efficiency in

any of these areas may acquire or merge with another with expertise in that area (Levy and

Sarnat, 1994). Financial efficiency can be achieved by either lowering the systematic risk of a

company through Mergers and Acquisitions, (M&A) with a company in an unrelated business or

accessing cheap capital which may rise due to growth in company size from Mergers and

Acquisitions, (M&A) activities (Trautwein, 1990). Consequently, larger firms resulting from

consolidation may gain access to cost-saving technologies

or spread their fixed costs over a larger base, thus reducing average costs and increasing

operational efficiency (Amel D., et al, 2004). Managerial efficiency can also be achieved by

acquiring or merging with a company that has more efficient management (Hackett 1996).

Managerial Motive

Merger and acquisition literature suggests that managers will have various motives for mergers

(Trautwein, 1990). Sundarsanam (1995), identified four major managerial motives for Mergers

and Acquisitions, (M&A) as the pursuit of growth, the deployment of current underused

managerial talents and skills, diversification of risk and avoidance of take over which is referred

to as job security motive. According to Levy and Sarnat (1994), managers may be motivated by a

desire to increase the size of their firms because of ‘the bigger is better’ syndrome and also

because compensation will rise as a result of the increase in size. Sundarsanam (1995) and

17

Trautwein (1990), related managerial motives for Mergers and Acquisitions, (M&A) to empire

building and stated that mergers are planned by managers to maximise their utility instead of

their shareholder value since their remuneration, status and power are a function of a firm size.

Gorton et al. (2005) showed that merger waves can also arise when managers make acquisitions

to discourage other firms. They further stressed that a manager can be willing to acquire

defensively even when it is not profitable.

According to May (1995), managerial motives can be linked to agency problems where the

relationship between the manager and the shareholder is viewed as that of an agent and the

principal, where the managers act in their own self interest at the expense of shareholders

interest. The agency problem refers to the fact that when an agent is hired to represent an owner,

the two parties will have conflicting interests.

In a sense, managers are the agents for stockholders (Hopkins et al, 1999). As a result of the

argument above, Mergers and Acquisitions, (M&A) may be due to managers’ desire to secure

their jobs by avoiding a take-over or a desire for self fulfillment by deploying under-utilised

managerial skills and talent (Sundarsanam, 1995).

Diversification of risk is often cited as a reason for mergers. The

diversification motive for Mergers and Acquisitions, (M&A) often represents an opportunity for

firms in profitable, mature sectors to diversify into more promising or growing sectors, thereby

ensuring that firms’ shareholders do not lose their top or best manager (Peck and Temple, 2002).

Also when firms in the matured industry are faced with fierce competition, Mergers And

Acquisitions, (M&A) is usually an option.

Consequently, innovations may not be enough to bring about higher returns; the bidding

company may opt for diversification through Mergers and Acquisitions, (M&A) (Gaughan,

2005). In addition to obtaining quick positioning in a particular market, diversification by

mergers is a way to gain entry without adding additional capacity to a market that already may

have excess capacity (Hopkins et al, 1999). Gaughan 2005, further reports that managers may

have an aspiration to diversify for employment risk purposes through M&A activities because it

is believed that Mergers and Acquisitions, (M&A) diversifies the firm activities consequently

and stabilizes the corporation’s income stream and reduces bankruptcy risk. However, according

18

to Sundarsanam (1995), diversification of risk can be achieved when the acquiring and the

acquired firms’ cash flows are not highly positively correlated.

Synergy Motive

Synergy occurs when two or more units can be run more efficiently and effectively combined

separately (Lubatkin 1983). Sirower (1997) further defines synergy as increases in

competitiveness and resulting cash flows beyond the level that the two companies are expected

to accomplish independently. It is probably the most often cited justification for an acquirer to

pay a premium for a target firm and is based on the concept of

2+2=5 (Cooke T., 1986). Synergies differ in terms of measurability and can be classified as

operational and financial (Hakkinen et al, 2004). Operational synergy is expected in the form of

economies of scale, scope and speed, learning curve, rationalisation or cost reduction (Brealey

and Myers, 2002; Hakkinen et. al., 2004). Economies of Scale advantages arise from cost

efficiencies gained by firms due to optimal size in operation and scope advantage from the

ability to share cost over close product lines (Jones and Hill, 1998).

The resultant impact of corporate mergers or acquisitions on the cost of capital of the combined

or acquiring firm is financial synergy (Navya V., 2008). Financial synergies come from risk

diversification and coinsurance (Hakkinen et. al., 2004). Several empirical studies support the

importance of synergy as a motive behind Mergers and Acquisitions, (M&A) while some do not.

Bradley et al (1998), maintained that tender offers increased the combined value of the acquiring

and target firm by an average of 7.4%. On the other hand Kursten (2008), in his work suggested

that synergetic mergers do not necessarily constitute any benefit especially to shareholders,

except that the value of the synergy exceeds a certain level.

Strategic Motive

Strategic motives such as global expansion, pursuit of market power, acquisition of new

resources including managerial skills and raw materials motivate merger activities (Brouthers et

al., 2002). According to Gaughan (2005), expansion through growth is one of the most common

motives for M&As. He identified two broad ways in which a firm can grow. Internal growth is

considered slow and ineffective if a firm is seeking to gain

19

advantage over competitors. The faster alternative is to merge and acquire in order to grow and

achieve competitive goals. Friedman (1989), states that it is profitable for firms to grow though

Mergers and Acquisitions, (M&A) rather than through green field operations because growth

through Mergers and Acquisitions, (M&A) enables acquiring firms to speed up the growth

process. Consequently where a firm is in a mature or declining industry, the survival of the firm

may depend on an orderly exit from that industry and entry into one with greater growth

opportunities. Without moving into a growth industry the

firm may lose young managers and thereby accelerate its own decline (Sundarsanam, 1995).

Another main strategic motive of Mergers and Acquisitions, (M&A) is to increase the share of a

firm in the market. It means to increase the size of the firm and create a degree of monopoly

power, giving the firm an opportunity to set prices at all levels (Navya, 2008). Some merges may

also be motivated by tax minimising opportunities. Cookie (1986), claims that, although there is

often no one single reason for M&A, in the UK, the taxation advantage has been a strong motive.

2.5 TRENDS IN BANK MERGERS AND ACQUISITIONS

Mergers and Acquisitions, (M&A) activities gave the consolidation process a boost in the 1920s

when that era represented a period of monopolization and Mergers and Acquisitions, (M&A)

were characterised as ‘mergers for oligopoly’ (Levy and Sarnat 1994). This boost in Mergers and

Acquisitions, (M&A) activity occurred when the development of mass production techniques

created a steep change in the scale of production (Bishop and Kay, 1993). They continued to

increase until another boom came in the 1960s as a response to the internalisation of the world

economy (Bishop and Kay, 1993) when companies reasoned from the financial management

perspective that there was a need for risk diversification (Levy and Sarnat 1994). This era saw a

reduction in horizontal mergers and continued increased in conglomerate mergers (Andrade et al,

2001).

The 1980s witnessed another major boom in Mergers and Acquisitions, (M&A) activities

although not as prevalent as in the 1960s (Levy and Sarnat 1994) with the evolution of the

market for corporate control (Bishop and Kay, 1993). According to Mitchell and Mulherin

(1996), the 1980s were truly a period of massive asset reallocation via merger. Moeller et al 2005

20

reports that two major changes in government’s policy in the US sparked this trend. These were

the removal of anti-trust rules against vertical mergers and a relaxation of the rule against

horizontal mergers. The second reason was the deregulation of certain industries in the 1980s

(Sundarsanam, 1995). The Mergers and Acquisitions, (M&A) activities in the 1990s continued

with the trend that began in the 1970s. of an ever-increasing percentage of mergers where both

parties are in the same industry (Andrade et al 2001). They also reported that the key distinction

between mergers in the 1980 and 1990s was the vast use of stock value as a method of payment.

The new millennium saw an increase in cross border deals especially in the UK, where

transactions involving only UK companies are decreasing and deals involving UK companies

and foreign companies are increasing (Dolbeck, 2005). He argued that the Mergers and

Acquisitions, (M&A) boom in the first half of 2000 was due to lower acquisition premiums and

noted that this era saw a greater proportion of cash deals. Acquirers paid cash for nearly half of

the deals from 2003 to 2006(Dobbs et. al2007). Cheap access to credit was one of the factors that

steered the Mergers and Acquisitions, (M&A) boom in the 2000s but has been in decline

(Dolbeck, 2007). Gaughan, 2005 also noted that one characteristic of merger waves is the

tendency to occur during economic expansion and to end when the market and the economy slow

down.

However, the trend of Mergers and Acquisitions, (M&A) activities in the banking industry

started in the other half of 1970s but was not significant until deregulatory measures such as

Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 that effectively eliminated

interstate banking restrictions was instituted in the mid-1990s. An unprecedented increase

occurred in the consolidation of the banking industry within and cross state borders (Francis et

al, 2008). The trend towards financial consolidation in Europe, USA and Asia could be traced to

several factors. In the USA, one reason was the need to eliminate weak or problem financial

institutions. Other reasons were attributed to the thrift and banking crisis of the late 1980s and

early 1990s as well as some European countries experiencing problems with institutions

weakened by exposure to real estate loans. Advancement in telecommunication and information

technology has also accelerated bank consolidation (Adeyemi 2005).

21

There was a dearth of Mergers and Acquisitions, (M&A) activities in the Nigerian economic

environment until 2005, when the banking sector witnessed several activities due to forced

consolidation brought about as a result of increased capital requirements by the Nigerian banking

authority.

2.6 EFFECT OF MERGERS AND ACQUISITIONS ON SHAREHOLDER’S VALUE

There has been a significant debate to determine whether Mergers and Acquisitions, (M&A) add

to shareholder value or otherwise. The extensive literature on the effect of Mergers and

Acquisitions, (M&A) produces mixed results regarding the benefits for shareholder value. While

most research shows that wealth creation accrued to shareholders of the target company, there

has been diverse opinion on the wealth effect of Mergers And Acquisitions, (M&A) for

shareholders of the acquiring firm (Andrade et al, 2005, Moeller et al, 2005 & Lordere &Martin,

1992). This section examines the effects of Mergers and Acquisitions, (M&A) on shareholder

value.

The positive wealth effect of Mergers and Acquisitions, (M&A) on target shareholders is

supported in the literature. Draper and Paudyal, 1999 reported that shareholders of target

companies benefit from the announcement of take-over bid over the period surrounding the

announcement and concluded that combined firms create value. Similarly the research findings

of Andrade et al, 2005 on M&A, suggests that mergers seem to create shareholders’ value, with

most of the gains accruing to the target company. Consequently, a positive abnormal return was

reported by Franks and Meyer, 1996 to occur where the management of the target is hostile to a

takeover offer. Rheaume and Bhabra (2008), also reports that the wealth effects for acquisitions

of acquiring firm shareholders were found to be generally either zero or significantly positive.

Using the Event Study method to examine the valuation effect of banks mergers from 1988-

1997, they noted that the overall results of bank mergers create positive wealth over time

particularly in the 1990s.

22

The outcome of some researches has however been mixed by distinguishing the wealth effect on

shareholders of both target and acquiring firms. Empirical studies examining the stock market

reaction to a merger announcement find that target shareholders earn substantial positive

abnormal returns from mergers and acquiring shareholders earn negative abnormal returns from

mergers (Scholtens and De-Wit, 2003). Their findings are consistent with Houtston and Ryngaert

(1994), who found little or no evidence of wealth creation with shareholders of the acquired firm

gaining at the expense of shareholders of the acquiring firm.

Similarly Kiechhoff et al (2006), states that shareholders of target

companies receive substantial positive abnormal returns while there is no significant abnormal

return accruing to shareholders of acquiring firms during Mergers and Acquisitions, (M&A)

activities. Limmack (1991), equally observed negative abnormal returns for acquiring companies

after the deals in the UK and large abnormal returns to target companies shareholders.

An extensive number of studies find that Mergers and Acquisitions, (M&A) generates negative

returns for the shareholders of acquiring firms. Agrawal et al (1992) found significant negative

abnormal returns over five years after merger. They argued that the problem with previous

merger research is that they do not correctly adjust the firm size effect. In their research they

observed that bidding firms lost 10% of their five year post merger period after adjusting for the

firm size effect as well as the beta risk. Similarly Loderer and Martin (1992) investigated both

mergers and acquisitions between 1965 and 1986 and observed that abnormal returns were

negative over five successive years especially in the second and third after the deal. Andre et al

(2004), in their study on long-term performance of 267 Canadian mergers and acquisitions that

took place between 1980 and 2000, using different calendar-time approaches with and without

overlapping cases, suggests that Canadian acquirers significantly underperform over the three-

year post-event period. Their finding is therefore consistent with other research both in the US

and the UK.

However, various literatures have attributed the difference in the outcome effect of Mergers and

Acquisitions, (M&A) activities on shareholders’ value to the research methodology. Using the

Event Study methodology, Sirower ,(1997), Magenhein and Mueller, (1998), Jensen and Rubeck,

1983, Agrawal et al (1992), found negative returns for acquiring firms as a result of merger

23

activities, even though different event windows ranging from few days to one year were used. In

contrast Bradeley and Jarrel (1998) used the same sample as Magenhein and Mueller (1998) but

different methods and did not find negative returns.

Loughran and Vinjh, 1997 reports that during a five-year period following the acquisition, on

average, firms that complete stock mergers earn significantly negative excess returns of -25.0

percent whereas firms that complete cash tender offers earn significantly positive excess returns

of 61.7 percent. He concluded that over the combined pre-acquisition and post-acquisition

period, target shareholders who hold on to the acquirer stock received as payment in stock

mergers do not earn significantly positive excess returns and in the top quartile of target to

acquirer size ratio, they earn negative excess returns.

Consequently, Moeller et al, 2005, reported that acquisition

announcement between 1997-2001 resulted in losses for shareholders of the acquiring firm.

Amihud et al, 2002 also reported that on average, acquirers experienced negative abnormal

returns, although the negative abnormal returns were insignificant. Their results are consistent

with those of a number of studies on domestic bank acquisitions. Hawawini and Swary 1990

found, for 126 bank acquisitions between 1968 and 1987,

that the bidders’ abnormal returns were negative and significant. Houston and Ryngaert 1994

also found negative abnormal returns for 153 bidding US banks between 1985 and 1991. Cybo-

Ottone and Murgia, 2000 found that for 54 European bank mergers between 1988 and 1997, the

acquirers’ abnormal returns were insignificantly different from zero.

2.7 EFFECT OF MERGERS AND ACQUISITIONS IN THE BANKING

INDUSTRY IN NIGERIA

A limited number of studies have investigated the effect of Mergers and Acquisitions, (M&A) on

the banking industry in Nigeria. However, Kolo, 2007 examined the effect of bank consolidation

on wealth returns of acquiring banks’ shareholders during, before and after the period of

announcement in Nigeria. His report stated that large acquisitions in-market mergers had

significant positive abnormal returns for banks that were documented around the announcement

date. He also found out that the announcement of interstate consolidation produced results

24

similar to the averages of mergers in the sample. The findings also showed statistically

significant positive abnormal returns to shareholders of acquired banks and insignificant negative

abnormal returns to shareholders of target banks around the announcement of the mergers. On

the contrary Akintoye and Shomoye (2008), suggested that the evidence of value creation for

acquiring firm shareholders are not so clear cut although they concluded that it is difficult to

claim that acquiring firms shareholders are losers in merger transactions. They are clearly not

winners like the target firm shareholders. Further studies by them found that with efficient

rearrangement of resources, gains to shareholders from merger activity are real and at merger

announcement accurately reflect improved expectations of future cash flow performance.

2.8 REASONS FOR POSITIVE OR NEGATIVE MERGER AND

ACQUISITION EFFECT ON SHAREHOLDERS VALUE

Various reasons are being attributed to whether mergers and acquisition actually create a positive

or negative effect on shareholders’ value. The neoclassical theory implies that, if mergers are

concentrated in periods following shocks (Mitchell and Mulherin 1996), then there will be a

positive autocorrelation in announcement returns since the shocks can boost overall stock prices,

hence enhancing shareholder value. Optimism about mergers overall generates a positive

autocorrelation in announcement returns whereas over-optimism can lead to positive correlation

between cumulative abnormal announcement return and the returns in the stock market. (Rosen,

2006). He also concluded that the performance of a merging or acquiring firm depends on the

type of merger, the sample size used in analysing the effect of Mergers and Acquisitions, (M&A)

on shareholders’ value as well as the motives behind engaging in Mergers and Acquisitions,

(M&A) activities.

Moeller et al, 2004, in their investigation on the effect of firm size on abnormal returns from

acquisition, concluded that acquisitions by smaller firms lead to statistically significant abnormal

returns than acquisitions by larger firms. Consequently, according to Roll (1986), one

explanation for negative returns to shareholders’ value is hubris. It is often believed that

managers of bidding firms that had success may believe that they can create value in situations

which the market judges to be negative net present value. The managers thus want to make

acquisitions even when they anticipate that the announcement will generate a decline in stock

prices. They expect that they will be proved correct in the long run. (Rosen, 2006).

25

Rau and Vermaelen (1998) in their studies on the value and post acquisition of acquiring firms

found that the long term underperformance of acquiring firms in mergers is caused by the poor

post-acquisition performance of low book-to- market value of firms which was attributed to

hubris on the part of managers.

Myers and Majluf (1984); Shleifer and Vishny, (2003); Rhodes-Kropf and Viswanathan (2004)

suggest another possible explanation for the negative coefficient on the bidder run-up variable is

that firms are more likely to issue stock when it is overvalued. Travlos (1987) attributed the

negative Cummulative Average Abnormal Returns (CAARs) to this for merger announcement of

acquisitions financed using stock. A firm might be more likely to use stock to finance an

acquisition when its stock price has been increasing and, thus, is more likely to be overvalued

(Rosen, 2006). Also Savor (2006) documents poor stock performance of failed stock mergers

relative to successful stock mergers, henceforth arguing that stock mergers, such as AOL-Time

Warner, create value for acquirer’s shareholder by taking advantage of mispricing on the market.

Frank et al (1991) also attributed underperformance of acquiring firms to the methodology

employed to find whether there exists an abnormal returns although their findings showed no

evidence of positive abnormal post acquisition performance.

Similarly Akintoye and Shomoye (2008) identified a major challenge to ascertain whether there

are economic gains or otherwise to methodological issues yielding negative drift in acquiring

firm stock prices following merger transactions. This would imply that the gains from mergers

are overstated or nonexistent.

2.9 SUMMARY

Mergers and Acquisitions, (M&A) represent part of a business strategy used by many firms to

achieve various objectives. The terms Mergers and Acquisitions are often used interchangeably

to mean any transaction that forms one economic unit from two or more previous units.

(Lubatkin & Shrieves 1986). Mergers and Acquisitions, (M&A) can be broadly and generally

divided into horizontal, vertical and conglomerate Mergers and Acquisitions, (M&A) (Hakkinen

26

et. al., 2004). But more detailed classifications include Horizontal Merger, Vertical Merger,

Conglomerate Merger, Forward Triangle Merger, Reverse Merger, Cross Border

Acquisition, Leveraged Buyouts (LBO), Management Buyout (MBO), Overcapacity M&A,

Product or Market Extension M&A, Geographic Roll-up M&A, Research and Development

Mergers and Acquisitions, (M&A) and Industry Convergence M&A.

Mergers and Acquisitions, (M&A) are being driven in many cases by a key trend within a given

industry such as fierce competition (Sherman &Hart, 2006). However, distinctively Mergers and

Acquisitions, (M&A) drivers can be identified as Globalisation, Deregulation, Cost of finance

and stock market, Technological advancement, Recent Economic Crises. Just as in drivers some

motives can be isolated as behind most M&As. Merger motives can be categorized into four

broad categories, namely economic motives, synergy motives, strategic motives and managerial

motives.

Reasons for Mergers and Acquisitions, (M&A) in terms of banking consolidation in Europe,

USA and Asia were need to eliminate weak or problem financial institutions, thrift and banking

crisis of the late ‘80s and ‘90s and advancement in telecommunication and information. Nigerian

banking consolidation, though regulatory induced was aimed at eliminating weak banks and

increase banks’ capacity through increased capital base.

On the effect of M&A, most research shows that wealth creation accrued to shareholders of the

acquiring company. However there has been diverse opinion to the wealth effect of Mergers and

Acquisitions, (M&A) for the shareholders of the acquiring firm. Similarly the research findings

of Andrade et al, 2005 on M&A, suggests that mergers seem to create shareholders’ value, with

most of the gains accruing to the target company.

Various reasons are being attributed to whether mergers and acquisition actually create a positive

or negative effect on shareholders’ value. The neoclassical theory implies that if mergers are

concentrated in periods following shocks (Mitchell and Mulherin 1996), then there will be a

positive autocorrelation in announcement returns since the shocks can boost overall stock prices,

hence enhancing shareholders value.

27

REFERENCES:

Ahammad M. and Glaister K. (2008). “Recent trends in UK Cross-Border Mergers and

Acquisitions”. Management Research News.

Arnold P. and Sikka P. (2001). "Globalization and The State-Profession Relationship: The Case

Of The Bank Of Credit and Commerce International" Accounting, Organizations and Society.

Berger A. Demetz, R. and Strahan, P., (1999). “The Consolidation of The Financial Services

Industry: Causes, Consequences, And Implications For The Future. Journal of Banking and

Finance.

Bishop M. and Kay J. (1993). “European Mergers and Merger Policy”. 1st ed. New York NY:

Oxford University Press Inc.

Bower J. (2001). “Not All M&As Are Alike – and That Matters”. Harvard Business Review.

Gaughan, P., 2005. “A Merger: What Can Go Wrong and How to Prevent It”. Hoboken, NJ.

USA: John Wiley & Sons.

Hill C. (2007). “International Business, Competing in the Global Market Place”. 6th ed. New

York NY: McGraw-Hill Company.

Petmezas D., (2008). What Drives Acquisitions?: Market Valuations and Bidder performance.

Journal of Multinational Financial Management.

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29

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

This study was undertaken to carefully define and examine the impact of Banks consolidation on the performances of banks in Nigeria. This chapter highlights the methodology employed in carrying out this project. This chapter highlights and explains the methodology, materials and methods used in this study. The data collection instruments are fully explained. It also discusses the population, sample size, research and sampling design, sources of data, the procedure used in gathering data, the sampling method and the method of data analysis.

Data for this study were gathered from secondary data sources. The secondary data were obtained from relevant materials gathered from books, journals, articles, magazines, periodical, bulletins and from the internet that are relevant to and could shed more light on the subject matter or the phenomenon under study.

The data generated through the above mentioned means were classified into groups and analyzed using various descriptive and inferential statistical methods.

3.1 Research Methods and Justification

The selection of a primary method of investigation is a key consideration for this study. The

study has as its basic consideration the impact of the mergers and acquisition activities

between 2005 and 2008 on shareholders returns by showing an increase or decrease in

shareholder value. The basic research method suggestively should therefore, be a normative-

survey research method (Osuala, 2005).

Despite the inestimable contributions brought forward through the use of scientific method

in research (quantitative method), it has fostered a naive faith in the substantiality and

intimacy of facts (Osuala, 2005). The human element has become recognized increasingly as

a critical and determining factor in the definition of truth and knowledge in research. The

epistemological underpinnings of the quantitative motive hold that there exist definable and

quantifiable "social facts" (Kerlinger, 1964).

Therefore this study w i l l e m p l o y b o t h quantitative and qualitative methods of

analysis

30

The Nigerian banking sector went through consolidation to ensure sustainability and growth to

regain lost public confidence in 2005. Mergers and Acquisition (M&A) became a popular

strategy adopted by most of the Nigerian commercial banks to meet the required minimum

deposit base of $1 billion set by the regulatory authority, the CBN, as a criterion for operating in

the country. However, the question brought up by research mostly in the US and the UK,

whether Mergers and Acquisition value destroys or creates value for the acquiring shareholders

is debatable and on-going. The focus of this project will be to ascertain if the Mergers and

Acquisition activities in the Nigerian banking sector between 2005-2008 had any impact on

shareholder returns by showing an increase or decrease in shareholder value.

3.1.1 Types of data use in the study

Scientific problems can be solved only on the basis of data and a major responsibility of the investigator is to set-up a research design capable of providing the data necessary for the solution of the study problem. The more clearly and thoroughly a problem and its ramifications are identified, the more adequately the study can be planned and carried to a successful completion. It is not wise to select a topic, no matter how adequate, if circumstances render the collection of data required for its solution impossible. The data used in this study was mainly secondary data.

3.1.1.1 Secondary DataOccasionally, data are collected for some other purpose mostly for administrative and policy reasons, and form part of the information or data used in this study which are referred to as secondary data. These materials were obtained for purposes other thanthis study. It is used, however, for compiling quite a large number of statistics relating to various variables and indices or indicators in the economy. Secondary data must be used with caution. Such data may not give the exact kind of information needed, and the data may not be in the most suitable form. Great attention must be paid to the precise coverage of all information in the form of secondary data.For this study, the data used was obtained from the website and publications of Nigeria Deposit Insurance Corporation (NDIC) and The Central Securities Clearing System (CSCS).

3.1.2 Methods of Data CollectionAmong the various methods available, the ones used specifically for this study are discussed below;

3.1.2.1 DocumentaryThe corporate website of both Nigeria Deposit Insurance Corporation (NDIC) and The Central Securities Clearing System (CSCS) as well as annual publications and

31

reports of various issues were utilised to obtained data and information using direct observation and study.This method of data collection is based on observations or informal conservations. More so, many facts and relevant information can also be sourced from past records either in text books, periodicals or journals, various statistical and informational materials from different institutions or agencies etc. This form of data collection constitute the secondary source of data collected for this study and help immenselyin literature review and background of study that constitute the foundation of this study.

3.1.2.2 Personal InterviewPersonal interviewing is another method this study employed to collect data. As a research method, the interview is a conversation carried out with the definite aim of obtaining certain information. It is designed to gather valid and reliable information through the responses of the interviewee to a planned sequence of questions.These questions are both structured and unstructured similar to the open and closed questions of the questionnaire. The form of the opening interview is crucial, nevertheless, to win those who are less willing to cooperate. The aim of the large scalesurvey through the interview is to attain uniformity in the asking of questions and recording of answers.

3.2 Research Population

According to Asika (1991), a population is made up of all conceivable elements, subjects or

observations relating to a particular phenomenon of interest to a researcher. During the

consolidation exercise more than fifty Mergers and Acquisitions, (M&A) transactions took place,

leading to a reduction in the number of commercial banks from 89 to just 25. Consequently, the

total population for this research work will be the 25 commercial banks.

3.3 Sample Selection And Data Description

This study examines four commercial banks involved in domestic M&A activities. The data used

in this study was sourced from Nigeria Deposit Insurance Corporation (NDIC) annual reports of

various issues. The Nigeria Deposit Insurance Corporation (NDIC) was established on 15 th June

1988 to strengthen the safety net for the newly liberalised banking sector. The NDIC is a

parastatal under the Nigerian Ministry of Finance. The corporation is charged with protecting the

banking system from instability occasioned by runs and loss of depositors’ confidence. NDIC

compliments the regulatory and supervisory of the Central Bank of Nigeria (CBN), although it

32

reports to the Federal Ministry of Finance. The NDIC advises the CBN in the liquidation of

distressed banks and manages distressed banks’ assets until they are fully liquidated. The NDIC

also has a supervisory role and provides insurance services for banks.

Data was also sourced from The Central Securities Clearing System (CSCS). The CSCS is a

limited liability company incorporated by the Corporate Affairs Commission in Nigeria. It was

licensed by the Securities and Exchange Commission as an agent for Central Depository,

Clearing and Settlement of transaction in the stock market. The CSCS operates a computerized

depository, clearing settlement and delivery system for all transactions listed on the Nigerian

Stock Exchange.

Data was also sourced from Finbank Security and Asset Management (FINSEC), who is a

subsidiary of First Inland Bank Nigeria PLC. FINSEC is a stock broking firm registered with the

Nigerian Stock Exchange Commission. To further ensure integrity and accuracy of data sourced,

the data was double checked with the Central Bank of Nigeria. The announcement dates for the

commercial banks under review were collected from their financial reports and these dates were

also double checked with the Central Bank of Nigeria.

In order to ensure all information was accessible the following requirements were placed in

selecting the sample for this project:

1. The bank had to be one of the operating banks in Nigeria and quoted on the Nigerian

Stock Exchange.

2. Historical share price must be available for the study period.

3. The exact date of announcement must be available and identifiable.

4. The bank had to acquire just one bank as at the period under consideration. Some banks

acquired two banks within the same period.

5. No other activity such as issuing new public to the market during the period under

consideration for the selected banks.

33

Based on the criteria above, the following commercial banks as identified in Table 1 were

selected for this study. Table 1 also shows the target banks and the announcement dates. The

values of the data are in the local currency of Nigerian Naira (N).

Thus the commercial banks selected in this study were involved in acquiring other commercial

banks during the period 2005 – 2010 and had their historical data available for a minimum

number of 135 days before the announcement date and 180 days after the announcement date.

Table 1

List Of Acquirers And Target Banks

SN ACQUIRING BANK TARGET BANK ANNOUNCEMENT DATE

1 Zenith Bank Plc Eagles Bank 30 October, 2007

2 First Bank of Nigeria MCB Bank 02 September, 2005

3 Union Bank of Nigeria United Trust Bank 31 November, 2005

4 United Bank for Africa Liberty Bank 06 June, 2008

3.4 Research Design

It is the frame work for a study that is used as a guide in collecting and analyzing data. This

research will make use of the quantitative research design while investigating the research topic.

‘THE EFFECT OF BANK CONSOLIDATION ON THE PERFORMANCE OF BANKS IN

NIGERIA’.

Also it is referred to a set of instruction for making something which leaves the details to be

worked out. According to Okwandu (2004) design is a term used to describe a number of

decision, which need to be taken regarding the collection of data before ever the data are

collected.

3.4.1 Data Analysis Technique

34

In the research work, the pre and post consolidation profitability ratios of the target banks were

analysed. The data were analyzed using both descriptive e.g. means and standard deviations and

analytical techniques such as the t-test and the test of equality of means.

3.4.2 Research Strategy

The evaluation of the effect of Mergers and Acquisition on shareholders’ wealth in the

Nigerian banking sector will focus on examining a cause-and-effect relationship and on objective

data which will be expressed in numbers. This research intends to employ a quantitative

approach using secondary data by collating share prices of the selected five commercial banks

that acquired other institutions during and at specific periods before and after the Merger and

Acquisition announcement.

3.4.3 Instrumentation, Sources and Data Description:

The study employed secondary data obtained from Nigeria Deposit Insurance Corporation

(NDIC) annual reports of various issues and Central Securities Clearing System (CSCS). The

data were analyzed using ratio analysis to measure bank performance as seen in the work of

Rose and Hudgins (2005). An analytical technique was further employed to test the equality of

the mean of the key profitability ratio using t-test statistic of the pre and post 2005 key

profitability ratio of banks. The study used all the insured banks in the nation as our sample

study to give good representation. We used the 2005 recapitalization as the base year, testing the

performance of banks three years before the 2005 recapitalization exercise and three years after

the 2005 recapitalization exercise to see the significance of the 2005 recapitalization exercise.

3.4.3.1 Instruments or Tools Used in the StudyThe basic analyses used in this study are the conventional instruments that are frequently employed for statistical analyses and measurement in most studies. These tools of analysis are tables which are used for the presentation of information and data in a tabular form either those acquired from the field or from the archives (documentation). The charts (bar and pie charts) are equally used to present the information displaying their trend or movement over time and space.

35

3.4.4 Methods of Data Analysis and Definition of ratios:

3.4.4.1 Statistical Techniques used

The statistical technique used in analyzing the data in this study is the t-test. A test of equality of mean was also carried out using the t-test to see if there is any significant difference in the mean of the pre and post ratios used

3.4.4.2 Definition of ratios

In an attempt to test the significance of the 2005 consolidation on bank performance, this study

adopts a simple ratio analysis, using specifically profitability ratios to evaluate the performance

of Banks three years before the 2005 recapitalization and consolidation exercise comparing it

with the performance of the bank three years after the recapitalization exercise.. The ratios used

are as stated below:

Net Interest Margin which is calculated as interest income from loans and security

investment less interest expense on deposit and other debt issues divided by total asset.

This ratio measure how large a spread between interest revenues and interest costs the

banks management have been able to achieve by close control over earning assets and

the pursuit of the cheapest sources of fund.

Yield on earning assets - This represents the percentage of return that an institution is

receiving on its earning assets. Earning assets include all assets that generate explicit

interest income or lease receipts. It is typically measured by subtracting all non-earning

assets, such as cash and due from banks, premises, equipment, and other assets from total

assets. Earning Assets is calculated as Earning Assets = Total Assets - Non Earning

Assets.

Funding cost – This is the weighted average cost of capital for the industry.

Return on equity – This is measured as net income after taxes divided by total equity

capital. It measures the rate of return to the shareholder.

Return on Asset – This is defined as net income after taxes divided by total assets.

This ratio is an indicator of managerial efficiency; it indicates how capable the management of

the banks has been converting the banks assets into net earnings.

36

3.4.5 Limitation to Data Collected:

The data was limited in temporal scope to three years before the 2005 Mergers and Acquisition

exercise and three years after the 2005 recapitalization and consolidation exercise. The choice of

the 2005 recapitalisation and consolidation exercise was because the era compelled all

commercial banks to raise their capital base from 2billion to 25billion Naira by the Central Bank

of Nigeria on or before 31st December 2005; and this sent some of these banks on the move to

consider Merger and Acquisition as a survival strategy.

3.5 Market Model Methodology

A number of approaches are also available in determining and calculate the impact and effect of

mergers and acquisition on the normal return of a given security and can be loosely grouped into

statistical and economic categories. Models are based on statistical assumptions that the

behaviour of asset returns do not depend on any economic arguments. For the statistical models,

the assumption that asset returns are jointly multivariate normal and independently and

identically distributed through time is imposed (Mackinlay, 1997). The most common models

identified include the Constant Mean-Return Model, the Market Model, the Other Statistical

Model and the Economic Model. This distributional assumption is sufficient for the constant

mean return model and the market model to be correctly specified (Mackinlay, 1997).

For the purpose of this research, the quantitative approach using key statistics from the affected

banks will be applied.

37

References:

Asika, N. (1991), Research Methodology in the Behavioural

Science, Lagos: Longman Nigeria Plc.

Andrade, A. Mitchell, M. and Erik, S. (2001). “New Evidence and

Perspectives on Mergers”. Journal of Economic Perspectives.

Beitel P. and Schiereck D., (2001). “Value Creation at the Ongoing Consolidation of the

European Banking Markets”. IMA Working Paper.

Brown S. and Warner J.(1985). “Using Daily Stock Returns: The Case of Event Studies.”Journal

of Financial Economics.

Bryman A. (2001). “Social Research Methods”. Oxford: Oxford University Press Inc.

Delany F. and Wamuziri S. (2004). “The Impact of Mergers and

Acqusitions ion Shareholders Wealth in the UK Construction Industry”. Engineering,

Construction and Architectural Management.

Easterby-Smith, M., Lowe A. (2003). Management Research: An

Introduction. 2nd Ed. London: Sage Publications.

Higson, C. and Elliot, J. (1994), ‘‘The performance of UK takeovers’’, IFA working paper,

London Business School.

Kumar R. (2009). “Post-Merger Corporate Performance: An Indian Perspective”. Journal of

Management Research News.

Mackinlay C. (1997). “Event Studies in Economics and Finance”. Journal of Economic

Literature.

38

McWilliams A. and Siegel (1997). “Event Studies in Management

Research: Theoretic and Empirical Issues". Academy of Management Journal.

Panayides M. and Gong X (2002). “The Stock Market Reaction to Merger and Acquisition

Announcements in Liner Shipping”. International Journal of Maritime Economics.

http://www.studyfinance.com/jfsd/pdffiles/v11n1/johnson.pdf

http://www.cscsnigerialtd.com/modules.php?name=Content&pa=showpage&pid=1

39

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.0 Introduction

This chapter focuses on the analysis of the data collected in the course of this research study and

the presentation of findings serve as a core of any research study because they give meaning to

the raw data collected during collection stage.

This chapter is based on the collection of data from the CBN statistical bulletin, Nigeria Stock

Exchange daily official list, Securities and Exchange Commission Annual Report and Account,

analyzed by the statistical tool mention in Chapter three. This analysis is to enable the researcher

measure the relationship that exist between the two variables (dependent and independent

variable), whether it is negative or positive, and to test the level of significance of the variables.

4.1 Data Analysis, Results and Discussions

Table 1 shows the data used in carrying out the study. The table below clearly highlights the pre

and post situation for the various performance ratios of banks in Nigeria following three years

before and three years after the 2005 recapitalization exercise, using the approach in Rose and

Hudgins (2005).

4.2 Test Of Hypothesis One

H0: There is no significant relationship between capitalisation and key profitability ratio of

banks in Nigeria

H1: There is a significant relationship between capitalisation and key profitability ratio of banks

in Nigeria

Question: Is there significant relationship between capitalisation and key liquidity ratios

of banks in Nigeria?

40

4.2.1 Net Interest Margin (NIM) – There was a gradual fall in the NIM for post

recapitalization result. In 2006 immediately after the recapitalization it was 10.47, it drop to

7.71 in 2007 and later pick up in 2008 to stand at 10.21. A higher NIM relative to the industry

average implies how efficient the management has been able to keep the growth of interest

income ahead of interest expenses. The result obtained indicate that bank management are still

trying to get their bearings after the 2005 recapitalization so we cannot conclude if they have

been efficient after the recapitalization but a test of equality of mean will help us reach a

conclusion.

4.2.2 Yield on Earning Assets (YEA) – The YEA rose sharply after the 2005

recapitalization exercise from 4.62 in 2004 to 27.55 in 2006, later drop to 20.32 in 2007 and

drop further to 18.88 in 2008. This shows that the banks earned more income on earning assets

after the recapitalization than before the recapitalization. Although it is beginning to fall from

the result obtained which implies that though recapitalization encourage more yields on

earning assets but it is not being managed well.

Table 1

Pre and Post 2005 Recapitalization Performance Evaluation Ratio for Nigerian Banks

Pre-recapitalization Post-recapitalization

2003 2004 2005 2006 2007 2008

Net Interest Margin

(NIM) %11.16 14.88 9.12 10.47 7.71 10.21

Yields on Earning

Assets (YEA) %17.55 4.64 4.62 27.55 20.32 18.88

Funding Cost (FC) % 8.09 9.42 9.47 13.05 9.63 9.66

Return on Equity (ROE)

%86.08 80.59 99.45 41.63 29.11 27.23

Return on Assets (ROA)

%4.52 4.13 3.96 2.63 2.00 2.58

Source: NDIC annual report, various issues

41

4.2.3 Funding Cost (FC) - The funding cost (FC) rose from 9.47 in 2004 to 13.05 in 2006,

and later fall to 9.63 in 2007 and 9.66 in 2008. This is quite expected as with every major

recapitalization there is an expected cost as all the banks will be all out to meet the

deadline. However, this was tapered off in 2007 and 2008 and was consistent with the

industry average even before the recapitalization.

The Return on Equity (ROE), which measures the rate of return to shareholders, was quite low

after the recapitalization falling sharply from 99.45 in 2004 to 41.63 in 2006 and further to

29.11 and 27.23 in 2007 and 2008 respectively. This shows that the shareholders receive

very low returns in terms of dividend after the recapitalization. This is not surprising as most

banks raise their fund through equity share which now increase the equity capital and the

profit after tax have not improve substantially to compensate the shareholder who add

additional fund to finance the bank recapitalization.

Table 2

Descriptive

Statistics

N Minimum Maximum Mean Std. DeviationNet Intrest Margin

Pre2005

Net Intrest Margin

Post2005

Yield on Earning Asset

Pre

Yield on Earning Asset

Post

Funding Cost Pre2005

Funding Cost Post2005

Return on Equity Pre2005

Return on Equity

3

3

3

3

3

3

3

9.12

7.71

4.62

18.88

8.09

9.63

80.59

14.88

10.47

17.55

27.55

9.47

13.05

99.45

11.7200

9.4633

8.9367

22.2500

8.9933

10.7800

88.7067

2.92055

1.52399

7.45937

4.64606

.78271

1.96593

9.70049

-Source: result obtained from authors computation

42

4.2.4 Return on Assets (ROA) - The Return on Assets also fell after the recapitalization from

3.96 in 2004 to 2.63 in 2006. This shows that management of the banks has not been able

convert the banks assets into net earnings after the recapitalization. The return on assets decline

further in 2007 to 2.0 but then picked up again in 2008 to 2.58.

4.3 Test Of Hypothesis Two

H0: There is no significant difference between the mean of the pre and post consolidation era in

the banking sector in Nigeria.

H1: There is a significant difference between the mean of the pre and post consolidation era in

the banking sector in Nigeria.

4.3.1 Test of Equality of mean helps to compare mean of a variable to see if there is any

significant different between the mean of a period compared with another period of the same

variable to know if there is any significant different in the two mean compared. Where it is

higher than .05 it mean that they are not significant meaning that there is no different between

the two mean compared. But where it is less than .05 it means they are significant.

Table 2 shows that the NIM pre recapitalization mean is higher at 11.27 than the post

capitalization NIM mean at 9.4 but table 3 shows the difference in the mean is not statistical

significant. The implication of this is that there is no difference in the performance of the bank

Net Interest Margin before and after 2005 recapitalization exercise.

On Yield on Earning Asset, the pre 2005 recapitalization mean is 8.9 with a standard deviation

of 7.4 while the post capitalization mean is 22.25 with a better standard deviation of 4.64

meaning that the figure are more together. The implication of the result is that the post the

banks earning assets have higher yield after the 2005 recapitalization exercise. Table 3, also

shows that different in the pre and post mean is significant at 5% significant level which implies

that statistically, there is a significant different in the mean of the two periods compared.

On funding cost, the pre mean shows 8.99 with a standard deviation of 0.78 while the post

2005 recapitalization mean shows 10.78 with a standard deviation of 1.96, The

43

implication of this is that pre funding cost is better than the post. However, table 3 shows that

at 5% significant level there is no different in the two means compared, meaning that it is not

statistically significant. This implies that statistically, there is no difference in the mean of the

pre and the post funding cost. This is also explained in the descriptive analysis, which shows

that the post funding cost is tending to the position of the bank during the pre 2005

recapitalization period.

Table 3

T- Test Paired Sample

Test.

Pair 1 MeanStd.

Dev.T Df

5%

level

Pair 1Net Interest Margin Pre 2005 – Net

Interest Margin Post 20012.257 4.347 0.90 2 0.463

Pair 2Yield on Earning Asset Pre – Yield on

Earning Asset Post-13.31 2.956 -7.80 2 0.016

Pair 3 Funding Cost Pre – Funding Cost Post -1.787 2.748 -1.13 2 0.377

Pair 4Return on Equity Pre – Return on Equity

Post56.05 14.44 6.72 2 0.021

Pair 5Return on Asset Pre – Return on Asset

Post1.80 0.383 8.140 2 0.015

Source: Result obtained from authors’ computation

The return on equity result shows that the pre recapitalization mean is much higher at 88.70 and

7.9 standard deviation than the post recapitalization mean of 32.66, though it has a better

standard deviation of 7.8. This implies that the shareholders earn better return on their

investment before the recapitalization but the 2005 recapitalization has left them worse off and it

will continue to decline unless the banks are able to generate higher profit than they were doing.

The t-test also shows the difference between the pre mean and the post mean, is significant at the

0.05 level of significance. This means that the shareholders are not earning as much as they were

earning before 2005 recapitalization.

44

On return on asset, it follows the same trend as in Return on Equity, the pre recapitalization

mean is better than the post recapitalization mean and the t-test show that the difference

between the two mean are significant at 0.05 significant level. This implies that the banks,

after the 2005 recapitalization are not turning over their assets enough to generate more profit

after tax.

Overall, this study has found that judging from the profitability ratio of banks and test of

equality of the pre and post mean for 2005 recapitalization exercise, it is not all the time

that recapitalization transforms into good performance of the bank and it is not only capital

that makes for good performance of banks. As banks recapitalize the economic environment

has to be conducive to make good profit and deepen the financial structure of the economy.

4.4 Abnormal Returns (Residual)

Using the analytical tools (graphs and tables) employed in this research, it was observed that

throughout the event window the abnormal returns fluctuated from positive to negative in its

movements but largely positive most times in the period. From Table 2 and Figure 3, it can be

observed that, the first three days of the event window (day-40 to -38) the average abnormal

returns were negative followed by a positive zig-zag movements consistently between event days

-36 and -24. The trend was observed negative mostly between event days -24 and -20 and was

positive again within event days -20 and -4. Significant positive spikes were observed on event

days -15 and -4 and these were due to significant positive price movement of 27.7% in First

Bank share price on event day -15 and also another positive share price for others on event day -

4.

The period around the announcement period i.e. (-1: 0: +1), the average abnormal returns was

positive. The positive returns on day -1 could be adduced to the market already having

anticipated the M&A announcement which is consistent with the results of Frank et al, 1991 and

Draper, 1999. However, the average returns were largely positive with some negative

movements on event days +4, +12 to +16, +28, +34 and +40. Other days outside of these are

marginally positive and significant ranging between abnormal returns of 0% to 3%.

Consequently, it can also be deduced these the four commercial banks experienced negative

returns during the period immediately following merger announcements and thereafter returns

45

were positive. For Oceanic Bank, -0.5% movement was observed on the day of merger

announcement i.e. day 0 while movements on days 3 and 4 were -3.3% and -2.2% respectively.

The same trend was observed in First Bank too. Day 0 was -0.9% while days +2 to +5 ranged

between -3.7% and -1.6%. For UBA, movement was -1.3% on day 0 and then varied between -

30.9 and -4.4% in event days +2 and +4. In the case of UBN, event days +2 to +9 showed price

movements of between -1.1% and -0.59% respectively. On the whole, event days +1 and +3

exhibited negative movements of -0.43% and -0.56% respectively.

The abnormal returns continued to fluctuate between positive and negative values throughout the

remaining days of the event window (but largely positive and significant) with the highest

positive value of about 9.8% and 3% the lowest negative value at an average of 2.8% per event

day. This finding s is consistent with result of this findings is consistent with the findings of

Kolo, 2007 who found positive abnormal returns for acquiring banks around the period of

announcement in Nigeria.

46

Hence, the findings on the Average Abnormal Returns for acquiring banks in Nigeria show that

it was positive but not significant which is consistent with the work done by Andrade et al.

(2001) which stated that it is difficult to claim that acquiring firms are losers in merger

transactions, although they are clearly not big winners like target firm shareholders.

Table 4: Acquiring Banks Abnormal Returns From Day -40 To +40.

EVENT DAY ARR EVENT DAY ARR

-40

-39

-38

-37

-36

-35

-34

-33

-32

-31

-30

-29

-28

-27

-26

-25

-24

-23

-22

-21

-0.013632595

-0.016876289

-0.003533093

0.008071165

-0.011718421

-0.010139925

0.013932559

0.011037473

0.003717552

0.002766657

0.011131376

0.005254105

-0.003087568

0.00286752

0.002426181

0.020779907

-0.014890767

0.011706173

-0.020793371

0.006759923

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

0.004336

-0.00211

0.005637

-0.01193

0.003761

0.001646

0.010508

0.00305

0.01068

0.010885

0.014982

-0.00386

-0.01183

-0.00429

-0.01

0.008875

0.000594

0.016988

0.01115

0.006193

47

-20

-19

-18

-17

-16

-15

-14

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

-0.027665057

0.015227781

0.00584428

-0.005168325

0.002859256

0.066843749

-0.017289076

-0.005966529

0.009094933

-0.004835149

0.023785625

-0.00539734

0.00475529

0.009269017

0.005108593

-0.001299657

0.09380962

-0.008589467

0.001621746

0.002209355

0.032409235

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

0.031096

0.008015

-0.00246

0.016978

0.025112

0.017781

0.006832

-0.01468

0.013716

0.010481

0.012329

0.000366

-0.00387

-0.01218

0.002542

-0.00192

0.00948

0.019282

0.002222

-0.00808

4.5 Cumulative Abnormal Returns (CAR)

Analysis on Table 3 and the graph in Figure 4 on the cumulative abnormal returns showed that

(for the Nigerian banks) there was positive CAR value most of the period of the event window

from event day -40 to event day +40. The positive value of CAR averaged +8.1% throughout the

event window with increases and decreases observed. Some major negative dip was observed in

event days -36 and -27. Although the net CAR was positive throughout the event period and

some negative dips observed on some days, it was largely positive after the announcement period

and no negative dip was observed after this period.

48

Overall the CAR finding shows that the net effect of M&A announcement for the shareholders of

the acquiring banks in Nigeria is positive. According to Watson and Weaver, 2001, a positive

CAR is beneficial to shareholder while a negative CAR is detrimental to shareholders. The total

cumulative average residual for the Nigerian banks for -40 to day +40 is 11.69% (Table 3) and

the corresponding t-stat value of 11.48 shows that it is significantly different from zero on a 0.5

level of significance. This observation above is consistent with previous research on the effect of

M&A on the shareholders of the acquiring firms.

49

Table 5: Acquiring Banks Cumulative Abnormal Returns And T-Start From

Day -40 To +40

EVENT

DAY

CAR T-START EVENT DAY CAR T-START

-40

-39

-38

-37

-36

-35

-34

-33

-32

-31

-30

-29

-28

-27

-26

-25

-24

-23

-22

-21

-20

-19

-18

-17

-16

-15

-0.013632595

-0.030508885

-0.034041978

-0.025970814

-0.037689235

-0.04782916

-0.033896601

-0.022859128

-0.019141576

-0.016374919

-0.005243543

1.05615E-05

-0.003077006

-0.000209486

0.002216695

0.022996601

0.008105834

0.019812007

-0.000981364

0.005778559

-0.021886498

-0.006658717

-0.000814437

-0.005982762

-0.003123506

0.063720243

0.00000

-0.23952

-0.18898

-0.11772

-0.14795

-0.16793

-0.10864

-0.06783

-0.05313

-0.04285

-0.01302

0.00003

-0.00697

-0.00046

0.00465

0.04662

0.01591

0.03772

-0.00182

0.01041

-0.03842

-0.01141

-0.00136

-0.00979

-0.00501

0.10005

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

0.206742

0.204637

0.210274

0.198343

0.202104

0.20375

0.214259

0.217309

0.227988

0.238874

0.253855

0.249993

0.238167

0.233872

0.223872

0.232747

0.233341

0.250329

0.261479

0.255286

0.224189

0.232205

0.229748

0.246726

0.271838

0.289619

0.25349

0.24790

0.25175

0.23475

0.23653

0.23585

0.24536

0.24625

0.25570

0.26522

0.27908

0.27217

0.25684

0.24986

0.23700

0.24418

0.24265

0.25806

0.26726

0.25875

0.22536

0.23152

0.22725

0.24213

0.26471

0.27988

50

-14

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

0.046431167

0.040464638

0.049559571

0.044724422

0.068510047

0.063112707

0.067867996

0.077137014

0.082245606

0.08094595

0.174755569

0.166166103

0.167787848

0.169997203

0.202406438

0.07149

0.06114

0.07353

0.06520

0.09820

0.08899

0.09419

0.10542

0.11074

0.10742

0.22867

0.21447

0.21369

0.21371

0.25126

27

28

29

30

31

32

33

34

35

36

37

38

39

40

0.296451

0.281769

0.295486

0.305967

0.318296

0.318662

0.314795

0.302617

0.305159

0.303243

0.312723

0.332005

0.334227

0.326143

0.28434

0.26826

0.27928

0.28711

0.29657

0.29484

0.28926

0.27618

0.27664

0.27309

0.27979

0.29513

0.29522

0.28628

Furthermore, an analysis of the share price of the banks under review was done and a trend of

upward movement for the share price was observed following the date of announcement (Figures

5 – 8 and Appendix 11 - 14). Although the analysis of the share price does not reflect whether

value was added to shareholders, it shows that investors gained more confidence by investing in

the company.

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References:

Bryman A. (2001). “Social Research Methods”. Oxford: Oxford University Press Inc.

Andrade, A. Mitchell, M. and Erik, S. (2001). “New Evidence and Perspectives on Mergers”.

Journal of Economic Perspectives.

Kolo, (2007). Impact of Nigeria’s Bank Consolidation on Shareholder’s Returns.

Weaver S. and Weston F.(2001). “Mergers and acquisitions”. 1st ed. McGraw-Hill Professiona

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CHAPTER FIVE

CONCLUSION

5.0 Recommendations and Conclusion

The aim of this research was to consider impact of M&A on shareholders of acquiring

companies by examining M&A that occurred in the banking sector in Nigeria in the pre-

capatalisation and consolidation period and post consolidation period. This was to be achieved

through the primary objectives listed below:

To establish if shareholders in acquiring banks experience positive wealth effects as a

result of M&A.

To critically evaluate the impact of merger announcements on acquiring bank’s equity

share price.

To analyse if the objectives set by the Central Bank of Nigeria were strengthened by bank

M&A activities.

To establish this objective, the data were analyzed using both descriptive and analytical

techniques such as the t-test and the test of equality of means. It was found that the mean of key

profitability ratio such as the Yield on earning asset (YEA), Return on Equity (ROE) and Return

on Asset (ROA) were significant meaning that there is statistical difference between the mean of

the bank before 2005 recapitalization and consolidation and after 2005 consolidation exercise.

It is obvious that the shareholders could be made worse- off after recapitalization and many

Nigerian investors do not realize this, the last recapitalization exercise witness many

Nigerian banks running off to the capital market to raise fund and many of the shares were

over subscribed to by Nigerian investors. Except calculative steps are taken by the bank

management to increase profitability, the recapitalization will result in lost of fund for the

shareholders. Knowing the implication of raising fund through the capital market, the CBN

never suggested this, but insist on bank consolidation through mergers and acquisition that is

why our recommendation will centre on how to increase banks profitability for better ROE.

Banks should improve their total asset turnover and diversify in such a way that they can

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generate more income on their assets. It was discovered from our data that bulk of the banks

investments as a component of their total assets were in the short term and this would not help

their profitability stance in the long run. Hence, they need to diversify their investment and

should be more of the long-term type.

Recapitalization is good for the economy but the way the banks raise their funds to meet the

recapitalization funds should be carefully looked into so that they do not make their

shareholders worse off than they were before the recapitalization.

Bank management should embark on effective intermediation drive that will bring all the

small savers to the purview of the government, CBN has said over time that most of the

money in circulation is in the informal service sector which the banks have neglected over the

years, bringing this fund through effective intermediation drive will provide a cheap source of

fund for the banks which they can use to generate more interest income which will eventually

increase their profit and once profit is increase the ROE will be better. That is why he authors

think licensing microfinance bank as a good development strategy for banks and a good step

in the right direction.

To generate more profit the banks need a good regulatory environment that will enable

the banks to expand their scope of business but strictly within the financial service industry.

With a good regulation and supervision corporate governance will be enhance, unnecessary

cost and expenses will be cut down and the profit will increase.

The government too has a role to play in providing necessary infrastructure to ensure that the

cost of doing business in Nigeria is reduced significantly to allow the banks to make more

profit.

The banks should put in place good corporate governance that will allow for transparency and

minimize fraud in the bank. The shareholders have the responsibility to choose their directors,

which will in turn choose members of management that will run the affairs of the banks.

They should put in place good management that will protect their investment and increase the

profitability of the banks.

The Nigerian banks and its regulator should recognize the peculiar operating environment, and

developed a viable indigenous financial services industry, which integrated seamlessly with the

traditional banking system. In this regard, most of the money outside the government purview

will be brought back and the government monetary policy will achieve its set objective.

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5.1 Comparing Research Findings with Earlier Literature

The findings of this research shows that the net effect of M&A announcement on the

shareholders of acquiring banks in the Nigerian banking sector is positive but not significant

which is consistent with the findings of Akintoye and Shomoye (2008). However, a further

analysis of the Cumulative Abnormal Returns showed a positive trend around the announcement

period establishing that there were gains for the shareholders of the four banks studied in this

research.

The result of the findings of this study is consistent to the findings of Rheaume and Bhabra

(2008); Draper and Paudyal, 1999; Andrade et al, 2005, who observed a positive wealth effect

for acquisitions of acquiring firm shareholders. Kolo, 2007 in his study on Nigerian banking

mergers also concluded that acquiring banks observed positive abnormal returns indicating

positive returns for shareholders.

However, the findings of this study were consistent with the findings of the studies as referenced

in the above paragraph, stating a positive wealth effect, it was different from the overwhelming

negative wealth effects for bidding firms documented in Chapter 2 i.e. literature review.

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REFERENCES:

Akintoye I. and Shomoye R. (2008). “Corporate Governance and Merger Activity in the Nigeria

Banking Industry: Some Clarifying Comments”. International Research Journal of Finance and

Economics. ISSN 1450-2887 Issue 19. EuroJournals Publishing, Inc.

Rheaume L.and Bhabra S.(2008). Value Creation In Information-Based Industries Through

Convergence: A Study Of U.S. Mergers and Acquisitions Between 1993 and 2005. Information

& Management.

Draper P.and Paudyal K.(1999). Corporate Takeovers: Mode of Payment, Returns and Trading

Activity”. Journal of Business Finance and Accounting.

Kolo, (2007). Impact of Nigeria’s Bank Consolidation on Shareholder’s Returns.

Soludo C. (2007). “Consolidating the Nigerian banking industry to meet the development

challenges of the 21st century”.

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