EFFECT OF MERGERS AND ACQUISITIONS ON PERFORMANCE OF THE NIGERIAN BANKING INDUSTRY 1998 – 2012

EFFECT OF MERGERS AND ACQUISITIONS ON PERFORMANCE OF THE NIGERIAN BANKING INDUSTRY 1998 – 2012

ABSTRACT

This study examined the effect of mergers and acquisitions on the performance of Nigerian banking industry. In order to strengthen the competitive and operational capabilities of banks in Nigeria with a view towards returning global and public confidence to the Nigerian banking sector and the economy in general, the Central Bank of Nigeria instituted a banking reform in 2004, which saw most of the then existing 89 banks merging with each other. The fundamental objectives of this research is to ascertain the impact of mergers and acquisitions on the liquidity profile of commercial banks in Nigeria, examine how mergers and acquisitions adopted by commercial banks impacted on the return on equity of the affected banks, evaluate the impact of mergers and acquisitions on the debt/equity profile of commercial banks in Nigeria and examine the extent to which earning per share of commercial banks improved as a result of mergers and acquisitions. An ex post facto research design was adopted in this study. The population of the study comprises of all 21 commercial banks in Nigeria. The study covered a period of 15years from 1998 to 2012. Secondary sources of data were used in this study. The data were handpicked from the annual reports of the sampled banks and internet. The data obtained were analyzed using panel data analysis. The method of estimation used is the Ordinary Least Square (OLS). The result of the study indicated that overall mergers and acquisitions has a positive effect on the liquidity profile, return on equity, debt/equity profile and earning per share of commercial banks. The study recommends that the monetary authorities should establish an institutional framework to sustain the positive and improved performance of the banking industry in response to mergers and acquisitions.

CHAPTER ONE

1.0       INTRODUCTION

1.1       Background of the Study

The Nigerian banking sector has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, as well as the depth of operations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards.

The Nigerian banking industry witnessed dramatic transformation during the recapitalization exercise which deadline was December 31st, 2005. Overall, the banking sector experience steady consolidation through recapitalization and mergers and acquisitions that have resulted in fewer banks holding a greater value of the total assets in the sector (Okpanachi, 2011). Spearheaded by the announcement of the Central Bank of Nigeria on July 6, 2004 about a major reform program that would transform the banking landscape of the country, an unprecedented process of merger and acquisition took place in the Nigerian banking sector, shrinking the number of banks.

Immediately after the recapitalization deadline ended on December 31st, 2005, the number of operating banks in the country reduced from 89 banks to 25banks but later reduced further to 23 with the merger of some banks like First Atlantic Bank Plc and Inland Bank to form Fin Bank Plc. Stanbic Bank Plc and IBTC to form Stanbic-IBTC Bank. The number of operating bank later increased to 24 banks with the entry of Citibank Nigeria Limited. The merger and acquisition of the nine rescued banks i.e. the merger of Access Bank Plc with Intercontinental Bank Plc: Merger of Ecobank Transnational Incorporation with Oceanic Bank Plc: merger of First City Monumental Bank with Fin Bank Plc further reduced the number of banks operating in Nigeria to 21.

The wave of mergers and acquisitions that had taken place in the Nigerian banking industry raises an important question of whether bank consolidation enhances the financial performance of Nigeria banks. Hosono et al (2007) argued that consolidation may increase or decrease the performance of a bank. Mergers and Acquisitions are common place in developing countries of the world but are just becoming prominent in Nigeria especially in the banking industry. Umoren (2007) says that merger and acquisition is simply another way of saying survival of the fittest that is to say a bigger, more efficient, better-capitalized, more skilled industry.

As the banks are devising ways of improving efficiency and ensuring the optimization of the available resources, policy makers and regulatory authorities are moving towards openness, competiveness, and at the same time ensuring market discipline. This is in tandem with the trend in the banking sector globally. Ahmed (2000:33) described this development as a magic one which caused quite a substantial number of Nigerian banks to be sick while some became healthier. In his view, he contended that growth in the banking sector should be transmitted easily into growth of the real sector. But as banks continued to record impressive growth in all economics, indices show a declining margin of economic growth. This makes one wonder where the impacts of the impressive performance of the banks as reported in the financial reports are being felt. Even the NDIC (Nigerian Deposit Insurance Corporation) which is established to insure the deposit liabilities of licensed banks has liquidated some distressed banks. The action, Ezeikpe (1993: 36-38) commended while arguing that some distressed banks should be liquidated as a way of survival for the banking system. This study seeks to evaluate the effect of mergers and acquisitions as strategic growth option in the Nigerian banking sector, with a view to find out if mergers and acquisitions result in superior financial performance, efficient, reliable and sound capital base for the bank that fully embraced it.

1.2       Statement of the Problem

The outbreak of bank mergers in Nigeria is attracting much attention, partly because of heightened interest in what motivates firms to merger and how mergers affect efficiency.

However, there are often two distinct views to the rationale behind merger and acquisition. The first held view of mergers, especially those involving mega firms, is that firms are merging just to get bigger and not to get more efficient. Accompanying that notion is the fear that as merging firms grab greater market share, individual freedoms, competition and efficiency are threatened, because bigger is perceived as greater concentration of power.

The second view holds that firm’s merger not just to get bigger but also to be more efficient. It is claimed that mergers enable the banking industry to take advantage of new opportunities created by changes in the technological and regulatory environment.

Fallout of this is the reduction in the number of banks nationwide but the concentration of power in local banking markets has not increased. And the very force of regulatory change that spurred bank merger is also bringing new sources of competition of local banking market (especially the management of the country’s external reserves). The post-consolidation performance of all Nigerian banks was overcast in 2009 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States. Sanusi (2010) attributed the post consolidation challenges of Nigerian banking industry to the inability of the industry and the regulators to sustain and monitor the sector’s explosive growth which as a result led to risk-build in the system. This study shall investigate the effect of the merger and acquisition that had taken place in the Nigerian banking sector on the performance of the selected banks 1998-2012.

1.3       Objectives of the Study

In a broad framework, the general objective of the study is to examine the effect of mergers and acquisitions on the performance of the Nigerian banking sector

The specific objectives of this study were to:

1. Ascertain the impact of mergers and acquisitions on the liquidity profile of commercial banks in Nigeria.
2. Examine how mergers and acquisitions adopted by commercial banks impacted on the return on equity of the affected banks.
3. Evaluate the impact of mergers and acquisitions on the debt/equity profile of commercial banks in Nigeria.
4. Examine the extent to which earning per share of commercial banks improved as a result of mergers and acquisitions.

1.4       Research Questions

The following research questions are considered relevant for the purpose of this research work:

1. What effect does mergers and acquisitions have on the liquidity profile of commercial banks in Nigeria?
2. Do mergers and acquisitions have any effect on return on equity of commercial banks in Nigeria?
3. What effect does mergers and acquisitions have on the debt equity profile of the commercial banks in Nigeria?
4. To what extent have mergers and acquisitions adopted by banks impacted on the earning per share of the affected banks?

1.5       Research Hypotheses

For the purpose of this research, the following hypothetical statements stated in their null forms are considered relevant in order to guide the researcher properly:

H1: Mergers and acquisitions do not have any significant positive effect on the liquidity profile of the affected banks.

H2: Mergers and acquisitions have no significant positive effect on the return on equity of commercial banks.

H3: Mergers and acquisitions do not have any significant positive effect on the debt equity profile of commercial banks in Nigeria

H4: Mergers and acquisitions have no significant positive impact on the earning per share of the affected banks.

1.6       Scope of the Study

This research focus on the effect of mergers and acquisitions on the performance of the Nigerian banking industry.The time frame for the analysis is 1998 – 2012, a period of fifteen (15) years. This is with the understanding that the time frame will only be fair and balance for analyzing their performance. It is also extended to 2012 to ensure that the information and data used are timely, up to date and accurate enough to represent the current position of the banks under study.

1.7       Significance of Study

The major significance of this study relates to the evaluation of mergers and acquisitions in terms of its impact on the performance in the post-consolidation era in the Nigerian banking sector, this will serve as a yardstick for the justification of the exercise. This study will also add to the general body of knowledge on the subject matter of mergers and acquisitions and also compliment the work of other authors.

In furtherance to the above, this research will also be significant to:

The policy makers and regulators of the banking industry, it will present a schema, through its analysis that could assist them in evolving policies and reforms that will positively impact on the performance of the banking industry.

To the public, it will enlighten the general public on the effect of bank consolidation on the performance of banks in Nigeria, and also provide a better understanding of the dynamics of the Nigerian banking industry and how it has performed within the period under review.

To investors in general, the study exposes the relationship existing between relevant variable used in this study. Investors will be in a better position to make rational investment decisions as the study will make them understand better the nature of relationship existing between mergers and acquisitions and various performance index of the Nigerian banking industry.

To students, the research will assist those who wish to take a career in economics, banking and finance to advance their understanding of the concept and mechanism of mergers and acquisitions and its effects.

Finally, the research work will serve as a reference material for future researchers on similar topic.

1.8       Operational Definition of Terms

Merger: In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risks involved in the deal.

Acquisition: This means the buying of one company (the target) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the targets board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.

Bank Re-Capitalization: It is the act of supplying long-term funds of the owners of the bank to meet the requirement of monetary authority. Osiegbu (2005).

Consolidation: It is the reduction in the number of banks and other deposit taking institution with a simultaneous increase in the size and concentration of the consolidation entities in the sector (BIS, 2001:2)

Shareholder’s fund: are alternative terms for owners’ or shareholders equity. It represents the funds invested in the company through stock purchase or other private investments.

Economy: The relationship between production, trade and the supply of money in a particular country or region. It is the system of trade and industry by which the wealth of a country is made and used.

REQUEST FOR PROJECT MATERIAL

For the complete research material visit our CHECKOUT PAGE or fill the request form below:

Thanks for your interest in the research topic we will reach out to you as soon as possible.