MERGER AND ACQUISITION IN THE BANKING INDUSTRY IN NIGERIA
ABSTRACT
Banking is in the midst of change that has arisen due to economic depression. As government seek to improve economic efficiency and better allocation of resources to solve the problem of economic depression, policy makers are shifting towards openness, competitiveness and market discipline. In response to the developments, Deposit Money Banks in. Nigeria engaged in financial sanitizing, management strengthening, corporate refocusing, Business. Process Reengineering (BPR), mergers and acquisitions in order to survive the depressed economy. This whole process is called mergers and acquisition. The study made efforts to discuss issues, facts and environmental factors surrounding the wave of Nigerian Bank's survival. The impact of this research in banks was gleaned from five performance indicators' namely total assets, total deposits, loans and advances, profit before tax and shareholders' funds, of-First Bank of Nigeria Plc. The research looked at the position of these indicators before and after the sanitizing exercise undertaken by the banks for survival and also, its impact on the entire banking system bearing in mind the effect of globalization on the financial market in particular and the economy at large. Chapter four:' shows the presentation and analysis of First Bank's financial statement with the use of chart, tables, bar chart and graph. Using the graph, five years results' which include 2001, 2002, 2003, 2004 and 2005 are for periods before mergers and acquisition was adopted, while, the other five years results which include 2006, 2007, 2008; 2009 and 2010 are for periods after mergers and acquisition .was adopted for the result of hypothesis tested. Findings revealed that merger and acquisitions in general has positive impact on the profitability of banks in Nigeria. This is the direct impact of the government .induced banks consolidation that took place in 2005, following the recapitalization policy to raise their capital base to N25 billion. Recommendations indicate that mergers and acquisition brought about profitability in the bank's performance as depicted by the performance indices; therefore Mergers and Acquisition should not be seen as an end in itself, rather it is a means to an end. So, the process should continually evolve with a review and amendment of the existing process.
TABLE OF CONTENTS
Title Page i
Certification ii
Declaration iii
Dedication iv
Acknowledgement v
Abstract vi
Table of Content vii
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the Study 1
1.2 Statement of the Problem 2
1.3 Objective of the Study 3
1.4 Significance of the Study 4
1.5 Research Questions 4
1.6 Statement of Hypothesis 5
1.7 Scope of the Study 6
1.8 Limitation of the Study 6
1.9 Definition of Terms 7
1.10 Organization of Study 8
1.11 Summary 9
1.12 Reference 10
CHAPTER TWO
2.0 Literature Review 11
2.1 Theoretical Framework 11
2.2 Conceptual Consideration 16
2.3 Empirical Study 19
2.4 Summary 26
2.5 Reference 27
CHAPTER THREE
3.0 Research Methodology 33
3.1 Introduction 33
3.2 Research Design 33
3.3 Population and Sample Size 34
3.4 Sample Design and Procedures (Sample Techniques) 36
3.5 Model Specification 37
3.6 Validity and Reliability of Data 38
3.7 Data Collection Instrument and Method of Administration (Method of Data Collection) 39
3.8 Method of Data Analysis/Procedures for Processing Collection of Data (Techniques of Data Analysis ) 39
3.9 Summary 40
3.10 Reference 41
CHAPTER FOUR
4.0 Data Presentation and Analysis 42
4.1 Introduction 42
4.2 Data Presentation 42
4.3 Analysis of Data 47
4.4 Test of Hypothesis 47
4.7 Summary 73
4.8 Reference: 74
CHAPTER FIVE
5.0 Discussion, Conclusion and Recommendations. 75
5.1 Discussion of Findings 75
5.2 Conclusion 84
5.3 Recommendations 86
5.4 Bibliography 87
Appendix I 94
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Mergers and acquisition is the most favoured or best financial means all over the world of saving companies from serious financial distress. Mergers would give such companies another hope to start all over again under a new management system or structure which must be very organized and has the financial resources to commence and continue the company. However, when we say merger, it implies the combination, joining or the fusion of two or more formerly independent companies into one organization or company with a common ownership and management without the coming together of these companies a merger cannot exist. That is, it is the liquidation of one company that leads to the coming together of these companies known as merging. In paragraph 3 of the International Accounting Standard No. 22 (1 As 22) Acquisition is not a uniting of interest. In a most coherent form, an acquisition arise when a company purchases the business and understanding of another and the acquired business retains their legal existence and continue their business with the acquirer company assuming the status of a holding company to the acquired company. However, both definition seen the same but the distinguishing factor is that whereas there is a fusion in a merger, in an acquisition, both the acquired and the acquirer companies continue in existence. A good example of merger is the Platinum & Habib Bank which came together to form Bank PHB. Also, an example of acquisition is the Access Bank which acquired former intercontinental which is now Access Bank Plc. What is currently happening in Nigeria today cause for pooling of resources together and a more efficient utilization to ensure economic rationalization, survival and growth which most bank in Nigeria are into presently? The most valuable and effective ways of bringing together the synergies in similar organization is through merger and acquisition and this is done to avoid the incidence of liquidation and bankruptcy in companies and also to reduce unemployment. Thus, with these means, the companies have access to growth which might be difficult to attain with the own internal resources if they stand on their own on the list, employee in the company continuous stay with the company is guaranteed. Moreover, the major objectives of most companies which is growth and profit maximization is achieved because now there is collective ideas and reduced competition. Moreso, mergers and acquisition may be the only way to achieve optimal growth. Many firms collapse during the structural adjustment days and those that survived did so because of their ability to meet the set goals and standards and also were able to reduce production cost, it became necessary for companies to pool their resource together in order to survive and grow. Finally, for companies to meet up with the new form of advances technology, they should encourage merging with one another or acquire one another so as to extend their aims of firms in other countries that can produce adequate and qualitative goods and services to meet local demand and export purposes.
1.2 STATEMENT OF THE PROBLEM
Every acclaimed business survival strategy is faced with one problem or the other, some of the problems associated with this study include:
(i) Inability of the concerned companies to engage qualified and experience consultants to manage the business. Most of the companies who want to engage in mergers and acquisition are face with these problems because. There are not trained or qualified and experienced consultants that will direct them on how to carry out this business. Finance is another major problem, because most of these few qualified consultants are highly demanding.
(ii) Constraint or existence of good will of which the valuation poses a concern. Every organization that wants to acquire another or that want to be acquired concentrate on the good will that is, there must be existence of good will.
(iii) Selection of appropriate model/methods in relation to cost. This poses a lot of concern to the firms in areas of cost determination, cost allocation, future cash inflows and so on. Many companies or organization (Bank) select or rather choose model/method that is relatively cheap or loss costly and most of these methods/models are not up to the standards of the banks.
(iv) Financing problem may sometimes be a limitation of the ability of the concerned firms to adopt mergers and acquisition effectively. Even when the concerned forms have the technical capacity at their disposal, they might not have the adequate financial resources to product the expertise.
(v) Government policy: In a capitalist system the major function of the government is to regulate production and other commercial activities. The government embarked on policies that could not keep pace with financial innovation such as the increasing importance of the shadow banking system.
1.3 OBJECTIVE OF THE STUDY
The study is aimed at highlighting the importance of mergers and acquisition in the survival and growth of Nigeria companies. Therefore, to achieve this, the research will:
i. State the benefits of mergers and acquisition in Nigerian economic development.
ii. Investigate into the business in which mergers and acquisition can be useful in Nigeria.
iii. Explore into reasons why Nigerian indigenous companies are not involved in mergers and acquisition and other related business combinations.
iv. Find ways of making mergers and acquisition known to most Nigerian companies as a good system of business strategy towards the improvement of their objectivity.
1.4 SIGNIFICANCE OF THE STUDY
i. The study intends to provide a mean of survival growth for present and future companies in Nigeria through the creation of awareness of the research topic by seminars, workshop and symposium and to review business suitable to undertake such an arrangement.
Ii The knowledge of mergers and acquisition and other business combination in the business community as a way out of financial distress will enhance the nation economical development and in terms of economic down turn and recommendation made will be of immense importance to the company and other similar companies.
iii It will highlight or identify some of the problem inherent not in mergers and acquisition as a survival strategy with reference to some bank in Nigeria.
iv. It will help to determine the causes of these problems, provide adequate recommendations that will be given as antinodes to those identified problems.
1.5 RESEARCH QUESTIONS This study will stimulate numerous questions in order to obtain needed information for the formation of hypothesis and to establish the scope of this research work, the questions include.
i. Are there benefits in the issue of forms merging or one organization acquiring another organization?
ii. Does the issue of mergers and acquisition lead to redundancy and the creation of monopolistic powers in the Nigerian Economy?
iii. Since the introduction of mergers and acquisition in the banking industry, has it been effective and efficient?
iv. How many banks are involved in this mergers and acquisition?
v. Has the introduction (mergers and acquisition in the banking industry) reduced or increase the interest rate maximize share price, profitability: (Stream of earnings) dividend, cost of equity (Ke) and so on?
1.6 STATEMENT OF HYPOTHESIS
Hypothesis I
Ho: Mergers and acquisition do not have significant impact on the capital structure of bank in Nigeria.
Hi: Mergers and acquisition have significant impact on the capital structure of banks in Nigeria.
Hypothesis II
Ho: Mergers and acquisition do not lead to stability in banks (mergers and acquisitions may not support the growth and survival of Nigerian banks in the long-run).
Hi. Mergers and acquisition lead to stability in banks (mergers and acquisition may support the growth and survival of Nigeria banks in the long-run).
Hypothesis III
Ho: Mergers and acquisition do not improve profitability in bank
Hi: Mergers and acquisition improve profitability in banks.
1.7 SCOPE OF THE STUDY
The research work will review the implications of mergers and Acquisition performance and value of banks in Nigerian economy. However, the study delves into appraisal and examination of the various steps in mergers and acquisition business reviving strategy and performance measurement employed in the companies (Banks). This study is concerned with the banks in Nigeria, such as (ECO Bank Plc and Access Bank) their performance from 2009-2012 and how they can develop a more and better corporate performance, how the introduction of mergers and acquisition has widen unemployment in the past, how a company would grow if they are acquired or merged together. Also, this study includes the problems faced with this introduction of mergers and acquisition, significance and objectives of mergers and acquisition.
1.8 LIMITATION OF THE STUDY This research is constrained by:
i. Lack of sufficient time: Time constraint is the principal limiting factor of this research work. Due to the work load of this session of the year and this made my work slow because I had other courses and lectures regularly.
ii Inadequate Resources: This also contributed to the limitation in their study it consist of lack of finance, no conducive environment and limited materials for the successful completion of the study. Also, the assumption that executives to be interviewed may not be easily accessible and sensitive information regarding their banks because they are suspicion of competitors.
1.9 DEFINITION OF TERMS
i. Mergers: This means the combination of fusion of two or more formerly independent business into one organization with a common ownership and management.
ii Acquisition: Accounting to International Accounting standard No. 22 paragraph 3 (IAS 22, paragraph 3) “ Acquisition is not a writing of interest “it is further defined handwork of modern accounting in the following ways: An acquisition at purchase is a combination in which little or no effort is made to continue in existence, the identity of the acquired company. “A acquisition could take the form of a merger or consolidation” furthermore, take place when a company purchases the business and undertaking of another companies and the business acquired retain their legal existence and continue her business with the company that acquired them where by the company that is acquired becomes the subsidiary of the company that acquired them (that is holding company). Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of business companies. Pandy: (2010:758).
iii Monopoly: Having Complete control of a business or organization so that other organization cannot compete with it. That is, the exclusive possession or control of the supply of or trade in a commodities or service. iv. Recapitalization: Provide (a business) with more capital. That is increasing the capital base of an organization for example, bank recapitalization to N25 billion.
v. Strategy: This may be defined as a course of actions, including the specification of the resources required to achieve a specific objective CIMA’96. That is, it is a plan designed to achieve a particular long-term aim, and also, it is a planned series of actions for achieving something.
vi. Financial Distress: This is a situation whenever an organization or bank is finding it difficult to meet up with their financial obligation. It can be managed through government policies that are increasing capital base.
Vii. Resources: The resources of an organization or person are material, money and other things that they have and can use in order to function properly. (that is things an organization has and can use to increase its wealth).
viii Interest Rate: A rate which is charged or aid for the use of money. An interest rate is expressed as an annual percentage of principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rate often changes as a result of inflation and Federal Reserve Board policies for example, if a lender (Such as a bank) charge customer @ 90 in a year on a loan & 1000, then the interest rate is expressed as annual percentage yield (APY) when the interest earned, for example, for a saving account or a certificate deposit. Also, the amount charged, expressed as percentage of principal, by a lender to a borrower for the use of assets. Interest rate is typically noted on an annual basis, known as the percentage rate (APR).
1.10 OGRANAIZATION OF STUDY The study is organized into five chapters as follows: Chapter one is an introduction of the research study. It consist of an overview or background of the study, statement of problems which the study seeks to provide answer to objective of the study, the significance research question, hypothesis formulated for the purpose of the study, scope and limitations of the study, definition of major terms why chapter two is a review of relevant literature and empirical review of renowned authors in this field of study. In chapter three the work presents the methodology upon which the research is based. In this chapter the population and sample size, the sample techniques, methods of obtaining data and the techniques of data analysis are given consideration. Chapter four consists of a vivid presentation and analysis of data obtained from relevant sources in order to prove or disprove the stated hypothesis. Finally, chapter five is the last section of the work and it consists of the researcher’s finding, conclusions and recommendations.
1.11 SUMMARY Merger and acquisitions are forms of business combinations that could be a last resort to organization seeking expansion, improvement of operations and survival in the ever competitive business environment. This chapter is an overview into the understanding of the benefits of mergers and acquisition to organizations. The purpose of the study, problems, research questions and significance of the study has been presented. Hypotheses have also been formulated as well as factors that pose limitations to the study.
1.12 REFERENCE
Akaye, S.O & Olaegde B.A (1996). Research methodology “A Practical Approach for Research Methodology. Lagos: Macmillian Press Ltd. Asika N. (1991). Research Methodology in the Behavioural Sciences. Lagos: Longman Nigeria Ltd. Drucker, P. F (1964).
Managing for Business Effectiveness. Harvard Business Review Volume 41, No.3, May to June Page 53-60. Pandy, I.M. (2010).
Financial Management. New Delhi: Vikas Publishing House RVT Ltd. Price J.L. (1972). Organizational measurement. Lexington: Mass D.C Health.
