EFFECT OF MERGER AND ACQUISITION ON GROWTH OF NIGERIAN BANKS

ABSTRACT

Banks in Nigeria operate in a dynamic environment affected by myriad of factors. These factors affect the industry in variety of ways creating both opportunities for the strong ones and distress for the feeble banks. However the need to ascertain the effect of merger and acquisition on the growth of Nigerian banks gave rise to this research. In analyzing the above research, the research adopted the following objectives; to examine the effect of merger and acquisition on the profitability of Banks in Nigeria, to evaluate the effect of  merger and acquisition on return on asset of  Banks in Nigeria and finally to determine the effect of merger and acquisition on return on equity of  Banks in Nigeria. The research adopted the use of SPSS to analyze the objectives. Findings reveals that there is a significant different in profit after tax of the bank before and after acquisition, there is a significant change in return on asset of the bank before and after merger and acquisition and finally there is a significant effect of Merger and acquisition on return on asset of Banks in Nigeria. Sequel to the findings and conclusion, the researcher makes the following recommendations; Merger/acquisition is a strategic tool that must be cautiously applied and implemented. The maturation period of the merger must be allowed so that the financial records of the intending firms coming together can be properly scrutinized by the board of directors of each firm and the regulatory agencies.

TABLE OF CONTENTS

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study                                                                          1

1.2 Statement of the Problem                                                                              2

1.3 Objectives of the Study                                                                      3

1.4 Research Questions                                                                           3

1.5 Research Hypotheses                                                                              4

1.6. Significance of the Study                                                                           4

1.7 Scope of the Study                                        5

1.8 Definition of Terms                                                                                   5

CHAPTER  TWO

REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework                                                                6

2.1.1 The Concept of Merger and Acquisition                                      6

2.1.2 The Rationale for Merger and Acquisition.                                         7

2.1.3 Classification of Merger and acquisition                                             9

2.1.4 Benefits of Merger and acquisition                                                       9

2.1.5 Effects of Merger and acquisition                                                 10

2.2   Theoretical Framework                                                                          11

2.2.1 Bank concentration Theory                                                                 11

2.2.2 Pro-concentration theory                                                              12

2.2.3 Pro-deconcentration theory                                                                12

2.2.4 “Eat or be Eaten” theory of Merger and acquisition and acquisitions                  13

2.2.5 Agency Theory                                                                              15

2.3   Empirical Review                                                                     16 

CHAPTER  THREE

 METHODOLOGY                                                                                                  22

3.1       Research Design                                                        22

3.2       Area of Study                                                         22

3.3       Source of Data                                                         22

3.4       Population of the Study                                                      22

3.5       Sample Size                                                                            22

3.6       Data analysis Technique                                                22

CHAPTER FOUR

DATA PRESENTATION AND  ANALYSIS                                                         24

4.1 DATA PRESENTATION                                                    24

4.2 Test of Hypothesis                                                                           24

4.3 Discussion on Findings                                                                  28

CHAPTER FIVE                             

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS                  30

5.1 Summary of Findings                                                                30

5.2 Conclusion                                                                      30

5.3 Recommendations                                                          30

REFERENCES                                                                                                                      

LIST OF TABLES

Data Presentation                                                                                  26       

One-Sample Statistics                                                                          27

One-Sample Test                                                                           27

One-Sample Statistics                                                                  28

One-Sample Test                                                                      28

One-Sample Statistics                                                                           29

One-Sample Test                                                                              29

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Banks in Nigeria operate in a dynamic environment affected by myriad of factors. These factors affect the industry in variety of ways creating both opportunities for the strong ones and distress for the feeble banks (Umoren, 2017).

However, the wave of banks’ consolidation that recently swept through the banking sector started after the announcement by the Central Bank of Nigeria (CBN) on behalf of the federal government of Nigeria, that banks in Nigeria should beef up their minimum capital base to N25 billion on or before 31^st December, 2005. As the termination date for banks’ consolidation workout drew nearer, desperate efforts were made by the banks to meet the minimum capital fixed by the CBN before the expiration date. There were many options available towards solving the challenge of recapitalization. A bank could among other options merge with others or acquire smaller ones or volunteer to be acquired by others or do it alone or by combination of two or more of the options (Okafor, 2014). Nevertheless, the strategies adopted by majority of these banks were mergers and acquisitions. These mergers and acquisitions brought about a fusion of the 89 banks in the country into mega banks units of only 25. According to CBN report, 25 banks emerged at the end of the consolidation exercise from the previous 89 banks, while 14 banks were liquidated (Godwin, 2015). 

According to Adeneniyi (2014), Mergers and Acquisitions are commonplace in developed countries of the world but are just becoming prominent in Nigeria especially in the banking industry. Before the recent consolidation, the Nigerian banks have not fully embraced mergers and acquisitions as expected because of their cultural background in terms of assets ownership, greediness, shame, fear of what people will say and lack of proficiency required for mergers and acquisitions, among other reasons. The issue of mergers and acquisitions in banking industry started in October, 2003 under the past president of CBN. Although the CBN rolled out incentives to encourage weaker banks adopt mergers and acquisitions. The incentives included concessionary cash reserve ratio on a case- by -case basis for a period of two years to the newly restructured banks, conversion of overdrawn positions of weak banks to long-term loans with concessionary interest and the acquired banks could be given up to 24 months grace period for complying with the minimum liquidity ratio requirement to enable it settle down as a newly recapitalized/restructured bank. However, most of the feeble banks were unwilling to listen until the new order on July 6, 2004 (Famakinwa, Oduniyi, Aminu, Obike and Ugwu 2014). 

The situation changed from July 6, 2004 as many banks have either merged with or acquired other banks. The increase in awareness and scheme is due to a number of reasons such as threat of distress, regulatory driven environment, foreign inducement, persuasion from regulatory bodies and economic benefits of mergers and acquisitions. The most common of these factors that is responsible for the growth of mergers and acquisition in Nigerian Banks is regulatory factor. Thus, mergers and acquisitions as consolidation tools have become a near permanent feature of our financial lexicon after July 6, 2004 (Ewubare, 2004). Based on the above background, the research work seeks to examine the impact of merger and acquisition on the financial performance of banks in Nigeria.

1.2 Statement of the Problem 

Over the years banks in Nigeria have experienced serious financial crisis and failure. This has led to distrust and defeat of expectation and objectives. However, as a mechanism of achieving profit maximization and cost minimization anchored on economic of large scale, merger and acquisition has been widely adopted.

The relationship between merger and acquisition and bank performance has been attracting much attention, partly because of heightened interest in what motivates firms to merge and how merger and acquisition affects performance or efficiency. However, According to Berger (2000) merger and acquisition may reduce industry risks, through the elimination of weak banks and create a better diversification opportunities.

According to Pilloff and Santomero (2017), there is little empirical evidence of merger and acquisition in achieving growth or other important performance gains. Also,  evidence  supporting  merger and acquisition to  achieve  costs  saving  and efficiency gains is sparse (Kwan, 2015). Towards this end, Beitel (2013) found no gain effect due to merger and acquisition

Furthermore, merger and acquisition and in the banking sector was greatly witnessed in Nigeria within the years 2005-2011 during the administration of Prof Charles Chukwuma Soludo as the governor of CBN. All banks were compelled to a re-capitalization of their deposit with the CBN to the tone of 25billion Naira. The amount was unrealizable for some usually improved then banks and some that realized saw more reasons to consolidate their capital in order to meet the policy of re-capitalization with ease. This led to the merging of so many commercial banks.

Objectively, the essence of this re-capitalization was to improve banking service performance and trust on the banking industry. Then, merger and acquisition was only adopted by bank to meet the recapitalization demand of CBN. But the question remains, has this actually improved or discouraged the performance of banks in Nigeria? If it has to what extent and magnitude bearing in mind that the objective of CBN was to improve stability and performance in the banking sector through recapitalization but the objective of the banks was to meet the CBN re- capitalization demand.

Overall  of  all  these  studies  provide  mixed  evidence  and  inconclusive  evidence  which  appear  counter  intuitive  aided in banking globalization efficiency and many fail to show a clear relationship between merger and acquisitions and financial performance.

Therefore, this work seeks to examine the effect of merger and acquisition on the performance of banks in Nigeria.

1.3 Objectives of the Study 

The main objective of the research is to ascertain the effect of merger and acquisition on the performance of banks in Nigeria. Specifically, the research seeks to;

               i.         examine the effect of merger and acquisition on the profitability of Banks in Nigeria.

              ii.         evaluate the effect of  merger and acquisition on return on asset of  Banks in Nigeria

            iii.         determine the effect of merger and acquisition on return on equity of  Banks in Nigeria.

1.4 Research Questions

The following research questions are formulated for the study:

               i.         To what extent does merger and acquisition have effect on the profitability of Banks in Nigeria?

              ii.         How does merger and acquisition affect the return on asset of Banks in Nigeria?

            iii.         What is the effect of merger and acquisition on return on equity of banks in Nigeria?

1.5 Research Hypotheses

H₀₁: Merger and acquisition have no significant effect on the profitability of Banks in Nigeria

H₀₂: Merger and acquisition have no significant effect on return on asset of Banks in Nigeria

H₀₃: There is no significant effect of Merger and acquisition on return on asset of Banks in Nigeria

1.6. Significance of the Study

The study which seeks to examine the effect of merger and acquisition on the performance of banks in Nigeria will be of immense benefit to the following groups:

i.      POLICY MAKERS

Here the policy makers are the central banks which are saddled with the responsibility of achieving economic stability and growth. To this extent, findings in this study shall enable the Central Bank of Nigeria (CBN) make policies that would enhance economic growth in relation to merger and acquisition of banks to enhance their strength and profit level.

ii.         INVESTORS AND OTHER ECONOMIC AGENTS

This study shall give an insight to the to investors by letting them know the advantages and benefits that accrue as a result of merger and acquisition so as to enable them make proper decision as it relates to investment.

iii.            ACADEMIA

This study shall guide future researches in formulating research questions and hypotheses. More so, literature generated in the study will also help other researchers to develop appropriate empirical literature and theoretical framework of their study.

Finally, future researchers will benefit from this research work because, it will serve as reference point for them that will want to research more on the topic.

1.7       Scope of the Study

The study will cover a period of 10 years from 2008-2017. This is to enable the researcher to have a comprehensive coverage of the period of mergers and acquisition which occurred during that period.

1.8       Definition of Terms

Capital base: - This is a term used to describe the funds that a company generates as a result of an initial public offering, as well as any additional offerings that the corporation makes at a later time plus any retained earnings generated by the business.

Risk: - This is exposure to damage or financial loss.

Re Capitalization: This means significant adjustment of a firm’s capital structure due to issuance of new shares, re organization after bankruptcy proceedings

Consolidation: This means combining assets, equity, liabilities and operating accounts of parent firm and its subsidiary into one financial statement.

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