EFFECT OF MERGERS AND ACQUISITIONS ON CAPITAL STRUCTURE AND FIRM PEFORMANCE OF BANKS IN NIGERIA
ABSTRAT
Mergers and acquisitions as a form of corporate restructuring are reform strategies recently adopted to reposition the banking sector. This research work seeks to examine the impacts of mergers and acquisition of commercial bank’s performance in Nigeria as the main objective. The research used shareholders fund and profit after tax of the selected banks as proxies to measure the financial efficiency of the banks in both pre and post consolidation eras in Nigeria. Two banks were selected for this study using simple random sampling methods. Data were collected from Academic journals, Nigerian stock exchange archive, text books, magazines, newspapers, companies’ annual reports, and internet sources and were subsequently analyzed using correlation and regression with the aid of Econometrics view (version 7). This research found out that “mergers and acquisition” is an effective means of ensuring the stability and profitability of the banking sector, the study also found out that shareholders fund contributed significantly to the profit after tax of the banks, and that corporate restructuring has affected the capital adequacy of commercial banks positively, It was also discovered that synergy gains are the key motive for bank mergers.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 4
1.2 Statement of the Problem 6
1.3 Objectives of the Study 7
1.4 Research Questions 7
1.5 Research Hypotheses 8
1.6 Significance of the Study 8
1.7 Scope of the Study 9
1.8 Operational Definition of Terms 9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 Introduction 10
2.1 Mergers and Acquisition 10
2.1.1 Form(s) of Corporate Mergers and Acquisition 11
2.2 Capital Structure 12
2.3 Firm Performance 13
2.4 Theoretical Framework 14
2.4.1 Efficiency Theory 14
2.4.2 Agency Theory 15
2.4.3 Diversification Theory 16
2.5 Empirical Review 16
2.6 Synthesis of Empirical Studies 25
2.7 Gap of Study 34
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction 36
3.1 Research Design 36
3.3 Population of the Study 36
3.4 Sample and Sampling Technique 36
3.5 Method of Data Collection 37
3.6 Method of Data Analysis and Model Specification 37
3.7 Limitations of the Study 40
CHARPTER 4 DATA PRESENTATION, ANALYSISAND DISCUSSION OF RESULTS
4.1Presentation of Data 41
4.1.1 Descriptive Statistics 41
4.1.2 Correlation Analysis 42
4.3 Diagnostic Tests43
4.3.1 Multicollinearity test43
4.3.2 Omitted variable test 44
4.3.3 Normality plot 44
4.3.4 Hausman test 44
4.3.5 Breusch-Pagan L M test 45
4.3.6:Heteroskedasticity, serial correlation (autocorrelation), and cross-sectional 46
Independence test
4.3.7 Choice of model analysis 48
4.4 Test of Hypotheses 49
4.4.1 Hypotheses 1: 49
4.4.2 Hypotheses 2: 50
4.4.3 Hypotheses 3: 50
4.5 Discussions 51
CHAPTER 5 SUMMERY OF FINDING, CONCLUSION AND RECOMMENDATIONS
5.1 Summery of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
5.4 Suggestions for further studies 55
5.5 Contribution to Knowledge 55
References 57
Appendices 62
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In Nigeria, the confidence restored to bank customers via mergers and acquisitions (M&A) from 2006 to date has made it a formidable force to reckon with in the banking industry. It is also to note that in Nigeria, reforms in the banking industry preceded against the backdrop of the bank crisis which was connected with highly undercapitalization of deposit-taking banks, weakness in regulatory and supervisory frameworks, weak management practices and tolerance of deficiencies in corporate governance behaviour of banks (Tarila & Ogege, 2019). Though bank reforms (M&A) reduced the competitiveness in the banking industry; however, it further strengthened the industry by way of enhancing banks’ capital structure.
The banking industry plays a very significant role in economic development via the channelingof scarce financial resources from surplus units to deficit units. Banks implement M&A to expand, diversify and reduce the number of competitors and to have a viable capital structure, such that they can partake in both local and global markets for high business growth (Alin, Sabina & Nicu,2021; and Santulli, Gallucci, Torchia & Calabro, 2020). According to Hu, Lu, Hui and Xing (2020), M&A refers to two or more corporate entities coming together to constitute one entity in order to expand synergy. Khan, Soundararajan and Shoham (2020) opined that the prime aim of M&A is to build shareholders’ wealth via expanded synergies and that the synergies translate into reduction in cost of production (operational synergy), costs of capital (financial synergy) and price (collusive synergy); this study is centered on the financial aspect of M&A.
Banks occupy central position in the country’s financial system and are essential agents in the development process. By intermediating between the surplus and deficit units in an economy, banks mobilize and facilitate efficient location of savings, thereby increasing the quantum of investments and hence national output (Afolabi, 2016). Through financial intermediation, banks facilitate capital formation (investment) and promote economic growth. The decade 1995 and 2005 were particularly traumatic for the Nigeria banking industry, with the magnitude of distress reaching an unprecedented level, thereby making it an issue of concern not only to the regulatory institutions but also to policy analyst and the general public. Thus, the need for a drastic overhaul of the industry was quite apparent.
In furtherance of the general overhauling of the financial system, the Central Bank of Nigeria (CBN) introduced major reform programs that changed the banking landscape of in 2004. The main thrust of the 13-point reform agenda was the prescription of minimum shareholders fund of N25 billion for Nigeria deposit money banks not later than December 31, 2005. In view of the low financial base of these banks, they were encouraged to merge (Fabinu, Jonny & Agbatogun, 2018). Solodu (2014) opined that the CBN choose to begin the Nigeria banking sector reforms process with the consolidation and recapitalization policy through M&A. This is done in order to arrest system decay, restoration of public confidence, building of strong and competitive players in the global arena, ensuring longevity and higher return to investors.
Considering the inability of most Nigeria banks to perform well due to operational hardship, expansion bottlenecks as a result of heavy, fixed and operating costs coupled with volatility between deposits and lending rates, the present banking sector reforms in Nigeria was announced by professor Chukwuma Soludo, the then CBN governor on July 6th, 2004 with the objective of creating a sound and more secure banking system that depositors can trust through mergers and acquisition which enhanced operational capital base (Hassan & Lukman, 2020). These and many more, act as springboard to achieving improving performance. It is in record that between 1990 to date, Nigeria witnessed several M&A arrangements. This trend changed particularly from 1995. In 1997 alone, about ten (10) M&A were recorded whereas as at 31st December, 2005 the Nigeria banking sector witnessed 25 mergers activities (Odetayo & Olowe, 2013). Thus, M&A was a new scheme geared in repositioning banks for more efficiency and reliability via strengthening the industry with its position multiplier effects on the economy.
Furthermore, by the introduction of 25-billion-naira deposits by the individual banks by the CBN as a credit asset, banks which could not cope up were either merged, acquired or taken out from the system (Omotayo, 2019). Without doubt, M&A has proved to be a masterstroke and a big advantage as it has not only engendered greater confidence in the banking system among the depositing public but has also resulted in the enthronement of a regime of healthy, strong, viable and competitive banking institutions as well as improving in the capital structure of banks (Tarila & Ogege, 2019; Taiwo & Musa, 2014).
In the views of Ogebe, Ogebe and Alewi (2013); capital structure refers to a mix of debt and equity that an entity employs in financing its operations. It has been a fundamental issue in finance ever since Modigliani and Miller (1958) postulated that given frictionless markets, homogeneous expectations, l of entities are irrelevant (Onaolapo & Kajola, 2010; Akinlo, 2011). According to Yinusa, Ismail, Yulia and Olawale (2019), capital structure could have two effects on firms; first, firms with same risk class could likely have greater costs of capital with higher leverage; and second, it may affect the value of the entity, with more leveraged banks being riskier. Consequently, it is against this background that the study attempts to assess M&A as a tool for survival in the post consolidation era of Nigeria banking industry with the aim of assessing its effect on the capital structure of banks in Nigeria.
1.2 Statement of the Problem
The outbreak of bank M&A in Nigeria is attracting much attention, partly because of heightened interest in what motivates firms to merge and how M&A affects performance or efficiency. However, the study investigates the M&A on the capital structure and performance of banks. It is motivated by the relative dearth of empirical evidence on the impact of M&A on capital structure and performance. Broadly, handful of studies on M&A activities in the Nigeria banking industry provide mixed results. For instance, Altunbas and Ibanez (2004) reported that bank mergers taking place in the banking industry do lead to improved profitability. On the other hand, Vander (2016) reported a limited improvement in profit efficiency but not with reference to cross-border deals.
According to Pilloff and Santomero (2017), there is little empirical evidence of merger achieving growth or other important performance gains. Evidence supporting M&A to costs saving and efficiency gain is sparse (Beitel, 2013; and Abdelrahman & Elgiziry, 2019). In general, these studies provide mixed evidence and inconclusive evidence which appears counter-initiative and many fail to show a clear relationship between M&A and capital structure and performance. This study intends to investigate empirically, the potency of M&A as a survival strategy of banks in enhancing capital structure and performance.
1.3 Objectives of the Study
The broad objective of this study is to investigate the effects of merger and acquisition on capital structure and performance of banks in Nigeria. The intended specific objectives are:
i. To assess the effects of mergers and acquisitions on the capital structure of Nigerian banks.
ii. To determine the effects of mergers and acquisition on the performance of Nigerian banks.
iii. To ascertain whether merger and acquisition guarantee the survival and growth rate of Nigeria banks in the long run.
1.4 Research Questions
The following research questions will guide the study:
i. To what extent do mergers and acquisitions affect the capital structure of Nigerian banks?
ii. What is the effect of mergers and acquisition on the performance of Nigerian banks?
iii. To what extent does merger and acquisition guarantee the survival and growth rate of Nigeria banks?
1.5 Research Hypotheses
In line with the specific objectives of the study, the following research hypotheses will be tested:
Ho1: There is no significant relationship between merger and acquisition with capital structure of Nigerian banks.
Ho2: There is no significant relationship between merger and acquisition with performance of Nigerian banks.
Ho3: There is no significant relationship between mergers and acquisitions with survival and growth rate of Nigeria banks.
1.6 Significance of the Study
This study will contribute its quota to the clamour for banks in Nigeria to embrace M&A as a strategic business policy for their survival and growth, especially in the present day highly competitive global environment. The study will be useful to management, regulatory authorities of the banking industry and researchers alike. For management, the study will serve as a means of determining how banks can engage in merger in order to improve on their capital structure and performance. For the regulatory authorities, it will provide an insight into whether banks would have ordinarily merged among themselves without any ‘coercion’ or ‘arms twisting.’ It is hoped that the study will serve as a rallying point for future discussion or at least a point of departure for future researchers in the field of accounting and finance.
1.7 Scope of the Study
This study intends to investigate the effects of merger and acquisition on capital structure and performance of banks in Nigeria. The study will cover eleven (11) year periods, from 2011-2021. In doing this, the study will look at some of the variables of both dependent (natural logarithm of net profits after tax, leverage, and revenue growth rate) and independent (natural logarithm of asset-base). Thus, performance will be measured using natural logarithm of net profits after tax, growth and survival of Nigeria banks in the long-run by revenue growth rate, capital structure by leverage (short, long and total debt ratios)while mergers and acquisition will be used using the natural logarithm of asset-base of banks. Data will be obtained from the annual reports and accounts of banks.
1.8 Operational Definition of Terms
- Acquisitions: This refers to an asset obtained or bought by an organization, which do not necessarily result to a single entity.
- Capital Structure: This refers to a mix of the debts and equities of corporate entities.
- Mergers: This refers to a combination of two or more organizations to become a single entity.
- Performance: This refers to the functioning or ability of corporate entities to determine how well they have carried out their operations effectively and efficiently.
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