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
Page
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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