THE EFFECTS OF MERGER AND ACQUISITION ON THE DEPOSIT MONEY BANKS (DMBS) IN NIGERIA

THE EFFECTS OF MERGER AND ACQUISITION ON THE DEPOSIT MONEY BANKS (DMBS) IN NIGERIA

ABSTRACT

This study examined the effects of merger and acquisition on the Deposit Money Banks (DMBS) in Nigeria. To achieve this broad objective the research seek to determine the impact of merger and acquisition on the quality of banks assets, evaluate the impact of merger and acquisition on banks earning performance, determine the liquidity ratios of the banks as a result of merger and acquisition and determine the impact of merger and acquisition on the level of bank capital adequacy. An ex post facto research design was adopted in this study. 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 earnings 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

INTRODUCTION

1.1     Background of the Study

Nigerian banking reform is a product of the global efforts at revamping the world economy. First it was a Millennium Development Goals (MDG), next it was New Partnership for African Development (NEPAD), before the National Economic Empowerment and Development Strategy (NEEDS). All these have one thing in common the economic development of Nigeria. For a long time in the history of policy reforms in Nigeria, developing the banking sector was given priority attention. Various directives were given to the banking sector with the aim of developing other sector, thus propelling the entire economy. The directive of raising the minimum capital of each bank to twenty-five billion naira (N25b) was mostly achieved through banks consolidation by the instrumentality of mergers and acquisitions (M&A). Implicit in the capitalization directive is the belief that stronger banks would act as spring board for the growth and development of the other sectors of the economy especially cottage industries and other small and medium scale enterprises (SMSE).

Over the years, the banking industry was in a dwindling state, until the then governor of Central Bank of Nigeria, Charles Soludo came up with the idea of reforming the Nigerian banking industry through mergers and acquisitions. The interest to undertake the study on mergers and acquisitions is to enable the researcher to examine the benefits of the subject to the organization concern, the shareholders and the economy. To this end, will mergers and acquisitions on banks brings about stability in the banking industry; enhances high assets quality, increases the shareholders funds, improves the quality of service render to the customers through technological advancement as well as promoting the banking public confidence?

The Nigerian banking sector is no stranger to mergers and acquisitions. It has probably seen the highest number of consolidation activity within the financial services sector in West Africa. The era of bank consolidation commenced in Nigeria around 2004/2005 when the Central Bank of Nigeria (CBN) increased the minimum capital requirement base of banks from N5billion to N25billion. This policy was introduced due to the challenges which plagued the banks including low capital base, liquidity and poor asset quality. These banks were consequently forced to merge in order to survive the recapitalization process. The wave of consolidation in the banking sector led to the reduction of banks from eighty nine (89) banks to twenty one (21) banks today. The bank recapitalization of 2005 laid the foundation for most of the banks operating today.  Also on the 19^th December 2018, Access and Diamond Banks announced that both parties had signed a Memorandum of Agreement in respect of a potential merger between both banks (the “Merger).

Furthermore, in the area of our national economy, will mergers and acquisitions in banks generate more employment, mobilization of foreign savings accessibility of small scale funding and above all provide solid financial institutions that can finance major projects that will enhance the country’s economic development? All these will be revealed on the course of this research work.

1.2     Statement of the Problem

The problem this study include the following:

1. Low Capital Base / Poor Quality of Bank Assets: Prior to merger and acquisition exercises in Nigeria banking sector majority of the Nigeria Deposit Money Banks have a capitalisation of less than $10 million. Even the largest bank in Nigeria has a capital base of about US $240 million which grossly affect their overall performance.
2. High Cost of Operation : The small size of most of Nigeria Deposit money banks, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with several branches in few commercial centres – lead to very high average cost for the industry.
3. Fraudulent practices, inadequate capital and bad Management:  Also in today’s banking environment corporate restructuring exercise such as: merger and acquisition, takeovers, amalgamation etc. are said to have increased the capital adequacy of commercial banks and research has shown that bank failures are mostly caused by factors that range from; liquidity, insolvency, fraudulent practices, inadequate capital and bad management within the deposit Money Banks.

1.3     Objectives of the Study

The objective of this study is to examine the impact of mergers and acquisitions on banks in Nigeria in relation to the recently concluded consolidation exercise carried out by the Central Bank of Nigeria (CBN) on banks. The specific objectives of the study include;

1. To determine the impact of merger and acquisition on the quality of banks assets
2. To evaluate the impact of merger and acquisition on banks earning performance
3. To determine the liquidity ratios of the banks as a result of merger and acquisition
4. To determine the impact of merger and acquisition on the level of bank capital adequacy.

1.4     Research Questions

The purpose of the study is to examine the impact of mergers and acquisitions on Banks in Nigeria. For realization of the above objective, great efforts were made to proffer answers to the following research questions.

1. Do Mergers and Acquisitions improve the capital adequacy on Banks in Nigeria?
2. What impact does mergers and acquisitions has on the bank’s earnings.
3. Do Mergers and Acquisitions improve the Assets quality of banks in Nigeria?
4. What impact does mergers and acquisitions has on the liquidity level on banks in Nigeria?

1.5     Statement of the Hypothesis

1. Ho: Mergers and Acquisitions did not have any effect on the banks capital adequacy

2. Ho: The assets quality of banks did not improve after mergers and acquisitions.

3. Ho: Mergers and acquisitions did not lead to the increase in banks earnings.

4. Ho: The liquidity level of the banks did not improve after mergers and acquisitions.

1.6     Scope of the Study

The scope of this study is limited to the examination of the effects of merger and acquisition on the deposit money banks with particular reference to access Bank (Diamond /Access).

1.7     Significance of the Study

It is not clear whether the recently concluded mergers and acquisitions have impacted on the fundamental of the banks. At the end of the study, the different types of mergers and acquisitions would have been discovered and their various pros and cons.

The study has a lot of useful information which include;

1. The research will educate both individual and financial sector on mergers and acquisitions.
   1. It will also enable any reader of this research work to gain insight on the health of the banks after mergers and acquisitions.
   1. It will be helpful to those who want to go into further research on mergers and acquisitions.
   1. It will also favour the banking public as it will give them a clue on how sound a particular bank is after mergers and acquisitions.
   1. It will benefits the investors who wishes to invest in the equities of these consolidated banks, it serves as a guide in determining the viability of their investment in these bank will be.
   1. It will be beneficial to financial analyst and practitioners to evaluate the strength of a particular bank and advise their clients on the opportunities and threats of individual banks and to make recommendations.

1.8     Limitation of the Study

This research work was carried out alongside with other academic work in the school and office work. Initially, the study encountered some problems as there were some difficulties in getting some of the banks previous year financial reports and some other important information and materials. Some of the bank staff contacted were reluctant to give out the financial reports, while some were using come today, come tomorrow system. The researcher was introduced to archive assistant who demanded money before he can assist. This was only applicable to a particular bank.

1.9     Definition of Terms

This research work appraises the definition of certain terms that need or make it to be very comprehensive, these include:

MERGER: – A merger is the amalgamation of two or more separately existing companies to form a new single company. The new single company will inherit the assets and liabilities of the separately existing companies which are then wound up. (Chuke, 2013).

ACQUISITION:- Acquisition is the purchase of controlling interest in one company by another company such that the acquired company becomes a subsidiary or division of the acquirer (Chuke, 2013).

SYNERGY: A synergy is a situation by which a firm, after a takeover, looks for a combined result that reflects a better rate of returns than was being achieved by the resources used independently before the takeover as a separate operation.

LIQUIDITY: This refers to the ability of banks to meet current financial obligations.

CAPITAL: This is the total fund contributed by bank shareholders for its operations.