MERGER AND ACQUISITION IN THE BANKING INDUSTRY IN NIGERIA

1.1 Introduction

The term “merger” refers to the integration of two companies where one new company will continue to exist. The term “acquisition” refers to the acquisition of assets by one company from another company. In an acquisition, both companies may continue to exist. The Nigerian banking industry has witnessed a dramatic transformation since the December 31st, 2005 deadline for bank recapitalization. Overall, the banking sector has experienced steady consolidation through recapitalization, mergers and acquisitions that have resulted in fewer banks holding a greater value of the total assets in the sector (Okpanachi, 2011). The waves of mergers and acquisitions that had taken place in the Nigerian banking industry raise an important question of whether bank consolidation enhances the financial sector’s performance in Nigeria.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of 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.

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.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Merger and Acquisition in the Banking Industry in Nigeria.

1.3 Statement of Problems

Every acclaimed business survival strategy is faced with one problem or the other, some of the problems associated with this study include:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

1.4 Aim and Objectives of Study

The aim of the study is to highlight the importance of mergers and acquisition in the survival and growth of Nigeria companies. In achieving this aim, the following specific objectives were laid out as follows:

1. To state the benefits of mergers and acquisition in Nigerian economic development.
2. To investigate into the business in which mergers and acquisition can be useful in Nigeria.
3. To explore into reasons why Nigerian indigenous companies are not involved in mergers and acquisition and other related business combinations.
4. To 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.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Are there benefits in the issue of forms merging or one organization acquiring another organization?
• Does the issue of mergers and acquisition lead to redundancy and the creation of monopolistic powers in the Nigerian Economy?
• Since the introduction of mergers and acquisition in the banking industry, has it been effective and efficient?
• How many banks are involved in this mergers and acquisition?
• 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

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Mergers and acquisition do not have significant impact on the capital structure of bank in Nigeria.
• H1: Mergers and acquisition have significant impact on the capital structure of banks in Nigeria.

Hypothesis Two

• H0: 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).
• H1: 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 Three

• H0: Mergers and acquisition do not improve profitability in bank
• H1: Mergers and acquisition improve profitability in banks.

1.7 Significance of Study

The following are the relevance of the research work;

1. 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.
2. 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.
3. 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.
4. It will help to determine the causes of these problems, provide adequate recommendations that will be given as antinodes to those identified problems.

1.8 Scope of 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.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
5. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Mergers: This means the combination of fusion of two or more formerly independent business into one organization with a common ownership and management.

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.

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.

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.

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.

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).

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.

1.11 Organization 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.

1.12 Summary of Chapter

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.