Full Project – ASSESSMENT OF MERGER AND ACQUISITION ON SELECTED COMMERCIAL BANKS

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CHAPTER ONE

INTRODUCTION

1.1  Background to the Study

Acquisitions. Growing business confidence, consumer demand and improving economic conditions in the region have whetted business executives‟ appetite for firms in the technology, mining and financial services sectors. Mergers and Acquisitions (M&A) are continuously being adopted for progressive company competitiveness by expanding market share. M&A are used to diversify the company’s portfolio as a risk management strategy. Additionally, to enable companies penetrate to new geographical markets to support growth by capitalizing on economies of scale and increase on customer base among other reasons (Kemal, 2011). The logic behind any corporate merger is the synergy effect; two is better than one. Companies believe that by either merging or acquiring another company, the performance would be better than a single entity. This is attributed by the fact that shareholder value would effectively be maximized (Sharma, 2009).The reasons behind mergers and acquisitions are; increased market share and revenues, economies of scale, synergy, taxation, widen geographical areas and among other rationale.

Mergers and acquisitions decisions are critical to the success of corporations and their managers. Many corporations find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, M&A create synergies, gain economies of scale, expand operations and cut costs. Investors may expect mergers to deliver enhanced market power. It is no secret that plenty of mergers do not work. In theory, M&A is great, but in practice, things can go awry. Various empirical results have revealed that many of mergers were disappointed, where the motivations that drive mergers can be flawed and efficiencies from economics of scale may prove elusive.

Mergers and Acquisitions refer to the change in ownership, business mix, assets mix and alliance with the view to maximize shareholders‟ value and improve firm performance. One of the main elements of improving company performance is the boom in mergers and acquisitions (Pazarkis et al, 2006). Additionally, (Gaughan ,2002) defines a merger as the process in which two firms combine and only one endures and the merged entity cease to exist.(Nakamura, 2005) asserts that an acquisition takes place when a company attains all or part of the target company‟s assets and the target remains as a legal entity after the transaction whereas in a share acquisition a company buys a certain share of stocks in the target company in order to influence the management of the target company.

Mergers and Acquisitions are important as they lead to combining corporate resources, but only if it results in a competitive advantage. Some of the benefits are rapid access to technology and products, an extended customer base, an enhanced market position and a stronger financial position. Another importance of mergers and acquisitions is access to an expanded installed base of customers. This not only provides an opportunity for sales of existing products to a larger group of customers, but also provides a greater base for future product sales. In addition, consolidated companies can own a greater share of market, which gives them a substantial competitive advantage. Mergers and acquisitions also benefit companies wanting to reposition themselves in the market. By adding capabilities to their product offerings, companies can rapidly expand their market coverage and modify their market position.

Banks play a crucial role in propelling the entire economy of any nation of which there is need to reposition it for efficient financial performance through a reform process geared towards forestalling bank distress. In Nigeria, the reform process of the banking sector is part and parcel of the government strategic agenda aimed at repositioning and integrating the Nigerian banking sector into the African regional and global financial system.  To make the Nigerian banking sector sound according to Akpan (2007), the sector has undergone remarkable changes over the years in terms of the number of institutions, structure of ownership, as well as depth and breadth of operations. These changes have been influenced mostly by the challenges posed by deregulation of the financial sector, operations globalization, technological innovations, and implementation of supervisory and prudential requirements that conform to international regulations and standards.

Similarly, a strong and virile economy depends to a very large extent on a robust, stable and reliable financial system including the banking sector. This explains the frequency with which the Nigerian banking sector has witnessed repeated reforms aimed at fine-tuning it to meet the challenges for economic stability and developmental goals which are not only limited to domestic savings mobilization and financial intermediation, but also the elimination of inefficiency to enhance financial efficiency. The financial efficiency parameters are determined and measured by gross earnings, profit after tax and net assets. Soludo (2004) opined that, the Central Bank of Nigeria (CBN) chose to begin the Nigerian banking sector reforms process with the consolidation and recapitalization policy through mergers and acquisitions.

1.2       Statement of the Problem

Despite the mergers and acquisitions of banks in the country, some of the merged banks are still facing those challenges that led to the 2005 consolidation. These challenges include; poor risk management, poor corporate governance practices, over reliance on public sector funds, weak infrastructure, insufficient regulation and reporting, weak credit assessment skills, lack of professionalism and skills gap, which have resulted to illiquidity in the sector thereby causing more banks distressed that is characterized by job losses causing untold hardship in the country after the consolidation.

It is on the basis of the above that this research is aimed to determine the reasons why most companies fail to achieve capital adequacy despite the practice of mergers and acquisitions and how can the difficulties in achieving capital adequacy be overcome. These were the main problems of this study with particular reference to Union bank of Nigeria Plc.

Prior to the consolidation of the banking sector in Nigeria initiated by Chukwuma Soludo in 1995, it was assumed that the Nigerian banking sector was in comatose, therefore, Mergers and acquisitions were part of the reforms strategies adopted to reposition the sector. These were done to achieve improved financial efficiency, forestall operational hardships and expansion bottlenecks. This study therefore critically looks at the effect of merger and acquisition on organizational performance, with a focus on the Nigerian banking sector.

1.3       Purpose of the Study

This research work will study the following:

1. To determine the effect of merger and acquisition on banks return on equity.
2. To determine the effect of merger and acquisition on banks profitability.
3. To determine the effect of merger and acquisition on banks credit risk.
4. To examine the effect of merger and acquisition on poor risk management, poor corporate governance practices and insufficient regulation.

1.4  Relevant Research Questions

In studying merger and acquisition and organizational performance, the following questions would be pertinent:

1. Does merger and acquisition have any effect on banks return on equity?
2. Does merger and acquisition have any effect on banks profitability?
3. Does merger and acquisition have any effect on banks credit risk?
4. What are the effects of merger and acquisition on poor risk management, poor corporate governance practices and insufficient regulation?

1.5 Statement of Hypothesis

H₁:  Merger and acquisition does not have significantly effect on banks return on equity.

H₂:  Merger and acquisition does not have significantly effect on banks profitability.

H₃:  Merger and acquisition does not have significantly effect on banks credit risk.

H₄:  Merger and acquisition does not have effect on poor risk management, poor corporate governance practices and insufficient regulation.

1.6   Significance of the Study

This study would serve as eye opener to government agencies that are involved in making policies on bank reforms.

The study will consider the effect of merger and acquisition on the banking sector which is aimed at strengthening and ensuring a diversified, strong and reliable banking sector which will play active roles in the Nigerian economy. The study will also enlighten investors that the state of the Nigerian bank has undergone a lot of changes through merger and acquisition and hence, a sure ground for profitable investment.

Again the study would serve as a resource for further knowledge and investigation by scholars who wish to study further on banking reforms, merger and acquisition in Nigeria.

Above all the study would serve as a theoretical contribution to selected banks on strengthening its policy on merger and acquisition.

1.8 Scope of the Study

This research studies the effect of merger and acquisition on selected commercial banks. Since it will be difficult and cumbersome in terms of time, financial resources and other logistics to study the whole banks in Nigeria, study shall limit its  scope to United Bank for Africa Plc, Sterling Bank Plc, Access Bank Plc and Eco Bank Plc.

1.9  Definition Of Terms

For a better understanding of this research work, the following terminologies are hereby explained:

Bank Performance: statement that indicates the profitability of an organization.

Merger: Coming together of two organizations to become one.

Acquisition: the process whereby one organization buys over the ownership and control of another organization.

Return on equity (ROE): It measures the rate of return for ownership interest of common stock owners. It measures the efficiency of a firm at generating profits from each unit of shareholder equity, also known as net assets or assets minus liabilities.

Profitability: This is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business’ activities.

Credit Risk: The risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation.

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