1.0 Introduction
Over the years, the world have witnessed growth and development in the business world and will still record a lot more due to rapid technological growth in recent times. Merger and Acquisitions (M&A) has contributed immensely to the world's economic development and also helped indirectly to create stability in some industries in both less developed and developed nations. A merger is usually the amalgamation of two or more companies running commercial activities. On the hand, acquisition is where one company takes over another and the identity of the other company's identity is lost as it becomes part of a larger company. Most M&As between companies have occurred as a result of achieving economies of scale and penetrate into new markets. Many bank employees regard M&A as a threat to their jobs as the period will record shareholders demand for reduction of workforce. It will be also problematic to execute Human resource management with and environment of M&A due the changes that will be recorded in the procedures and practices in the new company.
1.1 Background to the Study
A significant change has been witnessed in the Nigerian banking sector over the years, in respect to ownership structure, number of institutions and locations, as well as the profundity of operations. There are a number of effects when companies merge or when one company acquires another company (Cigola and Modesti, 2008). This include reduced expense in production and management cost, deriving It was observed that downsizing, mergers, and acquisitions are examples of the radical organizational responses to increase global completion, improvements in technology, and government deregulation (Shook and Roth, 2010). The changes so far recorded have been predisposed mostly by the challenges posed by issues as globalization, deregulation of the financial sector, and the implementation of a decision making and prudential requirements that are in line with international standards. This is why some companies may deliberately choose to merge with any other readily available in its line of business. The benefits in most cases are much more than the losses if any is recorded. Mergers have also had effects on employees as the process usually leads to an upward or downward review of wages and salaries. There are also cases where the M&A leads to downsizing of workforce as new technological operation techniques will be adopted and there will less need for human resource compared to the former way of operation.
1.2 Bank Mergers and Acquisition
A significant amount of research has been done to ascertain the success rate of M&As in banks to be able to draw conclusion on its profitability and efficiency (Behr and Heid, 2011). It was pointed out that despite the considerable prospective U.S banking mergers in the 1980s, many of them were not successful in achieving their aim due to cost of efficiency. Banks have diverse reasons why they merge which relates to the business motives behind it such as managerial incentives (Wood, 2006). The banking industry was partly strengthened through M&A as they use the merged assets was used to build a strong capital base for the bank and more assets that have appreciated value. Soludo (2004) enumerated the fundamental problems of the banks, particularly those classified as unsound, have been identified to include; persistent illiquidity, poor assets quality and unprofitable operations and further mentioned that their major problems also included weak governance , weak capital base, late publications of annual reports, gross insider abuses and over dependence on public sector deposits. Many literatures indicates that banking sector reforms in Nigeria propelled by the need to deepen the financial sector and reposition for growth, to become integrated into the global financial design; and involve a banking sector that is consulting with regional integration requirement and international best practices (Somoye, 2010).
1.3 Nigerian Banking Industry
In the recent past, Nigerian banks have adopted poles apart strategies to achieve a predetermined least amount capital base during the banking sector consolidation in the year 2004 and 2005 which was put at twenty five billion Naira (Alao, 2010). This process saw a lot banks in Nigeria to source for funds from all forms of businesses to meet up the demand and at a point, it was observed mergers or acquisition of smaller banks was the only way out of the regulation. M&As is a global phenomenon with an estimated four thousand deals taking place each year. Elumilade (2010) mentioned that banks are the linchpin of the economy of any country. He mentioned that banks in any every country play a vital position in respect to the country's financial system and they could be regarded as vital agent s for development process. Banks also are relevant through financial intermediation services and promote economic growth (Afolabi, 2004).
According to Ibru (2006), there was an embryonic phase of the Nigerian banking industry which began with the first set of banks started with the African banking corporation which had its headquarter in south Africa and was pioneering by the Nigerian banking system in 1892. In 1894 the British bank for West Africa which now known as the first bank while union bank of Nigeria plc formerly known as the Barclays D.C.O started in 1925. The British and French bank now united bank for Africa was established in 1949. Many other indigenous banks were established and they ushered in the era that saw the constant monopoly erstwhile enjoyed by the foreign owned banks (CBN, 2008)
Central Bank of Nigeria and Market Recapitalization
The Central Bank of Nigeria (CBN) in 2004 introduced a policy that made it mandatory for recapitalization to be carried out in the banking industry. This was mentioned as the fourth phase of the banks restructuring scheme and all banks should comply strictly before the end of 2005 (Afolabi, 2004). This led the emergence of twenty five consolidated banks and the process encouraged mergers and acquisition in many cases. They were 89 members of the Nigerian banking industry (NBI) prior to the recapitalization. It was recorded that the CBN in 2009 provided two hundred billion Naira to four undercapitalized banks in after an audit was carried out which reported that they could face liquidity problems and needed funds to continue normal operations. In addition, the CBN decided to stabilize the system and return confidence to the markets and investors, an addition injection of six hundred and twenty billion naira of liquidity into the banking sector and there a replacement of leadership in eight banks which has given sector a little more balanced than its formal position (Sanusi, 2010).
Relevance of the Research
After the bank consolidation in 2005, it was mentioned in a CBN report that UBA Plc and First Bank of Nigeria have been effectively competing with multinationals in various aspects of international business. CBN Report (2007) also revealed that some Nigerian banks after the consolidation were able to register their presence in the developed countries like United States of America and United Kingdom as participate in foreign market areas of funds transfer and loans servicing.
Aim of the Study
This research aims to look into the overall motives of banks mergers and acquisition as well as its impact on the Nigerian economy.
Research Questions and Objectives
Research Questions
What are the implications of bank mergers and acquisition?
What are the motives behind bank merger and acquisition?
How does merger and acquisition impact on efficiency?
How can merger and acquisition effect competition in the Nigerian banking sector?
Research Objectives
To critically evaluate the implication of mergers and acquisition after consolidation
To identify the reasons behind the corporate merger and acquisition
To investigate the level of efficiency after merging
To examine the impact of mergers and acquisition on the level of competitiveness in Nigeria Banking sector
Plan of the study
The plan of this work as been structured to begin by providing a background of the area under discussion and justifying the need for the study in the first chapter. This would be immediate followed by review of literatures relating to similar issues and traditional views of mergers and acquisition in chapter two. The research method which will highlight how I intend to gather data will be presented in the third chapter. The data analysis and findings will be presented and discussed in chapters four which will be followed by the summary, conclusion and recommendation in chapter five.
Summary
This chapter gives an insight into the subject matter by examining the different related aspects of the subject that will contribute to the major focus of the other chapters. It is a known fact that M&A has positive and negative impacts in any sector or environment where
it has occurred and this will give us the opportunity to draw the impact of competition that it brings with it in the absence of a monopoly situation.
CHAPTER TWO
Literature Review
This chapter contains the preliminary reviews of literatures based on earlier related research carried out on the subject matter and reviewed allied literatures with a view of justifying the research; the research has identified some areas such as the history of mergers and acquisition, the Nigerian banking environment and communication facilities, communication and management, the UBA merger, that gave insight to the type of literature reviewed. The literature to be review will depend on the availability of materials. All these are published works from various sources that are relevant to the study.
History of Mergers and Acquisitions
M&A history time and again have surprises many people when they realise that the concept of M&A are not new, and on the converse they are progressing from the early years. It helps us to understand the evolution of the concepts in the world. The economic watch (2011) mentioned that there are five major stages of M&A which discussed as wave period. Each of these waves recorded its progress associated with it and has a technological support that gave rise to the era. Past experience has also shown that M&A are triggered by economic factors. The period between (1897 - 1904) saw a lot of horizontal mergers as companies which enjoyed monopolistic competition over their area of production such as electricity and transcontinental railroads merging with others in same area. It mainly occurred between heavy manufacturing industries at that time. A lot of mergers failed towards the end of this phase as they could not get the desired efficiency and the state of world economy as at 1903 as well as the stock market crash on 1904 did not help matters.
The second wave or M&A was recorded between 1916 and 1929 which were more between oligopolies as that of monopolies in the first era. The post world war economic boom after the First World War supported these mergers. Also, government policies as at that time started to encouraged companies to work together and technological innovation in areas of transportation provided the needed for such M&A. Most of the mergers at this time were mainly horizontal or conglomerate in nature. Producers of key metals, petroleum products, food products, chemicals and transport equipments were mainly involved in the mergers of this period. Investment also supported very in merger as at the period but the great depression of 1929 and the stock market crash in same year brought period to an end. There were mainly conglomerate mergers as at 1965 to 1969 which was stimulated by sky-scraping stock prices, interest rates, and stringent enforcement of antitrust law in the third wave merger. This period did not end well as government were becoming too harsh towards them end of the period but a few companies did well in the 1970s.
The fourth merger wave was within 1981 to 1989 recorded mergers in some industries such as airline, banking, oil and gas and pharmaceutical. There many cases of foreign takeovers and the period ended with anti takeover laws, reforms in financial institution and the gulf war.
Globalization, stock market boom and deregulation in the telecommunication, banking and petroleum industries were major characteristics of the fifth merger. Most of the mergers at this time were geared towards profit maximization but the burst of the stock bubble also ended this era.
Nigerian Banking Environment
The wave of mergers and acquisition in banks to took place in 2004 and 2005 commenced after an announcement by the CBN that all commercial banks in Nigeria should upgrade their minimum capital base to twenty five billion Naira before the end of December 2005.
Umoren, (2009) examined the benefits of the fortification and consolidation of the Nigerian banking system as it could be seen as the first phase where by such reforms are made to help to guarantee a well built and reliable banking sector that is also considered to be diversified to ensure depositors safety. The role of money in the development of any nation cannot be over emphasized and the Nigerian economy needs to be capable and competitive in the African continent particular as well as the world in general.
Madabueze (2008) mentioned that the recent reforms in Nigeria banking sector which required the banks to source for high capital base to the tune of twenty five billion naira which is put at approximately one hundred and ninety million dollars, recorded a sharp drop down of the number of banks from eighty-nine to less than twenty-four currently in operation. He further argued that this will enable the Nigerian banks to become relevant and active players in the international scene, helping the image of Nigeria as a financial capital of some sort of (china of Africa). The Nigerian economic policy was regarded as an economically fragile policy some decades before then but the recapitalization process has enable two recent developments which is a positive message to the international community. The CBN governor at that time, prof. Charles Soludo explained that before the recapitalization commenced, the Nigerian banks have not played their role in economic development because of their feeble and frail capital base and as such, there was a great need to strengthen them through the consolidation process.
Madabueze (2007) opined that the crusade requesting the CBN to be flexible with their position of recapitalization did not involve bankers alone as members of the national assembly in Nigeria also requested the CBN to reverse its decision of recapitalization to the amount twenty five billion naira. Is was further observed as he mentioned that members of the public were completely against the move as they felt the process will worsen the situation and many of them started making panic withdrawals from their accounts. On the other hand, the CBN also had its fair supporters which included the former president of the federal republic of Nigeria, Olusegun Obasanjo who publicly showed his support for the twenty five billion capital base for banks, the Manufacturers association of Nigeria (MAN) who were completely in support of the policy claiming that it will enlarge the national economic base and help to position the real sector.
Concept of Merger and Acquisition
Ogundele (2008) agreed that mergers are essentially the amalgamation of two or more companies that of all or the parties must be in existence legally and the surviving company continues to function in its originally registered name. In some case, merged companies find themselves out of business and leave its assets and liabilities to the acquiring company. Williams and Rao (2006) focus on mergers and acquisition because they are events that correspond to considerable changes in the asset structure of the bank. Commercial bank faces different risk, capital structure and regulatory environments as against firms that have been traditionally studied for governance effects and managerial risk aversion.
Owokalade (2006) observed the definition of mergers as posited by the company and allied matters act decree of 1990 that any amalgamation of the undertakings of two or more companies or the undertaking of two or more companies and one or more bodies corporate. He emphasized that a form of dealings combination whereby two or more companies join collectively to become one; being voluntary liquidated by having it interest taken by the other and its shareholders becoming shareholders in the blown up existing company.
Kurfi (2010) is of the view that mergers as a principle of the combination of two or more companies that translate same business purposes and agree to come together and decide whichever the given name of one of the companies or absolutely take a new name. He further mentioned that amalgamation is another word for merger.
The UBA Merger
Mergers and acquisition is simply a different approach encourage survival of the fittest is to give rise to a stronger, more efficient, better structure and skilled industry. The Guardian Newspaper reported in 2005 the UBA merger started with separate meetings where that boards of directors of UBA and Standard Trust Bank Plc accepted the arrangement for a union of both financial institutions. The bank aimed to become the biggest bank in West African and one of the largest in Africa.
When they considered the assets of both banks before the merger, it was observed that had a formidable asset base after accessing their portfolios at that time and when is been concretised, they could customers from all sectors of the economy.
It has over 100 branches spread out strategically across the country in what is described as the largest truly online real-time banking network in sub-Saharan Africa. It is often referred to as Nigeria's neighbourhood bank. This derives from its national orientation in terms of geographic spread and continuing national expansion.
The amalgamation of UBA and STB makes for a formidable team. The enlarged bank will have close to five million customers. Chief amongst these areas of strength is the retail and consumer finance space. The enlarged institution will have the widest branch network in Nigeria, a critical criterion for success. This will make it a formidable competitor in an area that is set for strong growth in the coming years as government efforts to put the economy on a sustainable growth path take root. The respective Boards also believe that the enlarged institution should build an investment and wholesale banking operation that will be regarded as the foremost franchise in Nigeria, leveraging UBA's existing strength and international presence and reputation. The enlarged institution can be expected to play an increasingly significant role in key growth sectors of the Nigerian economy, such as telecommunication and energy finance. It will also seek to engage in the ongoing reforms of the power sector. A further area of advantage will be the public sector (at both the state and national levels) where both institutions have developed strong franchises. The respective Boards believe that local dominance will be an effective springboard for regional and global relevance. The merger may have already secured the support of the government and the regulatory authorities.
The merger has the potential to create benefits for all stakeholders in the two banks. The merged entity will have the kind of financial strength envisaged by the monetary authorities to support the economy. Shareholders of the two banks will benefit immensely from the merger. Based on the envisaged synergies of the combination, the latent and hitherto sub-optimized assets of the two banks, the many opportunities for economies of scale and the sheer size of the union, the future income potential for shareholders can only be described as humongous. Furthermore, the enlarged and diversified ownership structure of the merged entity will produce a very strong Board of Directors that will drive Corporate Governance to new standards in the country. Staff of the new bank will also be great beneficiaries, as the wherewithal to train, develop and properly remunerate them will not be lacking. The expansionist vision of the new bank will also guarantee new job creation instead of the job losses feared by many at the advent of the CBN's reform/consolidation drive.
