EFFECT OF POST MERGER PERFORMANCE OF NIGERIAN BANKS

EFFECT OF POST MERGER PERFORMANCE OF NIGERIAN BANKS

Abstract

This study investigates post-merger performance of Nigeria banks. The broad objective of the study is to examine the relationship between post and pre-merger financial performance of Nigeria banks. Business organizations are recently seeing consolidating (mergers and acquisitions) as an alternative means of recapitalization. Some of the merged banks are still failing and facing those challenges that led to 2005 consolidation which include poor risk management, poor corporate governance practices among others. The study uses the primary source of data to collect through stratified questionnaire.  Two banks were chosen (First Bank of Nigeria Plc and United Bank of Africa UBA) as the sample size using the simple random sampling technique to eliminate bias among the population. The z-test statistical tool was used in testing the various hypotheses. The study revealed that there is significant difference between post-merger and pre-merger in UBA using balance scorecard non-financial metrics. Also, there is significant difference between post-merger and pre-merger in FBN using balance score card non-financial metrics. The study recommended among others that balance scorecard performance indicators should be appraised annually for performance of post-merger period in commercial banks.

TABLE OF CONTENTS

Title Page                                                                         i

Certification                                                             ii

Dedication                                                               iii

Acknowledgments                                                    iv

Abstract                                                                   v

Table of Contents                                                     vi

Chapter One: Introduction                                   

1.1   Background to the Study                                                 1

1.2   Statement of Problem                                              5

1.3   Research Questions                                                         6

1.4   Objectives of the Study                                            7

1.5   Statement of Hypotheses                                         7

1.6   Significance of the Study                                                 9

1.7   Scope of the Study                                                   9

1.8   Limitations of the Study                                          10

1.9   Definition of Terms                                                  10

Chapter Two: Review of Related Literature

2.1   Introduction                                                             12

2.2   Conceptual Framework                                            13

2.3   Theoretical Framework                                            15

2.4   Empirical Evidence                                                  15

2.4.1 Merger and Customer Satisfaction                          24

2.4.2 Merger and Financial Performance                                 24

2.4.3 Merger and Employee Motivation                            27

2.4.4 Merger and Internal Business Process                    36

Chapter Three: Research Method and Design      

3.1   Introduction                                                             47

3.2   Research design                                                       47

3.3   Description of the Population of the Study                      47

3.4   Sample Size                                                             48

3.5   Sampling Techniques                                              48

3.6   Sources of Data Collection                                       49

3.7   Method of Data Presentation                                   50

3.8   Method of Data Analysis                                          51

Chapter Four: Data Presentation, Analysis and Interpretation                                                   

4.1   Introduction                                                             53

4.2   Presentation of Data                                                53

4.3   Data Analysis                                                           56

Chapter Five: Summary of Findings, Conclusion

and Recommendations                          

5.1   Introduction                                                             58

5.2   Summary of Findings                                              58

5.3   Conclusion                                                              59

5.4   Recommendations                                                   59

References                                                               61

Appendix I                                                               71

Appendix II                                                              72

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Bank plays 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 of the government strategic agenda aimed at repositioning and integrating the Nigeria 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 number of institution, structure of ownership as well as breadth and depth of operation. Similarly, a strong and virile economy depends to a very large extent on a robust, stable and reliable financial system including the banking sectors. 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.

According to Umoh (2004), mergers and acquisition are expected to address the problem of distress among insolvent banks without an initial resort to liquidation. For Nigeria banking sector, out of the eighty nine (89) banks that were in existence before 31st December, 2005, only 25 banks met the consolidation requirements through mergers and acquisition agreement. Currently, only twenty four (24) banks exist in Nigeria due to the merger between Stanbic Bank Limited and IBTC Chartered Bank Plc. Okparachi (2007) asserted that there was loss of public confidence due to fear of liquidation of customer dissatisfaction in banking services as well as some obnoxious, unprofessional and other sharp practices within the industry. All these caused great distractions in financial system resulting to financial inefficiency which made investors not to have constant and high dividend as a result of inefficiency in terms of earning profit after tax and net assets.

Merger and acquisition are a global phenomenon with an estimated four thousand (4000) deals taking place every year. However, there have been recent development for periods of high merger activity also known as mergers waves occurred in the United States in 1897 – 1904, 1916 – 1929, 1965 – 1969, 1984 – 1989 and 1993 – 2000 (Ilo, 2001; Mimmy, 2008), while merger staged in Nigeria, in 2004/2005 with effect from January 2006 under the governorship of Professor Charles Chukuma Soludo worked out details of an agenda for repositioning the Central Bank of Nigeria and the financial system for the 21st century with an outcome of proving the Nigerian eighty nine (89) banks to twenty five (25) on or before December 31st, 2005.

In 2009, the Central Bank of Nigeria declared five (5) banks in Nigeria as insolvent. The banks were Afribank, Union Bank, Oceanic Bank, Bank PHB and Intercontinental Bank. In 2011, the Central Bank of Nigeria declares the takeover of Bank PHB, Sterling Bank and Afribank by investors, in other words, call for nationalization of these banks.

2009 – 2012 Distress Banks in Nigeria and the New Banks that Acquired Them

S/N

Distress Banks

Their New Owner (Acquirer)

1.

Afribank Plc

Mainstream Bank Ltd

2.

Equatorial trust Bank

Sterling Bank Plc

3.

First Inland Bank

First City Monument Bank

4.

Intercontinental Bank Plc

Access Bank Plc

5.

Oceanic Bank Plc

Ecobank Nigeria Plc

6.

Spring Bank

Enterprise Bank Ltd

7.

Platinum-Habib Bank

Keystone Bank Ltd

8.

Union Bank Plc

African Capital Alliance

Source: Johua (2010)

Before the establishment of Central Bank of Nigeria in 1958, there have been serious cases of bank failure and unhealthy capital adequacy base resulting to uncountable reasons of bank failure is inappropriate determinants of capital adequacy. The first bank failure and unhealthy capital adequacy in Nigeria can be traced to 1930s when twenty one (21) banks were identified as bankrupt. The second bank failure in Nigeria can be traced to 1989 where eight (8) banks were identified to be weak and in the year 1998, total bank distress were up to thirty one (31). Third bank failure in Nigeria was in the year 2004 where eighty nine (89) banks were reduced to 25 banks that is to say that sixty four (64) banks were regarded to be in distressed stated. The reason behind this is the inability of regulators to oversee the activities of these banks. With reforms in several sectors of our economy, it is envisaged that many merger and acquisition will take place in the next decade not just in banking sector but other sectors of the economy.

1.2   Statement of Problem

Business organizations are recently seeing consolidating (merger and acquisition) as an alternative means of recapitalization. The current trend of compelling all commercial banks to raise their capital base from two (2) billion to twenty five (25) billion naira on or before 31st December, 2005, has sent some of these banks on the move to consider merger and acquisition of banks in the country. Some of the merged banks are still failing and facing those challenges that led to 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 bank distress that is characterized by job losses causing untold hardship in the country after the consolidation. It is on this basic of the above, that this research is aimed to determine the post- merger performance of Nigeria banks despite the merger and acquisition and how improved they are now. These are the main problems of this study with particularly First Bank and UBA Bank Plc.

1.3   Research Questions

1.     Is there any relationship between post and pre-merger financial performance of Nigeria banks,

2.     Is there any relationship between post and pre-merger learning and growth in Nigerian banks,

3.     Is there difference in the effectiveness of pre and post merger business processes in Nigeria, and

4.     Is there any relationship between pre and post merger customer satisfaction in Nigerian banks?

1.4   Objectives of the Study

The broad objective of the study is to examine post-merger strategic performance of merged banks. The specific objectives were to:

1.     examine the relationship between post and pre-merger financial performance of Nigeria banks,

2.     ascertain the relationship between post and pre-merger learning and growth in Nigerian banks,

3.     examine the difference in the effectiveness of pre and post merger business processes in Nigeria, and

4.     find out if there is any relationship between pre and post merger customer satisfaction in Nigerian banks.

1.5   Statement of Hypothesis

From the research question and objectives the study addressed the following hypotheses stated in the null form and alternative form.

Hypothesis One

HO:   There is no relationship between post and pre-merger financial performance of Nigeria banks.

HI:    There is relationship between post and pre-merger financial performance of Nigeria banks.

Hypothesis Two

HO:   There is no relationship between post and pre-merger learning and growth in Nigerian banks.

HI:    There is relationship between post and pre-merger learning and growth in Nigeria banks.

Hypothesis Three

HO:   The effectiveness of pre and post merger business processes in Nigeria is of no difference.

HI:    The effectiveness of pre and post merger business processes in Nigeria is different.

Hypothesis Four

HO:   There is no relationship between pre and post merger customer satisfaction in Nigerian banks.

HI:    There is relationship between pre and post merger customer satisfaction in Nigerian banks.

1.6   Significance of the Study

To show that a research is important, it must make an impact on the society being studied. This research will be relevant in respect of the following:

1. Researchers: It will serve as a reference point for the future researchers’ interest.
2. Shareholders: It will give more enlightenment to shareholders on the effect of merges and acquisition after consolidation.
3. Society: It will serve as a basis in educating members of the public on issues relating to tax and its implication during mergers and acquisition.
4. Government: It will enable government to control and regulate the prospects of merger and acquisition.

1.7   Scope of the Study

The study examines post-merger strategic performance of merged banks. The study investigates two selected banks i.e. First Bank of Nigeria and United bank of Africa (UBA). The time frame for this study is between 2010 and 2015 (i.e. 5 years) and the geographical coverage is Edo State.

1.8   Limitations of the Study

Post merger performance of Nigeria banks, because of its sensitive nature as it relates to the growth and development of the country’s economy the limitations are as follows:

1.     Finance: lack of adequate and sufficient finance in terms of the cost of collecting data, and processing the required information hindered the smooth conduct of this project.

2.     Non-availability of necessary books in the school library: Little or no relevant literature textbook to consolidate the
available information.

3.     The inability to obtain a complete random sample.

4.     The largeness of the sample size which is two big banks; First Bank Plc and UBA Bank Plc.

1.9   Definition of Terms

Balanced Score Card (BSC): Is a strategic performance management tool – a semi-standard report supported by design methods and automation tools that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions.

Profitability: The state or condition of yielding a financial profit or gain.

Merger: Voluntary organization of two firms on roughly equal terms into one new legal entity.

Pre merger: Is before the amalgamation of two firms on roughly equal terms into one new entity.

Post merger: Means after the amalgamation of two firms on roughly equal terms into one new legal entity.

Bank: A bank is a financial institution that creates credit by lending money to a borrower thereby creating a corresponding deposit on the bank’s balance sheet.

Consolidation: The unification of two or more corporations by dissolving of existing ones and creation of a new single corporation.

Acquisition: A corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm.