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0: RESEARCH METHODOLOGY This study was undertaken to carefully define and examine the impact of bank consolidation on the performances of Banks in Nigeria. This chapter highlights the methodology employed in carrying out this project. It includes: research design, the sources of data, the procedures used in gathering data, the sampling method and the method of data analysis.

3.1 Background Mergers and Acquisitions (M&As) are considered to be an important and sound vehicle for corporate growth and enhanced productivity. Even in todays unstable economic environment, it is a common component of business landscape. There usually exist various reasons for organizations to embark on Mergers and Acquisitions, (M&A) and these ranges from operational expansion to tax advantage purposes and enhancement in profit. Romanek and Krus, 2002 argued that Mergers and Acquisitions, (M&A) is propelled by a number of strategic factors, including competition, rationalization of business, technological evolution and globalisation. However, one of the primary motives of Mergers and Acquisitions, (M&A) is to maximize shareholders wealth through operational scale expansion and this has continued to be the major attraction among business leaders rather than having to rely on organic growth alone.

Mergers and Acquisitions, (M&A) have a unique potential to transform firms and contribute to corporate renewal (Angwin, 2001) and hence are a vital medium for corporate evolution and economic development. They can help a firm renew its market position at a speed not achievable through internal development (Harrison, 2002). Sherman and Hart, 2006 identified Mergers and Acquisitions, (M&A) as a vital part of any healthy economy and most importantly the primary way that companies are able to provide increased returns to owners and investors.

There has always been a substantial level of Mergers and Acquisitions, (M&A) in developed economies (Salama et al, 2003) as well as developing economies. There was a record wave in Mergers and Acquisitions, (M&A) activity in the 1990s and this continued at an intense pace. During these period aggregate announced values of Mergers and Acquisitions, (M&A)

transactions total trillions of dollars. Worldwide in 1991, there were only three deals completed valued at US$ 5 billion. This grew to 47 announced transactions valued at over US$ 50 billion in 1999 (Romanek and Krus, 2002) and the total deal volume between 1995-2000 exceeded US$ 12 dollars (Papadakis 2007). Balmer and Dinnie (1999) portends that the remarkable increase of Mergers and Acquisitions, (M&A) in recent years is typical of the current business environment and is occurring in every industry and every country. Although this is more rampant in developed nations, there have been some occurrences in developing nations such as Nigeria cutting across all industries even in a highly government regulated sector such as banking. However, most mergers have occurred in Asia, America and Europe with very little from developing nations like Nigeria. The banking mergers stimulated by the regulatory authority opened a new chapter in Mergers and Acquisitions, (M&A) activity in the Nigerian business environment in 2005.

The European banking landscape is currently characterised by an ongoing consolidation even in the wake of the current economic crises. Banks seek to expand their activities to maximise the interest of all stakeholders. Consequently, some weaker banks striving to survive have engaged in Mergers and Acquisitions, (M&A) transactions with stronger banks to avoid collapse and safeguard their better financial position. Hence, multinational banks in Europe have emerged as an effect of the restructuring that occurred in the mid 1980s which resulted in the emergence of some banks within the European Union. The Nigerian banking sector in an attempt to mirror the events in the European Union experienced Mergers and Acquisitions, (M&A) for the first time due to the forced consolidation brought about as a result of increased capital requirements. This was aimed at achieving a minimum capital base of equivalent of the U$ 1 billion by the Nigerian banking regulatory authority, the Central Bank of Nigeria (CBN) in 2005.

1.2 Nigeria Banking Sector Prior to the period of banking reform in Nigeria in 2005, the sector was grossly underdeveloped leading to a set back to the Nigerian economy. Public perception of the industry was of very risky business; hence people were not willing to deposit their funds in banks. In the early 1990s, the sector witnessed the collapse of several banks resulting in both shareholders and depositors losing capital value. The CBN instituted a major reform to strengthen the competitive and

operational capabilities of banks with the aim of returning global and public confidence to the Nigerian banking sector as well as the economy in general. Professor Soludo (the incumbent CBN governor) 2004, stressed that the sole objective in moving the Nigerian economy forward is to proactively position the banking system to become a sound and reliable catalyst for development through M&As. Succinctly put, the forced mergers were aimed at strengthening the competitive and operational capabilities of banks in Nigeria with a view towards returning global confidence in the Nigerian banking sector and the economy in general.

During the consolidation exercise more than fifty Mergers and Acquisitions, (M&A) transactions took place, leading to a reduction in the number of commercial banks from 89 to just 25. However, the transactions were mostly mergers rather than acquisitions. The following four commercial banks; United Banks of Africa, Zenith Bank, Union Bank of Nigeria and First Bank acquired other commercial banks that could not meet the Central Banks capital requirement. Although other commercial banks acquired others that could not meet the capital requirement, the above mentioned commercial banks will be considered in this study. A brief introduction of the four commercial banks is made below.

According to the CBN Governor, Soludo (2007), the objectives of the consolidation policy are being achieved. He claimed that the Nigerian banking was now more secure with deposits and credits more than doubled and individual banks capable of financing large projects valued at hundreds of millions of dollars and particularly operate in the oil and gas sector. This was sustained in the post merger period up until early 2008 prior to the current global economic meltdown.

In view of the current economic recession, there has been some pressure in existing banks to further consolidate to more effectively position themselves on global competition to prevent against any future collapse.

1.2.1 INTRODUCTION OF FOUR COMMERCIAL BANKS 1. Zenith Bank International Plc (ZBI)

ZBI is one of the biggest and most profitable banks in Nigeria. The bank was established in May 1990, became a public limited company in June 2004 and was listed in the Nigeria stock exchange in October, 2004. The total number of branches increased from 170 branches in 2008 to 315 branches in 2011 with branches in five African countries and the UK. For the Bank, total deposits was N1.29 trillion for the year ended December 31, 2010, representing a 16 per cent increase over the previous year's figure of N1.11 trillion. Profit after tax similarly jumped by 127 per cent, from N14.69 billion (annualized) in 2009 to N33.34 billion in 2010. During the same period, total assets of the Bank grew by 14 per cent, N1.57 trillion to N1.79 trillion; while shareholders' fund rose by seven per cent, from N328.38 billion to N350.41billion. Gross earnings however dropped from N203.32 billion (annualized) in year 2009 to N169.37 billion in 2010.

2. First Bank of Nigeria Plc (FBN) FBN evolved from the former Bank of British West Africa and its history dates back to 1894 to be the first major financial institution in Nigeria, hence the name. The bank has restructured several times and was officially listed on the Nigerian Stock Exchange in 1971. It has experienced phenomenal growth with the 520 branches throughout Nigeria and branches in the UK and Paris. Gross Earnings of N139.7 billion, an increase of 14.2% compared with the equivalent period in 2010 (N122.3 billion June 2010) as lending rates and yields improved. Operating income of N120.9 billion, up 41.8% on the prior year (N85.6 billion June 2010). Net Interest Income of N88.2 billion, up 53.5% on the prior year (N57.5 billion June 2010) Non-Interest Revenue N32.6 billion, up 16.2% on the prior year (N28.1 billion June 2010) Profit Before Tax of N35.7 billion, up 12.8% on the prior year (N31.7 billion June 2010) Profit After Tax of N31.3 billion, up 23.3% (N25.3 billion June 2010) Total Assets of N2.9 trillion, up 28.8% (N2.3 trillion June 2010) Deposits of N1.9 trillion, up 34.6% (N1.4 trillion June 2010) Loans & Advances of N1.2 trillion, up 13.0% (N1.1 trillion in June 2010) Shareholders Funds of N321 billion, up 4.1% (N308 billion in June 2010) Basic Earnings per Share (annualised) of 192 kobo (174 kobo June 2010). The bank offers a wide range of services which includes retail and corporate banking.

3. United Bank of Africa (UBA)


UBA commenced operations in 1961 and has witnessed several restructuring over the years. Todays UBA which emerged at the time of consolidation in Nigeria and is the product of the merger of Nigerias third (3rd) and fifth (5th) largest banks, namely the old UBA and the Standard Trust Bank Plc (STB) respectively. Today, the consolidated UBA is the largest financial services institution in West Africa with total assets in excess of N1.6 trillion (over USD$14b) and more than six million (6m) customer accounts. It operates in the West, Central and East African sub-regions with a total of 700 retail distribution centres across Nigeria which is its main operational base as well as 16 branches in Ghana, 5 branches in Uganda and 5 branches in Cameroon. Outside Africa, it also has presence in New York, Paris, Cayman Island and London.1

4. Union Bank of Nigeria Plc (UBN) UBN was established in 1917 as a Colonial Bank. It was initially called Barclays Bank (Dominion, Colonial and Overseas). In 1969 the name of the Bank was changed to Barclays Bank Nigeria Limited. The Bank became a Public Limited Company in 1971 and was listed on the Nigerian Stock exchange the same year. It has shareholders funds of N119.160 billion (USD$ 0.79 billion) and operates through 405 network of branches that are well spread across the country. As at 31st March, 2008, the Bank's gross earnings was N112.988billion (USD$ 0.75 billion); profit before tax was N33.012billion (USD$ 0.22 billion); total assets was N 1,128.890 billion (USD$ 7.5 billion); and shareholders' fund was N119.160billion,(USD$ 0.79).

1.3 Importance of Study Mergers and Acquisitions, (M&A) activity in any economy represents enormous reallocations of resources both within and across industries and has an impact on stakeholders of both acquiring and acquired companies. However, diverse arguments have been drawn from different studies on net wealth gains of M&As. Different views are shared on whether acquiring company shareholders experience a wealth effect. This is an ongoing debate among managers, academic researchers and business leaders. Measuring value creation (or destruction) resulting from

Mergers and Acquisitions, (M&A) and determining how this change in value is distributed among merger participants are two central objectives in merger research (Andrade et al, 2001).

This research focuses on the Mergers and Acquisitions, (M&A) activities that occurred in the Nigerian banking sector. Since the net effect of Mergers and Acquisitions, (M&A) activities remains inconclusive among research studies in developed economies, the Nigerian Mergers and Acquisitions, (M&A) experience among these selected banks is another opportunity to contribute to the on-going debate on the value derived from M&A. Hence, there is a need to conduct an investigation on whether stakeholders in the banking industry in Nigeria have experienced net gains or losses.

1.4 Aim and Objectives The aim of this project is to consider the impact of Mergers and Acquisitions, (M&A) on shareholders of acquiring companies by examining Mergers and Acquisitions, (M&A) that occurred in the banking sector in Nigeria in the period 2005-2008. To date most of the available knowledge on Mergers and Acquisitions, (M&A) comes from researches in the US and UK markets with little or no research conducted on the Mergers and Acquisitions, (M&A) transactions that took place after the consolidation exercise in Nigeria. This study attempts to contribute to the literature on Mergers and Acquisitions, (M&A) with special emphasis on the Nigerian banking sector by determining whether shareholders of acquiring firms experienced a positive value in gains as a result of the Mergers and Acquisitions, (M&A) activities that occurred. The related objectives are as follows: Objectives To establish if shareholders in acquiring banks experience positive wealth effects as a result of M&A. To critically evaluate the impact of merger announcements on acquiring banks equity share price. To analyse if the objectives set by the Central Bank of Nigeria were strengthened by bank Mergers and Acquisitions, (M&A) activities, thus, increasing shareholders value.

REFERENCES: Adeyemi K. (2005). Banking Sector Consolidation In Nigeria: Issues and Challenges. Anqwin D. (2001). Mergers and Acquisitions Across European Boarders. National Perspective on Pre-Acquisition Due Diligence and Use of Professional Advisers. Journal of World Business, Balogun D. (2007). A Review of Soludos Perspective of Banking Sector Reforms in Nigeria Salama A., Holland W. and Vinten G. (2003). Challenges and Opportunities in Mergers and Acquisition: Three International Case Study Deutshe BankBankers Trust; British Petroleum Amoco; Ford-Volvo. Journal of European Industrial Training. Soludo C. (2004). Consolidating the Nigerian banking industry to meet the development challenges of the 21st century.





CHAPTER TWO LITERATURE REVIEW 2.0 Introduction Mergers and Acquisitions, (M&A) have been one of the most extensively researched areas in finance with the most recent studies documenting empirical evidence that merger activity comes in waves (Petmezas, 2009). Mergers and Acquisitions, (M&A) represent part of a business strategy used by many firms to achieve various objectives. For example, they can be used to penetrate new markets and geographical regions and gain management or technical expertise. Consequently, they have been increasing significantly and the considered value has been a contentious issue. Whilst some studies have argued that Mergers and Acquisitions, (M&A) create value through economies of scale (Imeson 2007; Sudarsanam, 1995; Pablo and Javidan , 2004) others have argued that these transactions are motivated by managers seeking to build empires (Penrose, 1995: Lubatkin & Shrieves 1986; Trautwein, 1990) or overconfident (Arnold, 1991). Regardless of this debate, Mergers and Acquisitions, (M&A) continues to be an important way by which wealth can be maximized.

2.1 TYPES OF MERGERS Mergers and Acquisitions, (M&A) can be broadly and generally divided into horizontal, vertical and conglomerate types (Hakkinen et. al., 2004). More detailed classifications are given below. Horizontal Merger A merger is said to be horizontal when the two merging companies produce similar products or services in the same industry. It is the merger occurring between two equally sized companies that are in the same line of business and offering similar services. It is often a combination of two competitors (Gaughan, 2005). Horizontal mergers happen as a result of the companies trying to achieve a major part of the market. The principal anticipated benefits from this type of merger are economies of scale in production and possible increases in

market power in a more concentrated industry (Lorange et al., 1994). An example is the merger between Exxon and Mobil in 1998 (Gaughan, 2005). Vertical Merger This involves firms that operate at different stages of the same industry (Hakkinen et. al., 2004). However Gaughan, 2005 further described vertical mergers as those occurring between two companies manufacturing different goods, rendering dissimilar services or working at different stages for one specified finished output. In vertical transaction, a company might acquire a supplier or another company closer in the distribution chain to consumers. Conglomerate Merger Conglomerate mergers are a combination of companies that do not have a direct business relationship with each other in that they do not have a buyer-seller relationship and they are not competitors. It usually occurs between two firms operating in different industries (Gaughan, 2005). According to Lorange et al., 1994, these transactions are not aimed explicitly at shared resources, technologies, synergies or product-market strategies but rather the focus is centered on how an acquired entity can enhance the overall stability and balance of the firms total portfolio in terms of better use and generation of sources. Forward Triangle Merger This is a type of merger that occurs when the subsidiary of the parent company (acquiring company) merges with the target company. The equity stock of the acquiring parent corporation only is issued (Hunt, 2004). Reverse Merger This occurs when the acquiring company merges with, and into, the target and the target becomes the only surviving entity (Hunt, 2004). Cross Border Acquisition This occurs when the target and the acquiring company are in different geographical locations or environments. (Bishop and Kay, 1993). One of such examples was the acquisition of Banco Real, one of the biggest Brazilian banks, by the Dutch bank ABN AMRO. There many problems associated with this kind of acquisition such as finding the right target companies with high value creation abilities, the scope for high premium payments and hazardous problems of post integration (Kohler, 2009).

Leveraged Buyouts (LBO) This is a form of acquisition in which the acquiring company finances the deal using borrowed funds (Gaughan, 2005). One of the problems which LBOs generally is that the buyer takes on substantial debt (Gaughan, 2005). Management Buyout (MBO) This is said to occur when a management group acquires the company from the public shareholders (Grant, 2006). Recent studies by Bower, 2001 further classified the different types of Mergers and Acquisitions, (M&A) which is based on different motives, including:Overcapacity MERGERS AND ACQUISITIONS, (M&A) This is common when there is substantial overcapacity and hence inefficiency in a certain industry leading to an opportunity to gain from restructuring. This kind of industry consolidation can increase the acquirers market power and form entry barriers for competitors. According to Bower 2001, overcapacity Mergers and Acquisitions, (M&A) account for 37% of recent deals. Product or Market Extension MERGERS AND ACQUISITIONS, (M&A) This merger is used to extend into new markets or products. Internationalization through cross-border mergers is one main sub- motive in this group. The number of cross-border mergers has rapidly increased, especially in Europe since the beginning of the European integration process. Cross border mergers are a valid option when seeking to become international as they may provide quicker access to new markets and more effective local contacts than start-ups. Extension Mergers and Acquisitions, (M&A) account for 36% of M&As. Geographic Roll-up Mergers and Acquisitions, (M&A) This is used to seek growth and efficiency gains by buying out competitors in geographically fragmented markets. This type has many similarities with both overcapacity and extension mergers but unlike extension Mergers and Acquisitions, (M&A) they usually occur domestically and the acquirer is typically larger than the target. Apart from expanding its market presence, these mergers allow the acquirer to benefit from economies of scale and scope.


Research and Development Mergers and Acquisitions, (M&A) - This aims at obtaining R&D capacity and/or transferring R&D knowledge. This type is common especially in high-tech industries. Industry Convergence Mergers and Acquisitions, (M&A) This type of Mergers and Acquisitions, (M&A) aims at creating a whole new industry by culling resources from declining industries. However, Bower, 2001, does not give any clear boundaries of what can be classified as a new industry. Also these Mergers and Acquisitions, (M&A) are hard to analyze as well as to manage successfully.

2.2 DISTINCTION BETWEEN MERGERS AND ACQUISITIONS The terms Mergers and Acquisitions are often used interchangeably to mean any transaction that forms one economic unit from two or more previous units. (Lubatkin & Shrieves, 1986). Hence, the distinction is important for specific context Sundarsanam, 1995).

A merger is said to occur when two business entities combine together under common ownership. Sherman and Hart (2006) defined a merger as a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity. According to Epstien (2004), mergers of equals, such as J. P. Morgan Chase, involve two entities of relatively equal stature coming together and taking the best of each company to form a completely new organization.

According to Wall and Rees (2001) a merger is the result of a mutual agreement of the management of two or more companies to form a new joint legal entity through the exchange of shares or other funds. An acquisition or a take-over takes place when the management of one company makes a direct offer to the shareholders of another company to acquire controlling interest of this firm.


Acquisitions can be defined as the purchase of an asset, a plant, a division or even an entire company (Sherman and Hart, 2006). Sundarsanam, 1995 also described acquisitions as a situation where one firm purchases the assets or shares of another and the acquired firms shareholders cease to be owners of the enlarged firm.

Hakkinen et. al., 2004, described a merger as a result of the mutual agreement of the management of two more companies to form a new joint legal entity through the exchange of share or other funds while an acquisition on the other hand occurs when the management of one company makes a direct offer to the shareholders of another company to acquire controlling interest of the firm. Sherman and Hart, 2006 further distinguished mergers and acquisition by identifying mergers as two companies joining together usually through the exchange of shares as peers to become one and acquisitions as one company (buyer) that purchases the assets or shares of the seller with the form of payment being cash, the securities of the buyer or other assets of value to the seller.

For the purpose of this research the terms are used interchangeably to mean any transaction that forms one economic unit from two or more previous examples.

2.3 DRIVERS OF MERGERS AND ACQUISITION Mergers and Acquisitions, (M&A) are driven in many cases by a key trend within a given industry such as fierce competition (Sherman &Hart, 2006). Salama et al, 2003, identified the driver surrounding the growing popularity of Mergers and Acquisitions, (M&A) as a strategy that centers on factors such as global presence, deregulation, cost of finance and technological innovation. Furthermore, Altunbas and Marques, 2005, suggested a number of other reasons such as improvements in information technology, globalisation of real and financial markets increased shareholder pressure and financial deregulation. Mitchell and Mulherin, 1996, also report that Mergers and Acquisitions, (M&A) has been driven by companies wanting to meet both financial and industrial needs. Consequently, Ahammad and Glaister, 2008 emphasised that government policies related to investment liberalisation, privatisation and regulatory reform are increasing the number of, and access to, industrial targets


for cross boarder M&As. However for the purpose of this research the following will be considered as drivers for M&A.

GLOBALISATION The dominant contemporary discourse on Globalisation, however, asserts that this trend of business is a radically new phenomenon driven by recent advances in digital technologies (Arnold and Sikka, 2001). Andrade et al, 2001 states that globalisation is one of the main drivers for M&A. Fundamental changes have occurred in the world economy during the late 20th and the beginning of the 21st century (Rugman and Hodgetts, 2003). These changes increased the integration of world markets combined and reduced cross-border and investment barriers (Rugman and Hodgetts, 2003).

The process of globalisation and the movement of capital through multinational companies have contributed to the expansion of the international business activities of multinational financial institutions (Moshirian, 2007). Globalisation has increased firms opportunities to grow, expand and increase their profit by moving their business operations to countries where the cost of operations is cheaper (Hill, 2007).

Deregulation According to Andrade et al, 2001, deregulation has been a key driver of merger activities in the last ten years. Deregulation precipitated widespread consolidation and restructuring of industries in the 1990s, frequently accompanied through Mergers and Acquisitions, (M&A) (Andrade et al, 2001). Consequently, Mulherin and Boone (2000), in their work on acquisition and divestiture, opined that acquisition activity is greater in industries undergoing deregulation. Deregulation according to Gaughan (2005), creates new opportunities for companies as deals that are previously unachievable due to prior state regulation preventing such transactions become achievable after deregulation. Though deregulation was an important factor in previous periods of Mergers and Acquisitions, (M&A) activities, it has become a dominant factor in Mergers and Acquisitions,


(M&A) activity since the late 1980s and accounts for nearly half of the merger activity to date. (Andrade et al, 2001).

Cost of Capital and Stock Market Variations in share price can act as a strong driver for M&A. Mergers and Acquisitions, (M&A) activities and stock market activities appear correlated. A stock market boom tends to make Mergers and Acquisitions, (M&A) activities more appealing because it becomes easier to use the bidders share as the basis for the transaction instead of cash, on the other hand a falling stock market may advance the possibility of targets being valued lower and consequently become more attractive to a cash purchaser (Marcial 1997; Globe & White 1995). As a result to the availability of capital to fund the takeover activities is vital. If the stock market is viewed as strengthening, the level of Mergers and Acquisitions, (M&A) activities will increase as well because more firms will have access to funds needed to finance M&A. The intensity of Mergers and Acquisitions, (M&A) activities and the size of firms that are acquired swells with the ability to make use of public markets for leveraging finance (Mitchell & Mulherin, 1996).

Shleifer and Vishny, 2003, showed the importance of cash and stock value in M&A. According to the means of payment hypothesis, if managers are better informed about the firm's prospects than the market, they use stock value to acquire firms when it is overpriced and use cash otherwise. In the model, both the decision to acquire and the means of payment derive from market timing. Stock acquisitions are used specifically by overvalued bidders who expect to see negative long-run returns on their shares but are attempting to make these returns less negative Shleifer and Vishny, 2003).

Technological Advancement Industries react to shocks by restructuring. Examples include technological innovations which can create excess capacity and the need for industry consolidation (Andrade et al, 2001). The technological innovations of the 1980s in mass


production and transportation as well as innovation in informatics technology in the 1990s boosted the merger wave, according to Soubeniotis et al, 2006.

Recent Economic Crises The recent global economic crisis has added a new dimension to the factors that drive M&A. The financial crisis affecting the U.S. economy has changed the landscape for financial services companies, especially banking institutions. For some banks, the crisis is a time of opportunity but for others, a time of reckoning. For example, HBOS, the biggest British mortgage lender, is being acquired by Lloyds TSB Group on the grounds that it may not survive the combination of financial market turmoil and a weakening global economy. Conversely, the financial crisis has also brought mergers and acquisitions in the automobile industry to a virtual halt. This is marked in contrast with the situation in 2007, when the market boomed with a global disclosed deal value of US$57.1 billion and hopes for more activity in 2009.

DRIVERS OF MERGERS AND ACQUISITIONS, (M&A) IN THE BANKING SECTOR This wave of consolidation has been attributed to many factors, both macro and micro (Berger et al, 1999; Jones and Critchfield, 2005). At the macroeconomic level, consolidation has been influenced by exogenous in the banking industrys economic environment and these changes have often worked in concert to encourage consolidation (Jones and Critchfield, 2005). Factors such as the increasing globalisation of the international financial system, the liberalisation of capital movements across borders and financial deregulation within countries, technological advances particularly in transaction processing, and greater competition contribute to the macroeconomic reasons for consolidation (Lambkin and Muzzellec, 2008). From a microeconomic perspective, a bank's decision to consolidate reflects the management strategy for maximising or preserving firm value in the face of increased competitive pressure (Jones and Critchfield, 2005). For example, a merger strategy can be based on value-maximising motives, such as exploiting economies of scale and scope, or increasing profits through


geographic and product diversification. In a survey of bank management, value-maximising motives were cited as the principal reason to undertake a merger (Group of Ten, 2001).

Consequently, financial institution mergers are rapidly becoming a global phenomenon and have been integrated by the globalisation of the financial industry. Mergers and Acquisitions, (M&A) in the banking and financial services sector are a driving force behind, and a consequence of, globalization.5 A recent phase of consolidation in the global banking industry is attributed in part to the effect of geographical deregulation which has enabled banks to expand their activities across state lines (Amihud &Miller, 1998). Also, technological innovations and thorough-going deregulation have prompted a wave of mergers in the banking industry throughout the world, starting in the United States in the 1980s and reaching Europe in the 1990s (Focarelli and Pozzolo, 2001).

2.4 MOTIVES BEHIND MERGERS AND ACQUISITION The motive for an acquisition is important in that it will influence the degree of required interaction between members of each organisation (Salama et al., 2003). Economic theory has provided many possible reasons why mergers might occur ranging from efficiency-related issues which may involve economies of scale or other synergies and attempts to create market power (Papadakis 2007). According to Hakkinen et. al., 2004, each Mergers and Acquisitions, (M&A) has its own set of motives. The majority of Mergers and Acquisitions, (M&A) activities that directly impact on shareholder value are initiated for the purpose of economies of scale, increased revenues, cross selling, synergy and taxes (Sherman &Hart, 2006 and Dobbs et. al., 2007). However, there appears to be three general accepted motives of M&A, namely, economic, personal and strategic motives (Brouthers et al., 2002). Also taking into account Nearys (2007) work on cross-border mergers, two areas of motives are suggested, namely, an efficiency motive and a strategic motive for the purpose of this research merger motives will be categorized into four broad categories, namely, economic motives, synergy motives, strategic motives and managerial motives.

Economic Motive


Economic motives include increasing profits, achieving economies of scale, risk spreading, cost reductions, obtaining a bargain due to market valuation differentials, taking a defensive stance or responding to market failures (Brouthers et al., 2002). In an attempt to increase profit, achieve economies of scale and reduce cost, efficiency has been considered an essential motive for M&A. Cost efficiency is usually achieved by the ability to reduce costs due to redundant resources of two firms merging in the same or closely related industry. Thus, if a firm is acquiring another in the same or a closely related industry and there is substantial overlap between the two businesses, there may be ample opportunities to reduce costs (Hopkins et al 1999). In response to fundamental changes in regulation and technology, financial institutions have attempted to improve their efficiency (Amel, et al 2003). This can be in the form of managerial, operational or financial efficiency. A company in its quest to achieve efficiency in any of these areas may acquire or merge with another with expertise in that area (Levy and Sarnat, 1994). Financial efficiency can be achieved by either lowering the systematic risk of a company through Mergers and Acquisitions, (M&A) with a company in an unrelated business or accessing cheap capital which may rise due to growth in company size from Mergers and Acquisitions, (M&A) activities (Trautwein, 1990). Consequently, larger firms resulting from consolidation may gain access to cost-saving technologies or spread their fixed costs over a larger base, thus reducing average costs and increasing operational efficiency (Amel D., et al, 2004). Managerial efficiency can also be achieved by acquiring or merging with a company that has more efficient management (Hackett 1996).

Managerial Motive Merger and acquisition literature suggests that managers will have various motives for mergers (Trautwein, 1990). Sundarsanam (1995), identified four major managerial motives for Mergers and Acquisitions, (M&A) as the pursuit of growth, the deployment of current underused managerial talents and skills, diversification of risk and avoidance of take over which is referred to as job security motive. According to Levy and Sarnat (1994), managers may be motivated by a desire to increase the size of their firms because of the bigger is better syndrome and also because compensation will rise as a result of the increase in size. Sundarsanam (1995) and

Trautwein (1990), related managerial motives for Mergers and Acquisitions, (M&A) to empire building and stated that mergers are planned by managers to maximise their utility instead of their shareholder value since their remuneration, status and power are a function of a firm size. Gorton et al. (2005) showed that merger waves can also arise when managers make acquisitions to discourage other firms. They further stressed that a manager can be willing to acquire defensively even when it is not profitable.

According to May (1995), managerial motives can be linked to agency problems where the relationship between the manager and the shareholder is viewed as that of an agent and the principal, where the managers act in their own self interest at the expense of shareholders interest. The agency problem refers to the fact that when an agent is hired to represent an owner, the two parties will have conflicting interests. In a sense, managers are the agents for stockholders (Hopkins et al, 1999). As a result of the argument above, Mergers and Acquisitions, (M&A) may be due to managers desire to secure their jobs by avoiding a take-over or a desire for self fulfillment by deploying under-utilised managerial skills and talent (Sundarsanam, 1995).

Diversification of risk is often cited as a reason for mergers. The diversification motive for Mergers and Acquisitions, (M&A) often represents an opportunity for firms in profitable, mature sectors to diversify into more promising or growing sectors, thereby ensuring that firms shareholders do not lose their top or best manager (Peck and Temple, 2002). Also when firms in the matured industry are faced with fierce competition, Mergers And Acquisitions, (M&A) is usually an option. Consequently, innovations may not be enough to bring about higher returns; the bidding company may opt for diversification through Mergers and Acquisitions, (M&A) (Gaughan, 2005). In addition to obtaining quick positioning in a particular market, diversification by mergers is a way to gain entry without adding additional capacity to a market that already may have excess capacity (Hopkins et al, 1999). Gaughan 2005, further reports that managers may have an aspiration to diversify for employment risk purposes through M&A activities because it is believed that Mergers and Acquisitions, (M&A) diversifies the firm activities consequently and stabilizes the corporations income stream and reduces bankruptcy risk. However, according

to Sundarsanam (1995), diversification of risk can be achieved when the acquiring and the acquired firms cash flows are not highly positively correlated.

Synergy Motive Synergy occurs when two or more units can be run more efficiently and effectively combined separately (Lubatkin 1983). Sirower (1997) further defines synergy as increases in competitiveness and resulting cash flows beyond the level that the two companies are expected to accomplish independently. It is probably the most often cited justification for an acquirer to pay a premium for a target firm and is based on the concept of 2+2=5 (Cooke T., 1986). Synergies differ in terms of measurability and can be classified as operational and financial (Hakkinen et al, 2004). Operational synergy is expected in the form of economies of scale, scope and speed, learning curve, rationalisation or cost reduction (Brealey and Myers, 2002; Hakkinen et. al., 2004). Economies of Scale advantages arise from cost efficiencies gained by firms due to optimal size in operation and scope advantage from the ability to share cost over close product lines (Jones and Hill, 1998).

The resultant impact of corporate mergers or acquisitions on the cost of capital of the combined or acquiring firm is financial synergy (Navya V., 2008). Financial synergies come from risk diversification and coinsurance (Hakkinen et. al., 2004). Several empirical studies support the importance of synergy as a motive behind Mergers and Acquisitions, (M&A) while some do not. Bradley et al (1998), maintained that tender offers increased the combined value of the acquiring and target firm by an average of 7.4%. On the other hand Kursten (2008), in his work suggested that synergetic mergers do not necessarily constitute any benefit especially to shareholders, except that the value of the synergy exceeds a certain level.

Strategic Motive Strategic motives such as global expansion, pursuit of market power, acquisition of new resources including managerial skills and raw materials motivate merger activities (Brouthers et al., 2002). According to Gaughan (2005), expansion through growth is one of the most common motives for M&As. He identified two broad ways in which a firm can grow. Internal growth is considered slow and ineffective if a firm is seeking to gain

advantage over competitors. The faster alternative is to merge and acquire in order to grow and achieve competitive goals. Friedman (1989), states that it is profitable for firms to grow though Mergers and Acquisitions, (M&A) rather than through green field operations because growth through Mergers and Acquisitions, (M&A) enables acquiring firms to speed up the growth process. Consequently where a firm is in a mature or declining industry, the survival of the firm may depend on an orderly exit from that industry and entry into one with greater growth opportunities. Without moving into a growth industry the firm may lose young managers and thereby accelerate its own decline (Sundarsanam, 1995).

Another main strategic motive of Mergers and Acquisitions, (M&A) is to increase the share of a firm in the market. It means to increase the size of the firm and create a degree of monopoly power, giving the firm an opportunity to set prices at all levels (Navya, 2008). Some merges may also be motivated by tax minimising opportunities. Cookie (1986), claims that, although there is often no one single reason for M&A, in the UK, the taxation advantage has been a strong motive.

2.5 TRENDS IN BANK MERGERS AND ACQUISITIONS Mergers and Acquisitions, (M&A) activities gave the consolidation process a boost in the 1920s when that era represented a period of monopolization and Mergers and Acquisitions, (M&A) were characterised as mergers for oligopoly (Levy and Sarnat 1994). This boost in Mergers and Acquisitions, (M&A) activity occurred when the development of mass production techniques created a steep change in the scale of production (Bishop and Kay, 1993). They continued to increase until another boom came in the 1960s as a response to the internalisation of the world economy (Bishop and Kay, 1993) when companies reasoned from the financial management perspective that there was a need for risk diversification (Levy and Sarnat 1994). This era saw a reduction in horizontal mergers and continued increased in conglomerate mergers (Andrade et al, 2001).

The 1980s witnessed another major boom in Mergers and Acquisitions, (M&A) activities although not as prevalent as in the 1960s (Levy and Sarnat 1994) with the evolution of the market for corporate control (Bishop and Kay, 1993). According to Mitchell and Mulherin (1996), the 1980s were truly a period of massive asset reallocation via merger. Moeller et al 2005

reports that two major changes in governments policy in the US sparked this trend. These were the removal of anti-trust rules against vertical mergers and a relaxation of the rule against horizontal mergers. The second reason was the deregulation of certain industries in the 1980s (Sundarsanam, 1995). The Mergers and Acquisitions, (M&A) activities in the 1990s continued with the trend that began in the 1970s. of an ever-increasing percentage of mergers where both parties are in the same industry (Andrade et al 2001). They also reported that the key distinction between mergers in the 1980 and 1990s was the vast use of stock value as a method of payment.

The new millennium saw an increase in cross border deals especially in the UK, where transactions involving only UK companies are decreasing and deals involving UK companies and foreign companies are increasing (Dolbeck, 2005). He argued that the Mergers and Acquisitions, (M&A) boom in the first half of 2000 was due to lower acquisition premiums and noted that this era saw a greater proportion of cash deals. Acquirers paid cash for nearly half of the deals from 2003 to 2006(Dobbs et. al2007). Cheap access to credit was one of the factors that steered the Mergers and Acquisitions, (M&A) boom in the 2000s but has been in decline (Dolbeck, 2007). Gaughan, 2005 also noted that one characteristic of merger waves is the tendency to occur during economic expansion and to end when the market and the economy slow down.

However, the trend of Mergers and Acquisitions, (M&A) activities in the banking industry started in the other half of 1970s but was not significant until deregulatory measures such as RiegleNeal Interstate Banking and Branching Efficiency Act of 1994 that effectively eliminated interstate banking restrictions was instituted in the mid-1990s. An unprecedented increase occurred in the consolidation of the banking industry within and cross state borders (Francis et al, 2008). The trend towards financial consolidation in Europe, USA and Asia could be traced to several factors. In the USA, one reason was the need to eliminate weak or problem financial institutions. Other reasons were attributed to the thrift and banking crisis of the late 1980s and early 1990s as well as some European countries experiencing problems with institutions weakened by exposure to real estate loans. Advancement in telecommunication and information technology has also accelerated bank consolidation (Adeyemi 2005).


There was a dearth of Mergers and Acquisitions, (M&A) activities in the Nigerian economic environment until 2005, when the banking sector witnessed several activities due to forced consolidation brought about as a result of increased capital requirements by the Nigerian banking authority.

2.6 EFFECT OF MERGERS AND ACQUISITIONS ON SHAREHOLDERS VALUE There has been a significant debate to determine whether Mergers and Acquisitions, (M&A) add to shareholder value or otherwise. The extensive literature on the effect of Mergers and Acquisitions, (M&A) produces mixed results regarding the benefits for shareholder value. While most research shows that wealth creation accrued to shareholders of the target company, there has been diverse opinion on the wealth effect of Mergers And Acquisitions, (M&A) for shareholders of the acquiring firm (Andrade et al, 2005, Moeller et al, 2005 & Lordere &Martin, 1992). This section examines the effects of Mergers and Acquisitions, (M&A) on shareholder value.

The positive wealth effect of Mergers and Acquisitions, (M&A) on target shareholders is supported in the literature. Draper and Paudyal, 1999 reported that shareholders of target companies benefit from the announcement of take-over bid over the period surrounding the announcement and concluded that combined firms create value. Similarly the research findings of Andrade et al, 2005 on M&A, suggests that mergers seem to create shareholders value, with most of the gains accruing to the target company. Consequently, a positive abnormal return was reported by Franks and Meyer, 1996 to occur where the management of the target is hostile to a takeover offer. Rheaume and Bhabra (2008), also reports that the wealth effects for acquisitions of acquiring firm shareholders were found to be generally either zero or significantly positive. Using the Event Study method to examine the valuation effect of banks mergers from 19881997, they noted that the overall results of bank mergers create positive wealth over time particularly in the 1990s.


The outcome of some researches has however been mixed by distinguishing the wealth effect on shareholders of both target and acquiring firms. Empirical studies examining the stock market reaction to a merger announcement find that target shareholders earn substantial positive abnormal returns from mergers and acquiring shareholders earn negative abnormal returns from mergers (Scholtens and De-Wit, 2003). Their findings are consistent with Houtston and Ryngaert (1994), who found little or no evidence of wealth creation with shareholders of the acquired firm gaining at the expense of shareholders of the acquiring firm. Similarly Kiechhoff et al (2006), states that shareholders of target companies receive substantial positive abnormal returns while there is no significant abnormal return accruing to shareholders of acquiring firms during Mergers and Acquisitions, (M&A) activities. Limmack (1991), equally observed negative abnormal returns for acquiring companies after the deals in the UK and large abnormal returns to target companies shareholders.

An extensive number of studies find that Mergers and Acquisitions, (M&A) generates negative returns for the shareholders of acquiring firms. Agrawal et al (1992) found significant negative abnormal returns over five years after merger. They argued that the problem with previous merger research is that they do not correctly adjust the firm size effect. In their research they observed that bidding firms lost 10% of their five year post merger period after adjusting for the firm size effect as well as the beta risk. Similarly Loderer and Martin (1992) investigated both mergers and acquisitions between 1965 and 1986 and observed that abnormal returns were negative over five successive years especially in the second and third after the deal. Andre et al (2004), in their study on long-term performance of 267 Canadian mergers and acquisitions that took place between 1980 and 2000, using different calendar-time approaches with and without overlapping cases, suggests that Canadian acquirers significantly underperform over the threeyear post-event period. Their finding is therefore consistent with other research both in the US and the UK.

However, various literatures have attributed the difference in the outcome effect of Mergers and Acquisitions, (M&A) activities on shareholders value to the research methodology. Using the Event Study methodology, Sirower ,(1997), Magenhein and Mueller, (1998), Jensen and Rubeck, 1983, Agrawal et al (1992), found negative returns for acquiring firms as a result of merger

activities, even though different event windows ranging from few days to one year were used. In contrast Bradeley and Jarrel (1998) used the same sample as Magenhein and Mueller (1998) but different methods and did not find negative returns.

Loughran and Vinjh, 1997 reports that during a five-year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of -25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. He concluded that over the combined pre-acquisition and post-acquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns and in the top quartile of target to acquirer size ratio, they earn negative excess returns.

Consequently, Moeller et al, 2005, reported that acquisition announcement between 1997-2001 resulted in losses for shareholders of the acquiring firm. Amihud et al, 2002 also reported that on average, acquirers experienced negative abnormal returns, although the negative abnormal returns were insignificant. Their results are consistent with those of a number of studies on domestic bank acquisitions. Hawawini and Swary 1990 found, for 126 bank acquisitions between 1968 and 1987, that the bidders abnormal returns were negative and significant. Houston and Ryngaert 1994 also found negative abnormal returns for 153 bidding US banks between 1985 and 1991. CyboOttone and Murgia, 2000 found that for 54 European bank mergers between 1988 and 1997, the acquirers abnormal returns were insignificantly different from zero.

2.7 EFFECT OF MERGERS AND ACQUISITIONS IN THE BANKING INDUSTRY IN NIGERIA A limited number of studies have investigated the effect of Mergers and Acquisitions, (M&A) on the banking industry in Nigeria. However, Kolo, 2007 examined the effect of bank consolidation on wealth returns of acquiring banks shareholders during, before and after the period of announcement in Nigeria. His report stated that large acquisitions in-market mergers had significant positive abnormal returns for banks that were documented around the announcement date. He also found out that the announcement of interstate consolidation produced results

similar to the averages of mergers in the sample. The findings also showed statistically significant positive abnormal returns to shareholders of acquired banks and insignificant negative abnormal returns to shareholders of target banks around the announcement of the mergers. On the contrary Akintoye and Shomoye (2008), suggested that the evidence of value creation for acquiring firm shareholders are not so clear cut although they concluded that it is difficult to claim that acquiring firms shareholders are losers in merger transactions. They are clearly not winners like the target firm shareholders. Further studies by them found that with efficient rearrangement of resources, gains to shareholders from merger activity are real and at merger announcement accurately reflect improved expectations of future cash flow performance.

2.8 REASONS FOR POSITIVE OR NEGATIVE MERGER AND ACQUISITION EFFECT ON SHAREHOLDERS VALUE Various reasons are being attributed to whether mergers and acquisition actually create a positive or negative effect on shareholders value. The neoclassical theory implies that, if mergers are concentrated in periods following shocks (Mitchell and Mulherin 1996), then there will be a positive autocorrelation in announcement returns since the shocks can boost overall stock prices, hence enhancing shareholder value. Optimism about mergers overall generates a positive autocorrelation in announcement returns whereas over-optimism can lead to positive correlation between cumulative abnormal announcement return and the returns in the stock market. (Rosen, 2006). He also concluded that the performance of a merging or acquiring firm depends on the type of merger, the sample size used in analysing the effect of Mergers and Acquisitions, (M&A) on shareholders value as well as the motives behind engaging in Mergers and Acquisitions, (M&A) activities. Moeller et al, 2004, in their investigation on the effect of firm size on abnormal returns from acquisition, concluded that acquisitions by smaller firms lead to statistically significant abnormal returns than acquisitions by larger firms. Consequently, according to Roll (1986), one explanation for negative returns to shareholders value is hubris. It is often believed that managers of bidding firms that had success may believe that they can create value in situations which the market judges to be negative net present value. The managers thus want to make acquisitions even when they anticipate that the announcement will generate a decline in stock prices. They expect that they will be proved correct in the long run. (Rosen, 2006).

Rau and Vermaelen (1998) in their studies on the value and post acquisition of acquiring firms found that the long term underperformance of acquiring firms in mergers is caused by the poor post-acquisition performance of low book-to- market value of firms which was attributed to hubris on the part of managers.

Myers and Majluf (1984); Shleifer and Vishny, (2003); Rhodes-Kropf and Viswanathan (2004) suggest another possible explanation for the negative coefficient on the bidder run-up variable is that firms are more likely to issue stock when it is overvalued. Travlos (1987) attributed the negative Cummulative Average Abnormal Returns (CAARs) to this for merger announcement of acquisitions financed using stock. A firm might be more likely to use stock to finance an acquisition when its stock price has been increasing and, thus, is more likely to be overvalued (Rosen, 2006). Also Savor (2006) documents poor stock performance of failed stock mergers relative to successful stock mergers, henceforth arguing that stock mergers, such as AOL-Time Warner, create value for acquirers shareholder by taking advantage of mispricing on the market.

Frank et al (1991) also attributed underperformance of acquiring firms to the methodology employed to find whether there exists an abnormal returns although their findings showed no evidence of positive abnormal post acquisition performance. Similarly Akintoye and Shomoye (2008) identified a major challenge to ascertain whether there are economic gains or otherwise to methodological issues yielding negative drift in acquiring firm stock prices following merger transactions. This would imply that the gains from mergers are overstated or nonexistent.

2.9 SUMMARY Mergers and Acquisitions, (M&A) represent part of a business strategy used by many firms to achieve various objectives. The terms Mergers and Acquisitions are often used interchangeably to mean any transaction that forms one economic unit from two or more previous units. (Lubatkin & Shrieves 1986). Mergers and Acquisitions, (M&A) can be broadly and generally divided into horizontal, vertical and conglomerate Mergers and Acquisitions, (M&A) (Hakkinen


et. al., 2004). But more detailed classifications include Horizontal Merger, Vertical Merger, Conglomerate Merger, Forward Triangle Merger, Reverse Merger, Cross Border Acquisition, Leveraged Buyouts (LBO), Management Buyout (MBO), Overcapacity M&A, Product or Market Extension M&A, Geographic Roll-up M&A, Research and Development Mergers and Acquisitions, (M&A) and Industry Convergence M&A.

Mergers and Acquisitions, (M&A) are being driven in many cases by a key trend within a given industry such as fierce competition (Sherman &Hart, 2006). However, distinctively Mergers and Acquisitions, (M&A) drivers can be identified as Globalisation, Deregulation, Cost of finance and stock market, Technological advancement, Recent Economic Crises. Just as in drivers some motives can be isolated as behind most M&As. Merger motives can be categorized into four broad categories, namely economic motives, synergy motives, strategic motives and managerial motives.

Reasons for Mergers and Acquisitions, (M&A) in terms of banking consolidation in Europe, USA and Asia were need to eliminate weak or problem financial institutions, thrift and banking crisis of the late 80s and 90s and advancement in telecommunication and information. Nigerian banking consolidation, though regulatory induced was aimed at eliminating weak banks and increase banks capacity through increased capital base.

On the effect of M&A, most research shows that wealth creation accrued to shareholders of the acquiring company. However there has been diverse opinion to the wealth effect of Mergers and Acquisitions, (M&A) for the shareholders of the acquiring firm. Similarly the research findings of Andrade et al, 2005 on M&A, suggests that mergers seem to create shareholders value, with most of the gains accruing to the target company.

Various reasons are being attributed to whether mergers and acquisition actually create a positive or negative effect on shareholders value. The neoclassical theory implies that if mergers are concentrated in periods following shocks (Mitchell and Mulherin 1996), then there will be a positive autocorrelation in announcement returns since the shocks can boost overall stock prices, hence enhancing shareholders value.

REFERENCES: Ahammad M. and Glaister K. (2008). Recent trends in UK Cross-Border Mergers and Acquisitions. Management Research News.

Arnold P. and Sikka P. (2001). "Globalization and The State-Profession Relationship: The Case Of The Bank Of Credit and Commerce International" Accounting, Organizations and Society. Berger A. Demetz, R. and Strahan, P., (1999). The Consolidation of The Financial Services Industry: Causes, Consequences, And Implications For The Future. Journal of Banking and Finance. Bishop M. and Kay J. (1993). European Mergers and Merger Policy. 1st ed. New York NY: Oxford University Press Inc. Bower J. (2001). Not All M&As Are Alike and That Matters. Harvard Business Review. Gaughan, P., 2005. A Merger: What Can Go Wrong and How to Prevent It. Hoboken, NJ. USA: John Wiley & Sons. Hill C. (2007). International Business, Competing in the Global Market Place. 6th ed. New York NY: McGraw-Hill Company.

Petmezas D., (2008). What Drives Acquisitions?: Market Valuations and Bidder performance. Journal of Multinational Financial Management.




3.0 Introduction
This study was undertaken to carefully define and examine the impact of Banks consolidation on the performances of banks in Nigeria. This chapter highlights the methodology employed in carrying out this project. This chapter highlights and explains the methodology, materials and methods used in this study. The data collection instruments are fully explained. It also discusses the population, sample size, research and sampling design, sources of data, the procedure used in gathering data, the sampling method and the method of data analysis. Data for this study were gathered from secondary data sources. The secondary data were obtained from relevant materials gathered from books, journals, articles, magazines, periodical, bulletins and from the internet that are relevant to and could shed more light on the subject matter or the phenomenon under study. The data generated through the above mentioned means were classified into groups and analyzed using various descriptive and inferential statistical methods.

3.1 Research Methods and Justification

The selection of a primary method of investigation is a key consideration for this study. The study has as its basic consideration the impact of the mergers and acquisition activities between 2005 and 2008 on shareholders returns by showing an increase or decrease in shareholder value. The basic research method suggestively should therefore, be a normativesurvey research method (Osuala, 2005). Despite the inestimable contributions brought forward through the use of scientific method in research (quantitative method), it has fostered a naive faith in the substantiality and intimacy of facts (Osuala, 2005). The human element has become recognized increasingly as a critical and determining factor in the definition of truth and knowledge in research. The epistemological underpinnings of the quantitative motive hold that there exist definable and quantifiable "social facts" (Kerlinger, 1964).

Therefore this study w i l l analysis

employ both

quantitative and qualitative methods of


The Nigerian banking sector went through consolidation to ensure sustainability and growth to regain lost public confidence in 2005. Mergers and Acquisition (M&A) became a popular strategy adopted by most of the Nigerian commercial banks to meet the required minimum deposit base of $1 billion set by the regulatory authority, the CBN, as a criterion for operating in the country. However, the question brought up by research mostly in the US and the UK, whether Mergers and Acquisition value destroys or creates value for the acquiring shareholders is debatable and on-going. The focus of this project will be to ascertain if the Mergers and Acquisition activities in the Nigerian banking sector between 2005-2008 had any impact on shareholder returns by showing an increase or decrease in shareholder value.

3.1.1 Types of data use in the study Scientific problems can be solved only on the basis of data and a major responsibility of the investigator is to set-up a research design capable of providing the data necessary for the solution of the study problem. The more clearly and thoroughly a problem and its ramifications are identified, the more adequately the study can be planned and carried to a successful completion. It is not wise to select a topic, no matter how adequate, if circumstances render the collection of data required for its solution impossible. The data used in this study was mainly secondary data. Secondary Data Occasionally, data are collected for some other purpose mostly for administrative and policy reasons, and form part of the information or data used in this study which are referred to as secondary data. These materials were obtained for purposes other than this study. It is used, however, for compiling quite a large number of statistics relating to various variables and indices or indicators in the economy. Secondary data must be used with caution. Such data may not give the exact kind of information needed, and the data may not be in the most suitable form. Great attention must be paid to the precise coverage of all information in the form of secondary data. For this study, the data used was obtained from the website and publications of Nigeria Deposit Insurance Corporation (NDIC) and The Central Securities Clearing System (CSCS).

3.1.2 Methods of Data Collection

Among the various methods available, the ones used specifically for this study are discussed below; Documentary The corporate website of both Nigeria Deposit Insurance Corporation (NDIC) and The Central Securities Clearing System (CSCS) as well as annual publications and

reports of various issues were utilised to obtained data and information using direct observation and study. This method of data collection is based on observations or informal conservations. More so, many facts and relevant information can also be sourced from past records either in text books, periodicals or journals, various statistical and informational materials from different institutions or agencies etc. This form of data collection constitute the secondary source of data collected for this study and help immensely in literature review and background of study that constitute the foundation of this study. Personal Interview Personal interviewing is another method this study employed to collect data. As a research method, the interview is a conversation carried out with the definite aim of obtaining certain information. It is designed to gather valid and reliable information through the responses of the interviewee to a planned sequence of questions. These questions are both structured and unstructured similar to the open and closed questions of the questionnaire. The form of the opening interview is crucial, nevertheless, to win those who are less willing to cooperate. The aim of the large scale survey through the interview is to attain uniformity in the asking of questions and recording of answers.
3.2 Research Population
According to Asika (1991), a population is made up of all conceivable elements, subjects or observations relating to a particular phenomenon of interest to a researcher. During the consolidation exercise more than fifty Mergers and Acquisitions, (M&A) transactions took place, leading to a reduction in the number of commercial banks from 89 to just 25. Consequently, the total population for this research work will be the 25 commercial banks.

3.3 Sample Selection And Data Description

This study examines four commercial banks involved in domestic M&A activities. The data used in this study was sourced from Nigeria Deposit Insurance Corporation (NDIC) annual reports of various issues. The Nigeria Deposit Insurance Corporation (NDIC) was established on 15th June 1988 to strengthen the safety net for the newly liberalised banking sector. The NDIC is a parastatal under the Nigerian Ministry of Finance. The corporation is charged with protecting the banking system from instability occasioned by runs and loss of depositors confidence. NDIC compliments the regulatory and supervisory of the Central Bank of Nigeria (CBN), although it

reports to the Federal Ministry of Finance. The NDIC advises the CBN in the liquidation of distressed banks and manages distressed banks assets until they are fully liquidated. The NDIC also has a supervisory role and provides insurance services for banks. Data was also sourced from The Central Securities Clearing System (CSCS). The CSCS is a limited liability company incorporated by the Corporate Affairs Commission in Nigeria. It was licensed by the Securities and Exchange Commission as an agent for Central Depository, Clearing and Settlement of transaction in the stock market. The CSCS operates a computerized depository, clearing settlement and delivery system for all transactions listed on the Nigerian Stock Exchange. Data was also sourced from Finbank Security and Asset Management (FINSEC), who is a subsidiary of First Inland Bank Nigeria PLC. FINSEC is a stock broking firm registered with the Nigerian Stock Exchange Commission. To further ensure integrity and accuracy of data sourced, the data was double checked with the Central Bank of Nigeria. The announcement dates for the commercial banks under review were collected from their financial reports and these dates were also double checked with the Central Bank of Nigeria.

In order to ensure all information was accessible the following requirements were placed in selecting the sample for this project:

1. The bank had to be one of the operating banks in Nigeria and quoted on the Nigerian Stock Exchange.

2. Historical share price must be available for the study period.

3. The exact date of announcement must be available and identifiable.

4. The bank had to acquire just one bank as at the period under consideration. Some banks acquired two banks within the same period.

5. No other activity such as issuing new public to the market during the period under consideration for the selected banks.

Based on the criteria above, the following commercial banks as identified in Table 1 were selected for this study. Table 1 also shows the target banks and the announcement dates. The values of the data are in the local currency of Nigerian Naira (N).

Thus the commercial banks selected in this study were involved in acquiring other commercial banks during the period 2005 2010 and had their historical data available for a minimum number of 135 days before the announcement date and 180 days after the announcement date.

Table 1 List Of Acquirers And Target Banks

SN 1 2 3 4 ACQUIRING BANK Zenith Bank Plc First Bank of Nigeria Union Bank of Nigeria United Bank for Africa TARGET BANK Eagles Bank MCB Bank United Trust Bank Liberty Bank ANNOUNCEMENT DATE 30 October, 2007 02 September, 2005 31 November, 2005 06 June, 2008


Research Design

It is the frame work for a study that is used as a guide in collecting and analyzing data. This research will make use of the quantitative research design while investigating the research topic. THE EFFECT OF BANK CONSOLIDATION ON THE PERFORMANCE OF BANKS IN NIGERIA. Also it is referred to a set of instruction for making something which leaves the details to be worked out. According to Okwandu (2004) design is a term used to describe a number of decision, which need to be taken regarding the collection of data before ever the data are collected.

3.4.1 Data Analysis Technique


In the research work, the pre and post consolidation profitability ratios of the target banks were analysed. The data were analyzed using both descriptive e.g. means and standard deviations and analytical techniques such as the t-test and the test of equality of means.

3.4.2 Research Strategy

The evaluation of the effect of Mergers and Acquisition on shareholders wealth in the Nigerian banking sector will focus on examining a cause-and-effect relationship and on objective data which will be expressed in numbers. This research intends to employ a quantitative approach using secondary data by collating share prices of the selected five commercial banks that acquired other institutions during and at specific periods before and after the Merger and Acquisition announcement.

3.4.3 Instrumentation, Sources and Data Description:

The study employed secondary data obtained from Nigeria Deposit Insurance Corporation (NDIC) annual reports of various issues and Central Securities Clearing System (CSCS). The data were analyzed using ratio analysis to measure bank performance as seen in the work of Rose and Hudgins (2005). An analytical technique was further employed to test the equality of the mean of the key profitability ratio using t-test statistic of the pre and post 2005 key profitability ratio of banks. The study used all the insured banks in the nation as our sample study to give good representation. We used the 2005 recapitalization as the base year, testing the performance of banks three years before the 2005 recapitalization exercise and three years after the 2005 recapitalization exercise to see the significance of the 2005 recapitalization exercise. Instruments or Tools Used in the Study The basic analyses used in this study are the conventional instruments that are frequently employed for statistical analyses and measurement in most studies. These tools of analysis are tables which are used for the presentation of information and data in a tabular form either those acquired from the field or from the archives (documentation). The charts (bar and pie charts) are equally used to present the information displaying their trend or movement over time and space.


3.4.4 Methods of Data Analysis and Definition of ratios: Statistical Techniques used

The statistical technique used in analyzing the data in this study is the t-test. A test of
equality of mean was also carried out using the t-test to see if there is any significant difference in the mean of the pre and post ratios used Definition of ratios In an attempt to test the significance of the 2005 consolidation on bank performance, this study adopts a simple ratio analysis, using specifically profitability ratios to evaluate the performance of Banks three years before the 2005 recapitalization and consolidation exercise comparing it with the performance of the bank three years after the recapitalization exercise.. The ratios used are as stated below:

Net Interest Margin which is calculated as interest income from loans and security investment less interest expense on deposit and other debt issues divided by total asset. This ratio measure how large a spread between interest revenues and interest costs the banks management have been able to achieve by close control over earning assets and the pursuit of the cheapest sources of fund.

Yield on earning assets - This represents the percentage of return that an institution is receiving on its earning assets. Earning assets include all assets that generate explicit interest income or lease receipts. It is typically measured by subtracting all non-earning assets, such as cash and due from banks, premises, equipment, and other assets from total assets. Earning Assets is calculated as Earning Assets = Total Assets - Non Earning Assets.

Funding cost This is the weighted average cost of capital for the industry. Return on equity This is measured as net income after taxes divided by total equity capital. It measures the rate of return to the shareholder. Return on Asset This is defined as net income after taxes divided by total assets.

This ratio is an indicator of managerial efficiency; it indicates how capable the management of the banks has been converting the banks assets into net earnings.


3.4.5 Limitation to Data Collected:

The data was limited in temporal scope to three years before the 2005 Mergers and Acquisition exercise and three years after the 2005 recapitalization and consolidation exercise. The choice of the 2005 recapitalisation and consolidation exercise was because the era compelled all commercial banks to raise their capital base from 2billion to 25billion Naira by the Central Bank of Nigeria on or before 31st December 2005; and this sent some of these banks on the move to consider Merger and Acquisition as a survival strategy.

3.5 Market Model Methodology

A number of approaches are also available in determining and calculate the impact and effect of mergers and acquisition on the normal return of a given security and can be loosely grouped into statistical and economic categories. Models are based on statistical assumptions that the behaviour of asset returns do not depend on any economic arguments. For the statistical models, the assumption that asset returns are jointly multivariate normal and independently and identically distributed through time is imposed (Mackinlay, 1997). The most common models identified include the Constant Mean-Return Model, the Market Model, the Other Statistical Model and the Economic Model. This distributional assumption is sufficient for the constant mean return model and the market model to be correctly specified (Mackinlay, 1997). For the purpose of this research, the quantitative approach using key statistics from the affected banks will be applied.


Asika, N. (1991), Research Methodology in the Behavioural Science, Lagos: Longman Nigeria Plc. Andrade, A. Mitchell, M. and Erik, S. (2001). New Evidence and Perspectives on Mergers. Journal of Economic Perspectives. Beitel P. and Schiereck D., (2001). Value Creation at the Ongoing Consolidation of the European Banking Markets. IMA Working Paper. Brown S. and Warner J.(1985). Using Daily Stock Returns: The Case of Event Studies.Journal of Financial Economics. Bryman A. (2001). Social Research Methods. Oxford: Oxford University Press Inc. Delany F. and Wamuziri S. (2004). The Impact of Mergers and Acqusitions ion Shareholders Wealth in the UK Construction Industry. Engineering, Construction and Architectural Management.

Easterby-Smith, M., Lowe A. (2003). Management Research: An Introduction. 2nd Ed. London: Sage Publications. Higson, C. and Elliot, J. (1994), The performance of UK takeovers, IFA working paper, London Business School. Kumar R. (2009). Post-Merger Corporate Performance: An Indian Perspective. Journal of Management Research News. Mackinlay C. (1997). Event Studies in Economics and Finance. Journal of Economic Literature.


McWilliams A. and Siegel (1997). Event Studies in Management Research: Theoretic and Empirical Issues". Academy of Management Journal. Panayides M. and Gong X (2002). The Stock Market Reaction to Merger and Acquisition Announcements in Liner Shipping. International Journal of Maritime Economics.







This chapter focuses on the analysis of the data collected in the course of this research study and the presentation of findings serve as a core of any research study because they give meaning to the raw data collected during collection stage. This chapter is based on the collection of data from the CBN statistical bulletin, Nigeria Stock Exchange daily official list, Securities and Exchange Commission Annual Report and Account, analyzed by the statistical tool mention in Chapter three. This analysis is to enable the researcher measure the relationship that exist between the two variables (dependent and independent variable), whether it is negative or positive, and to test the level of significance of the variables.

4.1 Data Analysis, Results and Discussions

Table 1 shows the data used in carrying out the study. The table below clearly highlights the pre and post situation for the various performance ratios of banks in Nigeria following three years before and three years after the 2005 recapitalization exercise, using the approach in Rose and Hudgins (2005).


Test Of Hypothesis One

H0: There is no significant relationship between capitalisation and key profitability ratio of banks in Nigeria H1: There is a significant relationship between capitalisation and key profitability ratio of banks in Nigeria Question: Is there significant relationship between capitalisation and key liquidity ratios of banks in Nigeria?

4.2.1 Net Interest Margin (NIM) There was a gradual fall in the NIM for post recapitalization result. In 2006 immediately after the recapitalization it was 10.47, it drop to 7.71 in 2007 and later pick up in 2008 to stand at 10.21. A higher NIM relative to the industry average implies how efficient the management has been able to keep the growth of interest income ahead of interest expenses. The result obtained indicate that bank management are still trying to get their bearings after the 2005 recapitalization so we cannot conclude if they have been efficient after the recapitalization but a test of equality of mean will help us reach a conclusion. 4.2.2 Yield on Earning Assets (YEA) The YEA rose sharply after the 2005 recapitalization exercise from 4.62 in 2004 to 27.55 in 2006, later drop to 20.32 in 2007 and drop further to 18.88 in 2008. This shows that the banks earned more income on earning assets after the recapitalization than before the recapitalization. Although it is beginning to fall from the result obtained which implies that though recapitalization encourage more yields on earning assets but it is not being managed well.

Table 1 Pre and Post 2005 Recapitalization Performance Evaluation Ratio for Nigerian Banks
Pre-recapitalization 2003 Net Interest Margin Earning (NIM) % Yields on Assets (YEA) % Funding Cost (FC) % Return on Equity (ROE) % Return on Assets (ROA) % 86.08 4.52 80.59 4.13 99.45 3.96 41.63 2.63 29.11 2.00 27.23 2.58 11.16 17.55 8.09 2004 14.88 4.64 9.42 2005 9.12 4.62 9.47 Post-recapitalization 2006 10.47 27.55 13.05 2007 7.71 20.32 9.63 2008 10.21 18.88 9.66

Source: NDIC annual report, various issues 41

4.2.3 Funding Cost (FC) - The funding cost (FC) rose from 9.47 in 2004 to 13.05 in 2006, and later fall to 9.63 in 2007 and 9.66 in 2008. This is quite expected as with every major recapitalization there is an expected cost as all the banks will be all out to meet the deadline. However, this was tapered off in 2007 and 2008 and was consistent with the industry average even before the recapitalization. The Return on Equity (ROE), which measures the rate of return to shareholders, was quite low after the recapitalization falling sharply from 99.45 in 2004 to 41.63 in 2006 and further to 29.11 and 27.23 in 2007 and 2008 respectively. This shows that the shareholders receive very low returns in terms of dividend after the recapitalization. This is not surprising as most banks raise their fund through equity share which now increase the equity capital and the profit after tax have not improve substantially to compensate the shareholder who add additional fund to finance the bank recapitalization.

Table 2 Descriptive Statistics

N Net Intrest Margin Pre2005 Net Intrest Margin Post2005 Yield on Earning Asset Pre Yield on Earning Asset Post Funding Cost Pre2005 Funding Cost Post2005 Return on Equity Pre2005 Return on Equity Post2005 Return on Asset Pre2005 Return on Asset Post2005 Valid N (listwise) 3 3 3 3 3 8.09 9.63 80.59 9.47 13.05 99.45 41.63 4.52 2.63 8.9933 10.7800 88.7067 32.6567 4.2033 2.4033 .78271 1.96593 9.70049 7.82778 .28711 .35019 3 18.88 27.55 22.2500 4.64606 3 4.62 17.55 8.9367 7.45937 3 7.71 10.47 9.4633 1.52399 3 9.12 14.88 11.7200 2.92055 Minimum Maximum Mean Std. Deviation

-Source: result obtained from authors computation 3 27.23

3 3.96


4.2.4 Return on Assets (ROA) - The Return on Assets also fell after the recapitalization from 3.96 in 2004 to 2.63 in 2006. This shows that management of the banks has not been able convert the banks assets into net earnings after the recapitalization. The return on assets decline further in 2007 to 2.0 but then picked up again in 2008 to 2.58.


Test Of Hypothesis Two

H0: There is no significant difference between the mean of the pre and post consolidation era in the banking sector in Nigeria. H1: There is a significant difference between the mean of the pre and post consolidation era in the banking sector in Nigeria.

4.3.1 Test of Equality of mean helps to compare mean of a variable to see if there is any significant different between the mean of a period compared with another period of the same variable to know if there is any significant different in the two mean compared. Where it is higher than .05 it mean that they are not significant meaning that there is no different between the two mean compared. But where it is less than .05 it means they are significant.

Table 2 shows that the NIM pre recapitalization mean is higher at 11.27 than the post capitalization NIM mean at 9.4 but table 3 shows the difference in the mean is not statistical significant. The implication of this is that there is no difference in the performance of the bank Net Interest Margin before and after 2005 recapitalization exercise. On Yield on Earning Asset, the pre 2005 recapitalization mean is 8.9 with a standard deviation of 7.4 while the post capitalization mean is 22.25 with a better standard deviation of 4.64 meaning that the figure are more together. The implication of the result is that the post the banks earning assets have higher yield after the 2005 recapitalization exercise. Table 3, also shows that different in the pre and post mean is significant at 5% significant level which implies that statistically, there is a significant different in the mean of the two periods compared. On funding cost, the pre mean shows 8.99 with a standard deviation of 0.78 while the post 2005 recapitalization mean shows 10.78 with a standard deviation of 1.96, The implication of this is that pre funding cost is better than the post. However, table 3 shows that at 5%

significant level there is no different in the two means compared, meaning that it is not statistically significant. This implies that statistically, there is no difference in the mean of the pre and the post funding cost. This is also explained in the descriptive analysis, which shows that the post funding cost is tending to the position of the bank during the pre 2005 recapitalization period. Table 3 T- Test Paired Sample Test.
Std. Pair 1 Net Interest Margin Pair 1 Pair 2 Pair 3 Pair 4 Pair 5 Pre 2005 Net 2.257 -13.31 -1.787 56.05 1.80 4.347 2.956 2.748 14.44 0.383 0.90 -7.80 -1.13 6.72 8.140 2 2 2 2 2 0.463 0.016 0.377 0.021 0.015 Mean Dev. T Df 5% level

Interest Margin Post 2001 Yield on Earning Asset Pre Yield on Earning Asset Post Funding Cost Pre Funding Cost Post Return on Equity Pre Return on Equity Post Return on Asset Pre Return on Asset Post

Source: Result obtained from authors computation

The return on equity result shows that the pre recapitalization mean is much higher at 88.70 and 7.9 standard deviation than the post recapitalization mean of 32.66, though it has a better standard deviation of 7.8. This implies that the shareholders earn better return on their investment before the recapitalization but the 2005 recapitalization has left them worse off and it will continue to decline unless the banks are able to generate higher profit than they were doing. The t-test also shows the difference between the pre mean and the post mean, is significant at the 0.05 level of significance. This means that the shareholders are not earning as much as they were earning before 2005 recapitalization. On return on asset, it follows the same trend as in Return on Equity, the pre recapitalization mean is better than the post recapitalization mean and the t-test show that the difference between the two mean are significant at 0.05 significant level. This implies that the banks,


after the 2005 recapitalization are not turning over their assets enough to generate more profit after tax. Overall, this study has found that judging from the profitability ratio of banks and test of equality of the pre and post mean for 2005 recapitalization exercise, it is not all the time that recapitalization transforms into good performance of the bank and it is not only capital that makes for good performance of banks. As banks recapitalize the economic environment has to be conducive to make good profit and deepen the financial structure of the economy.

4.4 Abnormal Returns (Residual)

Using the analytical tools (graphs and tables) employed in this research, it was observed that throughout the event window the abnormal returns fluctuated from positive to negative in its movements but largely positive most times in the period. From Table 2 and Figure 3, it can be observed that, the first three days of the event window (day-40 to -38) the average abnormal returns were negative followed by a positive zig-zag movements consistently between event days -36 and -24. The trend was observed negative mostly between event days -24 and -20 and was positive again within event days -20 and -4. Significant positive spikes were observed on event days -15 and -4 and these were due to significant positive price movement of 27.7% in First Bank share price on event day -15 and also another positive share price for others on event day 4. The period around the announcement period i.e. (-1: 0: +1), the average abnormal returns was positive. The positive returns on day -1 could be adduced to the market already having anticipated the M&A announcement which is consistent with the results of Frank et al, 1991 and Draper, 1999. However, the average returns were largely positive with some negative movements on event days +4, +12 to +16, +28, +34 and +40. Other days outside of these are marginally positive and significant ranging between abnormal returns of 0% to 3%.

Consequently, it can also be deduced these the four commercial banks experienced negative returns during the period immediately following merger announcements and thereafter returns were positive. For Oceanic Bank, -0.5% movement was observed on the day of merger announcement i.e. day 0 while movements on days 3 and 4 were -3.3% and -2.2% respectively. The same trend was observed in First Bank too. Day 0 was -0.9% while days +2 to +5 ranged

between -3.7% and -1.6%. For UBA, movement was -1.3% on day 0 and then varied between 30.9 and -4.4% in event days +2 and +4. In the case of UBN, event days +2 to +9 showed price movements of between -1.1% and -0.59% respectively. On the whole, event days +1 and +3 exhibited negative movements of -0.43% and -0.56% respectively.

The abnormal returns continued to fluctuate between positive and negative values throughout the remaining days of the event window (but largely positive and significant) with the highest positive value of about 9.8% and 3% the lowest negative value at an average of 2.8% per event day. This finding s is consistent with result of this findings is consistent with the findings of Kolo, 2007 who found positive abnormal returns for acquiring banks around the period of announcement in Nigeria.

Hence, the findings on the Average Abnormal Returns for acquiring banks in Nigeria show that it was positive but not significant which is consistent with the work done by Andrade et al.

(2001) which stated that it is difficult to claim that acquiring firms are losers in merger transactions, although they are clearly not big winners like target firm shareholders.

Table 4: Acquiring Banks Abnormal Returns From Day -40 To +40.

EVENT DAY -40 -39 -38 -37 -36 -35 -34 -33 -32 -31 -30 -29 -28 -27 -26 -25 -24 -23 -22 -21 -20 -19 -18 ARR -0.013632595 -0.016876289 -0.003533093 0.008071165 -0.011718421 -0.010139925 0.013932559 0.011037473 0.003717552 0.002766657 0.011131376 0.005254105 -0.003087568 0.00286752 0.002426181 0.020779907 -0.014890767 0.011706173 -0.020793371 0.006759923 -0.027665057 0.015227781 0.00584428 EVENT DAY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

ARR 0.004336 -0.00211 0.005637 -0.01193 0.003761 0.001646 0.010508 0.00305 0.01068 0.010885 0.014982 -0.00386 -0.01183 -0.00429 -0.01 0.008875 0.000594 0.016988 0.01115 0.006193 0.031096 0.008015 -0.00246

-17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0

-0.005168325 0.002859256 0.066843749 -0.017289076 -0.005966529 0.009094933 -0.004835149 0.023785625 -0.00539734 0.00475529 0.009269017 0.005108593 -0.001299657 0.09380962 -0.008589467 0.001621746 0.002209355 0.032409235

24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

0.016978 0.025112 0.017781 0.006832 -0.01468 0.013716 0.010481 0.012329 0.000366 -0.00387 -0.01218 0.002542 -0.00192 0.00948 0.019282 0.002222 -0.00808

4.5 Cumulative Abnormal Returns (CAR)

Analysis on Table 3 and the graph in Figure 4 on the cumulative abnormal returns showed that (for the Nigerian banks) there was positive CAR value most of the period of the event window from event day -40 to event day +40. The positive value of CAR averaged +8.1% throughout the event window with increases and decreases observed. Some major negative dip was observed in event days -36 and -27. Although the net CAR was positive throughout the event period and some negative dips observed on some days, it was largely positive after the announcement period and no negative dip was observed after this period. Overall the CAR finding shows that the net effect of M&A announcement for the shareholders of the acquiring banks in Nigeria is positive. According to Watson and Weaver, 2001, a positive CAR is beneficial to shareholder while a negative CAR is detrimental to shareholders. The total

cumulative average residual for the Nigerian banks for -40 to day +40 is 11.69% (Table 3) and the corresponding t-stat value of 11.48 shows that it is significantly different from zero on a 0.5 level of significance. This observation above is consistent with previous research on the effect of M&A on the shareholders of the acquiring firms.

Table 5: Acquiring Banks Cumulative Abnormal Returns And T-Start From Day -40 To +40






-40 -39 -38 -37 -36 -35 -34 -33 -32 -31 -30 -29 -28 -27 -26 -25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10

-0.013632595 -0.030508885 -0.034041978 -0.025970814 -0.037689235 -0.04782916 -0.033896601 -0.022859128 -0.019141576 -0.016374919 -0.005243543 1.05615E-05 -0.003077006 -0.000209486 0.002216695 0.022996601 0.008105834 0.019812007 -0.000981364 0.005778559 -0.021886498 -0.006658717 -0.000814437 -0.005982762 -0.003123506 0.063720243 0.046431167 0.040464638 0.049559571 0.044724422 0.068510047

0.00000 -0.23952 -0.18898 -0.11772 -0.14795 -0.16793 -0.10864 -0.06783 -0.05313 -0.04285 -0.01302 0.00003 -0.00697 -0.00046 0.00465 0.04662 0.01591 0.03772 -0.00182 0.01041 -0.03842 -0.01141 -0.00136 -0.00979 -0.00501 0.10005 0.07149 0.06114 0.07353 0.06520 0.09820

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

0.206742 0.204637 0.210274 0.198343 0.202104 0.20375 0.214259 0.217309 0.227988 0.238874 0.253855 0.249993 0.238167 0.233872 0.223872 0.232747 0.233341 0.250329 0.261479 0.255286 0.224189 0.232205 0.229748 0.246726 0.271838 0.289619 0.296451 0.281769 0.295486 0.305967 0.318296

0.25349 0.24790 0.25175 0.23475 0.23653 0.23585 0.24536 0.24625 0.25570 0.26522 0.27908 0.27217 0.25684 0.24986 0.23700 0.24418 0.24265 0.25806 0.26726 0.25875 0.22536 0.23152 0.22725 0.24213 0.26471 0.27988 0.28434 0.26826 0.27928 0.28711 0.29657

-9 -8 -7 -6 -5 -4 -3 -2 -1 0

0.063112707 0.067867996 0.077137014 0.082245606 0.08094595 0.174755569 0.166166103 0.167787848 0.169997203 0.202406438

0.08899 0.09419 0.10542 0.11074 0.10742 0.22867 0.21447 0.21369 0.21371 0.25126

32 33 34 35 36 37 38 39 40

0.318662 0.314795 0.302617 0.305159 0.303243 0.312723 0.332005 0.334227 0.326143

0.29484 0.28926 0.27618 0.27664 0.27309 0.27979 0.29513 0.29522 0.28628

Furthermore, an analysis of the share price of the banks under review was done and a trend of upward movement for the share price was observed following the date of announcement (Figures 5 8 and Appendix 11 - 14). Although the analysis of the share price does not reflect whether value was added to shareholders, it shows that investors gained more confidence by investing in the company.





Bryman A. (2001). Social Research Methods. Oxford: Oxford University Press Inc. Andrade, A. Mitchell, M. and Erik, S. (2001). New Evidence and Perspectives on Mergers. Journal of Economic Perspectives. Kolo, (2007). Impact of Nigerias Bank Consolidation on Shareholders Returns. Weaver S. and Weston F.(2001). Mergers and acquisitions. 1st ed. McGraw-Hill Professiona



5.0 Recommendations and Conclusion

The aim of this research was to consider impact of M&A on shareholders of acquiring companies by examining M&A that occurred in the banking sector in Nigeria in the precapatalisation and consolidation period and post consolidation period. This was to be achieved through the primary objectives listed below: To establish if shareholders in acquiring banks experience positive wealth effects as a result of M&A. To critically evaluate the impact of merger announcements on acquiring banks equity share price. To analyse if the objectives set by the Central Bank of Nigeria were strengthened by bank M&A activities.

To establish this objective, the data were analyzed using both descriptive and analytical techniques such as the t-test and the test of equality of means. It was found that the mean of key profitability ratio such as the Yield on earning asset (YEA), Return on Equity (ROE) and Return on Asset (ROA) were significant meaning that there is statistical difference between the mean of the bank before 2005 recapitalization and consolidation and after 2005 consolidation exercise.

It is obvious that the shareholders could be made worse- off after recapitalization and many Nigerian investors do not realize this, the last recapitalization exercise witness many Nigerian banks running off to the capital market to raise fund and many of the shares were over subscribed to by Nigerian investors. Except calculative steps are taken by the bank management to increase profitability, the recapitalization will result in lost of fund for the shareholders. Knowing the implication of raising fund through the capital market, the CBN never suggested this, but insist on bank consolidation through mergers and acquisition that is why our recommendation will centre on how to increase banks profitability for better ROE. Banks should improve their total asset turnover and diversify in such a way that they can

generate more income on their assets. It was discovered from our data that bulk of the banks investments as a component of their total assets were in the short term and this would not help their profitability stance in the long run. Hence, they need to diversify their investment and should be more of the long-term type. Recapitalization is good for the economy but the way the banks raise their funds to meet the recapitalization funds should be carefully looked into so that they do not make their shareholders worse off than they were before the recapitalization. Bank management should embark on effective intermediation drive that will bring all the small savers to the purview of the government, CBN has said over time that most of the money in circulation is in the informal service sector which the banks have neglected over the years, bringing this fund through effective intermediation drive will provide a cheap source of fund for the banks which they can use to generate more interest income which will eventually increase their profit and once profit is increase the ROE will be better. That is why he authors think licensing microfinance bank as a good development strategy for banks and a good step in the right direction. To generate more profit the banks need a good regulatory environment that will enable the banks to expand their scope of business but strictly within the financial service industry. With a good regulation and supervision corporate governance will be enhance, unnecessary cost and expenses will be cut down and the profit will increase. The government too has a role to play in providing necessary infrastructure to ensure that the cost of doing business in Nigeria is reduced significantly to allow the banks to make more profit. The banks should put in place good corporate governance that will allow for transparency and minimize fraud in the bank. The shareholders have the responsibility to choose their directors, which will in turn choose members of management that will run the affairs of the banks. They should put in place good management that will protect their investment and increase the profitability of the banks. The Nigerian banks and its regulator should recognize the peculiar operating environment, and developed a viable indigenous financial services industry, which integrated seamlessly with the traditional banking system. In this regard, most of the money outside the government purview will be brought back and the government monetary policy will achieve its set objective.

5.1 Comparing Research Findings with Earlier Literature

The findings of this research shows that the net effect of M&A announcement on the shareholders of acquiring banks in the Nigerian banking sector is positive but not significant which is consistent with the findings of Akintoye and Shomoye (2008). However, a further analysis of the Cumulative Abnormal Returns showed a positive trend around the announcement period establishing that there were gains for the shareholders of the four banks studied in this research.

The result of the findings of this study is consistent to the findings of Rheaume and Bhabra (2008); Draper and Paudyal, 1999; Andrade et al, 2005, who observed a positive wealth effect for acquisitions of acquiring firm shareholders. Kolo, 2007 in his study on Nigerian banking mergers also concluded that acquiring banks observed positive abnormal returns indicating positive returns for shareholders.

However, the findings of this study were consistent with the findings of the studies as referenced in the above paragraph, stating a positive wealth effect, it was different from the overwhelming negative wealth effects for bidding firms documented in Chapter 2 i.e. literature review.


REFERENCES: Akintoye I. and Shomoye R. (2008). Corporate Governance and Merger Activity in the Nigeria Banking Industry: Some Clarifying Comments. International Research Journal of Finance and Economics. ISSN 1450-2887 Issue 19. EuroJournals Publishing, Inc.

Rheaume L.and Bhabra S.(2008). Value Creation In Information-Based Industries Through Convergence: A Study Of U.S. Mergers and Acquisitions Between 1993 and 2005. Information & Management.

Draper P.and Paudyal K.(1999). Corporate Takeovers: Mode of Payment, Returns and Trading Activity. Journal of Business Finance and Accounting. Kolo, (2007). Impact of Nigerias Bank Consolidation on Shareholders Returns. Soludo C. (2007). Consolidating the Nigerian banking industry to meet the development challenges of the 21st century.