The Impact of Merger and Acquisition in Banking Industry and the Economy (2005-2015) (A Case Study of Diamond Bank of Nigeria Plc)


Ibo, Sunday Adekoya
The Federal Polytechnic,
Ile-Oluji, Ondo State, Nigeria

Oyewole, Kehinde Samuel
The Federal Polytechnic,
 Ile Oluji, Ondo State, Nigeria

Akindutire, Solomon O.
The Federal Polytechnic,
 Ile Oluji, Ondo State, Nigeria

Oluwadare, Ayodeji Abraham
Rufus Giwa Polytechnic,
 Owo, Ondo State, Nigeria
ABSTRACT
Merger and acquisition is the only legal mode for the banking consolidation as part of the economic reform.  For banks to be active player in the economy it requires adequate capital and this can be sourced through merger and acquisition. More often than not, since merger and acquisition is a vital instrument for banks recapitalization and efficiency, there is need for researchers to find out its impact both negative and positive in the banks and the economy at large.  In carrying out this research, Diamond Bank of Nigeria, Ondo branch was used as the case study where questionnaire were distributed as the primary source of data and information were collected through secondary source.  An overview of merger and acquisition exercise between the years 2005-2015 was done in order to know those banks that have existed in Nigeria before and after the years under review.  After a thorough distribution of questionnaires and analysis of the information gotten, a conclusion was drawn that merger and acquisition has a great impact in banking industry & the economy at large, also an instrument of revitalizing and boosting of banks capital base so as to guarantee its active role in the economy.  Recommendations were also made to relevant stake holders to make adequate preparation for the purpose of tackling any negative effect that might suffice after the exercise.
INTRODUCTION
The determination of the federal government of Nigeria to release the economy from its devastated state led to its effort to place it in the fare arena of unbridled economic competitiveness as epitomized by its policy of deregulation and privatization.  The banking industry that had hitherto been an engine room of the economy became a major “casualty” in this regard.
The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. The economies of all market-oriented nations depend on the efficient operation of complex and delicately balance systems of money and credit. Banks are an indispensable element in these systems. They provide the bulk of the money supply as well as the primary means of facilitating the flow of credit. "Consequently, it is submitted that the economic well-being of a nation is a function of advancement and development of her banking industry (Obadan, 1997).
Besides the determination of the government to remove its hold on banks which it held equity or statutory participation, it descended into banking arena with a mandate that compel all commercial banks and Regional banks to increase their shareholders fund to twenty five billion naira only (N25.000,000,000.00) and ten billion naira (N10,000,000,000.00)only respectively.  Meanwhile this development has been effected by the CBN between 2005 and till date and this has really strengthened the banking industry and the economy as a whole.  This it to ensure the safety of depositors money, viability of commercial banks in the country, active participation in the Nigerian economy and be competent and competitive player In the global financial system.  
All over the world and considering the internationalization of finance, size has become an important ingredient for success in the global world.   In the world of finance, no country can afford to operate in isolation, the last few years, have witnessed the creation of the worlds banking group through merger and acquisition.  The trend has been influenced by factors such as prospects of cost saving due to economy of scale as well as more efficient allocation of resources, and risk reduction arising from improved management.
Merger and acquisition especially in the banking industry is a global phenomenon in the United State of America, there has been over seven thousand cases of banks merger since 1980, a merger in France resulted in a new bank with a capital base of six hundred and eighty eight billion Us dollars, while the merger of two banks in Germany in the same year resulted into the second largest bank in Germany with a capital base of Five hundred and forty one billion dollars.
More so, Nigerian banks witness tremendous phases of merger and acquisition between the years 2006 to 2015 which has reduced more than eighty-nine banks before consolidation to nineteen banks after the consolidation exercise.  This process made Nigerian banks to be more viable and stronger as well as experiencing a multiple effect on their deposit base, shareholders fund, asset base and other profitability status.  Before now, we have 89 banks that are so minimal and small with about 3,300 branches compare to this 8 banks in South Korea with about 4,500 branches or the one in South Africa with larger assets than all the banks in Nigeria presently.   
The fact is that the Nigerian banking system remains very marginal relative to its potentials and in comparison to other countries before now, but after the consolidation exercise between 2006 to 2015, Nigerian banks are becoming stronger and could compete with many other banks globally even in the face of economic recession.  In many emerging markets, including Argentina, Brazil and Korea, consolidation has also become prominent, as banks strive to become more competitive and resilient to shocks as well as reposition their operations to cope with the challenges of the increasingly globalised banking system.
According to Charles Chukwuma Soludo (2004) in his paper titled “consolidating the Nigerian banking industry to merit the developmental challenges of the 21st century :
” He emphasized that the Nigerian and the world economy in the year 2025 and 2050, what I see is a world economy with 10-20 mega banks all over the world.  I see national and cross-national merger, acquisition, taking place in massive scales.  It will not be a world for marginal or fringe players, countries that fail to proactively position themselves today will wake up and continue to complain of marginalization and this development is ongoing.
    I can see Asia consolidating, America consolidating, consolidation is taken place in South Africa as such that one bank in South Africa, Amalgamated banks of South Africa (ABSA) has asset base larger than all Nigeria commercial banks put together.  Malaysia has gone through its first round of consolidation whereby about 80 banks shrunk to about 12 within one year”.

Statement of the Problem
            Merger and acquisition exercise has been on the increase and common in most part of the world today.  This increase should have been able to have positive impact in the area to profitability, efficient delivery of credit facilities as well as economic revitalization as a whole.  However, the following questions are tailored to examine the impact of merger and acquisition in banking industry and the economy at large.
        i.            What is merger and acquisition?
      ii.            Will merger and acquisition boost profitability?
    iii.            What are the benefits/importance of merger and acquisition?
    iv.            Will merger and acquisition have positive impact on banks, business and operations?
      v.            Is there any distinction between merger and acquisition?
    vi.            Are there motives behind merger and acquisition?
Some of these questions will be answered in the course of this research work.
Objectives of the Study
This research work has the following objectives.
        i.                        To enumerate the positive impact of merger and acquisition in the banking industry.
      ii.                        To find out the effect of merger and acquisition on banks and the economy at large.
    iii.                        To uncover the reasons for merger and acquisition
    iv.                        To discuss on the roles merger and acquisition play in the economic development.

Hypothesis
Ho: Represent merger and acquisition have no positive impact on banking industry and the economy.
Hi:  Represent merger and acquisition have positive impact in banking industry and the economy.

Theoretical Framework and Empirical Studies Merger: A Strategy for Development
According to Geofrey Knott (1998) the word merger has been used so far as generic term describing the fusion of assets of two or more businesses.
 In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. A merger in 2007 was a deal between Digital Computers and Compaq, where Compaq absorbed Digital Computers.  (www.investopedia.com, ©2016)
According to Okonkwo (2004)”merger occurs when two or more companies transfer their business and asset to a new company (or to one of themselves) all in consolidation, their members receives shares in the transferee company”
Merger is normally reserved for the scheme of arrangement where.
        i.            Both sets of shareholders agree to the merger
      ii.            Both set of Board of directors agree to the terms and consolidation
    iii.            The separate business continues after amalgamation.
    iv.            Individual business name ceases after merger and a new combined name is formed by both companies (e.g in 1999 merger of Glaxo wellcome and Smithkline Beecham, both firms ceased to exist when they merge, and a new company, Glaxo Smithkline was created).
      v.            Previous shareholders remain members of the enlarged unit and retain some control over it.
In pure sense of the terms, a merger happens when two firms agree to forward as a single new company rather than remain separately owned or operated.


Acquisition: A Tool for Stability
Acquisition happens when one company takes over another and clearly establishes itself as the new owner.  From a legal point of view, the target company ceases to exist the buyer swallows the business and the buyers stock continues to be traded. “Acquisition occurs when one company acquires sufficient shares in another company so as to give control of that company. This may be by takeover or by purchasing shares in the market. Okonkwo, (2004)
 In an acquisition, the acquiring company obtains the majority stake in the acquired firms, which does not change its name or legal structure. An example of this transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services.  (www.investopedia.com ©2016)
According to Geofrey Knott (1998)”acquisition is where an acquired company’s members give up membership of the company, the consideration for the purchase of their share or asset being cash, loan stock, convertible loan stock or a mixture of these” the acquired company can either be wound up or continue, but its membership is liquidated. For instance, in 2012, Access bank plc acquired Intercontinental bank plc.

Overview of Merger and Acquisition in Nigeria’s Bank Between (2005-2015)
Existing Banks in 2005 after Merger and Acquisition (From 89-25 Bank)
S/N
NEW COMERCIAL BANKS
COMPOSITION
1
Access Bank Plc
Access bank, Marina Int’l bank, Capital bank Int’l.
2
Afribank Nig Plc
Afribank plc and Afribank Int’l(Merchant bank)
3
Bank PHB plc
Bank PHB plc and Habib bank Nig Ltd.
4
Diamond Bank Plc
Diamond bank, Lion Bank and Dercom bank Ltd.
5
Ecobank Nig Plc

6
Equatorial Trust bank
ETB
7
Fidelity Bank Plc
Fidelity bank, FSB Int’l bank and Manny bank.
8
First bank Nig Ltd
First bank plc, MBC Int’l bank and FSB (merchant bank)
9
First City Monument bank
FCMB, Coop. Dev. Bank, Nigeria American bank and Midas bank.
10
First Inland bank plc
First Antlantic bank, Inland bank Nig.Plc, IMB Int’l bank plc and NUB Int’l bank.
11
Guaranty Trust Bank

12
IBTC Chartered Bank plc
IBTC Chartered bank plc and Regent bank plc
13
Intercontinental Bank plc
Citizen Intl.bank, ACB
14
Oceanic bank Int’l plc
Oceanic bank Int’l plc and Int’l trust bank
15
Nigeria Intl bank

16
Skye bank plc
Prudent bank plc, Bond bank ltd, Reliance bank ltd, Cooperative bank plc and ETB bank Int’l ltd
17
Spring bank plc
Citizen Int’l bank, Acb Int’l bank, Guardians Express bank, Omiga bank, Trans-Int’l bank, and Fountain trust bank
18
Sterling bank plc
Trust bank, Africa ltd, NBM bank ltd, Magnum trust bank, NAC bank plc and Indo-Nigeria bank.
19
Stanbic Ibtc bank plc

20
Standard chartered bank

21
United bank for Africa plc
United bank for Africa plc, Standard trust bank plc, Continental bank
22
Union bank plc
Union bank of Nigeria plc, Union Merchant bank ltd, Broad bank of Nigeria ltd and Universal trust bank Nigeria plc
23
Unity bank plc
Intercity bank plc, First Interstate bank plc, Tropical Commercial bank plc, Center-Point bank plc, Bank of the North, New Africa bank, Societe Bank , Pacify Bank and New Nigeria Bank
24
Wema bank plc
Wema bank plc and National bank of Nigeria ltd


Acquisition and Capitalization Exercise of Commercial Banks between (2011-2012)
S/N
DISTRESED BANKS
NEW BANKS
1
Afribank plc
Main street bank ltd (bridge bank-AMCON)
2
Equatorial trust bank
Sterling bank plc
3
First Inland bank
First City Monument bank
4
Intercontinental bank plc
Access bank plc
5
Oceanic bank plc
Ecobank Nig. Plc
6
Spring bank
Enterprise bank plc (bridge bank-AMCON)
7
Platinum Habib bank
Keystone Bank ltd (bridge bank-AMCON)
8
Union bank plc
Owned by African Capital Alliance


Acquisition Exercise of Commercial Banks In 2015
S/N
OLD OWNER
NEW OWNER
1
Main Street bank
Skye bank plc
2
Enterprise bank
Heritage bank plc

Existing Commercial Banks As At March 2016
S/N
NAME OF BANK
1
Access Bank Plc
2
City Bank Nigeria Ltd
3
Diamond Bank Plc
4
Ecobank Nig. Plc
5
Fidelity Bank Plc
6
First Bank Nig. Plc
7
First City Monument Bank
8
Guaranty Trust Bank Plc
9
Heritage Bank Plc
10
Keystone Bank Ltd
11
Skye Bank Plc
12
Sterling Bank Plc
13
Standard Chartered Bank
14
Sun Trust Bank Nig Ltd
15
United Bank For Africa Plc
16
Unity Bank Plc
17
Union Bank Plc
18
Wema Bank Plc
19
Zenith Bank Plc

Research Methodology
The research was a descriptive one; therefore survey method was used because of the large area to be covered.  Population used for this research work is Diamond Bank of Nigeria Plc, Ondo branch, which consists of both management staff and customers.  A random sampling technique was used.  Data was collected through the use of questionnaire which was analyzed with the use of a simple percentage method.

Analysis of data:
Questionnaire Administration
Question 1:      Does merger and acquisition have an impact on the banking industry and the economy?
Responses
No of respondent
Percentage
Yes
15
100%
No
-
-
Total
15
100%
The table above affirms 100% responses from the respondents that merger and acquisition will have a significant impact on the economy.

Question 2:      If yes what impact?   
Responses
No of Respondent
Percentage
Positive
13
87%
Negative
2
13%
Total
15
100%
The table above shows that 87% of the respondents agree that merger and acquisition have positive impact, while 13% belief that the impact is negative.
Question 3:      Do you think merger and acquisition is the best alternative tool for banks to boost their capital base?
Responses
No of Respondent
Percentage
Positive
15
100%
Negative
-
-
Total
15
100%
The table above shows that 100%% of the respondents confirm that merger and acquisition is the best alternative for banks to boost its capital base.
Question 4: Do you think merger and acquisition will make banks to be more effective and sound?
Responses
No of Respondent
Percentage
Positive
13
87%
Negative
2
13%
Total
15
100%

The table above shows that 87% of the respondents agree that merger and acquisition will make bake to be more effective and sound, while 13% of the respondents disagree with the above assertion.
Test of Hypothesis
            The hypothesis formulated for this testing includes the null and alternate hypothesis.  It is dependent on this testing.
Ho1:- Merger and acquisition have no impact in banking industry and the economy.
Hi2:- Merger and acquisition have an impact in banking industry and the economy.
This can be tested further based on the response in the table below:

Option
Respondents
Percentage %

Yes
13
87
No
2
13
Total
15
100
                                                                                                                                               
Null Hypothesis
Adverse: -       2/15  x  100/1
= 0.133x100
= 13.3%
Alternative Hypothesis
Favour :-          13/15  x   100/1
            =  0.8666 x 100
            =  86.7%
This shows that 86.7% agreed that merger and acquisition have impact on Diamond Bank Plc and the economy while 13.3 hold a contrary view.  Therefore, the alternative hypothesis is accepted while the null hypothesis is rejected.
  Findings
  1. Merger and acquisition is the best alternative for banks to boost its capital base.
  2. Merger and acquisition will strengthen banks in giving out loans to finance capital project and large scale businesses.
  3. Merger and acquisition will make banks to be more effective and sound.
  4. The aftermath of merger and acquisition enhance banks to create more businesses as well as expanding their scope of business.
  5. Merger and acquisition will reduce interest rate on loans and reduce bank charges.
  6. Merger and acquisition will lead to economic of scale by reducing operating cost and increasing profit margins.
  7. Merger and acquisition will increase revenue, market share and enhance synergy within the banking industry.
  8. Merger and acquisition will help in solving management problem as well as creating shareholders wealth.
Considering the above findings, the impact of merger and acquisition on the country’s economy, also the strategic positive posture of merger and acquisition on business and adequate capital has been urged to be the foundation of a safe banking system.  The reason being the fact that a good  and strong capital base gives a bank competitive edge and enable it to provide better services and ultimately increase its earning.
For a bank to be sound and strong it has to meet the needs of its customers, its obligations as at when due and plays a competitive role in strengthening the economy which requires adequate capital, that can be generated through merger and acquisition.
Therefore, merger and acquisition should be given a chance to prove its benefits, strength and develop banks and the economy at large.

Conclusion
After undergoing a research on the topic “the impact of merger and acquisition in Banking Industry and the economy”, it was discovered that merger and acquisition have more of positive impact on banking industry and the economy.
It can be deduced that the only legal mode for banks consolidation is merger and acquisition which is the best alternative for Nigerian banking system.
Recommendations
Merger and acquisition have helped to develop and revitalized various sectors of different countries and Nigeria cannot be an exception, although for more and better performance and to have tremendous success in strengthening economic as a whole, we therefore recommend that:
i.            Corporate governance should be adhered to at every stage of the exercise to ensure a safe landing for the bank engaging in merger and acquisition exercise.
ii.            Professionals are to be employed to handle responsibilities that require professional attention.
iii.            Policies and procedure laid down should not be contravened at any point in time in the course of the exercise.
iv.            The Central Bank of Nigeria should help to solve the problem of cultural differences which is one of the setbacks of merger and acquisition.
v.            The interest of all parties to merger and acquisition exercise should be considered and protected by the regulatory authorities such as, shareholders, staff, investors, management board e.t.c.
vi.            Central Bank of Nigeria should monitor and supervise the operations and management of banks before and after the exercise.
vii.            There should be a proper integration and alignment of processes and procedures so as to ensure proper implementation.
viii.            Government should develop strategies that will cushion the effect of unemployment and other negative development that may arise after merger and acquisition exercise. 
 References
Abok P.A. (2006). Merger and Acquisition: Instrument of Banking Soundness.  Unpublished
Charles, C.S. (2004). “Consolidating the Nigerian Banking Industries to meet the Developmental challenges of the 21st Century”
Clerk, J.J. (1988). A Statistical Prior for Manager (New York, free press, a division of   Macmillan publishing co.inc.)
Knott, G. (1998). Financial Management, third Edition (ebbro Vale, Britain Creative print ad design)
Kolb R.W. &  Rogri gnez R.J (1996).  Financial Management (Blackwell Publishers, Inc.)
Nwosu, G.O. (2005). The Re-capitalization of Nigeria Banks in the 21st Century. Unpublished
Okonkwo, C.O. (2004). “Legal frame Work for Merger and Acquisition” A Paper presented at the Retreat on Merger and acquisition.


Share on Google Plus

About Pen2Print Services