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August 2008
ABSTRACT
This dissertation evaluated organic growth, and mergers and acquisitions as strategic
growth options in the Nigerian banking sector, with a view to ascertaining which of
the growth strategies result in superior financial performance. Access Bank and
Zenith Bank were used as case studies.
Through the use of various financial ratios in analysing five years financial statements
and other relevant information on both banks from 2003 to 2007, the analysis suggests
a mixed result: Access Bank that pursued M&A witnessed a faster growth rate,
whereas Zenith Bank that pursued organic growth was able to sustain its quality
performance trends and achieved a slower growth rate during the period under review,
in line with past literatures on mergers and acquisitions, and organic growth
respectively.
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Table of Contents
Page
Title page i
Abstract ii
List of tables and Figures v
Acknowledgement vii
Dedication viii
Chapter 1 - INTRODUCTION
1.1 Background 1
1.2 Overview of the Nigerian Banking Sector 1
1.3 Literature Review 1
1.4 Research Methodology 1
1.5 Data Analysis and Presentation 2
1.6 Discussion and Conclusion 2
REFERENCES 67
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List of Tables and Figures
Pages
Table 2.1 List of banks in Nigeria as at January 1, 2006 11
Table 2.2 Basic indicators of Banking sector consolidation results 12
Table 3.1 Summary of major M&A waves in the US 24
Table 3.2 Bank M&A in Nigeria between 2004 and 2005 26
Table 3.3 Reasons for merger and acquisitions 28
Table 5.1 Summary of Access Bank’s 5 Years Profit & Loss Account 39
Table 5.2 Highlights of Access Bank’s 5 Years Balance Sheet 39
Table 5.3 Summary of Zenith Bank’s 5 Years Profit & Loss Account 41
Table 5.4 Highlights of Zenith Bank’s 5 Years Balance Sheet 41
Table 5.5 Loan: Deposit Ratios 43
Table 5.6 Return on Assets 45
Table 5.7 Net Interest Income: Total Asset Margin 47
Table 5.8 Cost: Income Ratio 47
Table 5.9 Equity to Asset Ratio 49
Table 5.10 Equity to Loans Ratio 50
Table 5.11 Provision for Loan Losses to Total loans 51
Table 5.12 Provision for Loan Losses to Profit before Tax 52
Table 5.13 Profit before Tax growth rate 54
Table 5.14 Deposits growth rate 55
Table 5.15 Shareholders’ Equity growth rate 56
Table 5.16 Total Assets plus Contingencies 57
Table 5.17 Dividends Payout Ratios 58
Table 5.18 Profit and Loss Accounts (highlight of forecast and actual) 62
Table 5.19 Balance Sheet highlights (forecast and actual) 62
Table 6.1 Growth rate between 2005 and 2007 64
Table 6.2 Access Bank’s 2008 performance highlights 65
Table 6.3 Zenith Bank's 2008 3Q Operation Statement 65
Figure 5.1 Cash & Short-term Investment to Current Liabilities 43
Figure 5.2 Returns on Assets 45
Figure 5.3 Returns on Equity 46
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Figure 5.4 Returns on Capital Employed 46
Figure 5.5 Cost: Income ratio 48
Figure 5.6 Equity: Total Assets 49
Figure 5.7 Provisions for Loan Losses to Total loans 51
Figure 5.8 Provisions for Loan Losses to Profit before Tax 52
Figure 5.9 Gross Earnings growth rate 53
Figure 5.10 Deposit growth rate 55
Figure 5.11 Shareholders’ Equity growth rate 56
Figure 5.12 Total Assets plus Contingencies 57
Figure 5.13 Growth in Earnings per Share 58
Figure 5.14 Share price movement pre Access Bank merger 60
Figure 5.15 Share price movement during merger 60
Figure 5.16 Share price movement post Access Bank merger 61
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ACKNOWLEDGEMENT
I will like to express my profound gratitude to my supervisors, Kevin Amess (PhD), for
My sincere gratitude also goes to the following individuals and others too many to
mention, who in no small way contributed to the success of this research and Masters
programme: Professor Bob Berry, Professor Andy Lockett, Professor Dave Wastell,
Egbabor, Felix Soh Chick, Kim Jungmo, Gino Miller, Hung Lin, Xu Ma, Kayode Ajani,
Durosinmi, Alex Tobi, Tajudeen Ahmed, Nnamdi Owoh, Dokun Faniran, Okezi Orioko,
Godwin O’Fidel Ogbepia, Baba Sege Okunnade, John Chijindu Onuoha, Zek
Enamegwono Bazunu, Josephine Bazunu, Ofurio Moses, Andy and Ajiri Evanwawerae,
Fovie Jude & family, Mr & Mrs Bode Betiku, Mr & Mrs Patrick Atamu, Virtue
Omolamai & family, Jacob Ogbekene & family, Billy & Priya Johal, Ted-Mukoro Oboh
Esq. & family, Martins Emozino Edoja Esq. & family, Jimmy Solomon, Gladys Jimmy,
Obruthe Jimmy, Edwin Jimmy, Abigael and Reuben Jimmy. Also Engr. T.K. Elelewor,
Sam Elelewor and family, Rev. Paul Omasere & family, Israel Omasere & family,
Sunday Onaimor & family, Adueniwomah Williams & family, Sunday Ojaigho & family,
Felix Uchenunu & family, and Simon Uchenunu & family. And most especially to Mrs
Doreen Onome Uchenunu, and Ambrose Oroboh Uchenunu (Ph.D), who were very
University of Nottingham.
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DEDICATION
To:
my parents – Freeborn A. Jimmy and Martha Ada Jimmy; and
my friend/wife (Jimmy Rita), and our children: Zino, Maro and Karo.
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Chapter 1: Introduction
1.1 Background
Following the 18 months ultimatum given by the Central Bank of Nigeria on July
2004 to all deposit taking banks in Nigeria to increase their paid-up share capital to a
minimum of N25 billion with a deadline of December 31, 2005, most banks resorted
to mergers and acquisition while a few to organic growth to achieve the feat. This
directive led to an unprecedented number of mergers among Nigerian banks within
the spate of eighteen months, between July 2004 and December 2005.
This study seeks to evaluate organic growth, and mergers and acquisition as strategic
growth options in the Nigerian banking sector, with a view to ascertaining which of
the strategies result in superior financial performance. To achieve the purpose of this
study, two banks: Access Bank Plc that was involved in a merger during the
consolidation of 2004 and 2005; and Zenith Bank Plc that achieved the N25 billion
requirement through organic growth, are used as case study.
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Chapter 2: An overview of the Nigerian banking system
2.0. Introduction
Banking in Nigeria went through phases and covers a wide span of time, from an era
of free banking or virtually absolute freedom in tune with the dictate of the economies
of classical liberalism, to the era of rigid or strict prudential regulations (Agbaje,
2008; Nwankwo, 1980). The sector is one of the most dynamic sectors of the Nigerian
economy, it responds quickly and significantly to policy adjustments of government
from time to time. The sector mobilises funds from the surplus-spending units into the
economy and by on-lending such funds to the deficit-spending units for investment,
banks in the process increase the quantum of national savings and investment (Mordi,
2004). Banks are the most regulated institution in Nigeria because of their role as
financial intermediaries. It will be worthwhile to discuss briefly the agencies
responsible for the regulation of the Nigerian banking sector. This will be followed by
a history of banking in Nigeria divided into four phases: the embryonic; expansion;
consolidation/reform; and post-consolidation phases.
Section 45(1)(a-b) of the CBN Act 2007 provides that the apex bank shall from time
to time determine and through circulars cause banks to maintain specified reserve
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requirements and liquidity ratios. Also Section 44 (e) and (f) empowers CBN and
other members of the Financial Services Regulation Co-ordinating Committee to
articulate strategies for the promotion of safe, sound and efficient practices for
financial intermediaries, and deliberate on such other issue as may be specified from
time to time.
The British Bank for West Africa was for many years the sole banker to the colonial
government and all the important expatriate companies of that time. Its monopoly
remained unchallenged until 1917 when the Colonial Bank which later became
Barclays Bank D.C.O. in 1925 (now Union Bank of Nigeria Plc), and in 1949 when
the British and French Bank (now United Bank for Africa Plc) were established in
Nigeria (Ebhodaghe, 1990; Ibru, 2006).
In its early period, the first commercial banks: The British Bank for West Africa;
Colonial Bank; and British and French Bank, were all wholly foreign owned until the
Federal Government of Nigeria purchased majority shareholdings of each in the mid
1970s (Ibru, 2006; UBN Plc, 2008). The story of indigenous banking in Nigeria began
with the establishment of the National Bank of Nigeria Limited in February 1933,
Agbonmagbe Bank Limited (now Wema Bank Plc) in 1945, and African
Development Bank Limited, which later became known as African Continental Bank
Plc in 1948. The establishment of these indigenous banks ushered in the era that saw
the constant monopoly erstwhile enjoyed by the foreign owned banks challenged
(CBN, 2008; Ebhodaghe, 1990).
The Nigerian banking sector witnessed phenomenal expansion from 1986 to the early
part of the 1990s following a major policy shift initiated by the monetary authorities
with the relaxation of controls and liberalisation of the Nigerian economy.
Government policy to liberalise the economy (banking sector inclusive) within the
framework of the Structural Adjustment Programme (SAP) in 1986 led to the increase
in the number of licensed banks from 40 in 1985 to 120 in 1991 (Agbaje, 2008; Bichi,
1996; Ebhodaghe, 1995; Mordi, 2004). The avalanche of banks all rendering the same
services engendered stiff competition as the banking sector became more market
driven. The available resources particularly, human resources was grossly inadequate
to support the growth in the sector, resulting in sharp practices and unorthodox
banking culture to the extent of threatening the existence of some banks, which could
not cope with the volatile and competitive situation. This eventually drew the
attention of the Central Bank of Nigeria (Bichi, 1996; Okoduwa, 1995; Umaru, 1993:
31).
A common feature of all the distressed banks was their ownership structure. The
maxim, ‘he who pays the piper dictates the tune’ cannot be more apt than where
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shareholding of a bank is concentrated in a single individual whether directly or
indirectly. Most of the banks were privately owned by individuals and in few
instances by state government. According to the CBN Director of Banking
Supervision, Imala (2004), ‘… interference in the affairs of a bank could lead to
distress, … loans granted through the influence of those in authority, were hardly
repaid’. Ownership structure was one of the factors responsible for banking distress in
Nigeria during the 1990s.
The above policy thrust was to be achieved through the adoption of the following
strategies: (i) embarking on a comprehensive reform process aimed at substantially
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improving the financial infrastructure; (ii) restructuring, strengthening and
rationalising the regulatory and supervisory framework in the financial sector; (iii)
addressing the issue of low capitalisation of financial institutions; (iv) developing a
structured financing for cheap credit to the real sector; and (v) fostering financial
deepening and accommodation for small and rural financial market (NPC, 2004: 75-
76; Soludo, 2008).
The need for a radical overhaul of Nigeria’s banking system was evident with the
introduction of the Prudential Guidelines in 1990 by the CBN. The sector was highly
fragmented, with just about 10 of the 89 banks controlling more than 70 percent of the
industry’s total assets and savings deposits (CIBN, 2008; Soludo, 2008). The then
banks could not compete with their regional counterparts due to their relatively small
size and thus had little, if any, tangible impact upon the economy. Following the
sudden demise of five banks between 1994 and 1995 and the acquisition of 12 banks
by the CBN/NDIC, it was clear that the sector needed urgent reforms to avoid
systemic collapse (Augusto and Co., 1996: 7).
Why mega-banks?
• Creation of mega banks was aimed at making Nigerian banks compete with
banking institutions from other parts of the world. The creation of mega-banks
was to help Nigeria’s banking sector become Africa’s financial hub, facilitating
intra-regional trade and investments, and join the world-class bank groups
(Adesida, 2008; Moin, 2004; Ogbonna, 2007; Soludo, 2006);
• To act as catalyst to the economic development of Nigeria and the sub-region
through the provision of superior services to the banking public. With a single-
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obligor-limit of 35% of equity, the maximum loan amount that can be granted to a
single customer was N700 million (that is, 35% of N2 billion capital base), this
was a far cry from what most customers actually needed. An increase of capital
base to N25 billion meant an increase of single-obligor-limit to N8.75 billion, thus
enabling banks to handle big-ticket transactions (Adesida, 2008; Ogbonna, 2007;
Soludo, 2006; Soludo, 2008);
• Building confidence in the Nigerian banking sector so as to interact favourably
with the rest of the world (Soludo, 2008; Steinberg, et al, 2008); and
• Providing good returns to investors through efficiencies and a better range and
quality financial services.
At the end of 31 December 2005, 25 groups emerged from 75 banks out of the 89
licensed banks, these 25 bank groups that were able to meet the N25 billion capital
base, either through organic growth by raising funds from the capital market by way
of ‘public offering’ or by mergers and acquisition had their operating licenses
renewed, while 14 unsuccessful banks had their operating licenses revoked (CBN,
2005: 45; CIBN, 2008). Alphabetically itemised in Table 2.1 below are the successful
banks that attained the N25 billion capitalisation by December 31, 2005:
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Table 2.1 List of Banks in Nigeria as at January 1, 2006.
Bank Constituent member
1 Access Bank Nigeria Plc Access Bank, Marina Int’l Bank & Capital Bank International
2 Afribank Nigeria Plc Afribank Plc and Afribank Int’l (Merchant Bankers)
3 Bank PHB Plc Platinum Bank Limited and Habib Nigeria Bank Limited
4 Diamond Bank Plc Diamond Bank , Lion Bank and African International Bank
5 EcoBank Nigeria Plc EcoBank Plc
6 Equitorial Trust Bank Plc Equitorial Trust Bank Ltd and Devcom Bank Ltd
7 Fidelity Bank Plc Fidelity Bank, FSB International Bank and Manny Bank
8 First Bank of Nigeria Plc First Bank Plc, MBC International Bank & FBN (Merchant Bankers)
9 First City Monument Bank Plc First City Monument Bank, Coop Development Bank,
Nigeria-American Bank and Midas Bank
10 First Inland Bank Plc First Atlantic Bank, Inland Bank (Nigeria) Plc, IMB International Bank
Plc and NUB International Bank Limited
11 GT Bank Plc GT Bank Plc
12 IBTC-Chartered Bank Plc IBTC, Chartered Bank Plc and Regent Bank Plc
13 Intercontinental Bank Plc Intercontinental Bank Plc, Global Bank Plc, Equity Bank of Nigeria
Limited and Gateway Bank of Nigeria Plc
14 **Nigeria International Bank Limited Nigeria International Bank limited
(Citi Group)
15 Oceanic Bank International Plc Oceanic Bank International Plc and International Trust Bank
16 Skye Bank Plc Prudent Bank Plc, Bond Bank Limited, Reliance Bank Limited ,
Cooperative Bank Plc and EIB International bank Plc
17 Spring Bank Plc Citizens International Bank , ACB International Bank, Guardian Express
Bank, Omega Bank, Trans International Bank and
Fountain Trust Bank
18 **Stanbic Bank of Nigeria Ltd Stanbic Bank of Nigeria Limited
19 **Standard Chartered Bank Ltd Standard Chartered Bank Limited
20 Sterling Bank Plc Trust Bank of Africa Limited, NBM Bank Limited, Magnum Trust Bank,
NAL Bank Plc and Indo-Nigeria Bank
21 United Bank for Africa Plc United Bank for Africa Plc, Standard Trust Bank Plc and Continental
Trust Bank
22 Union Bank of Nigeria Plc Union Bank of Nigeria Plc, Union Merchant Bank Limited, Broad Bank
of Nigeria Limited and Universal Trust Bank Nigeria Plc
23 Unity Bank Plc Intercity Bank Plc, First Interstate Bank Plc, Tropical Commercial Bank
Plc, Centre-point Bank Plc, Bank of the North, New African Bank,
Societe Bancaire, Pacific Bank and New Nigerian Bank
24 Wema Bank Plc Wema Bank Plc and National Bank of Nigeria Limited
25 Zenith Bank Plc Zenith Bank Plc
** Foreign owned banks
Source: CBN Annual Reports 2005: 45
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2.5. Post Consolidation
Apart from the three foreign-owned banks that survived the consolidation/reform
exercise, there is a considerable modification to the ownership structure of the banks;
ownership is now widespread and better diversified. The emergent well diversified
ownership structure promotes better corporate governance as banks can now be
subjected to discipline from the capital market (CIBN 2008; Ekundayo, 2008). With
over a US$1 billion in Tier 1 capital, some Nigerian banks can now compete
favourably with their counterparts from other parts of the world (Soludo, 2008: 15).
Basic indicators in the Table 2.2 below show that Nigeria banking is coming out
stronger compared to what it used to be.
Since December 31, 2005, a number of Nigerian banks have in their pursuit of growth
resorted to raising additional capital from the capital market via public offering
(Agbaje, 2008), others have been acquiring those banks that were unable to
recapitalise (CIBN, 2008). With the merger between IBTC Chartered Bank Plc and
Stanbic Bank of Nigeria Limited in 2007, the number of banks have been further
reduced from 25 to 24 (Adesida, 2008; Ekundayo, 2008). These developments are
indication that Nigerian banks are poised for aggressive growth, either organically or
by merger and acquisitions. The rest of this study is to ‘evaluate organic growth and
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merger and acquisition as strategic growth options in the Nigerian banking sector’,
with a view to ascertaining which of the strategies result in superior financial
performance.
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Chapter 3: Literature Review
3.0 Introduction
The consolidation/reform process in the Nigerian banking sector during 2004 and
2005 resulted in the reduction of the number of operating licensed banks from 89 to
25 as at December 31, 2005 and further reduced to 24, courtesy of the merger
between Stanbic Nigeria Bank Limited and IBTC Chartered Bank Plc in 2008.
Nigerian banks adopted different strategies to achieve the stipulated minimum capital
base of N25 billion during the banking sector consolidation of 2004 and 2005,
including Mergers and Acquisitions (henceforth, M&A) and internal growth. The
choice of a consolidation strategy is mainly determined by the organisational form of
the involved institutions as well as the driving motive behind its corporate strategy.
M&A represents the most widespread corporate/business strategy used by many firms
to penetrate into new markets and new geographic regions, gain
technical/management expertise and knowledge, or allocate capital. Although a very
popular corporate/business strategy, most literatures on the subject reveals that almost
50% of M&A end up being unsuccessful (Gadiesh, Ormiston and Rovit, 2003; Kaplan,
2002; Schneider, 2003; Weber, Shenkar & Raveh 1996).
Given past research results and continued interest in M&A activities, this approach to
organisational growth seem worthy of evaluation. The main objective of this study is
to evaluate ‘M&A’ and ‘organic growth’ as strategic growth options. The literature
review begin with an explanation of organic growth, the meaning of M&A,
classification of previous M&A research concepts, different types of M&A, and
different stages involved in M&A process. This is followed with an overview of
M&A activities in the Nigerian banking sector, the legal hurdles for M&A in the
Nigerian banking sector, and the reasons for M&A. Relying on previous studies, this
section conclude with the effect of M&A on organisational performance.
Unlike other businesses, banks’ article of trade is brand and trust (Emefiele, 2008;
Emmanuel, 2008), therefore to achieve organic growth, banks need to have a formal
strategy that is anchored on: customer retention; customer service; employee
satisfaction; dynamic branch management; leveraging a multi-brand portfolio to
create attractive value propositions for each market segment; and customer
profitability (Atkearney, 2005; Business Wire, 2008; Daruvala and Yulinsky, 2001;
Emmanuel, 2008; Highbeam, 2008; Milligan, 2006).
Section 590 of the Nigerian Companies and Allied Matters Act 1990 defines merger
as ‘any amalgamation of the undertakings or any part of the undertakings or part of
the undertakings of one or more companies and one or more bodies corporate’. In the
same vain, Gaughan (2007: 12) defines merger as ‘a combination of two or more
corporations in which only one corporation survives’. He further stated that the
acquiring company assumes the assets and liabilities of the merged firm. Okonkwo
(2004) writes that a merger may be achieved through an acquisition, in this case, the
shareholders of the acquired company are paid off and the acquirer becomes the
owner of all or a substantial part of the assets of the acquired company. Also,
Sudarsanam (2003: 2-3) stated that terms such as ‘merger’, ‘acquisition’, ‘buyout’ and
‘takeover’ are used interchangeably and are all part of the M&A parlance, but was
quick to point out the differences when he described merger as the process whereby
corporations come together to combine and share their resources to achieve common
objectives with the shareholders of the merged firms still retaining part of their
ownership and this may sometimes lead into a new entity being formed while
acquisition resembles more of an arm’s-length deal, with one firm purchasing the
assets or shares of the other and the shareholders of the acquired firm ceasing to be
owners of the new firm. The views of Sudarsanam conforms with those of Okonkwo
(2004: 2), who maintained that the major difference between a merger and acquisition
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is essentially what the fate of shareholders becomes: (a) ‘shareholders of acquired
firms are paid off in the case of acquisition; (b) there is no disinvestment of the
shareholders of the amalgamating companies in the case of merger’. From the above
distinction, it is apparent that a merger occurs when two or more companies transfer
their businesses and assets to a new company (or to one of themselves) and in
consideration, their members receive shares in the transferee company.
Vertical merger is a merger in which one firms supplies its products to the other. A
vertical merger results in the consolidation of firms that have actual or potential
buyer-seller relationships. (Coyle, 2000; Fitzroy, et al., 1998; Gaughan, 2007). On
the other hand, a conglomerate merger occurs when unrelated enterprises combine or
firms which compete in different product markets, and which are situated at different
production stages of the same or similar products combine, to enter into different
activity fields in the shortest possible time span and reduce financial risks by portfolio
diversification (Brealey, et al., 2006: 871; Cartwright and Cooper 1992; Gaughan,
2007; Okonkwo, 2004: 4). Concentric M&A involve firms which have different
business operation patterns, though divergent, but may be highly related in production
and distribution technologies. The acquired company represents an extension of the
product lines, market participation, or technologies of the acquiring firm under
concentric M&A (Cartwright and Cooper 1992; Fisher, 200?; Sharma, 200?).
A horizontal merger is the merger of two or more companies operating in the same
field and in the same stages of process of attaining the same commodity or service
(Gaughan, 2007: 13; Brealey, et al., 2006: 871; Okonkwo, 2004: 3). In other words, a
horizontal merger is the combination of firms that are direct rivals selling
substitutable products within overlapping geographical markets. The purpose of this
type of merger is to eliminate a competitor company, to increase market share, buy up
surplus capacity or obtain a more profitable firm in order to gain a competitive
advantage. Besides such benefits, this type of mergers has the drawbacks of restricting
new entrants into the market, thus harming outsiders due to diminishing competition
(Gaughan, 2007). Typical examples of horizontal M&As are: IBTC-Chartered Bank
merger with Stanbic Bank Nigeria Limited, Access Bank’s merger with Capital Bank
and Marina International Bank, and Platinum Bank Limited merger with Habib
Nigeria Bank Limited in Nigeria (Adesida, 2008; CBN, 2005: 45; Ekundayo, 2008);
and JP Morgan Chase’s acquisition of Bank One (Brealey, et al., 2006: 871).
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3.5. Stages of Merger and Acquisition:
Saudarsanam (2003: 3) provide us with a five-stage model that will result in
successful pursuit of synergistic gains from M&A:
• Corporate strategy development;
• Organising for acquisitions;
• Deal structuring and negotiation;
• Post-acquisition integration; and
• Post-acquisition audit and organisational learning.
The use of third-party in the negotiations stage can be very valuable in giving the
client time to consider options, or keeping the client from giving into emotions and
making costly and unnecessary concessions in the heat of matters at the bargaining
table (Angwin, 2001; Murphree & Hollander, 2003; Perry & Herd, 2004; Sinickas,
2004). The use of wrong valuation methods during the deal structuring stage and over
optimism have resulted in the failure of many M&As in achieving the anticipated
results as in the case of AT&T and NCR; Vodafone, AOL and Vivendi; and Mizuho
(Rafferty, 2000; Saudarsanam, 2003: 7).
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3.5.4. Post-acquisition integration
This stage involves the combination of the distinct organisations into one, resulting in
changes in both the target and the acquirer, to deliver the strategic and value
expectations that informed the merger (Saudarsanam, 2003). Schuler (2003),
emphasised the importance of: an early planning; careful attention to leadership
selection; an insider’s view of knowledge networks and information flow; a clear,
coherent and timely communication strategies; and the dedication of adequate
resources to the transition management team are necessary ingredient that can lead to
a successful post-acquisition integration. The value of most firms depends on its
human assets-managers and skilled workers, therefore, utmost care must be taken to
avoid situation whereby the valuable human assets leave to join a rival firm (Brealey,
et al, 2006; Weber & Camerer, 2003).
Lubatkin, Schweiger and Weber (1999) find that cultural differences and the removal
of managerial autonomy were associated with significantly greater management
turnover in the first year after acquisition. Consistent with Lubatkin et al, (1999),
Krug and Hegarty (2001) also find that most managers who departed within five years
of acquisition were those who felt that the acquirer firm did not understand their
firm’s culture.
Table 3.1 below summarises the five major M&A waves that occurred in the United
States of America.
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Table 3.1 Summary of major Mergers and Acquisitions waves in the US
Wave Underlying Factors Characteristics
Technological developments Horizontal mergers
1st wave (1897 – 1904)
‘Merging for Monopoly’ Rapid Economic Expansion Heavy manufacturing industry
Failure of conglomerates
Expanding economy, rising stock Emphasized longer-term
5th wave (1993-?) prices strategy rather than immediate
“Strategic Restructuring” financial gains
Technological developments
More often financed with equity
Globalization than debt
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3.7. Mergers and acquisitions’ activities in the Nigerian banking sector
An 18 month ultimatum given by the apex bank, CBN, to all banks to recapitalise and
shore-up their paid-up capital to a minimum of N25 billion with December 31 2005 as
deadline jolted most of the banks in Nigeria. As a result of the directive, the Nigerian
banking sector went through a radical transformation within the spate of 18 months:
aggressive consolidation through M&A, and organic growth by retaining previous
years profit as general reserves or public offerings from the capital market. The rate of
bank mergers within this period (2004 and 2005) has been unparalleled in Nigeria
banking history. Prior to the M&A wave of 2004 and 2005, the acquisition of African
Banking Corporation in 1894 by ‘The British Bank for West Africa’ (now First Bank
of Nigeria Plc), and Union Bank of Nigeria’s acquisition of Citi Trust Merchant Bank
Limited for N167.75 million in 1995 (Danjuma, 1993; IBTC, 2007) were the major
bank M&A in Nigeria. Growth in the banking sector before the 18 month ultimatum
has been through licensing of new banks or organic growth aided by government
regulation (Agbaje, 2008; Bichi, 1996; Ebhodaghe, 1995; Mordi, 2004).
Between July 6, 2004 and December 31, 2005, the number of banks in Nigeria
reduced from 89 to 25 courtesy of M&As and forced withdrawal of banking license
from institutions that were unable to achieve the new paid-up capital of N25 billion.
Out of the 25 banks that achieved the N25 billion requirements, Table 3.2 below
showed that 14 of them were the product of M&A involving 69 banks, while only 6
grew organically (CBN, 2005: 45). The wave of M&A that began in 2004 has not
abated as the merger between IBTC Chartered Bank Plc and Stanbic Bank of Nigeria
Limited after the December 31, 2005 deadline has further reduced the number of
banks from 25 to 24 (Adesida, 2008; Ekundayo, 2008), while those banks that were
unable to recapitalise which were earmarked for liquidation by the banking regulatory
authorities have virtually been acquired by successfully recapitalised banks (Adesida,
2008b; Okwe, 2006; Olajide, 2008; Kilner, 2008).
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Table 3.2 Bank mergers and acquisition in Nigeria between 2004 and 2005
Bank Constituent member
1 Access Bank Nigeria Plc Access Bank, Marina Int’l Bank & Capital Bank International
2 Afribank Nigeria Plc Afribank Plc and Afribank Int’l (Merchant Bankers)
3 Bank PHB Plc Platinum Bank Limited and Habib Nigeria Bank Limited
4 Diamond Bank Plc Diamond Bank , Lion Bank and African International Bank
5 Equatorial Trust Bank Plc Equatorial Trust Bank Ltd and Devcom Bank Ltd
6 Fidelity Bank Plc Fidelity Bank, FSB International Bank and Manny Bank
7 First Bank of Nigeria Plc First Bank Plc, MBC International Bank & FBN (Merchant
Bankers)
8 First City Monument Bank Plc First City Monument Bank, Coop Development Bank,
Nigeria-American Bank and Midas Bank
9 First Inland Bank Plc First Atlantic Bank, Inland Bank (Nigeria) Plc, IMB International
Bank Plc and NUB International Bank Limited
10 IBTC-Chartered Bank Plc IBTC, Chartered Bank Plc and Regent Bank Plc
11 Intercontinental Bank Plc Intercontinental Bank Plc, Global Bank Plc, Equity Bank of
Nigeria Limited and Gateway Bank of Nigeria Plc
12 Oceanic Bank International Plc Oceanic Bank International Plc and International Trust Bank
13 Skye Bank Plc Prudent Bank Plc, Bond Bank Limited, Reliance Bank Limited ,
Cooperative Bank Plc and EIB International bank Plc
14 Spring Bank Plc Citizens International Bank , ACB International Bank, Guardian
Express Bank, Omega Bank, Trans International Bank and
Fountain Trust Bank
15 Sterling Bank Plc Trust Bank of Africa Limited, NBM Bank Limited, Magnum Trust
Bank, NAL Bank Plc and Indo-Nigeria Bank
16 United Bank for Africa Plc United Bank for Africa Plc, Standard Trust Bank Plc and
Continental Trust Bank
17 Union Bank of Nigeria Plc Union Bank of Nigeria Plc, Union Merchant Bank Limited, Broad
Bank of Nigeria Limited and Universal Trust Bank Nigeria Plc
18 Unity Bank Plc Intercity Bank Plc, First Interstate Bank Plc, Tropical Commercial
Bank Plc, Centre-point Bank Plc, Bank of the North, New African
Bank, Societe Bancaire, Pacific Bank and New Nigerian Bank
19 Wema Bank Plc Wema Bank Plc and National Bank of Nigeria Limited
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As earlier stated in the preceding chapter, the consolidation in the Nigerian banking
sector was induced by government regulation to: avoid a systemic distress of the
banking sector; create mega banks that can compete with banking institutions from
other parts of the world; and act as catalyst to the economic development of Nigeria
and the sub-region through the provision of superior services to the banking public
(Adesida, 2008; Euromoney, 2006; Moin, 2004; Ogbonna, 2007; Soludo, 2006b &
2008).
The objective of M&A regulation by the Investment and Securities Act, Banks and
Other Financial Institutions Act and the Companies and Allied Matters Act is to
prevent restraint of competition and monopolistic tendencies. They provide that a
majority agreement is required at a court-ordered meetings before approval of the
Securities and Exchange Commission is sought for: the transfer to the transferee of
property and liabilities; allotting or appropriation by transferee company shares,
debentures, policies or other like interest; continuation by or against the transferee
company of any legal proceedings pending; and dissolution, without winding-up, of
any transferee company. The Acts also have provision for dissenting shareholders
(Okonkwo, 2004; Ogwu, 2004). Section 7(1) of the Banks and Other Financial
Institutions Act (BOFIA) stated emphatically that banks must obtain the approval of
the Governor of CBN before any merger and/or acquisition is announced and/or
consummated.
From the above, one can summarise that the main reasons for M&As is to improve the
financial performance of the firms. This could be achieved through cost reduction,
extending the range of products and services, increase in market share, obtaining tax
advantages, improvement of solvency and knowledge transfer.
Available statistics show that the consolidation of the Nigerian banking sector through
M&A and organic growth resulted in a remarkable improvement on the sector as a
whole (Ekundayo, 2008; Soludo, 2006; Soludo, 2008: 15). The Balance Sheet size
and Profit and Loss profile of most banks in Nigerian have more than doubled since
December 2005 to date.
3.12. Summary
From the preceding scholarly discourse on M&A, the simple major reason why firms
opt for growth and the expansion of their operations is because growth affects
business and the general public opinion as it stands for stability, safety and
profitability. Strategy is the engine that drives the expansion and consolidation of
business. Businesses can grow organically by internal investments or externally by
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acquiring other businesses. Which of these growth options result in superior financial
performance in the Nigerian banking sector? The right choice and mix of both
strategic options depends on the planned growth rate and on available internal and
external resources to achieve that goal. The subsequent part of the study is set to
evaluate M&A and Organic growth as strategic growth options in the Nigerian
banking sector.
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Chapter 4: Research Methodology
4.0 Introduction
This chapter discusses the methodology used in this study. The aim of this discussion
is to highlight the key activities that were undertaken, and to indicate their relevance
to this study. The purpose of the research; the research approach; methods of data
collection; case study selection criteria; and profile of the companies used as case
studies are discussed in this chapter.
The study aim to answer the question: ‘which of the strategies (organic growth and
M&A) result in superior financial performance in the Nigerian banking sector?’
To eliminate the risk of delayed or non-response from the banks, which is the usual
phenomenon with interviews and surveys considering time constraint, this study made
use of case study with empirical data from audited and CBN approved annual reports
of the banks. Although the use of the banks’ own data eliminate to a large extent
biases from the researcher, it has the inherent problem of providing information that
favours the reporting bank, therefore, where necessary, additional information from
third party sources such as banking regulatory authorities and stock market
information were used.
In this study, Access Bank Plc and Zenith Bank Plc were selected based on their
different recapitalisation strategies and performance over the years. The two banks are
relatively of the same age since they were incorporated almost the same time,
February 1989 and May 1990 respectively. Also, both banks commenced operation as
commercial banks before the advent of universal (retail and wholesale) banking in
Nigeria.
Although financial ratios have their own limitations (Casu, et al, 2006: 221), the
massive amount of numbers in a bank’s financial statements can be bewildering and
intimidating, however, with financial ratio analysis, these can be presented in an
organised form (Rees, 1995: 85). Multiple performance indicators such as liquidity;
profitability (return on assets, return on equity and return on capital employed); size
(the levels and growth rates of total assets and revenue); productivity (the ratio of total
revenue to non-interest expense); and investment valuation ratios (Hirthle, 1991;
Mishkin, 2006) were applied in this study.
4.6 Limitations
Besides the usual limitations existing as a natural and permanent part or quality of
research study and errors in data gathering and analysis, this study acknowledged that
a case study of two out of twenty-fives banks in the Nigerian banking sector could not
form the basis of generalisation. Also, the technical suspension of Access Bank shares
from trading before during its public offering, and the commencement of merger talk
could not afford this study the opportunity of determining the actual effect of the
merger announcement on the bank’s stock price.
4.7 Summary
This chapter has presented the methodology of the study. The research process was
illustrated and choice of the methods were presented and explained. The research
purpose, research approach, method of data collection, and case study selection was
discussed in this chapter. The next chapter is a presentation of the empirical study.
-36-
Chapter 5: Data analysis and presentation
5.1. Introduction
This study was embarked upon to evaluate organic growth and merger and acquisition
(M&A) as strategic growth options in the Nigerian banking, to ascertain which of the
growth strategy result in superior financial performance. Data collected from five
years financial statements of the banks which covered three years before the merger
of Access Bank with Capital Bank and Marina International Bank Limited and two
years post-merger were analysed using financial ratios and other valuation techniques
and the results are presented in tables and graphs with necessary explanations..
This chapter begins with an overview of the case studies, thereafter, the findings are
presented in the form of ratio analysing the performance of Access Bank Plc and
Zenith Bank Plc in terms of liquidity, profitability, capital adequacy, assets quality,
and growth rates. The stock market reaction to Access Bank’s merger will be
presented using price movement before and after the merger.
From a modest beginning in 1989, Access Bank Plc grew its Balance Sheet size to
almost N70 billion, and shareholders’ equity N14.07 billion with a fully paid share
capital of N4.056 billion comprising 8,111,214,625 ordinary shares of 50 kobo each
as at March 31, 2005. Following the review of minimum capital base to N25 billion
by the Central Bank of Nigeria, the bank acquired Capital Bank International Limited
and Marina International Bank Limited on November 1, 2005 through share exchange
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consideration and continued trading as Access Bank Plc. The Bank has two overseas
and two local subsidiaries namely Access Bank (Gambia) Limited, Access Bank
Sierra Leone, Access Investments and Securities Limited and United Securities
Limited (Access Bank annual report, 2007; Access, Capital & Marina Scheme of
Merger, 2005: 40).
Table 5.1 and 5.2 below shows the summary of Access Bank’s financial statements
Access Bank from 2003 to 2007:
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Table 5.1 Summary of Access Bank’s 5 Years Profit & Loss Account
2007 2006 2005 2004 2003
(N’m) (N’m) (N’m) (N’m) (N’m)
From a humble beginning in 1990, Zenith Bank as at 2007 financial year end has
grown both in profitability and balance sheet size with over 200 branches and
business offices in Nigeria. The bank also owned 100% stake of Zenith Bank, UK,
Zenith Bank Ghana, besides Zenith Pension Custodian Limited, Zenith General
Insurance Limited and Zenith Securities Limited (Zenith Bank Annual Report, 2007).
Table 5.3 and 5.4 below shows the summary of Zenith Bank’s financial statements
from 2003 to 2007:
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Table 5.3 Summary of Zenith Bank’s 5 Years Profit & Loss Account
2007 2006 2005 2004 2003
(N’m) (N’m) (N’m) (N’m) (N’m)
Gross Earnings 89,194 58,222 34,913 23,931 17,844
Interest and Discount Income 62,017 37,295 22,885 15,708 11,996
Interest Expense -18,733 -10,463 -5,620 -3,332 -2,289
Net Interest Income 43,284 26,832 17,265 12,376 9,707
Provision for Risk Assets -1,783 -1,307 -1,975 -397 -65
41,501 25,525 15,290 11,979 9,642
Other Income 27,177 20,927 12,028 8,223 5,848
68,677 46,452 27,318 20,202 15,490
Operating Expense -45,388 -31,298 -18,154 -13,797 -10,049
Profit Before Taxation 23,289 15,154 9,165 6,405 5,440
Taxation -5,780 -3,665 -2,009 -1,214 -1,016
Profit After Taxation 17,509 11,489 7,156 5,191 4,424
Earnings Per Share (Kobo) 189k 191k 13k 168k 375k
Dividend Per Share (Kobo) 100k 110k 70k 70k 70k
Avg. no of ordinary shares issued 9,266 9,173 5,274 3,097 1,180
Source: Zenith Bank Annual Reports.
5.3.1. Liquidity.
To evaluate the short-term liquidity position of both banks, cash and short-term
investment to current liabilities; and loans to deposits ratios were used. Liquidity ratio
expresses a company’s ability to meet its short-term obligations
Table 5.5 measuring the proportion of customers deposit given-out as loans by the
banks indicated that Access Bank has a higher rate of 70%, 51% and 53% compared
to Zenith Bank’s 45%, 41% and 39% during the period 2003, 2004 and 2007
respectively. A higher loan to deposit ratio is an indication that most of customers’
deposit are given out as loans, implying that should there be a surge in the number of
depositors calling off their deposit, the bank will be faced with a temporary illiquidity
until it is able to recall its risk assets.
Using cash and short-term investment as a cover to current liabilities, Figure 5.1
showed both banks as having adequate liquidity levels. The data also showed that
both banks witnessed a significant drop in liquidity in 2005; this might not be
unconnected to the consolidation in the banking sector during the period as depositors
embarked on flight to safety by investing in other form of assets instead of deposits
with banks. During the liquidity squeeze of 2005, Access Bank’s ratio was below the
required rate of 40%. During 2006 financial year (first year post-merger), Access
Bank recorded a significant improvement in liquidity ratio from 37% in 2005 to 58%
and 66% in 2006 and 2007 financial years respectively. However, besides 2005
financial year that Access Bank recorded 37% liquidity ratio, both banks surpassed
the regulatory liquidity benchmark of 40% as set by the Central Bank of Nigeria
(CBN, 2005:21).
-42-
Table 5.5 Loans: Deposit Ratio
Access Bank Zenith Bank
Loans Deposits Loans Deposits
Year (N 'm) (N 'm) % (N 'm) (N 'm) %
2003 6,508 9,309 70 27,765 61,574 45
2004 11,507 22,724 51 54,239 131,095 41
2005 16,334 32,608 50 123,336 233,413 53
2006 54,407 110,879 49 201,424 392,864 51
2007 108,775 205,235 53 220,750 568,012 39
Source: Access Bank and Zenith Bank Annual Reports.
100
80
Ratios (% )
60 Access
40 Zenith
20
0
2003 2004 2005 MY 2006 PM 2007
Years
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5.3.2 Profitability Ratios
In this section, the study assessed the profitability and efficiency of both banks to
ascertain which of the growth strategies produces better results. Key performance
indicators such as return on assets (ROA), return on equity (ROE), return on capital
employed (ROCE) and the cost-income ratio (CI) were utilised. These indicators are
considered as measures of a bank’s profitability and efficiency. In order to facilitate
the presentation, the study considered and analysed performance during the three
years (2003, 2004 and 2005) before merger of Access Bank and two years thereafter
(2006 and 2007), the last years for which information was available. These
profitability and efficiency indicators were used to evaluate the long-term profitability
of the case studies to ascertain how well both banks utilised resources at their disposal
in generating profit and shareholders’ value creation. The log-term profitability of
both banks is vital for their survival and the benefit received by shareholders.
Table 5.6 and Figure 5.2 indicated a decline in both banks returns in assets (ROA)
between 2003 and 2006. Access Bank’s ROA declined from 2.5% in 2003 to 0.4% in
2006 (the first post-merger year), but increased significantly to 1.9% in 2007. On the
other hand, Zenith Bank’s ROA declined from 3.9% in 2003 to 1.9% in 2006. Access
Bank’s recorded improvement in profitability in 2007 is underpinned by strong
volume growth that lifted non-interest earnings and improved efficiencies. This
served as a buffer narrowing net interest margins, which have been impacted by
increasing competition and maintaining a highly liquid balance sheet.
Figures 5.3 and 5.4 indicate that returns on equity and returns on capital employed
also exhibited the same pattern as ROA. Net interest income by both banks witnessed
a steady decline between 2003 and 2007 as shown in Table 5.7. Zenith’s net-interest
to total asset margin declined from 8.6% in 2003 to 4.4% in 2006 while Access’
decline was from 6% to 3.5% between 2003 and 2005 but stabilises at 3.6% during
2006 and 2007 financial years.
On the average, Zenith Bank maintained a cost to income ratio of 64.8% for the
period under review, while Access Bank had an average of 66% (Table 5.8 and Figure
5.5). Access Bank’s cost to income ratio peaked at 77% in 2006 most of which is
related to merger expenses but reduced drastically to 57% in 2007. This significant
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improvement was due mainly to strong growth in net earnings, although operating
expenses actually increased to N13.1 billion in 2007due to increase in the number of
personnel from 327 in 2003 to 729 in 2007: an indication that in the event of static
earnings or slow earnings growth in the medium to short term, Access Bank’s cost to
income ratio could deteriorate sharply. On the other hand, Zenith Bank’s operating
expenses growth was driven significantly by increase in the number of personnel to
complement the bank’s increased branch network: personnel increased from 1,592 in
2003 to 5,435 in 2007 while branch-network increased from about 120 in 2005 to
over 200 in 2007 (Cashcraft, 2008, Zenith Bank, 2007).
Retuns on Assets
5.0
4.0
ROA (%)
3.0 Access
2.0 Zenith
1.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
Returns on Equity
40.0
30.0
R O E (% )
Access
20.0
Zenith
10.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
4.5
4.0
3.5
ROCE (%)
3.0
2.5 Access
2.0 Zenith
1.5
1.0
0.5
0.0
2003 2004 2005 MY 2006 PM 2007
Years
-46-
Table 5.7 Net Interest Income: Total Asset Margin
Access Bank Zenith Bank
Net Interest Total Net Interest Total
Income Asset Income Asset
Year (N’m) (N’m) % (N’m) (N’m) %
2003 1,347 22,582 6.0 9,707 112,535 8.6
2004 1,301 31,342 4.1 12,376 193,321 6.4
2005 2,353 66,918 3.5 17,265 332,885 5.2
2006 6,261 174,554 3.6 26,832 610,768 4.4
2007 11,942 328,615 3.6 43,284 883,941 4.9
Source: Access Bank and Zenith Bank Annual Reports.
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Figure 5.5 Cost: Income Ratio analysis
90.0
80.0
70.0
Ratios (%)
60.0
50.0 Access
40.0 Zenith
30.0
20.0
10.0
0.0
2003 2004 2005 2006 2007
MY PM
Years
25.0
20.0
Ratios (%)
15.0 Access
10.0 Zenith
5.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
-49-
Table 5.10 Equity to Loans Ratio
Access Bank Zenith Bank
Equity Total Loans Equity Total Loans
Year (N’m) (N’m) % (N’m) (N’m) %
2003 2,365 6,508 36.3 12,652 27,765 45.6
2004 3,003 11,507 26.1 15,674 54,239 28.9
2005 14,072 16,334 86.2 37,790 123,336 30.6
2006 28,894 54,407 53.1 100,401 201,424 49.8
2007 28,384 108,775 26.1 112,833 220,750 51.1
Source: Access Bank and Zenith Bank Annual Reports.
Table 5.12 and Figure 5.8 showed that non-performing loans provisions took a greater
percentage of Access Bank’s profit before tax; showing that better loans quality could
lead to improved profitability.
-50-
Table 5.11 Provisions for Loan Losses to Total loans
Access Bank Zenith Bank
Provision for Total Provision for Total
Loan Losses Loans Loan Losses Loans
Year (N’m) (N’m) % (N’m) (N’m) %
2003 328 6,508 5.0 65 27,765 0.2
2004 386 11,507 3.4 397 54,239 0.7
2005 984 16,334 6.0 1,975 123,336 1.6
2006 1,386 54,407 2.5 1,307 201,424 0.6
2007 1,775 108,775 1.6 1,783 220,750 0.8
Source: Access Bank and Zenith Bank Annual Reports.
7.0
6.0
5.0
Ratios (%)
4.0 Access
3.0 Zenith
2.0
1.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
-51-
Table 5.12 Provisions for Loan Losses to Profit Before Tax
Access Bank Zenith Bank
Provision for Profit Before Provision for Profit Before
Loan Losses Tax Loan Losses Tax
Year (N’m) (N’m) % (N’m) (N’m) %
2003 328 811 40.4 65 5,440 1.2
2004 386 952 40.5 397 6,405 6.2
2005 984 751 131.1 1,975 9,165 21.5
2006 1,386 1,119 123.8 1,307 15,154 8.6
2007 1,775 8,043 22.1 1,783 23,289 7.7
Source: Access Bank and Zenith Bank Annual Reports.
140.0
120.0
100.0
Ratios (%)
80.0 Access
60.0 Access
40.0
20.0
0.0
2003 2004 2005 2006 2007
MY PM
Years
120.0
100.0
Growth (%)
80.0
Access
60.0
Zenith
40.0
20.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
-54-
Table 5.14 Deposits Growth Rate
Access Bank Zenith Bank
Current Preceding Current Preceding
Year Total Year Total Year Total Year Total
Deposit Deposit Deposit Deposit
Year (N’m) (N’m) % (N’m) (N’m) %
2003 9,309 6,475 44 61,574 50,688 21
2004 22,724 9,309 144 131,095 61,574 113
2005 32,608 22,724 43 233,413 131,095 78
2006 110,879 32,608 240 392,864 233,413 68
2007 205,235 110,879 85 568,012 392,864 45
Source: Access Bank and Zenith Bank Annual Reports.
300.0
250.0
Growth (%)
200.0
Access
150.0
Zenith
100.0
50.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
-55-
5.3.5.4 Shareholders’ Equity
Table 5.15 showed both banks achieving significant growth in shareholders’ equity in
2005. However, much of the growth could not be traced to retained earnings but fresh
capitalisation in the form of public offerings. Zenith Bank raised over N48 billion
during its Initial Public Offering of 2004 wherein only about N15.8 billion was
absorbed and the balance returned, and also a public offering in 2006 where N53.6
billion was realised. In the same vain, Access Bank also raised fresh capital through
public offering in 2005 and 2006. Access Bank also realised N12.1 billion from the
merger with Capital and Marina Bank which was paid for by way of share exchange
(Access Bank, 2006: 26). The drop in Access Bank’s shareholders’ equity by 2% was
occasioned by a write-off of the unexpired goodwill of almost N6.6 billion against
share premium reserve (Access Bank, 2007: 57).
400.0
300.0
Growth (%)
200.0 Access
Zenith
100.0
0.0
2003 2004 2005 MY 2006 PM 2007
-100.0
Years
200.0
Growth (%)
150.0
Access
100.0
Zenith
50.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years
Figure 5.13 and Table 5.17 shows the performance of both banks on earnings per
share and dividends payout ratios respectively. Although Access Bank witnessed a
remarkable growth in EPS, Zenith Bank nevertheless maintained its superiority in
dividend pay-out.
4.00
3.50
Earnings (Naira)
3.00
2.50
Access
2.00
Zenith
1.50
1.00
0.50
0.00
2003 2004 2005 MY 2006 PM 2007
Years
The share price movement is analysed under three periods: pre-merger (21/10/2004 -
31/05/2005), actual-merger period (01/06/2005 - 31/10/2005), and post-merger period
(01/11/2005 - 22/07/2008) using share price information from the Nigerian stock
exchange.
From Figure 5.14 below, there was no movement in the price of Access Bank within
the period preceding its merger with Capital Bank and Marina Bank, because its share
was on technical suspension due to its initial public offering. The share price
stagnated at N3.42 during period, while Zenith was trading for about N14.
Figure 5.15 which covered the actual merger period of Access Bank showed that the
price of Access Bank dropped from N3.42 to N2.99 on August 22, 2008 and remained
unchanged till December 9, 2005, a month after the consummation of the merger
process in November 1, 2006. However, post-merger price movement of Access Bank
showed a remarkable improvement between December 2005 and July 2008 as shown
in Figure 5.16 below. Access Bank share peaked at N25.50 per share on January 2008,
while Zenith Bank peaked at N66.14 per share in June 2007 before dividend and
bonus were paid to shareholders in August 2007. From a pre-merger share price of
N2.99 in August 2005 to N15 as at July 22, 2008, Access Bank share experienced a
growth of 402% while Zenith Bank’s share price experienced a 193% growth in share
price within the same period besides dividend of N0.70 per share in 2005, N1.10 per
share in 2006 and N1.00 per share plus one bonus share for every four ordinary share
held as at the close of its register in August 2007.
-59-
P ric e (N a ira ) P r ic e (N a ira )
2008.
2008.
-
-
5.00
10.00
15.00
20.00
25.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
0 6 /0 1 /2 0 0 5 1 0 /2 1 /2 0 0 4
0 6 /0 9 /2 0 0 5 1 1 /0 2 /2 0 0 4
6 /1 7 /2 0 0 5 1 1 /2 3 /2 0 0 4
6 /2 7 /2 0 0 5 1 2 /0 2 /2 0 0 4
1 2 /1 3 /2 0 0 4
0 7 /0 3 /2 0 0 5
1 2 /2 4 /2 0 0 4
0 7 /0 8 /2 0 0 5
0 1 /0 5 /2 0 0 5
7 /1 8 /2 0 0 5
1 /1 4 /2 0 0 5
7 /2 6 /2 0 0 5
1 /3 1 /2 0 0 5
0 8 /0 3 /2 0 0 5
0 2 /0 9 /2 0 0 5
0 8 /1 2 /2 0 0 5
Date
2 /1 8 /2 0 0 5
Date
8 /2 2 /2 0 0 5
0 3 /0 1 /2 0 0 5
-60-
8 /3 0 /2 0 0 5 0 3 /1 0 /2 0 0 5
0 9 /0 7 /2 0 0 5 3 /2 1 /2 0 0 5
9 /1 5 /2 0 0 5 0 4 /0 1 /2 0 0 5
9 /2 3 /2 0 0 5 4 /1 3 /2 0 0 5
1 0 /0 4 /2 0 0 5 4 /2 5 /2 0 0 5
1 0 /1 2 /2 0 0 5 0 5 /0 5 /2 0 0 5
Figure 5.14 Share price movement pre Access Bank merger
1 0 /2 0 /2 0 0 5 5 /1 6 /2 0 0 5
Zenith Bank
Zenith Bank
Access Bank
Access Bank
Source: Securities & Exchange Commission, Nigerian Capital Market Data Bank
Source: Securities & Exchange Commission, Nigerian Capital Market Data Bank
Figure 5.16 Share price movements post Access Bank merger
80.00
70.00
60.00
Price (Naira)
50.00
Access Bank
40.00
Zenith Bank
30.00
20.00
10.00
-
11/01/2005
12/20/2005
2/13/2006
04/07/2006
06/01/2006
7/20/2006
09/07/2006
10/30/2006
12/18/2006
2/13/2007
04/04/2007
06/01/2007
7/19/2007
09/06/2007
10/30/2007
12/18/2007
02/12/2008
04/04/2008
5/26/2008
7/15/2008
Date
Source: Securities & Exchange Commission, Nigerian Capital Market Data Bank
2008.
-61-
Table 5.18 Profit and Loss Accounts highlight (forecast and actual)
2006 2007
Forecast Actual Variance Forecast Actual Variance
(N'm) (N'm) (%) (N'm) (N'm) (%)
Gross Earnings 17,283 13,360 -0.23 21,273 27,881 0.31
Interest Income 10,199 8,733 -0.14 12,751 16,894 0.32
Interest Expense 5,192 2,472 -0.52 5,421 4,952 -0.09
Other Income 7,084 4,628 -0.35 8,522 10,988 0.29
Operating Expense 6,148 8,384 0.36 7,164 13,111 0.83
Profit Before Tax 2,953 1,119 -0.62 6,117 8,043 0.31
Dividends 1,109 - -1.00 2,080 - -1.00
Source: Access, Capital and Marina Scheme of Mergers, 2005: 117
Access Bank Plc, Annual Report, 2007: 7
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Chapter 6: Discussion and Conclusion
This study was aimed at evaluating organic growth and mergers and acquisitions as
strategic growth options in the Nigerian banking sector, with Access Bank Plc and
Zenith Bank Plc as case studies. It was aimed at answering the research question,
‘which of the strategies (organic growth or mergers and acquisitions) result in
superior financial performance?’
In order to answer the research question, the study started with an overview of the
Nigerian Banking sector and a review of relevant literatures on organic growth, and
mergers and acquisition. Different perspectives to the study of M&A were considered.
The methodology of this study was qualitative, based on the economic and finance
perspectives of the study of mergers and acquisitions, using financial ratio analysis.
The study considered liquidity, profitability, capital adequacy, asset quality, and
growth rates as measures of financial performance.
Liquidity: As shown in the data analysis in the previous chapter, though both banks
surpassed the regulatory benchmark of 40%, Zenith Bank outperformed Access Bank.
Growth: Access Bank witnessed a higher growth rate than Zenith Bank during the
period under review as shown in Table 6.1, an indication that M&A resulted in
superior financial performance.
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Table 6.1 Growth rate between 2005 and 2007
Bank Pre- Post- Growth
merger merger rate
2005 2007 (%)
(N’m) (N’m)
Gross Access 7,495 27,881 272
Earnings Zenith 34,913 89,194 155
Profit Before Access 751 8,043 971
Tax Zenith 9,195 23,289 154
Deposit Access 32,608 205,235 529
Zenith 233,413 568,012 143
Shareholders’ Access 14,072 28,384 102
Fund Zenith 37,790 112,833 199
Total asset + Access 81,681 408,745 400
contingencies Zenith 373,890 1,178,386 215
When considering Access Bank’s post-merger performance for the period under
review, I was initially cynical if the result of just two years will be sufficient to draw a
conclusion, especially with regard to 2007 profitability and growth of Access Bank.
Fortunately, the 2008 financial year end result of Access Bank was released before the
conclusion of this study and the performance as highlighted in Table 6.2 below,
reinforced the opinion that Access Bank did enjoyed positive synergies from its
merger of 2005. Shareholders funds growth in 2008 was mainly due to N136.5 billion
raised through public offering of over 9.16 billion ordinary shares of 50 kobo each at
N14.90 in July 2007 (Access Bank, 2008: 52), an expression of public confidence in
the bank. Also for the first time post-merger, a dividend of 40 kobo per share was
declared.
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Table 6.2 Access Bank’s 2008 Performance Highlights
2008 2007 Growth
(N’million) (N’million) (%)
Gross Earnings 57,627 27,881 107
Profit Before Tax 19,042 8,043 137
Deposit 351,789 205,235 71
Loans & Advances 244,596 107,761 127
Total assets 1,043,465 328,615 218
Total liabilities 871,463 300,230 190
Shareholders' fund 172,002 28,385 506
On the other hand, Zenith Bank has been able to sustain its quality financial
performance, achieving all regulatory ratio requirements. Its core management team
and values are retained and sustained. Also, during the study, I was thinking that
Zenith Bank must have reached the zenith of its performance and diminishing returns
must have started setting-in; however according to a nine month unaudited interim
report as shown in Table 6.3 obtained from the Nigerian Stock Exchange, indicate
that the Bank is set to continue in its profitability streak as the most profitable bank in
Nigeria by the time its 12 months financial report for 2008 is released.
9 months to 31 9 months to 31
March 2008 March 2007 Growth
(N’million) (N’million) (%)
Gross Earnings 120,306 62,660 92
Profit Before Tax 40,638 17,650 130
Taxation 7,314 2,650 176
Profit After Tax 33,320 15,000 122
Source: http://www.cashcraft.com/interimresult.asp
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The study showed that Access Bank that pursued M&A witnessed a faster growth rate,
whereas Zenith Bank that pursued organic growth was able to sustain its quality
performance trends and achieved a slower growth rate during the period under review,
in line with past literatures on mergers and acquisitions, and organic growth
respectively.
The choice of strategy adopted by either bank was dependent upon their individual
circumstances and organisational strategy. Organic growth requires time and
development of additional managerial resources (Dierickx and Cool 1989); whereas
mergers and acquisitions are driven by seeming synergies which the emergent firm
harnesses by managing the interrelationships existing between the merging businesses
(Goold and Luchs, 1993).
This study recommends that researchers undertaking similar studies on the Nigerian
banking sector should focus on evaluating the performance of at least 75% of the total
banks, using quantitative methods to find out the correlation between strategies and
performance to enable generalisation of the outcome.
-66-
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