CHAPTER ONE INTRODUCTI ON 3.0: 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 today’s 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 1
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CHAPTER ONE
INTRODUCTION
3.0: 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 today’s 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)
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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
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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 Bank’s 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) –
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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)
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UBA commenced operations in 1961 and has witnessed several
restructuring over the years. Today’s UBA which emerged at the time of consolidation in Nigeria
and is the product of the merger of Nigeria’s 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
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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 bank’s 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.
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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 Soludo’s 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 Bank-
Bankers 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”.
http://www.ubagroup.com/web/group/genericpage
http://www.firstbanknigeria.com
http://www.unionbankng.com
http://www.zenithbank
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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
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.
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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.
28
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CHAPTER THREE
RESEARCH METHODOLOGY
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 normative-
survey 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 e m p l o y b o t h quantitative and qualitative methods of
analysis
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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.
3.1.1.1 Secondary DataOccasionally, 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 thanthis 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 CollectionAmong the various methods available, the ones used specifically for this study are discussed below;
3.1.2.1 DocumentaryThe corporate website of both Nigeria Deposit Insurance Corporation (NDIC) and The Central Securities Clearing System (CSCS) as well as annual publications and
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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 immenselyin literature review and background of study that constitute the foundation of this study.
3.1.2.2 Personal InterviewPersonal 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 scalesurvey 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 15 th 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
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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.
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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 ACQUIRING BANK TARGET BANK ANNOUNCEMENT DATE
1 Zenith Bank Plc Eagles Bank 30 October, 2007
2 First Bank of Nigeria MCB Bank 02 September, 2005
3 Union Bank of Nigeria United Trust Bank 31 November, 2005
4 United Bank for Africa Liberty Bank 06 June, 2008
3.4 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
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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.
3.4.3.1 Instruments or Tools Used in the StudyThe 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.
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3.4.4 Methods of Data Analysis and Definition of ratios:
3.4.4.1 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
3.4.4.2 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.
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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.
37
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