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An Evaluation of Organic growth, and Mergers and Acquisitions as Strategic Growth options in the Nigerian Banking Sector

By Anthony Efe Jimmy BSc., MBA.

A dissertation presented in part consideration for the degree of MA in Corpoate Strategy & Governance. August 2008

ABSTRACT In response to a Central Bank of Nigeria’s policy to increase the minimum paid-up share capital requirement of Nigerian banks from N2 billion to N25 billion in July 2004, with December 31, 2005 as deadline, more than half of the 89 banks in Nigeria as at July 2004 were engaged in one form of merger and acquisition, some sourced for additional capital through public offering of their share, and others a combination of merger and acquisition and public offering. The Central Bank of Nigeria’s policy to increase the paid-up share capital was to amongst other things to strengthen the financial capacity and effectiveness of the Nigerian banking sector.

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.

(ii)

Table of Contents

Page Title page Abstract List of tables and Figures Acknowledgement Dedication Chapter 1 - INTRODUCTION 1.1 Background 1.2 1.3 1.4 1.5 1.6 Overview of the Nigerian Banking Sector Literature Review Research Methodology Data Analysis and Presentation Discussion and Conclusion i ii v vii viii

1 1 1 1 2 2

Chapter 2 – OVERVIEW OF THE NIGERIAN BANKING SECTOR 2.0 Introduction 2.1 2.2 2.3 2.4 2.4 Nigerian Banking sector regulatory Agencies Embryonic phase of Nigerian Banking The expansion phase of Nigerian Banking Consolidation/reform phase Post-consolidation

3 3 5 6 8 12

Chapter 3 – LITERATURE REVIEW 3.0 3.1 3.1.1 3.1.2 3.2 3.3 3.4 3.5 3.6 Introduction Organic (Internal) Growth Benefits of Organic (Internal) Growth Limitations of Organic (Internal) Growth Merger and Acquisition defined Mergers and Acquisitions research paradigms Types of Mergers and Acquisitions Stages of Mergers and Acquisitions Merger and Acquisitions wave (iii) 14 14 15 15 16 17 18 20 23

3.7 3.8 3.9 3.10 3.11 3.12

Merger and Acquisitions activities in the Nigerian Banking sector Legal hurdles for M&A in Nigerian Banking sector Reasons for Mergers and Acquisitions Limitations of Merger and Acquisitions Effects of Merger and Acquisitions on bank performance Summary

25 27 27 29 30 30

Chapter 4 – RESEARCH METHODOLOGY 4.0 Introduction 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Research purpose Research approach Type of research Case studies selection criteria Data collection and analysis procedure Limitations Summary

32 32 32 32 33 33 36 36

Chapter 5 – DATA ANALYSIS AND PRESENTATION 5.1 Introduction 5.2 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6 5.3.7 5.3.8 An overview of the case studies Findings Liquidity Profitability Capital Adequacy Asset Quality Growth rate Investment Valuation ratios Share price movement Actual versus projected performance of Access Bank

37 37 42 42 44 48 50 52 58 59 61 63 67

Chapter 6 – DISCUSSION AND CONCLUSION REFERENCES

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1 Table 3.17 Table 5. 2006 Basic indicators of Banking sector consolidation results Summary of major M&A waves in the US Bank M&A in Nigeria between 2004 and 2005 Reasons for merger and acquisitions Summary of Access Bank’s 5 Years Profit & Loss Account Highlights of Access Bank’s 5 Years Balance Sheet Summary of Zenith Bank’s 5 Years Profit & Loss Account Highlights of Zenith Bank’s 5 Years Balance Sheet Loan: Deposit Ratios Return on Assets Net Interest Income: Total Asset Margin Cost: Income Ratio Equity to Asset Ratio Equity to Loans Ratio Provision for Loan Losses to Total loans Provision for Loan Losses to Profit before Tax Profit before Tax growth rate Deposits growth rate Shareholders’ Equity growth rate Total Assets plus Contingencies Dividends Payout Ratios Profit and Loss Accounts (highlight of forecast and actual) Balance Sheet highlights (forecast and actual) Growth rate between 2005 and 2007 Access Bank’s 2008 performance highlights Zenith Bank's 2008 3Q Operation Statement Cash & Short-term Investment to Current Liabilities Returns on Assets Returns on Equity (v) 11 12 24 26 28 39 39 41 41 43 45 47 47 49 50 51 52 54 55 56 57 58 62 62 64 65 65 43 45 46 .7 Table 5.2 Table 5.8 Table 5.1 Table 5.List of Tables and Figures Pages Table 2.2 Table 6.2 Table 3.19 Table 6.18 Table 5.13 Table 5.5 Table 5.1 Table 2.10 Table 5.11 Table 5.3 Table 5.2 Table 3.9 Table 5.3 Figure 5.6 Table 5.2 Figure 5.14 Table 5.12 Table 5.3 List of banks in Nigeria as at January 1.1 Figure 5.15 Table 5.4 Table 5.3 Table 5.1 Table 6.16 Table 5.

12 Figure 5.10 Figure 5.15 Figure 5.8 Figure 5.9 Figure 5.14 Figure 5.11 Figure 5.6 Figure 5.4 Figure 5.Figure 5.7 Figure 5.13 Figure 5.5 Figure 5.16 Returns on Capital Employed Cost: Income ratio Equity: Total Assets Provisions for Loan Losses to Total loans Provisions for Loan Losses to Profit before Tax Gross Earnings growth rate Deposit growth rate Shareholders’ Equity growth rate Total Assets plus Contingencies Growth in Earnings per Share Share price movement pre Access Bank merger Share price movement during merger Share price movement post Access Bank merger 46 48 49 51 52 53 55 56 57 58 60 60 61 (vi) .

T. Dokun Faniran. Josephine Bazunu. Kim Jungmo. & family. Xu Ma. Professor John Hasseldine. Ofurio Moses. Mr & Mrs Bode Betiku. Udom Emmanuel. Edwin Jimmy. Godwin Emefiele. My sincere gratitude also goes to the following individuals and others too many to mention. and attention. John Chijindu Onuoha. who were very inspirational to my choice of and exceptionally comfortable stay during my studies in the University of Nottingham. Rev. valuable suggestions. and Ambrose Oroboh Uchenunu (Ph. Israel Omasere & family. Kayode Ajani. Felix Soh Chick. Jacob Ogbekene & family.ACKNOWLEDGEMENT I will like to express my profound gratitude to my supervisors. Fovie Jude & family. patience. Mr Emma Egbabor. Jimmy Solomon. and Qi Xu (PhD).K. Elelewor. Hung Lin. Biodun Durosinmi. Obruthe Jimmy. Billy & Priya Johal.D). Rodion Skovoroda (PhD). Sunday Ojaigho & family. Mr & Mrs Patrick Atamu. Gideon Jarikre. (vii) . Okezi Orioko. and Simon Uchenunu & family. Gladys Jimmy. Adueniwomah Williams & family. Also Engr. Sam Elelewor and family. Professor Dave Wastell. Martins Emozino Edoja Esq. Alex Tobi. Zek Enamegwono Bazunu. Godwin O’Fidel Ogbepia. Professor Andy Lockett. Kevin Amess (PhD). & family. Tajudeen Ahmed. Nnamdi Owoh. Abigael and Reuben Jimmy. for his insightful professional guidance. Baba Sege Okunnade. Sunday Onaimor & family. Stanley Amuchie. Andy and Ajiri Evanwawerae. Paul Omasere & family. Felix Uchenunu & family. Virtue Omolamai & family. Gino Miller. who in no small way contributed to the success of this research and Masters programme: Professor Bob Berry. And most especially to Mrs Doreen Onome Uchenunu. Ted-Mukoro Oboh Esq.

and our children: Zino. Maro and Karo.DEDICATION To: my parents – Freeborn A. Jimmy and Martha Ada Jimmy. and my friend/wife (Jimmy Rita). (viii) .

4 Research Methodology: Chapter four is a discussion of research methodology used in the study.2 Overview of the Nigerian banking sector Chapter two of this study gives a general overview of the Nigerian banking sector. meaning and types of mergers and acquisitions. and a synopsis of banking history in Nigeria from its embryonic phase in the late 19th century to events leading to the spate of mergers and acquisitions witnessed in Nigeria between July 2004 and December 2005. 1.Chapter 1: Introduction 1. 2005. This study seeks to evaluate organic growth. are used as case study. between July 2004 and December 2005. 1. To achieve the purpose of this study. and Zenith Bank Plc that achieved the N25 billion requirement through organic growth. and mergers and acquisitions in the Nigerian banking sector. most banks resorted to mergers and acquisition while a few to organic growth to achieve the feat. 1. It focused on the organic growth. with a view to ascertaining which of the strategies result in superior financial performance.3 Literature –Review Chapter three is a review of scholarly academic literatures and analytical views on merger and acquisition. and mergers and acquisition as strategic growth options in the Nigerian banking sector.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. It dwelt briefly on banking regulation and regulatory authorities in Nigeria. This directive led to an unprecedented number of mergers among Nigerian banks within the spate of eighteen months. two banks: Access Bank Plc that was involved in a merger during the consolidation of 2004 and 2005. different paradigms to the study of mergers and acquisitions. The study used qualitative research approach from the economic/finance and strategy perspectives of M&A. relying on simple statistical tools and methods to analytically -1- .

because it is the most suitable means of research that can lead to a better understanding and evaluation of the financial performance of the case studies. growth rate. and market share – pre and post M&A period of the selected case studies. -2- . asset quality. market valuation.5 Data Analysis and Presentation This part of the study gives an analysis and presentation of findings on the case studies. Access Bank and Zenith Bank’s financial statements for the period 2003 to 2007 were analysed using a procedural approach of liquidity. Qualitative approach was chosen for this study. 1. capital adequacy. profitability. and stock price movement.6 Discussion and Conclusion: I do believe the outcome of this research would be instrumental in inspiring other empirical studies in the future on the Nigerian banking sector. 1.review financial performance.

Nigerian banking sector Regulatory Agencies The Nigerian banking sector is highly regulated due to the strict surveillance on banking activities by regulatory authorities. Banks submits data online through an electronic Financial Analysis and Surveillance System (e-FASS) to Central Bank of Nigeria and Nigeria Deposit Insurance Corporation on a regular basis – daily. mid-month. The set of rules and regulations guiding the Nigerian banking sector are made by regulatory/supervisory authorities set up by government. consolidation/reform. It will be worthwhile to discuss briefly the agencies responsible for the regulation of the Nigerian banking sector.0. quarterly. as cited by Alashi. This will be followed by a history of banking in Nigeria divided into four phases: the embryonic. monthly. to the era of rigid or strict prudential regulations (Agbaje. semi-annually and annually (CBN circular 20071) to enable the regulatory agencies carry-out their oversight functions. 2004). expansion. it responds quickly and significantly to policy adjustments of government from time to time. 1980). The regulatory/supervisory authorities that are concerned with the regulation of the Nigerian banking sector. include: (1) the Federal Ministry of Finance. (2) Central Bank of Nigeria. and post-consolidation phases. weekly. The sector is one of the most dynamic sectors of the Nigerian economy.0. Introduction Banking in Nigeria went through phases and covers a wide span of time. (3) Nigeria Deposit Insurance -3- . from an era of free banking or virtually absolute freedom in tune with the dictate of the economies of classical liberalism. 2002). Nwankwo. 2008. 2. 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. banking regulation is defined as a body of specific rules or agreed behaviour either imposed by government or other external agency or self imposed by explicit or implicit agreement within the industry that limits the activities and business operations of banks.Chapter 2: An overview of the Nigerian banking system 2.1. According to Llwellyn (1986. Banks are the most regulated institution in Nigeria because of their role as financial intermediaries.

the Bank promotes monetary stability. co-ordinate the supervision of financial institutions especially conglomerates. as well as banker of last resort to the banks (Onyido. 2004: 13).1.Corporation. and f. eliminate any information gap encountered by any regulatory agency in its relationship with any group of financial institutions. Central Bank of Nigeria Act 2007. Section 43 and 44 of CBN Act 2007 provides for the establishment of a Financial Services Regulation Co-ordinating Committee. 2. 2.2 Central Bank of Nigeria The Central Bank of Nigeria is the apex regulatory authority in the financial system. 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 -4- .1 Federal Ministry of Finance The Federal Ministry of Finance (FMF) advises the Federal Government on its Fiscal operations and cooperates with CBN on monetary matters. d. articulate the strategies for the promotion of safe. the Federal Ministry of Finance and CBN were jointly responsible for the licensing of banks. and acts as banker and financial adviser to the Federal Government of Nigeria. sound and efficient practices for financial intermediaries. deliberate on such other issue as may be specified from time to time. Among its primary functions. b. c. e. gave the CBN more flexibility in regulating and overseeing the banking sector and licensing finance companies. deliberate on problems experienced by any member in its relationship with any financial institution. 2004). and (4) Securities and Exchange Commission (Onyido. Section 43 (2f) of CBN Act 2007 that set up the Financial Services Regulation Co-ordinating Committee makes the Federal Ministry of Finance part and parcel of the regulatory committee. but now the sole responsibility of CBN. promotes a sound financial system. cause reduction of arbitrage opportunities usually created by differing regulation and supervision standards among supervisory authorities in the economy. Prior to 1991.1. whose responsibilities is to: a.

4. 2004). the Department carries out on-site as well as off-site supervision of banks (Onyido. it complements the regulatory and supervisory role of the CBN and also acts as the liquidator for banks which the CBN decides to take over and close down (Umoh.1. Although an autonomous entity from the CBN.3 Nigerian Deposit Insurance Corporation The Nigerian Deposit Insurance Corporation (NDIC) was set up in 1988 to insure deposits of all licensed banks in order to promote confidence in the Nigerian banking industry. 2. sound and efficient practices for financial intermediaries.2 The embryonic phase of Nigeria banking The concept of banking in the contemporary sense was unknown to the natives and customs of the geo-political entities and units making up the present day Nigeria until -5- . promote monetary stability and a sound financial system. Section 43 (2c) of CBN Act 2007 that set up the Financial Services Regulation Co-ordinating Committee name the Securities and Exchange Commission as a member of the committee regulating the activities of financial institutions in Nigeria. 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. Its major objective is to promote an orderly and active capital market by ensuring adequate protection of securities. 2.requirements and liquidity ratios. Central Bank of Nigeria through its Banking Supervision Department carryout functions and responsibilities of ensuring the soundness of the banking system. and deliberate on such other issue as may be specified from time to time. It is funded by a tax deductible premium paid on the insured deposits of deposit taking banks. In discharging this responsibility. approving and regulating mergers and acquisitions and maintaining surveillance over the market to enhance efficiency. 2. registering all securities dealers in order to maintain proper standards of conduct and professionalism. 2004). Securities and Exchange Commission The Securities and Exchange Commission (SEC) is the apex regulatory organ of the capital market in Nigeria.1.

in 1925 (now Union Bank of Nigeria Plc).the second half of the 19th century when Elder Dempster started the movement of money in specie from one part of the country to another to boost its shipping business. were all wholly foreign owned until the Federal Government of Nigeria purchased majority shareholdings of each in the mid 1970s (Ibru. Colonial Bank.O. Government pursued this policy vigorously by giving financial assistance to banks to -6- .3 The expansion phase of Nigerian banking sector The comparatively solid and not so selfish motive for the establishment of banks is to aid commerce. 2006. Ibru. 2. In 1977 for example. 2008. and was subsequently absorbed in 1894 by ‘The British Bank for West Africa’ (now First Bank of Nigeria Plc) (Danjuma. Peoples’ Bank was established by the government.C. 2008). The establishment of these indigenous banks ushered in the era that saw the constant monopoly erstwhile enjoyed by the foreign owned banks challenged (CBN. 1990. The story of indigenous banking in Nigeria began with the establishment of the National Bank of Nigeria Limited in February 1933. 1993). In 1989. African Banking Corporation with its headquarters in South Africa established its presence in Nigeria and took over specie movement from Elder Dempster Company. 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. and African Development Bank Limited. In 1892. and in 1949 when the British and French Bank (now United Bank for Africa Plc) were established in Nigeria (Ebhodaghe. 1990). In its early period. Ebhodaghe. 1990). and a year later. Agbonmagbe Bank Limited (now Wema Bank Plc) in 1945. 2006). which later became known as African Continental Bank Plc in 1948. and British and French Bank. Its monopoly remained unchallenged until 1917 when the Colonial Bank which later became Barclays Bank D. The cardinal policy of government has been the studied encouragement of indigenous banking institutions. UBN Plc. the investing public were asked to establish Community Banks (Ebhodaghe. the Federal Government literally forced the then existing banks to open branches in the rural areas known as the Rural Banking Scheme. the first commercial banks: The British Bank for West Africa. general economic development and profit maximisation.

The available resources particularly. The introduction of the Prudential Guideline by the Central Bank of Nigeria (henceforth CBN) in 1990 exposed the true health of most banks then in operation.00 each. A common feature of all the distressed banks was their ownership structure. between 1994 and 1995. resulting in sharp practices and unorthodox banking culture to the extent of threatening the existence of some banks. unrestricted powers to develop and execute the most cost-effective measures to resolve the problems of the banks and execute an eventual sale to the public (Augusto and Co. This development led to the demise of five banks (Alpha Merchant Bank Plc. 1996. and United Commercial Bank Limited) out of the 120 banks between 1994 and 1995 (Bichi. only incomes from performing loans were to be considered in banks’ Profit and Loss Accounts. The maxim. With the Prudential Guideline in place. human resources was grossly inadequate to support the growth in the sector. 1995. CBN obtained a High Court order to acquire 12 banks with manifestation of distress for N1. 2004). 1996). 1993: 31). This eventually drew the attention of the Central Bank of Nigeria (Bichi. which could not cope with the volatile and competitive situation. 1996: 7)..enable them provide credit facilities to indigenous businessmen who have profitable projects in which to invest the funds thus provided them (Nwankwo. 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. Okoduwa. Republic Bank Limited. Mordi. Ebhodaghe. 1995. ‘he who pays the piper dictates the tune’ cannot be more apt than where -7- . 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. 1980). Kapital Merchant Bank Limited. The avalanche of banks all rendering the same services engendered stiff competition as the banking sector became more market driven. Financial Merchant Bank Limited. the purpose of this was to afford CBN and Nigerian Deposit Insurance Corporation (henceforth NDIC). In another development. 1996. Umaru. Bichi. the major banking regulatory agencies in Nigeria. 2008.

overdependence of banking institutions on public sector and foreign exchange trading as sources of funding. • drastic reduction and ultimate elimination of financing of government deficits by the financial systems in order to free-up resources for on-lending to the private sector. the policy thrusts included amongst other things: • deepening the financial system in terms of asset volume and instrument diversity.shareholding of a bank is concentrated in a single individual whether directly or indirectly. 2. somewhat erroneous returns made by banks to the monetary authorities. Most of the banks were privately owned by individuals and in few instances by state government. that the financial sector needed ‘to play a key role in pricing and trading risks and implementing monetary and fiscal policies’ as part of the process of ‘a shift in emphasis to a private sector led economy’ (NPC. were hardly repaid’. Ownership structure was one of the factors responsible for banking distress in Nigeria during the 1990s. The policy thrust was to build and foster a competitive and healthy financial system to support development and to avoid systemic distress in the Nigerian banking sector (NPC. Consolidation/Reform phase The banking sector reforms were guided by the provision in the National Economic Empowerment and Development Strategy (henceforth NEEDS) document (a process of development anchored on clear vision. Soludo. According to the CBN Director of Banking Supervision. ‘… interference in the affairs of a bank could lead to distress. Imala (2004). 2004. 2006). The reform was to address: shallow dept of the Nigerian capital market. • • a review of the capitalisation of financial institutions. Furthermore. and noticeable lack of harmony between fiscal and monetary policies (NPC. sound values and enduring principles). 2004). and development of a structure of financial sector incentives that would support real sector financing. 2004: 75). … loans granted through the influence of those in authority.4. 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 -8- .

The creation of mega-banks was to help Nigeria’s banking sector become Africa’s financial hub. facilitating intra-regional trade and investments. (iii) addressing the issue of low capitalisation of financial institutions. Following the sudden demise of five banks between 1994 and 1995 and the acquisition of 12 banks by the CBN/NDIC. 2004: 7576. Soludo. tangible impact upon the economy. (iv) developing a structured financing for cheap credit to the real sector. This increase representing about 1. With a single-9- . Ogbonna. Soludo.150% was to amongst other things encourage the consolidation of the banking sector to produce mega-banks from the then existing 89 banks as most of them were just fringe players and financially unsound (Soludo. it was clear that the sector needed urgent reforms to avoid systemic collapse (Augusto and Co. 2006). 2008). Soludo. 2008. strengthening and rationalising the regulatory and supervisory framework in the financial sector. • To act as catalyst to the economic development of Nigeria and the sub-region through the provision of superior services to the banking public. Soludo. 2007. 2004. The sector was highly fragmented. 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. with just about 10 of the 89 banks controlling more than 70 percent of the industry’s total assets and savings deposits (CIBN. 2005 as deadline. Professor Charles Soludo released a revolutionary consolidation/reform timetable for the banking sector in line with the policy thrust of the NEEDS document (Ibru. 2008). (ii) restructuring. Moin. 2008). and (v) fostering financial deepening and accommodation for small and rural financial market (NPC. Why mega-banks? • Creation of mega banks was aimed at making Nigerian banks compete with banking institutions from other parts of the world. 2006. if any. The then banks could not compete with their regional counterparts due to their relatively small size and thus had little. with December 31. 1996: 7). On 6 July 2004. 2004. 2008. NPC.improving the financial infrastructure. 2008).. and join the world-class bank groups (Adesida. the CBN Governor. requiring banks to raise their minimum capital base from N2 billion to N25 billion.

2006. Steinberg. • Building confidence in the Nigerian banking sector so as to interact favourably with the rest of the world (Soludo. 2008. while 14 unsuccessful banks had their operating licenses revoked (CBN. the maximum loan amount that can be granted to a single customer was N700 million (that is. 2005: 45. 2005: -10- . and • Providing good returns to investors through efficiencies and a better range and quality financial services. 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. An increase of capital base to N25 billion meant an increase of single-obligor-limit to N8. Ogbonna. 2008). Soludo. 2008). 2007. these 25 bank groups that were able to meet the N25 billion capital base.75 billion. 2008. At the end of 31 December 2005.1 below are the successful banks that attained the N25 billion capitalisation by December 31. 35% of N2 billion capital base).obligor-limit of 35% of equity. Soludo. CIBN. 25 groups emerged from 75 banks out of the 89 licensed banks. 2008). thus enabling banks to handle big-ticket transactions (Adesida. this was a far cry from what most customers actually needed. et al. Alphabetically itemised in Table 2.

Omega Bank. Tropical Commercial Bank Plc. MBC International Bank & FBN (Merchant Bankers) First City Monument Bank. Societe Bancaire. Global Bank Plc. Bond Bank Limited. Reliance Bank Limited . First Interstate Bank Plc. 2006. Lion Bank and African International Bank EcoBank Plc Equitorial Trust Bank Ltd and Devcom Bank Ltd Fidelity Bank. NBM Bank Limited. Centre-point Bank Plc. Union Merchant Bank Limited. Cooperative Bank Plc and EIB International bank Plc 17 Spring Bank Plc Citizens International Bank . New African Bank. NAL Bank Plc and Indo-Nigeria Bank 21 United Bank for Africa Plc United Bank for Africa Plc.1 Bank 1 2 3 4 5 6 7 8 9 List of Banks in Nigeria as at January 1. Bank of the North. Constituent member Access Bank. IMB International Bank Plc and NUB International Bank Limited 11 12 13 GT Bank Plc IBTC-Chartered Bank Plc Intercontinental Bank Plc GT Bank Plc IBTC. Marina Int’l Bank & Capital Bank International Afribank Plc and Afribank Int’l (Merchant Bankers) Platinum Bank Limited and Habib Nigeria Bank Limited Diamond Bank . Magnum Trust Bank. Inland Bank (Nigeria) Plc. FSB International Bank and Manny Bank First Bank Plc. ACB International Bank. Pacific Bank and New Nigerian Bank 24 25 Wema Bank Plc Zenith Bank Plc Wema Bank Plc and National Bank of Nigeria Limited Zenith Bank Plc ** Foreign owned banks Source: CBN Annual Reports 2005: 45 -11- . Broad Bank of Nigeria Limited and Universal Trust Bank Nigeria Plc 23 Unity Bank Plc Intercity Bank Plc. Nigeria-American Bank and Midas Bank Access Bank Nigeria Plc Afribank Nigeria Plc Bank PHB Plc Diamond Bank Plc EcoBank Nigeria Plc Equitorial Trust Bank Plc Fidelity Bank Plc First Bank of Nigeria Plc First City Monument Bank Plc 10 First Inland Bank Plc First Atlantic Bank. Coop Development Bank. Equity Bank of Nigeria Limited and Gateway Bank of Nigeria Plc 14 **Nigeria International Bank Limited (Citi Group) Nigeria International Bank limited 15 16 Oceanic Bank International Plc Skye Bank Plc Oceanic Bank International Plc and International Trust Bank Prudent Bank Plc. Trans International Bank and Fountain Trust Bank 18 19 20 **Stanbic Bank of Nigeria Ltd **Standard Chartered Bank Ltd Sterling Bank Plc Stanbic Bank of Nigeria Limited Standard Chartered Bank Limited Trust Bank of Africa Limited. Guardian Express Bank. Chartered Bank Plc and Regent Bank Plc Intercontinental Bank Plc.Table 2. Standard Trust Bank Plc and Continental Trust Bank 22 Union Bank of Nigeria Plc Union Bank of Nigeria Plc.

some Nigerian banks can now compete favourably with their counterparts from other parts of the world (Soludo. Ekundayo. 2008: 15).555 957 21. These developments are indication that Nigerian banks are poised for aggressive growth.2.2 19.382 3.5 (71. Post Consolidation Apart from the three foreign-owned banks that survived the consolidation/reform exercise. Basic indicators in the Table 2.3) consolidation consolidation 2004 Number of banks Number of bank branches Total assets base of banks (N’Billion) Capital and Reserves (N’Billion) Industry Capital Adequacy Ratio (%) Ratio of non-performing credit to total (%) Source: Central Bank of Nigeria.1 104. ownership is now widespread and better diversified.2 Basic Indicators of Banking Sector Consolidation Results PrePostGrowth (%) 25 4. there is a considerable modification to the ownership structure of the banks.5. 2008). the number of banks have been further reduced from 25 to 24 (Adesida. 2008).209 327 15. Abuja 89 3.3 192.5 2006 Since December 31.7 42.500 6. either organically or by merger and acquisitions. others have been acquiring those banks that were unable to recapitalise (CIBN.6 (51. With the merger between IBTC Chartered Bank Plc and Stanbic Bank of Nigeria Limited in 2007. 2008).2 below show that Nigeria banking is coming out stronger compared to what it used to be. Ekundayo. With over a US$1 billion in Tier 1 capital. The rest of this study is to ‘evaluate organic growth and -12- . 2005. 2008).6 9. The emergent well diversified ownership structure promotes better corporate governance as banks can now be subjected to discipline from the capital market (CIBN 2008. 2008. Table 2.9) 33. a number of Nigerian banks have in their pursuit of growth resorted to raising additional capital from the capital market via public offering (Agbaje.

with a view to ascertaining which of the strategies result in superior financial performance. -13- .merger and acquisition as strategic growth options in the Nigerian banking sector’.

Given past research results and continued interest in M&A activities. the meaning of M&A. courtesy of the merger between Stanbic Nigeria Bank Limited and IBTC Chartered Bank Plc in 2008. Ormiston and Rovit. and different stages involved in M&A process.1. this section conclude with the effect of M&A on organisational performance. this approach to organisational growth seem worthy of evaluation. most literatures on the subject reveals that almost 50% of M&A end up being unsuccessful (Gadiesh. 2007).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. gain technical/management expertise and knowledge. 2003. The literature review begin with an explanation of organic growth. and the reasons for M&A. Shenkar & Raveh 1996). M&A represents the most widespread corporate/business strategy used by many firms to penetrate into new markets and new geographic regions. Organic (Internal) Growth This is the rate of business expansion through increasing output and sales (growth achieved by internal investments of the firm) as opposed to mergers. acquisitions and take-overs which involves an outside firm (Samara. Although a very popular corporate/business strategy. Nigerian banks adopted different strategies to achieve the stipulated minimum capital base of N25 billion during the banking sector consolidation of 2004 and 2005. classification of previous M&A research concepts. Schneider. The main objective of this study is to evaluate ‘M&A’ and ‘organic growth’ as strategic growth options. 3. 2005 and further reduced to 24. 2003. including Mergers and Acquisitions (henceforth. or allocate capital. 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. Organic growth is a -14- . M&A) and internal growth. different types of M&A. the legal hurdles for M&A in the Nigerian banking sector. 2002. This is followed with an overview of M&A activities in the Nigerian banking sector. Weber. Relying on previous studies.Chapter 3: Literature Review 3. Kaplan.

and protects organisational cultures and core values (Denrell. eventually current operation effectiveness is expected to decline. which is susceptible to Penrose Effect (Dierickx and Cool 1989. Organic growth result in the creation of sustainable competitive advantages since the firm’s value-creating process and positions are less likely to be duplicated or imitated by other firms (Barney. banks’ article of trade is brand and trust (Emefiele. 2006). Thompson & Wright. and customer profitability (Atkearney.1. 3. Daruvala and Yulinsky. Milligan. Unlike other businesses.1. dynamic branch management. 2001.1. therefore to achieve organic growth. Emmanuel. together with finance provided by shareholders. 2005. It is a cheaper growth strategy compared to M&A.straightforward mechanism for achieving business growth. Limitations of organic growth Organic growth is a slower way of growth compared to M&A since it requires the development of new resources (setting up the whole business. Emefielie. banks need to have a formal strategy that is anchored on: customer retention. and internal investment is likely to be better planned and efficient. encourages internal entrepreneurship. customer service. Emmanuel. Highbeam. investing in machineries) internally. Benefits of organic growth Organic growth provides more corporate control. The logic of the Penrose Effect is that firm-level managers have firm-specific experiences internal to the firm and that in successive time periods the firm may not likely be able to adjust timely its managerial resources to the desired level due to dynamic adjustment costs. -15- . employee satisfaction. if one were to continually add new managers at a rapid rate. 2008. 1998). Since the more experienced managers need to explain to the new managers’ firmspecific details. 2005: 58). hiring and recruiting human capital. The essential feature of organic growth is the reinvestment of the previous years’ profit in the existing business. 2008). 2008). Fang and Winter. leveraging a multi-brand portfolio to create attractive value propositions for each market segment. It also provides managers with a better understanding of their own firm and assets.2. 3. Business Wire. 2008. 2003. 2008. 2008.

Also, businesses that choose organic growth strategy will be bearing the whole risk by themselves. 3.2. Mergers and Acquisitions defined

The terms merger, acquisition and consolidation are often used interchangeably. However, there are some differences. A merger refers to the combination of two or more organisations into one larger organisation. Such actions are commonly voluntary and often result in a new organisational name (often combining the names of the original organisations). An acquisition, on the other hand, is the purchase of one organisation by another. Such actions can be hostile or friendly and the acquirer maintains control over the acquired firm. Mergers and acquisitions differ from a consolidation, which is a business combination where two or more companies join to form an entirely new company. All of the combining companies are dissolved and only the new entity continues to operate (Okonkwo, 2004). 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 -16-

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. 3.3. Mergers and Acquisitions research paradigms

There are different perspectives to the study of M&A. Datta, et al (1992: 68) acknowledged strategic management and financial economics as two major literature frameworks for identifying sources of shareholders’ wealth in M&A activities. However, Larsson and Finkelstein (1999) gave a more detailed categorisation of M&A paradigms: economic and finance; strategy; organisational behaviour; and human resource management perspectives. 3.3.1. Economic and Finance perspective The economic and finance paradigm is primarily interested in the efficiency impact of M&A on the economy through economies of scale and market power with emphasis on ‘market for corporate control’. The main argument of this ‘market for corporate control’ paradigm is that M&A are viewed as ‘contests between competing management teams for the control of corporate entities’ (Datta et al.1992: 69). One of the key arguments of the market for the corporate control paradigm is that economic value created through acquisition activities is decided by market characteristics, including its competitiveness (Denis and McConnel, 2003: 266). These researchers measure the success of M&A with accounting numbers by considering their profit margins and return on equity. The finance scholars typically study M&A performance using stock market based measures. Event studies are used to examine the performance impact of the acquisitions and changes in stock prices that occur over a short period of time (Flanagan & O’Shaughnessy, 2003; Ramawamy & Waegelein, 2003; Rao, Mahajan & Varaiya, 1991). 3.3.2. Strategy Perspective Researcher using the strategy paradigm sees M&A as a means of corporate growth and diversification, primarily emphasising factors that are management controlled -17-

such as diversification strategies (that is, related vs. unrelated diversification) as a crucial factor in determining post-acquisition performance. They also consider the identification of differences between types of acquisition (merger vs. tender offer); and types of payment (cash vs. stock). The common variables used in this field are size, market share, pre-acquisition profitability and growth. Problems of measurement and convenience sampling are given as reasons for inconsistent findings (Marks & Mirvis, 2001; Datta, et al, 1992). 3.3.3. Organisational Behaviour Perspective Organisational behaviour researchers are interested in post combination integration process emphasising both cultural clash and conflict resolution (e.g., Buono, 2003; Birkinshaw, Bresman & Hakanson, 2000). Constraining time-pressure or too high work pace, deficiencies concerning working conditions, incompatible or ambiguous demands and expectations around roles, tasks and responsibilities and uncertainty at work are issues of concern to organisational behaviour researcher of M&A. 3.3.4. Human Resource Management Perspective Primary interest in the Human Resource management perspective is the psychological effects M&A have on individuals such as feelings of tension, alienation, and uncertainty. However, the importance of communication, and career planning are the interest of researchers in this field (Millward & Kyriakidou , 2004; Ford & Harding, 2003; Marks & Mirvis, 2001). The organisational behaviour and human resource perspectives indicate that it is basically the “people problem” that contributes to the success and failure of M&A. As the value creation of M&A mainly depends on the implementation process where people problem plays a key role (Jemision & Sitkin, 1986), the financial results of M&A can not be explained without considering the human and organisational side of M&A. The people problem not only prevents the creation of synergistic values, but can also be a direct cause of M&A failures (Larsson & Finkelstein, 1999). 3.4. Types of Mergers and Acquisitions

Literatures on M&A consistently discussed three types of M&A: Horizontal; Vertical; and Conglomerate mergers. However, Cartwright and Cooper (1992) and other -18-

writers mentioned and discussed a fourth type, which is Concentric mergers. (Gaughan, 2007: 13; Brealey, et al., 2006: 871; Okonkwo, 2004: 3).

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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Thompson and Morgenstern. 2008). Corporate strategy development is concerned ‘with ways of optimising the portfolios of businesses that a firm currently owns.5. 3. competition among strategic groups or resource-based) upon which corporate strategy is based (Barney.2. Post-acquisition integration. 2004). and Post-acquisition audit and organisational learning.1. This implies that for a merger to be successful it would require serious planning which includes screening and identification of clear and realistic goals with proactive strategies to overcome resistance by the target firm or competitors bidding for the same firm. Corporate strategy development Corporate strategic planning has been emphasised by organisations as an essential ingredient for business success. Lockett. therefore. In agreement with the stance of Saudarsaram.700 M&A and interviewed 250 Chief Executives Officers (CEOs) revealed that almost 60% of the CEOs interviewed do not understood the contribution of M&A to their company’s long-term financial performance. while those with a clear rationale underpinning their M&A activity came to realise after the deal that their rationale were altogether wrong. 2003: 4). Organising for acquisition The firm lays down the criteria for potential acquisitions consistent with the strategic objectives and value creation logic of the firm’s corporate strategy and business -20- .5. Deal structuring and negotiation. and how this portfolio can be changed to serve the interests of the corporation’s stakeholders’ (Saudarsanam. Organising for acquisitions. 3.3. 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. a study by Harding and Rovit (2004) that reviewed more than 1. the success or failure of M&A to a large extent depends on the alignment of corporate strategy and M&A strategy (Harding and Rovit. 1991.5. The effectiveness of M&A in achieving corporate strategic objectives depends on the conceptual and empirical validity of the models (industry structure-driven.

2001.5. and (d) developing the appropriate bid and defence strategies and tactics within the parameters set by the relevant regulatory regimes. Saudarsanam. and (ii) the organisational process. 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. Murphree & Hollander. Perry & Herd. or keeping the client from giving into emotions and making costly and unnecessary concessions in the heat of matters at the bargaining table (Angwin. and Mizuho (Rafferty. The use of third-party in the negotiations stage can be very valuable in giving the client time to consider options. 2004). since it has a bearing on the quality of acquisition decision and its value creation logic (Saudarsanam. choice of advisers to the deal. 2003: 7). an understanding of the acquisition decision process is important. (c) determining the range of negotiation parameters including the walk-away price negotiating warranties and indemnities. cited in Saudarsaram. 2001). 3. Vodafone. negotiating the positions of senior management of both firms in the post-merger dispensation. 2003). 2003) pointed out two contrasting perspectives of acquisition decision making process: (i) the rationalist. AOL and Vivendi. Sinickas. (b) obtaining and evaluating as much intelligence as possible about the target from the target as well as other sources through due diligence. clarity and forethought with which the value creation logic is blueprinted at the acquisition decision stage.model. Haspeslagh and Jemison (1991. this stage of M&A involves: (a) valuing target companies. -21- . According to Saudarsanam (2003: 6). Success of post-acquisition integration is determined at least partly by the thoroughness. 2000. 2004.3. Therefore. 2003. taking into account how the acquirer plans to leverage its own assets with those of the target. Deal structuring and negotiation M&A is tricky business and it can have serious financial implications for both the acquirer and the acquired that do not posses the necessary experience or professional guidance due to asymmetric information (Angwin.

resulting in changes in both the target and the acquirer. a clear. Post-acquisition integration This stage involves the combination of the distinct organisations into one. synergy may be elusive if not strategically handled. emphasised the importance of: an early planning. and the dedication of adequate resources to the transition management team are necessary ingredient that can lead to a successful post-acquisition integration. coherent and timely communication strategies.5. such as financial measures as well as -22- . Another important area to consider in post-acquisition integration is the integration of the merging firms’ information system. Issues around control and appropriate incentives for the acquired firm’s employees should all be carefully handled. This stage involves long-term plan evaluation.3. The value of most firms depends on its human assets-managers and skilled workers. 2003). et al. utmost care must be taken to avoid situation whereby the valuable human assets leave to join a rival firm (Brealey. Post-acquisition audit and organisational learning. therefore. careful attention to leadership selection.5. to deliver the strategic and value expectations that informed the merger (Saudarsanam. Consistent with Lubatkin et al. (1999). Specific performance measures. 2006.4. Kawalek & Wastell. Weber & Camerer. Schuler (2003). 2005: 84. 1999:109. 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. Effective integration of information system in any organisation is a function of technical and organisational factors (Henderson & Venkatraman. 2003). an insider’s view of knowledge networks and information flow. Orlikowski. 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. Wastell.5. 3. adjustment and capitalising on success of M&A. Luftman & Brier. 1999: 591) Although post-acquisition integration stage of M&A involves intangible assets which can not be easily quantified. 1993: 4. 1992.

Standard Oil (ExxonMobil. caused by a combination of economic. Mergers and Acquisitions waves Mergers and acquisitions have often occurred in waves. 2003). A global view of competition. Exxon and Mobil. Lipton. -23- . Citibank and Travelers. Du Point Inc. with different motives behind each wave. Bank of America and FleetBoston Financial Corporation. 2001. Datta. AOL and Time Warner. General Electric. Healy. 2007.1 below summarises the five major M&A waves that occurred in the United States of America. 2007. Robbins & Stylianou. 1991. 3. 1999. practices and processes that will be of immense relevance for future M&As. Sanofi and Aventis. 2006. Some of today’s business giants such as USX Corporation. 1999 and Sudarsanam. and Vodafone and Mannesmann (Brealey.6.. Boeing and McDonnell Douglas. 2003). and technological shocks (Gaughan. et al. Gaughan. in which companies often find that they must be big to compete led to once-unthinkable combinations. 2003). 2007: 36. et al. Post-acquisition audit and organisational learning enables the emergent firm to continue developing common tools. Chevron and Amoco) and Eastman Kodak are result of merger and acquisition (Gaughan. Sidel. Ghosh. 2006. 1996. Sudarsanam. Mitchell & Mulherin. 1991. Table 3. Sudarsanam 2003: 14). Chrysler and Daimler Benz. such as the mergers of Pfizer and Pharmacia.information system integration may be assessed for further development of capabilities and learning (Cossey. Five M&A waves in the United States of America between 1897 and 2004 were characterised by cyclic activities. 1992. regulatory.

Gaughan. Shleifer and Vishny. and conglomerates (usually related) Used significant proportion of debt to finance deals Primarily conglomerate mergers Some bidders smaller than targets 5th wave (1993-?) “Strategic Restructuring” Emphasized longer-term strategy rather than immediate financial gains Adapted from: Ensico & Garcia. and banking industries Heavy use of debt to pay for acquisitions More hostile takeovers Primarily owners financedinvestment banks did not play central role Executive managers with vision to create conglomerate Size and prominence of acquisition targets much greater than before Foreign M&As became common Characteristics Horizontal mergers Heavy manufacturing industry Emergence of oligopolies. 2003.Table 3. 1991. 1996. Lipton. -24- . vertical mergers. 2006. 2007. 1999. Sudarsanam. rising stock prices Technological developments Globalization Reduced government regulation More often financed with equity than debt Consolidation in the telecoms.1 Summary of major Mergers and Acquisitions waves in the US Wave 1st wave (1897 – 1904) ‘Merging for Monopoly’ Underlying Factors Technological developments Rapid Economic Expansion Corporation laws relaxed Voluntary code of ethical behaviour Post-World War I economic boom 2nd wave (1916-1929) ‘Merging for Oligopoly’ Technological developments Government encouraged firms to work together Booming economy 3rd wave (1963-1971) “Conglomerate Mergers” Rising stock prices High interest rates Tough antitrust enforcement Management science developments Financial manipulations Expanding economy 4th wave (1984-1990) “The Mega merger” Technological developments International competition Deregulation Increased pension fund assets Financial innovations Investment banking industry much more competitive Failure of conglomerates Expanding economy.

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.7. 1995. 2004). Bichi. Olajide. IBTC. As a result of the directive. Between July 6. and Union Bank of Nigeria’s acquisition of Citi Trust Merchant Bank Limited for N167. 2005: 45). Ebhodaghe. 2008. Ekundayo. -25- . 1996. the acquisition of African Banking Corporation in 1894 by ‘The British Bank for West Africa’ (now First Bank of Nigeria Plc). Out of the 25 banks that achieved the N25 billion requirements. 2008). and organic growth by retaining previous years profit as general reserves or public offerings from the capital market. 2007) were the major bank M&A in Nigeria. Kilner. Mordi.3. the Nigerian banking sector went through a radical transformation within the spate of 18 months: aggressive consolidation through M&A. 2008b. 2008. Mergers and acquisitions’ activities in the Nigerian banking sector An 18 month ultimatum given by the apex bank. 2004 and December 31. 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. 2005. while only 6 grew organically (CBN. 2008. Prior to the M&A wave of 2004 and 2005. The rate of bank mergers within this period (2004 and 2005) has been unparalleled in Nigeria banking history.2 below showed that 14 of them were the product of M&A involving 69 banks.75 million in 1995 (Danjuma. CBN. 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). 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. 1993. Okwe. 2006. 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. Table 3.

Lion Bank and African International Bank Equatorial Trust Bank Ltd and Devcom Bank Ltd Fidelity Bank. Bond Bank Limited. NAL Bank Plc and Indo-Nigeria Bank 16 United Bank for Africa Plc United Bank for Africa Plc. Pacific Bank and New Nigerian Bank 19 Wema Bank Plc Wema Bank Plc and National Bank of Nigeria Limited Source: CBN Annual Reports 2005: 45 -26- . Cooperative Bank Plc and EIB International bank Plc 14 Spring Bank Plc Citizens International Bank . NBM Bank Limited. Union Merchant Bank Limited. FSB International Bank and Manny Bank First Bank Plc. Inland Bank (Nigeria) Plc. Omega Bank. Equity Bank of Nigeria Limited and Gateway Bank of Nigeria Plc 12 13 Oceanic Bank International Plc Skye Bank Plc Oceanic Bank International Plc and International Trust Bank Prudent Bank Plc. Global Bank Plc.Table 3. Magnum Trust Bank. Broad Bank of Nigeria Limited and Universal Trust Bank Nigeria Plc 18 Unity Bank Plc Intercity Bank Plc. First Interstate Bank Plc. Marina Int’l Bank & Capital Bank International Afribank Plc and Afribank Int’l (Merchant Bankers) Platinum Bank Limited and Habib Nigeria Bank Limited Diamond Bank . Nigeria-American Bank and Midas Bank 9 First Inland Bank Plc First Atlantic Bank. Tropical Commercial Bank Plc. Trans International Bank and Fountain Trust Bank 15 Sterling Bank Plc Trust Bank of Africa Limited.2 Bank mergers and acquisition in Nigeria between 2004 and 2005 Bank 1 2 3 4 5 6 7 Access Bank Nigeria Plc Afribank Nigeria Plc Bank PHB Plc Diamond Bank Plc Equatorial Trust Bank Plc Fidelity Bank Plc First Bank of Nigeria Plc Constituent member Access Bank. MBC International Bank & FBN (Merchant Bankers) 8 First City Monument Bank Plc First City Monument Bank. Coop Development Bank. ACB International Bank. Standard Trust Bank Plc and Continental Trust Bank 17 Union Bank of Nigeria Plc Union Bank of Nigeria Plc. Bank of the North. Guardian Express Bank. Chartered Bank Plc and Regent Bank Plc Intercontinental Bank Plc. IMB International Bank Plc and NUB International Bank Limited 10 11 IBTC-Chartered Bank Plc Intercontinental Bank Plc IBTC. Societe Bancaire. Reliance Bank Limited . New African Bank. Centre-point Bank Plc.

Soludo. debentures. without winding-up. Moin. 3. allotting or appropriation by transferee company shares. -27- . 2004. 2006b & 2008). 2006. 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. create mega banks that can compete with banking institutions from other parts of the world. 1988. of any transferee company. Ogwu. policies or other like interest. and dissolution. Euromoney. continuation by or against the transferee company of any legal proceedings pending. 45 of 1999 and the Rules and Regulations of the Securities and Exchange Commission pursuant to the ISA.As earlier stated in the preceding chapter. 2004. with the concept of synergy as the underlying factor (Brealey. Banks and Other Financial Institutions Act and the Companies and Allied Matters Act is to prevent restraint of competition and monopolistic tendencies. 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. 2006. • • Banks and Other Financial Institutions Act (BOFIA) No. 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. Reasons for Mergers and Acquisitions Economic literatures provide various reasons why companies engage in M&A. Coffee. and Sections 538 and 539 of the Companies and Allied Matters Act (CAMA) 1990. et al.8. 25 of 1991.. Legal hurdles for M&A in Nigerian banking sector M&A in the Nigerian banking sector is guided by the provisions of: • Sections 99 .9. The Acts also have provision for dissenting shareholders (Okonkwo. 3. 2007. the consolidation in the Nigerian banking sector was induced by government regulation to: avoid a systemic distress of the banking sector. 2004). Ogbonna. The objective of M&A regulation by the Investment and Securities Act.123 of the Investment and Securities Act (ISA) No. 2008.

3 below: Table 3. 2000). 2000).. and macroeconomic phenomenon. The explanation for this occurrence is either the firms were not performing to optimal level prior to merging or that benefits were achieved by the merger. Following this logic. 2006). 1999. et al. In the same vain.3 Reasons for merger and acquisitions Merger as rational choice Net gains through Efficiency theory synergies Merger benefit bidder’s shareholders Wealth transfers from customers Wealth transfers from target’s shareholders Net gains Monopoly theory Raider’s theory through Valuation theory private information Merger benefits managers Empire-building theory Merger as process outcome Merger as macroeconomic phenomenon Process theory Disturbance theory Source: Trautwein 1990: 284. economies of vertical integration. complementary resources. Companies derive synergy from M&A’s activities through. Trautwein. companies are motivated to involve in M&A in order to create synergies (Coyle. 2007. but not limited to: economies of scale. surplus funds.Gaughan. Trautwein (1990: 284) stated that M&A may occur as a result of: rational choice. 1990). elimination of inefficiencies (Brealey. Synergy is the interaction or cooperation of two or more organisations to produce a combined effect grater than the sums of the two organisations operating independently (Coyle. this can be stated as: Value (A + B) > Value (A) + Value (B). Mathematically. 2001. -28- . These reasons are further broadened as shown in the Table 3. Bliss and Rosen. Coffee (1988) was of the view that managers might also engage in growthoriented or empire building strategies in order to create a diversified portfolio within the firm to lower their employment risk but not necessarily due to business synergy. Hadlock et al. process outcome.

M&A may at this instance serve as a corrective tool to improve the performance of the bank or as a means of implementing radical business changes. Studies by Avkiran (1999) and Worthington (2004) also support the relative efficiency hypothesis. Support for a ‘reverse’ Relative Efficiency Hypothesis is provided by Resti (1998). 3. In a related study by Koetter et al. who stated that. Berger (1988) identified the Relative Efficiency and Low Efficiency hypotheses as the drivers of business motives for M&As by banks. obtaining tax advantages. or free cash flows. While the low efficiency hypothesis and the relative efficiency hypothesis are not mutually exclusive. increase in market share. low efficiency hypothesis is where one or both of the merging banks are inefficient relative to their peers. On the other hand. This could be achieved through cost reduction. In this study. observed that many mergers serve as a pre-emptive distress resolution measure. banks have reasons why they engage in M&As. In a study of the US market. such as managerial incentives. 2001). for their own personal interest in inefficient projects. can play an important role (Bliss and Rosen. Amihud and Lev (1981) who empirically examined the motives for the widespread -29- . merger among Italian bank between 1987 and 1995. Vennet (1996) in his research confirms this result for European bank takeovers between 1988 and 1992. (1999) who opined that poorly performing banks are more likely to be acquired.10. this finding contradict an earlier study by Hadlock et al. which focused on the German banking market. The relative efficiency hypothesis provides that the acquiring bank seek to bring in the target bank to its own higherlevel of efficiency by transferring its superior management capacities or its business procedures. showed that the acquirers appeared even less efficient than their targets.Like any business. Limitations of merger and acquisitions Acquisitions can result in the destruction of value if management reinvests the firm’s resources. inefficient banks are less likely to be acquired. Wheelock and Wilson (2000) find that. From the above. one can summarise that the main reasons for M&As is to improve the financial performance of the firms. improvement of solvency and knowledge transfer. contrary to the low efficiency hypothesis. researchers find more evidence for the former. we focus on the business motive while acknowledging that other motives. (2007). extending the range of products and services.

results from other studies showed that M&A does result in improved profitability (Akhavien. 1992. Some of these studies find little or no evidence of M&A-enabled productivity gains (Berger and Humphrey. 2001). 2006. 2008: 15). Rafferty. et al. agency costs occur when there are substantial free-cash flows that are reinvested inefficiently by the managers. However. instead of redistributing them directly to their shareholders through dividend payments. 1989). 3. et al. Focarelli. Soludo. The Balance Sheet size and Profit and Loss profile of most banks in Nigerian have more than doubled since December 2005 to date. Cuesta and Orea. Another limitation of M&A is value-destruction that results from poor post-merger integration (Stewart. Soludo.12. 2002. 2002. Manager-specific investments also provide the opportunity for managers to extract higher wages and to have more control over the corporate strategy of the company (Shleifer and Vishny. Businesses can grow organically by internal investments or externally by -30- . safety and profitability. 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. ranging from simple Balance Sheet and Profit and Loss ratios to more advanced statistical efficiency measures. et al. 2000). 2006). Strategy is the engine that drives the expansion and consolidation of business. 2008.11.and persisting phenomenon of conglomerate mergers conclude that managers are engaging in conglomerate mergers ‘to decrease their largely undiversified employment risk. Effects of merger and acquisitions on banks performance Considerable amount of studies have been carried out to test whether M&A result in successful improvement of banks’ profitability and efficiency. 1999. 1997. 3. Lang & Welzel. A wide range of performance indicators has been applied in these studies. 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. Summary From the preceding scholarly discourse on M&A. Houston. According to Jensen (1986).

The subsequent part of the study is set to evaluate M&A and Organic growth as strategic growth options in the Nigerian banking sector.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. -31- .

2 Research approach To address the above stated objectives.1 Research purpose This study is to evaluate organic growth. relying on simple statistical tools and methods to analytically review financial performance. 4. and market share – pre and post M&A period of the selected case studies. The purpose of the research. because of the great wealth of empirical materials that is the most suitable means of research that can lead to a better understanding of the research question. The aim of this discussion is to highlight the key activities that were undertaken. the study used qualitative research approach from the economic/finance and strategy perspectives of M&A. the research approach. Zenith Bank Plc that pursued organic growth and Access Bank Plc that was involved in M&A in 2005 are used as case study. and to indicate their relevance to this study. using different methods in collecting and analysing data and information upon which inferences are made. Qualitative research using case studies is an in-dept investigation. market valuation. Exploratory research is a type of research that -32- .3 Type of research The research purpose and question indicates that this study is exploratory through case study because of its ‘multiple wealth of details for the development of nuanced view of reality’ (Flyvbjerg.0 Introduction This chapter discusses the methodology used in this study. 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?’ 4. 2004: 392). case study selection criteria.Chapter 4: Research Methodology 4. 4. This approach was chosen for the study. methods of data collection. and merger and acquisition (M&A) as strategic growth options in the Nigerian banking sector.

both banks commenced operation as commercial banks before the advent of universal (retail and wholesale) banking in Nigeria.seeks to investigate one or a few situations similar to the researcher’s problem (Zikmund 2003 p. it was more objective to analyse data from the published accounts of the banks to eliminate personal opinion. where necessary. Although the use of the banks’ own data eliminate to a large extent biases from the researcher.5 Data collection and analysis procedure The study relied primarily on secondary data from academic journals. this will to a large extent guarantee the validity and reliability of empirical data and further analysis. Also. In this study. Access Bank Plc and Zenith Bank Plc were selected based on their different recapitalisation strategies and performance over the years. newspapers. and internet sources. companies’ annual reports. The data analysis procedure in this -33- . 4. The results of exploratory research through case studies though may not be useful for decision-making by themselves because of the ‘contextdependent’ nature of the outcome (Flyvbjerg. additional information from third party sources such as banking regulatory authorities and stock market information were used.115). To eliminate the risk of delayed or non-response from the banks. Time and availability of data are important considerations in the determination of the case study. 2004). which is the usual phenomenon with interviews and surveys considering time constraint. 4. the strategic choice of case may add to the generalisability of a case study in providing significant insight into a given situation.4 Case studies selection criteria One of the critical decisions to make in a research of this nature is the determination of the right case study. Furthermore. text books. The two banks are relatively of the same age since they were incorporated almost the same time. February 1989 and May 1990 respectively. it has the inherent problem of providing information that favours the reporting bank. magazines. therefore. this study made use of case study with empirical data from audited and CBN approved annual reports of the banks.

profitability (return on assets. 4. with financial ratio analysis. size (the levels and growth rates of total assets and revenue).1 Liquidity ratio Liquidity ratios attempt to measure a company’s capability to meet its short-term debt obligations.1 Return on equity Return on equity (ROE) ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity (Mishkin. 2006: 232). The higher the ratio percentage. and investment valuation ratios (Hirthle.study involved the use of numerical data from the banks’ published accounts from 2003 to 2007. return on capital employed (ROCE). Although financial ratios have their own limitations (Casu. the more efficient management is in utilising its equity base and the better return is to shareholders. 4. and return on asset (ROA) are used in the data analysis.2 Profitability ratio These ratios give users a good understanding of how well the company utilised its resources in generating profit and shareholder value. productivity (the ratio of total revenue to non-interest expense). the massive amount of numbers in a bank’s financial statements can be bewildering and intimidating. 2006: 221).5. these can be presented in an organised form (Rees.2. Mishkin. This study used current ratio with the formula: Current ratio = Current Assets/Current liabilities 4. Multiple performance indicators such as liquidity. Robustness against outliers is achieved by using the percentage ranking of variables instead of their absolute values.5. The ratio measures how much the shareholders earned for their investment in the company. 2006) were applied in this study. Return on equity (ROE). however.5. ROE = Net profit after taxes/Average shareholders’ equity -34- . 1995: 85). This is done by comparing most liquid assets to short-term liabilities. return on equity and return on capital employed). 1991. et al.

This ratio is obtained by the formula below: C/I = Non-interest expenses/(net interest income + non-interest income) 4. 2006: 215). ROCE = Net profit after taxes/Capital Employed 4. and is expressed as a percentage.3 Investment valuation ratios Investment ratios act as a forecast parameter which predicts the anticipated returns that the investors would earn (O’Regan 2001). or funded debt. 4. et al. to equity to reflect a company's total "capital employed".5.5.4 Cost-Income ratio This ratio is a quick test of the efficiency that reflects bank non-interest (operating) cost as a proportion of income (Casu.3.2. The ROA ratio is calculated by comparing net income to average total assets.5. complements the return on equity (ROE) ratio by adding a company’s debt liabilities.3 Return on Assets This ratio shows how profitable a company is relative to its total assets (Mishkin.5. This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base.4.1 Dividend payout ratio (DPR) This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. 2006: 232). The higher the return. -35- . ROA = Net profit after taxes / Total Assets 4.2. DPR is an indicator of how well earnings support the dividend payment.2.5. the more efficient management is in utilising its asset base.2 Return on capital employed The return on capital employed (ROCE) expressed as a percentage. DPR= Dividends per common share/Earnings per share. The return on assets ratio illustrates how well management is employing the company's total assets to make a profit.

The next chapter is a presentation of the empirical study. 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. -36- . and case study selection was discussed in this chapter. 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.1 Earnings per share (EPS) This is part of a company's profit apportioned to each outstanding ordinary share. EPS is used by investors as a profitability variable in determining share price. EPS = (Net Income – Dividends on preferred stocks)/Average outstanding ordinary shares 4. Also. research approach.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.4. the technical suspension of Access Bank shares from trading before during its public offering. method of data collection.5. The research purpose.3. 4. The research process was illustrated and choice of the methods were presented and explained.7 Summary This chapter has presented the methodology of the study.

This chapter begins with an overview of the case studies. the findings are presented in the form of ratio analysing the performance of Access Bank Plc and Zenith Bank Plc in terms of liquidity. and shareholders’ equity N14. 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. thereafter. to ascertain which of the growth strategy result in superior financial performance. Following the review of minimum capital base to N25 billion by the Central Bank of Nigeria. Access Bank Plc grew its Balance Sheet size to almost N70 billion.214. its shares were listed on the Nigerian Stock Exchange in November 1998.111. the bank acquired Capital Bank International Limited and Marina International Bank Limited on November 1. assets quality. Introduction This study was embarked upon to evaluate organic growth and merger and acquisition (M&A) as strategic growth options in the Nigerian banking.056 billion comprising 8.2 An overview of the case studies 5. and growth rates.. Consequent to the bank conversion to a public limited liability company on March 1998. The stock market reaction to Access Bank’s merger will be presented using price movement before and after the merger. Following the unification of banking activities in Nigeria. Access Bank Plc Access Bank Plc was incorporated in Nigeria as a private limited liability company in February 1989 and commenced commercial banking operations in May 1989. 2005. 5.1. 2005 through share exchange -37- .625 ordinary shares of 50 kobo each as at March 31. profitability.Chapter 5: Data analysis and presentation 5.2. capital adequacy.07 billion with a fully paid share capital of N4. From a modest beginning in 1989. the Central Bank of Nigeria issued Access Bank Plc a universal banking license in February 2001.1.

2005 deadline. Access Investments and Securities Limited and United Securities Limited (Access Bank annual report. Capital & Marina Scheme of Merger. the merging banks were expected to benefit from the followings: • • • • Wider geographical spread of branch network.1. Brand enhancement and improved market positioning. It also provides Access Bank Plc with an inorganic growth opportunity to achieve its strategic objective of being one of the top banks in Nigeria by 2007 (Access.1 and 5. 2005: 20). The Bank has two overseas and two local subsidiaries namely Access Bank (Gambia) Limited. 2007.2 below shows the summary of Access Bank’s financial statements Access Bank from 2003 to 2007: -38 . 2005: 40). Capital and Marina Scheme of Merger (2005: 21). Access Bank Sierra Leone. Economies of scale resulting from cost reduction and increased product scale. and Leveraging on the combined bank’s balance sheet size and shareholders’ funds to provide more credit to a larger spectrum of customers. 5.consideration and continued trading as Access Bank Plc. According to the Access. Capital & Marina Scheme of Merger.2.1 Rationale for the Merger The merger was driven by the need to meet the new minimum capital requirement of N25 billion as set by the Central Bank of Nigeria with a December 31. Access. Table 5.

341 13.339 3.365 22.732 952 952 -314 637 21k 10k 3.082 2.130 408.615 300.577 2.119 -382 737 7k 11.342 28.846 1.167 Other Income 10.615 80.495 3.952 11.988 21.447 6.735 2003 (N’m) 22.183 1.261 -1.566 4.745 28.386 4.942 -1.091 204.700 (N’m) (N’m) 7.918 14.769 3.360 8. Table 5.301 -386 915 2.894 174.368 3.377 28.628 9.681 2004 (N’m) 31.083 87k 6.472 6.645 Source: Access Bank Annual Reports.353 -984 1.111 8.934 -4.881 16.019 1.384 328.445 1.763 81.043 -1.003 31.775 10.347 -328 1.011 -200 811 -254 557 21k 5k 2.183 751 751 -250 502 12k 4.978 Source: Access Bank Annual Reports.857 -1.929 -1.846 14.2 Highlights of Access Bank’s 5 Years Balance Sheet 2007 (N’m) 2006 (N’m) 174.154 Operating Expense PBT & Exceptional items Exceptional items PBT Taxation Profit After Taxation Earnings Per Share (Kobo) Dividend Per Share (Kobo) Avg.660 28.733 -2.Table 5.119 1. no of ordinary shares issued -13. -39- .394 44.554 2005 (N’m) 66.043 8.876 4.000 Gross Earnings Interest and Discount Income Interest Expense Net Interest Income Provision for Risk Assets 27.530 -1.139 2005 2004 2003 (N’m) 4.838 2.582 20.894 -4.515 2.959 Total Assets Total Liabilities Shareholders' fund Liabilities and equity Commitments and Contingencies Total Assets and Contingencies 328.072 66.230 145.746 -1.330 5.960 6.384 1.554 30.368 2.918 52.684 -2.1 Summary of Access Bank’s 5 Years Profit & Loss Account 2007 (N’m) 2006 (N’m) 13.503 -8.

However. Zenith Bank raised N53. as amended) as a private limited liability company and commenced commercial banking operations in 1990. and its shares were listed on the Nigerian Stock Exchange in October 2004. 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. 2007. after a successful Initial Public Offering (IPO). From a humble beginning in 1990. and therefore did not merge with any other organisations within the industry. Zenith Bank Plc Zenith Bank Plc was incorporated in Nigeria (under the Companies and Allied matters Act of 1990.2. Zenith Bank Ghana. in line with the bank’s growth strategy. During the consolidation exercise of 2004/2005. Table 5.4 below shows the summary of Zenith Bank’s financial statements from 2003 to 2007: -40- . Zenith General Insurance Limited and Zenith Securities Limited (Zenith Bank Annual Report.63 billion by a Public Offer of three billion ordinary shares in February 2006 (IBTC. Zenith was already sufficiently capitalised to meet the new minimum requirements imposed by the Central Bank of Nigeria. besides Zenith Pension Custodian Limited. 2007). 2006). UK. Zenith Bank.2. Zenith Bank Plc became a public limited liability company in July 2004.5. The bank also owned 100% stake of Zenith Bank. The bank was issued a universal banking license by the Central Bank of Nigeria in 2001.3 and 5.

017 -18.289 9.844 11.440 -1.223 20.501 Other Income 27.156 13k 70k 5.717 41.177 68.513 291.298 15.290 12.620 17.911 153.368 100.783 41.535 40.173 2005 (N’m) 34.642 5.Table 5.202 -13.445 1.265 -1.214 5.927 37.194 62.376 -397 11.885 193. Table 5.266 Source: Zenith Bank Annual Reports.832 -1.452 -31.388 23.975 15.780 17.463 26.321 112.674 193.321 21.284 -1.848 15.745 714.401 610.525 20.097 2003 (N’m) 17.424 375k 70k 1.005 373.332 12.227 99.3 Summary of Zenith Bank’s 5 Years Profit & Loss Account 2007 (N’m) 2006 (N’m) 58. no of ordinary shares issued -45.222 37.790 329.927 46.154 -3.652 112.405 -1.165 -2.489 191k 110k 9.885 -5.708 -3.028 27.647 15.677 Operating Expense Profit Before Taxation Taxation Profit After Taxation Earnings Per Share (Kobo) Dividend Per Share (Kobo) Avg.009 7.913 22.108 112.509 189k 100k 9.941 610.289 -5.180 Gross Earnings Interest and Discount Income Interest Expense Net Interest Income Provision for Risk Assets 89.996 -2.931 15.446 Source: Zenith Bank Annual Reports.191 168k 70k 3.979 8.665 11.154 9.733 43.890 177.941 294.307 25.386 510.535 Total Liabilities Shareholders' fund Liabilities and equity Commitments and Contingencies Total Assets and Contingencies 771.295 -10.707 -65 9.768 332.883 12.797 6. -41- .274 2004 (N’m) 23.049 5.490 -10.178.016 4.318 -18.833 883.905 215.768 103.4 Highlights of Zenith Bank’s 5 Years Balance Sheet 2007 (N’m) 2006 (N’m) 2005 (N’m) 2004 (N’m) 2003 (N’m) Total Assets 883.

3 Findings 5. besides 2005 financial year that Access Bank recorded 37% liquidity ratio. Figure 5. 2004 and 2007 respectively. During the liquidity squeeze of 2005. During 2006 financial year (first year post-merger). 2005:21). -42- . To evaluate the short-term liquidity position of both banks. Access Bank recorded a significant improvement in liquidity ratio from 37% in 2005 to 58% and 66% in 2006 and 2007 financial years respectively.1. 51% and 53% compared to Zenith Bank’s 45%. both banks surpassed the regulatory liquidity benchmark of 40% as set by the Central Bank of Nigeria (CBN. Access Bank’s ratio was below the required rate of 40%. and loans to deposits ratios were used.5 measuring the proportion of customers deposit given-out as loans by the banks indicated that Access Bank has a higher rate of 70%. 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. The data also showed that both banks witnessed a significant drop in liquidity in 2005. implying that should there be a surge in the number of depositors calling off their deposit.5. cash and short-term investment to current liabilities. A higher loan to deposit ratio is an indication that most of customers’ deposit are given out as loans. Liquidity.3. Using cash and short-term investment as a cover to current liabilities. However.1 showed both banks as having adequate liquidity levels. the bank will be faced with a temporary illiquidity until it is able to recall its risk assets. 41% and 39% during the period 2003. Liquidity ratio expresses a company’s ability to meet its short-term obligations Table 5.

724 32.5 Loans: Deposit Ratio Access Bank Loans Year 2003 2004 2005 2006 2007 (N 'm) 6.879 205.012 % 45 41 53 51 39 Source: Access Bank and Zenith Bank Annual Reports.Table 5.750 Zenith Bank Deposits (N 'm) 61.775 Deposits (N 'm) 9.336 201.239 123. Access Zenith 2007 -43- .608 110.508 11. Figure 5.309 22.507 16.574 131.334 54.413 392.1 Cash & Short-term Investment to Current Liabilities Cash & Short-term Investment : Current Liabilities 100 80 Ratios (% ) 60 40 20 0 2003 2004 2005 MY 2006 PM Years Source: Access Bank and Zenith Bank Annual Reports.235 % 70 51 50 49 53 Loans (N 'm) 27.765 54.424 220.407 108.095 233.864 568.

the last years for which information was available.5.8 and Figure 5.2 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.5% between 2003 and 2005 but stabilises at 3. which have been impacted by increasing competition and maintaining a highly liquid balance sheet.6 and Figure 5. On the average.4% in 2006 while Access’ decline was from 6% to 3. Zenith Bank maintained a cost to income ratio of 64. but increased significantly to 1. while Access Bank had an average of 66% (Table 5. Zenith’s net-interest to total asset margin declined from 8. 2004 and 2005) before merger of Access Bank and two years thereafter (2006 and 2007). Table 5.9% in 2007. 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. These indicators are considered as measures of a bank’s profitability and efficiency. Figures 5. Key performance indicators such as return on assets (ROA). Access Bank’s ROA declined from 2. the study considered and analysed performance during the three years (2003.7.9% in 2003 to 1.3 and 5.3. return on equity (ROE).5). Net interest income by both banks witnessed a steady decline between 2003 and 2007 as shown in Table 5. The log-term profitability of both banks is vital for their survival and the benefit received by shareholders. Zenith Bank’s ROA declined from 3.4 indicate that returns on equity and returns on capital employed also exhibited the same pattern as ROA. 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. In order to facilitate the presentation.5% in 2003 to 0.4% in 2006 (the first post-merger year).6% during 2006 and 2007 financial years.2 indicated a decline in both banks returns in assets (ROA) between 2003 and 2006. This served as a buffer narrowing net interest margins. Access Bank’s recorded improvement in profitability in 2007 is underpinned by strong volume growth that lifted non-interest earnings and improved efficiencies.6% in 2003 to 4. On the other hand. return on capital employed (ROCE) and the cost-income ratio (CI) were utilised. This significant -44- .9% in 2006.8% for the period under review.

941 % 3.435 in 2007 while branch-network increased from about 120 in 2005 to over 200 in 2007 (Cashcraft.156 11.1 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.582 31. Zenith Bank.7 0.342 66. Table 5. Access Bank’s cost to income ratio could deteriorate sharply.0 ROA (%) 3. 2008.9 Profit After Tax (N’m) 4.554 328.592 in 2003 to 5.7 2.9 2.9 2.4 1.321 332.0 4.0 2003 2004 2005 MY Years 2006 PM 2007 Access Zenith Source: Access Bank and Zenith Bank Annual Reports.0 2.615 % 2.6 Return on Assets Access Bank Profit After Tax Year 2003 2004 2005 2006 2007 (N’m) 557 637 502 737 6. 2007). -45- .0 Source: Access Bank and Zenith Bank Annual Reports. 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 1.0 1. although operating expenses actually increased to N13.535 193.1 1.489 17.2 Returns on Assets Retuns on Assets 5.0 0.5 2.885 610.083 Total Assets (N’m) 22.424 5.918 174. Figure 5.0 0.768 883.improvement was due mainly to strong growth in net earnings. On the other hand.191 7.509 Zenith Bank Total Assets (N’m) 112.

0 3.0 0.0 Zenith 10.0 R O E (% ) 30.0 2003 2004 2005 MY Years 2006 PM 2007 Source: Access Bank and Zenith Bank Annual Reports.Figure 5. -46- .0 Access 20.3 Returns on Equity Returns on Equity 40.0 1.5 1.5 0.0 2.5 2.5 4. Figure 5.5 3.0 2003 2004 2005 MY 2006 PM Years 2007 ROCE (%) Access Zenith Source: Access Bank and Zenith Bank Annual Reports.4 Return on Capital Employed Returns on Capital Employed 4.0 0.

Table 5.599 29.582 31.298 45.185 4.941 % 8.918 10.301 2.768 883.942 Total Asset (N’m) 22.885 610.321 332.759 70.1 3.797 18.0 4.4 5.347 1.154 31.930 % 58 67 71 77 57 Noninterest expense (N’m) 10.732 4.284 Total Asset (N’m) 112.9 Source: Access Bank and Zenith Bank Annual Reports.Table 5.2 4.918 174.846 2.554 328.293 47.4 4.376 17.353 6.388 Zenith Bank Net interest income + non interest income (N’m) 15.6 Zenith Bank Net Interest Income (N’m) 9.6 3.111 Net interest income + non interest income (N’m) 3.384 13.5 3.832 43.8 Cost: Income Ratio Access Bank Noninterest expense Year 2003 2004 2005 2006 2007 (N’m) 1.615 % 6.535 193.049 13.707 12.7 Net Interest Income: Total Asset Margin Access Bank Net Interest Income Year 2003 2004 2005 2006 2007 (N’m) 1.070 5.555 20.889 22.183 8.342 66. -47- .461 % 65 67 62 66 64 Source: Access Bank and Zenith Bank Annual Reports.6 6.261 11.265 26.

5.4% in 2006 and then dropped to 12.0 60.0 80.9 and Figure 5.3. Also.0 10.4% in 2004 to 16. The weakened capital adequacy ratios of Access Bank are as a result of quantum leap in loans and advances.0 50. 2005 and 2006 but failed in 2004 and 2007.6% for 2005.8 billion in 2007 (representing 795% increase).0 70.3 billion in 2003 to N28. 2005.3 billion in 2007 (representing 1.Figure 5. Access Bank’s equity to assets drop in equity is related to a write-off of N6.6 billion in 2003 to N112.0 40. On the other hand.5 Cost: Income Ratio analysis Cost : Income Ratios 90.0 20.130% increase).8% in 2007 (Table 5.0 30.0 2003 2004 2005 MY Years 2006 PM 2007 Ratios (%) Access Zenith Source: Access Bank and Zenith Bank Annual Reports. But equity to asset ratio as a measure of capital adequacy indicates a fluctuation for the respective years by both banks. expressed as a percentage of its loan exposures or assets. Zenith’s equity grew from N12.59 billion balance of goodwill arising from consolidation against a reserve (Access Bank. -48- .6% and further to 8. 2006 and 2007 financial years.2003. Zenith witnessed an increase from 11. Access Bank recorded a drop from 21% to 16. and Access Bank also recorded a phenomenon growth in equity from N2. Zenith Bank exceeded the minimum for the period .3 CAPITAL ADEQUACY Capital adequacy ratios are appraisal of the amount of a bank’s capital.6). 2006 and 2007 but failed in 2004. while Access Bank surpassed the minimum in 2003.0 0. 2007: 56). When measured against the minimum capital adequacy (equity to total assets) requirement of 10% as set by the Central Bank of Nigeria (CBN 2005: 21).

535 193.6 21.8 Source: Access Bank and Zenith Bank Annual Reports.6 Equity to Total Assets analysis Equity to Total Assets 25.768 883.674 37.003 14.554 328.941 % 11.0 2003 2004 2005 MY 2006 PM Years 2007 Access Zenith Source: Access Bank and Zenith Bank Annual Reports.0 0.582 31.4 12.5 9.0 16.Table 5.885 610.0 5.0 Ratios (%) 15.1 11.9 Equity to Total Asset Ratio Access Bank Equity Year 2003 2004 2005 2006 2007 (N’m) 2.894 28.6 8.072 28.401 112.833 Zenith Bank Total Assets (N’m) 112.0 10.4 16.384 Total Assets (N’m) 22.342 66.365 3.0 20.615 % 10.652 15. -49- .2 8.6 Equity (N’m) 12.918 174. Figure 5.790 100.321 332.

3 26.8 showed that non-performing loans provisions took a greater percentage of Access Bank’s profit before tax.239 123.3.8 51.6% in 2007.003 14.652 15.765 54. Both bank’s loan loss provision to total loans was very satisfactory compared to the statutory tolerable rate of 20% (CBN. the result in Table 5.424 220.750 % 45.674 37. its non-performing loans dropped from 6% in 2005 to 2.1 26.7 indicates both banks as having quality assets.2 53.1 Equity (N’m) 12. showing that better loans quality could lead to improved profitability.407 108.508 11.336 201. The point of interest in the case of Access Bank is the fact that in 2006.1 86.507 16. Zenith Bank’s non-performing loans to total loans ratio was below 1% except for 2005 financial year that its non-performing loans reached 1.11 and Figure 5.384 Total Loans (N’m) 6.Table 5.5% in 2006.072 28.833 Zenith Bank Total Loans (N’m) 27.894 28. 5.6 28.334 54.365 3.6% of total loans against an industry average of 10%.9 30.6 49.1 Source: Access Bank and Zenith Bank Annual Reports.12 and Figure 5. 2005: 23) Table 5.401 112.4 ASSET QUALITY When asset quality was measured using loan loss provision to total loans as indices.10 Equity to Loans Ratio Access Bank Equity Year 2003 2004 2005 2006 2007 (N’m) 2. -50- . Access Bank’s non-performing loans to total loans improved significantly from 5% in 2003 to 1.775 % 36.790 100.

0 2.0 1.239 123.424 220.0 0.Table 5.386 1.0 3.775 Total Loans (N’m) 6.407 108.6 Zenith Bank Provision for Loan Losses (N’m) 65 397 1.975 1.334 54.765 54.5 1. -51- .0 3.8 Source: Access Bank and Zenith Bank Annual Reports.11 Provisions for Loan Losses to Total loans Access Bank Provision for Loan Losses Year 2003 2004 2005 2006 2007 (N’m) 328 386 984 1.6 0.336 201.6 0.0 2003 2004 2005 MY 2006 PM Years 2007 Access Zenith Source: Access Bank and Zenith Bank Annual Reports. Figure 5.750 % 0.508 11.7 Provisions for Loan Losses to Total Loans Provision for Loan Losses to Total Loans 7.783 Total Loans (N’m) 27.0 6.507 16.0 4.0 Ratios (%) 5.7 1.2 0.307 1.775 % 5.4 6.0 2.

Gross earnings.165 15. 5.783 Profit Before Tax (N’m) 5.8 22.154 23.7 Source: Access Bank and Zenith Bank Annual Reports.3.1 123.0 100.289 % 1.5 GROWTH RATES The study used annualised growth rate to evaluate the performance of Access Bank and Zenith Bank.119 8.307 1. deposit.Table 5.0 2003 2004 2005 MY Years 2006 PM 2007 Access Access Source: Access Bank and Zenith Bank Annual Reports.775 Profit Before Tax (N’m) 811 952 751 1. Figure 5.5 8.0 60.1 Zenith Bank Provision for Loan Losses (N’m) 65 397 1.0 20.4 40.386 1.12 Provisions for Loan Losses to Profit Before Tax Access Bank Provision for Loan Losses Year 2003 2004 2005 2006 2007 (N’m) 328 386 984 1.440 6.8 Provisions for Loan Losses to Profit before Tax Provision for Loan Losses to Profit Before Tax 140. profit before tax.2 6.6 7. -52- Ratios (%) .0 0.043 % 40.0 120. Annualised growth rate is the hypothetical constant year-to-year growth rate necessary to take the beginning-year value of a series to its ending-year value. shareholders’ equity and total assets/contingencies were measured.2 21.0 80.5 131.0 40.975 1.405 9.

0 Access 60. -53- . Table 5. 65% and 54% during the same period. 5.9 Gross Earnings Gross Earnings Growth Rate 120. Improved gross earnings by Access Bank are manifestation of the synergy derived from its merger in November 2005. Figure 5.5. Access Bank has been able to harness the advantages of its merger synergy.5. Access Bank achieved 26% and 36% in 2004 and 2005 respectively as against Zenith Bank’s 34% and 46% for the same period.0 20. Like growth in gross earnings. Access Bank achieved a growth of 49% and 618% in 2006 and 2007 respectively compared with Zenith’s growth rate of 43%.5.0 0.0 100.1 Gross Earnings This measured the growth in gross earnings (interest income and other operating income) between one period and the other. Prior to merger.3. From a decrease of 21% in 2005.0 Zenith 40.0 2003 2004 2005 MY 2006 PM Years 2007 Source: Access Bank and Zenith Bank Annual Reports.0 Growth (%) 80. In 2007.9 showed Access Bank achieved a 78% increase in gross earnings in 2006 whereas Zenith Bank recorded 67% increase.3.2 Profit before Tax Growth rate. Figure 5. Zenith Bank only increased its gross earnings by 53% while Access Bank achieved 109% increase.13 shows Zenith Bank’s profit before tax growth rate surpassed Access Bank’s achievement before its (Access Bank) merger in November 2005.

13 Profit before Tax Access Bank Current Year PBT Year 2003 2004 2005 2006 2007 (N’m) 811 952 751 1.165 15.289 Zenith Bank Preceding Year PBT (N’m) 3.154 Growth Rate 36 18 43 65 54 Source: Access Bank and Zenith Bank Annual Reports.6 billion in 2005 to N205. 5. a very impressive accomplishment.999 5.119 % 4.165 15. Zenith Bank notwithstanding maintains a significant lead in total deposit over Access Bank.440 6.405 9.3. -54- .2 billion in 2007.Table 5.3 Deposit Growth Rate Although Table 5.10 showed both banks exhibiting appreciable growth in total deposits.440 6.043 Preceding Year PBT (N’m) -17 811 952 751 1.405 9.733 17 -21 49 618 Current Year PBT (N’m) 5.14 and Figure 5.5.154 23. Access Bank was able to grow its deposit base from N32. Access Bank’s deposit mobilisation capacity was further enhanced through increased branch network and business combination with erstwhile Capital Bank and Marina Bank in November 2005.119 8.

14 Deposits Growth Rate Access Bank Current Year Total Deposit Year 2003 2004 2005 2006 2007 (N’m) 9. Figure 5.0 Access 150.012 Zenith Bank Preceding Year Total Deposit (N’m) 50.879 % 44 144 43 240 85 Current Year Total Deposit (N’m) 61.309 22.724 32.0 2003 2004 2005 MY 2006 PM Years 2007 Source: Access Bank and Zenith Bank Annual Reports.864 % 21 113 78 68 45 Source: Access Bank and Zenith Bank Annual Reports.475 9.879 205.608 110. -55- .10 Deposit Growth rate Deposit Growth Rate 300.688 61.608 110.0 0.413 392.864 568.095 233.0 250.574 131.095 233.Table 5.0 50.574 131.309 22.235 Preceding Year Total Deposit (N’m) 6.0 Zenith 100.0 Growth (%) 200.724 32.413 392.

6 billion against share premium reserve (Access Bank. Table 5.15 showed both banks achieving significant growth in shareholders’ equity in 2005.4 Shareholders’ Equity Table 5.401 112.790 100.401 Year 2003 2004 2005 2006 2007 Current Year Equity (N’m) 2.0 Years 2004 2005 MY 2006 PM 2007 Access Zenith Source: Access Bank and Zenith Bank Annual Reports.3.0 100.1 billion from the merger with Capital and Marina Bank which was paid for by way of share exchange (Access Bank. Access Bank also realised N12.894 28. -56- .790 100.384 % 22 27 369 105 -2 % 36 24 141 166 12 Source: Access Bank and Zenith Bank Annual Reports. 2007: 57).0 300.674 37.0 Growth (%) 200.5. The drop in Access Bank’s shareholders’ equity by 2% was occasioned by a write-off of the unexpired goodwill of almost N6. 2006: 26).894 Zenith Bank Current Year Equity (N’m) 12. In the same vain.0 0.365 3.003 14. However.674 37.652 15. and also a public offering in 2006 where N53.652 15.5. much of the growth could not be traced to retained earnings but fresh capitalisation in the form of public offerings.8 billion was absorbed and the balance returned. Figure 5.6 billion was realised.0 2003 -100. Access Bank also raised fresh capital through public offering in 2005 and 2006.833 Preceding Year Equity (N’m) 9.944 2.072 28.365 3. Zenith Bank raised over N48 billion during its Initial Public Offering of 2004 wherein only about N15.003 14.11 Shareholders’ Equity Growth rate Shareholders' Equity Growth Rate 400.15 Shareholders’ Equity Access Bank Preceding Year Equity (N’m) 1.306 12.072 28.

0 0.890 714.16 and Figure 5.0 Access 100.681 204.645 408.890 714.227 373.513 % 36 40 74 91 65 Source: Access Bank and Zenith Bank Annual Reports.079 28.959 44.735 81.5 Total Assets plus Contingencies Table 5.3.735 81. Access Bank’s balance sheet size doubled each year since merger: 151% and 100% in 2006 and 2007 respectively.0 2003 2004 2005 MY Years 2006 PM 2007 Source: Access Bank and Zenith Bank Annual Reports.227 373.0 Zenith 50.959 44.5.16 Total Assets plus Contingencies Access Bank Preceding Current Year Total Assets Year 2003 2004 2005 2006 2007 (N’m) 28.386 Zenith Bank Preceding Year Total Assets (N’m) 112. Table 5.446 215.446 215. while Zenith Bank balance sheet size also grew by 91% and 65% during the same period.12 showed a steady growth in total asset plus contingencies by both banks between 2004 and 2006.513 1.0 Growth (%) 150.681 204. This growth is closely related to the growth in shareholders’ equity and increased deposit mobilisation.645 % 106 54 83 151 100 Current Year Total Assets (N’m) 153.745 Year Total Assets (N’m) 14.5.12 Total Assets plus Contingencies Total Assets plus Contingent Grow th Rate 200. -57- .178. Figure 5.549 153.

00 2003 2004 2005 MY Years 2006 PM 2007 Earnings (Naira) Access Zenith Source: Access Bank and Zenith Bank Annual Reports.00 0.00 2. Although Access Bank witnessed a remarkable growth in EPS. Zenith Bank nevertheless maintained its superiority in dividend pay-out.17 Dividends Payout Ratio Access Bank Dividend per ordinary share Year 2003 2004 2005 2006 2007 (kobo) 5 10 0 0 0 Earning Per Share (kobo) 21 21 12 7 87 Dividend Payout ratio (%) 24 47 0 0 0 Dividend per ordinary share (kobo) 70 70 70 110 100 Earning Per Share (kobo) 375 168 136 191 189 Dividend Payout ratio (%) 19 42 52 58 53 Zenith Bank Source: Access Bank and Zenith Bank Annual Reports.17 shows the performance of both banks on earnings per share and dividends payout ratios respectively.13 and Table 5.6 Investment Valuation ratios Figure 5.50 0.50 1. Table 5.3.50 2. -58- .00 1.13 Earnings per Share Earnings Per Share 4. Figure 5.00 3.5.50 3.

42 to N2. -59- . because its share was on technical suspension due to its initial public offering. However.14 per share in June 2007 before dividend and bonus were paid to shareholders in August 2007. From Figure 5. actual-merger period (01/06/2005 . there was no movement in the price of Access Bank within the period preceding its merger with Capital Bank and Marina Bank. Figure 5.99 on August 22.70 per share in 2005.7 Shares prices movement The share price movement is analysed under three periods: pre-merger (21/10/2004 31/05/2005). 2006.14 below.50 per share on January 2008. while Zenith Bank peaked at N66. and post-merger period (01/11/2005 . while Zenith was trading for about N14.16 below.00 per share plus one bonus share for every four ordinary share held as at the close of its register in August 2007.5. From a pre-merger share price of N2.15 which covered the actual merger period of Access Bank showed that the price of Access Bank dropped from N3.3.31/10/2005). 2005. 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 N0.99 in August 2005 to N15 as at July 22.10 per share in 2006 and N1. a month after the consummation of the merger process in November 1. post-merger price movement of Access Bank showed a remarkable improvement between December 2005 and July 2008 as shown in Figure 5.42 during period. The share price stagnated at N3. N1. Access Bank share peaked at N25.22/07/2008) using share price information from the Nigerian stock exchange. 2008 and remained unchanged till December 9. 2008.

00 5.00 18. P r ic e (N a ira ) 10. Nigerian Capital Market Data Bank Source: Securities & Exchange Commission.00 15.00 6.00 - P ric e (N a ira ) 20. 2008.00 8.00 2.00 14.00 25.00 10. Nigerian Capital Market Data Bank -60Access Bank Zenith Bank 8 /3 0 /2 0 0 5 0 9 /0 7 /2 0 0 5 9 /1 5 /2 0 0 5 9 /2 3 /2 0 0 5 1 0 /0 4 /2 0 0 5 1 0 /1 2 /2 0 0 5 1 0 /2 0 /2 0 0 5 1 0 /2 8 /2 0 0 5 Access Bank Zenith Bank .2008.00 20.15 Share price movements during Access Bank merger Source: Securities & Exchange Commission.00 12.00 1 0 /2 1 /2 0 0 4 1 1 /0 2 /2 0 0 4 1 1 /2 3 /2 0 0 4 1 2 /0 2 /2 0 0 4 1 2 /1 3 /2 0 0 4 1 2 /2 4 /2 0 0 4 0 1 /0 5 /2 0 0 5 1 /1 4 /2 0 0 5 1 /3 1 /2 0 0 5 0 2 /0 9 /2 0 0 5 2 /1 8 /2 0 0 5 0 3 /0 1 /2 0 0 5 0 3 /1 0 /2 0 0 5 3 /2 1 /2 0 0 5 0 4 /0 1 /2 0 0 5 4 /1 3 /2 0 0 5 4 /2 5 /2 0 0 5 0 5 /0 5 /2 0 0 5 5 /1 6 /2 0 0 5 5 /2 5 /2 0 0 5 Date 0 6 /0 1 /2 0 0 5 0 6 /0 9 /2 0 0 5 6 /1 7 /2 0 0 5 6 /2 7 /2 0 0 5 0 7 /0 3 /2 0 0 5 0 7 /0 8 /2 0 0 5 7 /1 8 /2 0 0 5 7 /2 6 /2 0 0 5 0 8 /0 3 /2 0 0 5 Date 0 8 /1 2 /2 0 0 5 8 /2 2 /2 0 0 5 Pre-Merger Share Price Movement Actual Merger Share Price Movement Figure 5.00 16.00 4.14 Share price movement pre Access Bank merger Figure 5.

Nigerian Capital Market Data Bank 2008. but surpassed the balance sheet projections.00 30.00 50.8 Actual versus projected performance of Access Bank Tables 5. 5.00 2/13/2006 7/20/2006 2/13/2007 7/19/2007 5/26/2008 11/01/2005 12/20/2005 04/07/2006 06/01/2006 09/07/2006 10/30/2006 12/18/2006 04/04/2007 06/01/2007 09/06/2007 10/30/2007 12/18/2007 02/12/2008 04/04/2008 7/15/2008 Zenith Bank Access Bank Date Source: Securities & Exchange Commission.6 billion unamortised goodwill that ought to be written-off over five years. On the other hand.00 10.16 Share price movements post Access Bank merger Post-Merger Share Price Movement 80.19 below reveal that Access Bank was unable to attain its projected profit and loss target for 2006 financial year.00 40. The increase in operating expense in 2007 by about 83% is closely related to the write-off of N6.Figure 5.00 Price (Naira) 60. -61- .3. the Bank surpassed its profit and loss projections for 2007.18 and 5.00 20. The attainment of the projected performance by Access Bank is an indication that the expected financial synergies from the merger were achieved.00 70.

00 Forecast (N'm) 21.421 8.119 Variance (%) -0.52 -0.043 Variance (%) 0.31 0.31 -1.384 1.14 -0.83 0.894 Variance (%) 0.881 16.953 1.18 Profit and Loss Accounts highlight (forecast and actual) 2006 Forecast (N'm) Gross Earnings Interest Income Interest Expense Other Income Operating Expense Profit Before Tax Dividends 17.Balance Sheet highlights (forecast and actual) 2006 Forecast (N'm) Total assets Total assets & Contingencies Total liabilities Deposits Loans & Advances Shareholders' fund 133. Capital and Marina Scheme of Mergers. Annual Report.54 0.283 10.00 Source: Access.273 12. Annual Report.09 0.645 145. 2005: 115.733 2.117 2.536 154.32 -0.164 6.522 7.952 10.35 0.894 4. 2007: 7 5.199 5.660 110.62 -1.084 6.062 39.035 28.39 0.02 Source: Access.651 105.554 204.111 28.19 .148 2.23 -0.879 54.398 Actual (N'm) 174.988 13.109 Actual (N'm) 13.39 0.472 4.192 7.628 8.138 72. Access Bank Plc.360 8.080 2007 Actual (N'm) 27. 2005: 117 Access Bank Plc.751 5.29 0.Table 5.31 0. Capital and Marina Scheme of Mergers.36 -0.32 0. 2007: 6 -62- .111 8.

Profitability: Evaluating profitability on the basis of ROCE. Zenith Bank’s ROCE declined by 9% from 2.1. profitability. The study considered liquidity. In this regard. asset quality. with Access Bank Plc and Zenith Bank Plc as case studies. It was aimed at answering the research question.9% in 2007: a growth of 171%.2% in 2005 to 2% in 2007. Different perspectives to the study of M&A were considered. based on the economic and finance perspectives of the study of mergers and acquisitions. -63- . using financial ratio analysis.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.10 in the preceding chapter. The methodology of this study was qualitative. capital adequacy. Zenith Bank outperformed Access Bank on a year by year basis. On the other hand. Capital Adequacy as a measure of performance showed Zenith Bank as having more quality assets as indicated in Tables 5. Zenith Bank outperformed Access Bank. the study started with an overview of the Nigerian Banking sector and a review of relevant literatures on organic growth. an indication that M&A resulted in superior financial performance. and growth rates as measures of financial performance.7% pre-merger in 2005 to 1. ‘which of the strategies (organic growth or mergers and acquisitions) result in superior financial performance?’ In order to answer the research question. and mergers and acquisition.9 and 5. However. though both banks surpassed the regulatory benchmark of 40%. Liquidity: As shown in the data analysis in the previous chapter. Access Bank grew its ROCE from 0. M&A produced a superior financial performance. Growth: Access Bank witnessed a higher growth rate than Zenith Bank during the period under review as shown in Table 6.

16 billion ordinary shares of 50 kobo each at N14.235 568.495 34. reinforced the opinion that Access Bank did enjoyed positive synergies from its merger of 2005.413 14.833 408.194 8.681 373.072 37. Shareholders funds growth in 2008 was mainly due to N136.790 81.608 233.2 below.386 272 155 971 154 529 143 102 199 400 215 Growth rate (%) Before Access Zenith Access Zenith Shareholders’ Fund Access Zenith Total asset + Access contingencies Zenith Earnings share per Access Zenith 12 kobo 136 kobo 87 kobo 189 kobo 625 39 Source: Access Bank and Zenith Bank Annual Reports. especially with regard to 2007 profitability and growth of Access Bank.5 billion raised through public offering of over 9.913 751 9.043 23.012 28.178. Fortunately.745 1.384 112.Table 6. a dividend of 40 kobo per share was declared. the 2008 financial year end result of Access Bank was released before the conclusion of this study and the performance as highlighted in Table 6.1 Growth rate between 2005 and 2007 Bank Premerger 2005 (N’m) Gross Earnings Profit Tax Deposit Access Zenith 7.90 in July 2007 (Access Bank. Also for the first time post-merger.890 Postmerger 2007 (N’m) 27. 2008: 52). an expression of public confidence in the bank. -64- .289 205. I was initially cynical if the result of just two years will be sufficient to draw a conclusion. When considering Access Bank’s post-merger performance for the period under review.881 89.195 32.

2 Access Bank’s 2008 Performance Highlights 2008 (N’million) 57. during the study.660 17. achieving all regulatory ratio requirements. Annual Report.650 15.615 300.000 Growth (%) 92 130 176 122 Source: http://www.002 2007 Growth (N’million) (%) 27.cashcraft.638 7.596 1. Zenith Bank has been able to sustain its quality financial performance. I was thinking that Zenith Bank must have reached the zenith of its performance and diminishing returns must have started setting-in.3 obtained from the Nigerian Stock Exchange.789 244.042 351.314 33. 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.043 205.3 Zenith Bank's 2008 3Q Operation Statement 9 months to 31 March 2008 (N’million) Gross Earnings Profit Before Tax Taxation Profit After Tax 120.881 107 8.463 172. Table 6. Also.asp -65- .com/interimresult.761 328.320 9 months to 31 March 2007 (N’million) 62.627 19.235 107. Its core management team and values are retained and sustained.306 40.043.650 2.230 28.Table 6.385 137 71 127 218 190 506 Gross Earnings Profit Before Tax Deposit Loans & Advances Total assets Total liabilities Shareholders' fund Source: Access Bank. On the other hand. 2008: 26 – 27.465 871. however according to a nine month unaudited interim report as shown in Table 6.

and organic growth respectively. Organic growth requires time and development of additional managerial resources (Dierickx and Cool 1989). The choice of strategy adopted by either bank was dependent upon their individual circumstances and organisational strategy.The study showed that Access Bank that pursued M&A witnessed a faster growth rate. 1993). using quantitative methods to find out the correlation between strategies and performance to enable generalisation of the outcome. 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. -66- . 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. in line with past literatures on mergers and acquisitions. 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.

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