THE EFFECT OF CORPORATE MERGERS AND

ACQUISITIONS ON THE PERFORMANCE OF

NIGERIAN BANKS.

BY:
AKINFENWA EMMANUEL G.
Matric No: 20131923

SUBMITTED TO:
DEPARTMENT OF BANKING AND FINANCE
COLLEGE OF MANAGEMENT SCIENCES
FEDERAL UNIVERSITY OF AGRICULTURE, ABEOKUTA.

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF BACHELOR OF SCIENCE (B.Sc) DEGREE IN BANKING
AND FINANCE

SUPERVISOR:MR. OSHADARE, S.A.

FEBRUARY, 2018
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 CERTIFICATION

This is to certify that the research project is carried by

Akinfenwa Emmanuel G. of Federal University of Agriculture,
Abeokuta, under my supervision.

…………………… …………………………
Mr. S.A. Oshadare Date
Supervisor

…………………… …………………………
Dr. J.A. Ajayi Date
Head of Department
Department of Banking and Finance
College of Management Sciences
Federal University OF Agriculture, Abeokuta

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 DEDICATION

This work is dedicated to my dearly beloved mum, for her un-relentless support, encouragement
and belief in me without which I would not have been able to complete this challenging task.
Mum you are more valuable than diamond, i cannot trade you for silver nor gold.
Love you mum.

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 ACKNOWLEDGEMENT

I thank the Almighty God for the gift of life and health that I received throughout my studies and
for His many blessings and inspiration during this research.
My heartfelt gratitude goes out to my supervisor Mr. Oshadare S.A. for his patience,
encouragement, guidance, understanding and enlightenment throughout this research.
Also I cannot fail to appreciate my pastor in person of Uche Israel and his family for their
support and prayer, from me to you I say ‘I love the way you pastor me sir’.
The Akinfenwas I can’t appreciate you enough, you are my inspiration. Love you guys to the end
of the world.
Olabodesegun, Adekunle Williams, Godwin Effiong, Egbiremolen Samson, Williams
Theophilus and the LCC family you guys have made a part of me, thanks for the prayer, support,
belief, encouragement. May the eyes of your understanding keep being flooded with light.
Team DID i love you guys like myself, greater height i pray for you all.
Lastly and not least, am also indebted to my B.Sc. Banking and Finance colleagues and friends
and all those who assisted me in one way or another throughout this period of study and though I
may not name each one of you individually, your contribution is recognized and appreciated
immensely. I owe you my gratitude. To you all, God bless.

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 TABLE OF CONTENT

Title page…………………………………………………………………………....i
Certification………………………………………………………………………....ii
Dedication………………………………………………………………………...…iii
Acknowledgement…………………………………………………………………..iv
Table of Contents……………………………………………………………………v-vii
Abstract………………………………………………………………………………viii
CHAPTER ONE: INTRODUCTION…………………………………………… 1-8
1.1: Background to the Study ……………………………………………………….1-3
1.2: Statement of the Problem ……………………………………………………….3-4
1.3: Objectives of the Study …………………………………………………………4
1.4: Research Questions ……………………………………………………………...5
1.5: Research Hypotheses ……………………………………………………………5
1.6: Significance of the Study………………………………………………………..6
1.7: Scope of the Study……………………………………………………………… 6
1.8: Limitations to the Study ………………………………………………………...7
1.9: Definition of Terms…………………………………………………………….. 8
1.10: Organisation of the Study…………………………………………………….. 8

CHAPTER TWO: LITERATURE REVIEW………………………………….. 9-27

2.1: Conceptual Review………………………………………………………………9-15
2.1.1: Merit of Mergers and Acquisitions…………………………………………… 12-15
2.2: Theoretical Review ………………………………………………………………15-20
2.2.1 Efficiency Theory……………………………………………………………….15-16
2.2.2 Market Power Hypothesis……………………………………………………....16
2.2.3 Free Cashflow Theory…………………………………………………………..16
2.2.4 Agency Theory………………………………………………………………….17
2.2.5 Bankruptcy Avoidance Hypothesis……………………………………………. 17-18
2.2.6 Valuation Theory………………………………………………………………. 18
2.2.7 Managerial Hubris Theory……………………………………………………….18

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2.2.8 Industry Shock Theory…………………………………………………………..19
2.2.9 Transaction Cost Theory…………………………………………………………19
2.3 Empirical Review…………………………………………………………………..19-27
2.4 Gaps to be Filled……………………………………………………………………27

CHAPTER THREE: METHODOLOGY…………………………………………. 28-34

3.1: Research Design…………………………………………………………………...28-29
3.2: Population …………………………………………………………………………29
3.3: Sample……………………………………………………………………………..29
3.4: Sources of Data and Type of Data………………………………………………...30
3.5: Models’ Specification……………………………………………………………...30-31
3.6: Method of Data Analysis…………………………………………………………..31
3.6.1 Descriptive Analysis………………………………………………………………31-32
3.6.2 Correlation Analysis………………………………………………………………32
3.6.3 Regression Analysis……………………………………………………………….32
3.7 A priori expectation…………………………………………………………………33
3.8 Operationalisation of Variables……………………………………………………..34

CHAPTER FOUR: PRESENTATION OF RESULTS……………………………. 35-43

4.1 Preliminary Analysis………………………………………………………………...35-41
4.1.1 Descriptive Analysis………………………………………………………………35-36
4.1.2 Graphical Analysis………………………………………………………………...37-39
4.1.3 Formal Pre-test…………………………………………………………………….40-41
4.2 Model Estimation Result…………………………………………………………… 41
4.3 Correlation Result………………………………………………………………….. 42
4.4 Discussion of Findings………………….. …………………………………………42-43

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CHAPTER FIVE: SUMMARY AND RECOMMENDATION……………………44-47
5.1 Introduction…………………………………………………………………………44
5.2 Summary…………………………………………………………………………….44-45
5.3 Conclusion…………………………………………………………………………..45-46
5.4 Recommendation……………………………………………………………………46-47
5.5 Limitations of the study…………………………………………………………….47
5.6 Suggestions for further studies……………………………………………………...47
References………………………………………………………………………………48-49
Appendix 1: Extracted Data……………………………………………………………50-53
Appendix 2: Regression Result…………………………………………………………54

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 ABSTRACT
The study evaluated the effects of corporate mergers and acquisitions on the performance of
selected Nigerian banks. The return on equity was used as the explained variable that served as
a function of shareholder’s fund, total asset and total deposit that are explanatory variables. The
research made used of secondary data, obtained from the bank’s annual reports and statements
of accounts spans from 2006 to 2015, the study employed Ordinary Least Square has shown
from the unit root test that all of the time series are stationary series i.e. stationary at level. The
result showed that merger and acquisition has no significant impact on banks’ performance of
the selected banks in Nigeria. Based on the findings, the study recommended among others, that
Central Bank of Nigeria should ensure that only strong banks can merge so as to form mega
bank in order to achieve the synergy that the bank consolidation promises. The study also
recommended that Management of Nigerian banks should be discouraged from unethical
banking practices and regulatory authorities should use their searchlights on the Nigerian
banking industry in order to curb financial crimes being perpetuated in Nigerian banks.

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 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Banking sector plays a crucial role in the economic growth and development of a nation.
Globalisation, deregulation of economies coupled with technological development has changed
the banking landscape dramatically (Gupta, 2015). With the fast changing environment, the
banking sector is resorting to the process of consolidation, corporate restructuring and
strengthening to remain efficient and viable. Banks strategically occupy a pivotal position in the
economy wheel of a nation by intermediating and channeling surplus funds from surplus
economic units to the deficit units of the economy.

The liberalization of the Nigerian financial system can be traced back to 1987 with the objective
of enhancing the efficiency of resource allocation and strengthening competition. CBN's
surveillance on banks in 2004 revealed deterioration in banks' overall performance, based on
CAMEL parameters. Banks' performance rating showed that 10 banks were rated as sound, while
51, 16 and 10 banks were rated as satisfactory, marginal and unsound, respectively. This now
raises some questions on the state of the banks in the country, can mergers and acquisitions be a
solution? What is the relationship between mergers and acquisitions on the one hand and bank
performance or the other hand? What are the post-merger challenges and how does it affect
performance? What will be the nature of competition before and after the consolidation policy?
Against this background, the CBN in July 2004 rolled out a 13-point reform agenda aimed at
consolidating the banking sector and preventing the occurrence of systemic distress. (CBN Briefs
2004/5-02), part of which all commercial banks were ordered to beef up their minimum capital
base to the tune of N25 Billion. Upon this pronouncement, the options available for the banks
were offered for subscription through the capital market and consolidation through the merger
and acquisition. The merger acquisition exercise resulted in the emergence of 25 banks out of 89
banks and revocation of 11 licenses. Few years after the exercise, precisely in 2008, some of the

9
so called mega banks began to experience crisis. The crisis saw three of the banks acquired and
other three nationalized. Presently, there exist 22 licensed deposit money banks in Nigeria.
In terms of Assets, the total asset of all the 89banks operating in Nigeria in 2004 prior to the
consolidation was N3,753.28billon(US$28.250billion) and rose to
N6400.78billion(US$49.88billon) indicating a growth rate of70.54.16 per cent within one year
after consolidation. The asset size of an average bank which was N42.172billion (US$0.3174
billion) grew geometrically to N267.482billion (US$2.0856billion) within a year after the
consolidation exercise, a growth rate of 534.27percent. This was an impressive performance.
However, an assessment of the level of capitalization of an average bank prior to the exercise
indicates an equity base (Net worth) of N7.71 billion (US$0.06168billion) rising toN38.83billion
(US$0.31064billion) in 2006, indicating a growth rate of 404 per cent. The leverage ratio
measured in terms of equity to total asset also declined from 18.28 per cent 2004 to 14.52 per
cent in 2006 for an average bank. This ratio compares favourably with the CBN minimum level
of 10 per cent. The post consolidation ratio is also better in terms of its distribution among the
banks compared with the pre-consolidation ratio where more than 70 per cent of the equity and
assets were concentrated in (the largest five banks) less than 5 per cent of the existing banks.
However, the intermediation activities of an average bank improved significantly by about 1,690
per cent from an average deposit base of N10.48billion (US$0.08384) in 2004 to N188.48billion
(US$1.50784) in 2006. The profit efficiency/asset utilization has not been impressive. Although
the banks have been able to double their gross earnings from their pre consolidation performance
level, their profit and asset utilization efficiencies have declined since the conclusion of the
consolidation. For instance, the industry return on equity declined from 35.28 per cent in 2004 to
11.12 per cent in 2006, while return on asset declined from 8.37 per cent to 2.09 per cent over
the same period. The asset utilization ratio also declined; while an average bank was able to earn
34 kobo for every N1.0 asset in 2004, this declined to 11kobo in 2006. Thus, while the
consolidation has improved the structure of the Nigerian bank industry in terms of asset size,
deposit base and capital adequacy, the profit efficiency has not been impressive. The banks will
need to become more efficient in terms of their ability to generate enough return to justify the
increase in the equity base as well as the resources put at their disposals by their stakeholders.
The lending capacity of the banks improved significantly as a result of the consolidation. As at
2004, an average bank could only lend about N14, 371.billion. Whereas, the consolidation

10
strengthen the bank where a typical bank in Nigeria in 2006 could lend an average of
N80.788billion. This represents a growth of 462.13 percent growth (Somoye, 2008).
It becomes germane to conduct a research that aims to provide answers to questions such as:
what effect has corporate mergers and acquisitions has on the performance of Nigerian banks.

Hence, this study will be targeted at investigating the effect of corporate mergers and
acquisitions on the performance of Nigerian banks.

1.2 Statement of the Problem

0ver the past two decades, the banking sector has experienced an unprecedented level of mergers
and acquisitions among large financial institutions which has taken place at record levels.
Researchers have tried to study the performance of acquiring firms after the post merger
acquisitions.

According to Pilloff and Santomero (1997), there is little empirical evidence of mergers and
acquisitions achieving growth and impacting performance gains. Some of the popular studies
conducted were accounting studies, event studies, clinical studies and executive studies.

Appah & John (2011) in their study analyzed the profit efficiency effects of Mergers and
acquisition in the Nigerian Banking Industry. The Study used ex-post research design with data
drawn the annual reports of sampled banks for the period 2003-2008 using ROE as proxy for
profit efficiency while the sample size consist of 10 banks. The paired sample T-test statistics
and descriptive analysis was used for analysis. Findings revealed that sampled banks performed
better during the Pre-merger and acquisition period (2003-2005). The study concluded that there
is no significant difference in ROE of all banks combined between the pre and post-merger
period.

This position was also confirmed by Taiwo & Musa (2014) who examined the impact of
consolidation on the performance of listed deposit money banks in Nigeria covering a period of
12 years from 2000 to 2011(6yrs pre & post); using a sample of four banks. Paired sample

11
T-test was used to test the hypothesis formulated with reference to the variables; Return on
Asset, Return on Equity and Net profit margin. The study concluded that the consolidation
reform in the Nigerian banking sector has impacted positively on Return on Assets, Net profit
margin, but does not impact on Banks Return on equity.

A vivid and closer look at the aftermath of 2006 consolidation exercise which produce the
emergence of 25 mega banks, revealed a wave of turbulence and crises in the financial activities
of these so called mega banks precisely in 2008 which resulted in the acquisition of three banks
and nationalization of another three banks. This poses a question on the effectiveness of bank
mergers and acquisitions.

A deeper look at the banks that emerged after their mergers and acquisitions shows that most of
the banks that were distressed and unsound regrouped or fused. These new strong banks
established were perceived not necessarily to correct their incompetence in their operating
system but just to meet mandatory requirement and remain afloat as well as to continue business
as usual.

Also there exist mixed and inconclusive evidence which appears counter intuitive and many fail
to show a clear relationship between merger and acquisition and performance. Hence, this study
aims to use a comprehensive approach in order to test whether mergers and acquisitions in the
Nigerian banking industry led to an improvement in performance.

1.3 Objective of the Study

This study seeks to examine the effect of corporate mergers and acquisitions on performance of
Nigeria banks. Also we shall examine for the following:
1. The effect of shareholders fund on bank profitability.
2. To ascertain the effect of total value of deposit on the profitability of the sampled
commercial banks.
3. Examine the effect of total asset on bank profitability.

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1.4 Research Questions
To achieve the above objectives, the following research questions will be raised:
1. Does corporate mergers and acquisitions have any effect on performance of Nigeria
banks?
2. What effect does shareholders fund have on bank profitability?
3. How does total value of deposit of the sampled commercial banks affect their
performance?
4. What effect does an increase total asset have on bank profitability?

1.5 Research Hypothesis

Hypothesis 1
Ho: Mergers and acquisitions has no significant effect on the performance of the selected sample
banks.
H1: Mergers and acquisitions has significant effect on performance of the selected sample banks.

Hypothesis 2
Ho: There exists no positive relationship between increase in shareholders fund and bank
performance.
H1: There exists a positive relationship between increase in shareholders fund and bank
performance.

Hypothesis 3
Ho: There exists no positive relationship between total value of deposit and bank performance.
H1: There exists a positive relationship between total value of deposit and bank performance.

Hypothesis 4
Ho: There exist no positive relationship between increase in total assets and bank performance.
H1: There exist a positive relationship between increase in total assets and bank performance.

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1.6 Significance of the Study
The major significance of this study is to examine the effect of corporate mergers and
acquisitions on the performance of Nigerian banks in terms of its impact on efficiency and
returns.

The study will make cogent contributions to the long list of existing research works on the topic
and also serve as policy guidance for implementation of consolidation in other sector of the
economy. It will also be use to establish the research gaps and provide reference for further
research under the field of merger and acquisition.

Also the study will be of significant interest to individuals, investors, corporate bodies,
regulators and government as it would help in unveiling the effect of corporate mergers and
acquisition on performance of banks and in shaping their decisions.

1.7 Scope of the Study

This study intends to examine the effect of corporate mergers and acquisitions on performance of
Nigerian banks. For the population of this study seven (7) banks are selected as sample for the
purpose of analysis. This represents 31.8% of the Nigerian banking industry. The choice of this
was to ensure data availability to enhance a comparative analysis.

In line with previous empirical studies that identified some set of variables believed to be major
determinants of bank performance, this study focused mainly on four(4) of such variables and
are: Profitability as measured by ROE (Return on Equity), and independent variables as
measured by SHF (Shareholders’ Fund), TA (Total Assets) and TVD (Total Volume of Deposit).

This research covered a period of 10 years (2006-2015). The data used was obtained from the
annual financial reports of the selected sample banks.

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1.8 Definition of Terms
To ensure a proper and comprehensive understanding of this research work, the under listed
terms are defined thus:
1. Merger: is a corporate restructuring activity which involves the combination of two or
more companies in such a way that only one survives while the others are dissolved.
2. Acquisition: refers to the situation where one firm acquires another and the latter ceases
to exist. In the case of acquisition, the target company is usually a firm that is not doing
well in terms of financial and management activity.
3. Amalgamation: is the combination of two or more companies in such a way that all the
former entities are collapsed giving way for a new and separate entity to be form.
4. Take-0ver: In contrast to what happens in acquisition, a weak firm voluntarily surrenders
to a strong firm in a form of acquisition. The acquiring firm strategically purchases shares
from the market without the knowledge of the management of the weak company to
acquire controlling interest.
5. Corporate restructuring: Corporate restructuring can also be termed business
combination and it includes merger and acquisition (M&A), amalgamation, takeover,
leveraged buyouts, capital reorganization, sale of business units and assets etc.
6. Return on equity: The return on equity is net profit after tax divided by share holders‟
equity which is given by net worth. This is the net income of an organization expressed
as a percentage of its equity capital, i.e. it indicates how well the firm has used the
resource for owners (shareholders).
7. Shareholders’ fund: This refers to the amount of equity in a company, which belongs to
the shareholders. The amount of shareholders’ funds yields an approximation of
theoretically how much the shareholders would receive if a business were to liquidate. It
is calculated by subtracting the total amount of liabilities on a company’s balance sheet
from the total amount of assets.
8. Total Volume of Deposit: This represent the total volume of deposits received by the
commercial banks. They are also referred to as deposit liabilities. It consists of demand
deposit, time deposit and fixed deposit.

15
 9. Total assets: This is the final amount of all gross investments, cash and equivalents,
receivables, and other assets as they are presented on the statement of financial position.

1.9 Organisation of the Study

This research work is divided into five (5) chapters; The Introductory chapter is the first and
comprises the background of the study, statement of the problem, objective of the study, research
question, research hypothesis, significance of the study, the scope of the study, limitations of the
study and definition of terms. Chapter two which has the literature review will comprise mainly
of the theoretical, conceptual, and empirical frameworks of the study. Chapter three, the
methodology, will contain the research method that would be adopted, the research design and
method of data collection. Chapter four would analyze the data and interpret the result. Chapter
five would be the summary, conclusion, recommendations and contribution to knowledge.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction
There has been numerous studies on mergers and acquisitions in the last four decades and several
theories have been proposed and tested for empirical validation. Researchers have studied effect
of M&A on industry consolidation, returns to shareholders following M&A and the post-merger
performance of companies. Whether or not a merged company achieves the expected
performance is the critical question that has been examined by most researchers. Several
measures have included both short term and long term impacts of merger announcements effects.
The subsequent literature review seeks to integrate issues regarding theories to be reviewed,
Classification of mergers and acquisitions, benefits of mergers and acquisitions, conceptual
review and the empirical review of related studies.
It will also seek to summarize the information from other researchers who have carried out their
research on mergers and acquisition.

2.1 Conceptual Review

The term merger and acquisition are often used interchangeably to mean the same thing, and in a
more common sense used in the dual form as mergers and acquisitions which is (abbreviated
M&A). Mergers and Acquisitions are a global business term used in achieving business growth
and survival. Soludo (2004) opined that mergers and acquisitions are aimed at achieving cost
efficiency through; economies of scale, and to diversify and expand on the range of business
activities for improved performance. Also merger and acquisition is relatively synonymous with
synergy.

According to A.O. Umoren and F.O. Olokoyo (2007) they defined merger as the fusion of two or
more companies in which one company will legally exist and continues to operate in its original

17
name or adopt a new name, while acquisition is described as a business combination in which
one completely swallows the other(s) under the leadership of a single management.
Acquisitions can be friendly or hostile. In the case of a friendly acquisition the target is willing to
be acquired. The target may view the acquisition as an opportunity to develop into new areas and
use the resources offered by the acquirer. In the case of a hostile acquisition, the target is
opposed to the acquisition. Hostile acquisitions are sometimes referred to as hostile takeovers. A
review of the literatures on merger and acquisition shows that the definition of merger and
acquisition significantly varies from country to country depending on factors such as the
country’s state of economic development, the performance of their banking sectors etc.

In some literatures mergers and acquisitions is used to refer to a generic term of corporate
restructuring (Sudarsanam, 2008). Mergers and acquisitions can either of the following forms:

Merger: The term Merger, refer to the combination of two or more organizations into one larger
organization. Such actions are commonly voluntary and often result in a new organizational
name (often combining the names of the original organization).
Sudarsanam (2008) 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 thus may sometimes lead in new entity
being formed. A Merger is essentially a fusion at two or more company in which one of the
combining companies legally exist and the surviving company continues to operate in its original
name.

Acquisition: Acquisition includes all business and corporate organizational and operational
devises and arrangement by which by which the ownership and management of independently
operated properties and businesses are brought under the control of a single management
(Emekaekwue, 2008). Acquisition involves a larger firm taking over a smaller one. It can even
be regarded as a situation where one company the bidder buys total or majority shares from a
smaller company. Sudarsanam (2008) says that acquisition resembles more of an arm’s length
transaction with one firm purchasing the asset of the other and the shareholders of the acquired
firm leasing to be owners of the new firm.

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Amalgamation: Amalgamation is the combination of two or more companies in such a way that
all the former entities are collapsed giving way for a new and separate entity to be form.

Takeover: A takeover can be said to be an acquisition. A takeover occurs when the acquiring
firm takes over the control of the target firm. In some case it can be said to be an assumption of
control of a corporation achieved by buying a majority of its shares.

Mergers and acquisitions can be classified into the following categories. These include
horizontal, vertical and conglomerate mergers.
I. Horizontal or Explicative Merger: This result when two or more firms in the same type of
industry merge into one. This also involves combination of two or more firms in similar type of
production, distribution or area of business. Examples include: the merger of the two banks to
form a bigger and a more effective one, under this arrangement the firm is merely enlarged to
allow for economics of scale and, removing duplicity of functions.
II. Vertical or Complementary Merger: This type of merger results when firms combine so as to
complement one another. It can even be regarded as a fusion or two or more firm and different
stages of marketing or production of a single product. The vertical merger may take the form of
forward or backward merger. It is forward when combined with the suppliers and distributors of
it finished product, while in the case of a backward integration it combines with its suppliers of
needed raw materials or inputs.
III. Conglomerate merger: This is a form of external growth though mergers of companies whose
businesses are not related either vertically or horizontally i.e. not in the same line of business.
This suggests a sort of portfolio investment strategy and a union of unlike bodies to form an
amorphous organization.

2.1.1 Merit of Mergers and Acquisitions

According to Emekaekwue (2008), Questions have been popped up to why firms should want to
merge their business with another firm when pride of ownership, enhanced status and undiluted
control are motivating factors in business arrangement. More generally, motivation for takeovers

19
and mergers may arise from the fact that the cost of production would be less in a larger entity
combined with the enlarged operational capacity and reduction of duplications (the economies of
scale).

A lot of reasons have been adduced for this; these reasons are categorized into aggressive and
defensive strategy. It is defensive, if it is aimed at wiping out competition by controlling
important source of raw materials, capital or even distribution. A strategy is aggressive if it
aimed at capturing markets that have hitherto proved difficult to penetrate or capture. The merits
are analyzed in details below:

I. Income Enhancement
On discovering by a firm that despite all its efforts, a strong sustainable and profitable
competitive position cannot be produced, it will therefore take a deliberate step to effect a change
in its share of the market. A fundamental reason for acquisition is the desire to enhance income.
A combined company may generate greater income than two separate companies. Increased
income many come from improved marketing, strategic advantage, reduced cost, monopoly
power or market power and increased market share. As regards to marketing, a merger can bring
about a significant improvement in previously ineffective media programming and advertising
efforts, a weak existing distribution network and an imbalance product mix. As regards strategic
advantage, some acquisitions are done purely to obtain strategic advantage. This is a process of
entering a new industry to exploit perceived opportunities. As regards to reduce cost, mergers
tend to eliminate multiplicity of cost and enjoyment of economies of scale. On monopolizing the
market, there are occasions when a company merges with another within the same industry to
reduce or eliminate tangible competition.

II. Reduced Competition

Merger results in reduced competition especially where there are few players and some of these
can successfully merge with others. It should be noted however that this often results in the
creation of monopolies. For instance, after the 2006 consolidation took place in the Nigerian
banking industry it resulted in the reduction of the total number of banks from the total of 89 to
25. The few emerged banks definitely became dominant in the industry.

20
III. Synergy
This is a situation where the product of the merger is in excess of the value of the aggregated
value of all the firms considered together, often referred to as the two- plus-two- equals five-
effect (2+2=5). Synergy implies a situation where the combined firm is more valuable than the
sum of the individual combining forms
If a firm acquires another firm in the same industry, a lot of financial advantage might result
from the elimination of duplicated activities in the marketing, research, purchasing and
administrative areas. For example financial benefits can be achieved in a merger between
manufacturers by eliminating the duplication of existing facilities and equipment. In an industrial
organization, synergism can occur not only with the elimination of duplicated operations but also
with a rounding out of the product line in the hopes of increasing the total demand for the
product of both companies.

IV. Economies of scale

Economies of scale arise when increase in the volume of production lead to a reduction in the
cost of production per unit. Economies can be maximized when it is optimally utilized.
Similarly, economies of scale occur when average cost declines with increase in volume.
Economies of scale are possible not only in production, but also in marketing purchasing,
distribution, accounting and even finance. The idea is to concentrate a greater volume of activity
with a given facility into a given number of people, into a given distribution system etc. that is
increase in volume permits a more efficient utilization of resources. However there are optimal
limits of growth, beyond a certain point increase in volume may be very problematic resulting in
less efficiency.

V. Use of idle Cash

A company might find itself with more cash than it requires presently in business operations. It
then looks for another business to buy. This is necessary because cash in sterile and it proper use
is not made of such excess cash, the company might find itself over capitalized. It is widely

21
argued that the only true justification for a merger is to achieve operating economics when the
objective of the firm is to maximize the wealth of the shareholders.

VI. Tax Saving

Sometimes mergers and acquisitions result in tax savings. This occurs when a profit-making
(thus a tax-paying firm) combines with a loss-making (a non-tax paying firm). The merger
results in lower profit and lower tax liability. Tax considerations may also be a determining
factor in mergers. One consideration is to substitute capital gains taxes for ordinary income taxes
by acquiring a growth firm with a small or no dividend payout and then selling it to realize
capital gains. This is made possible by the fact that differential tax rates are charged on capital
gains and dividends. Thus if a profitable firm merges, with a firm carrying over its tax loss, the
taxes that the profitable firm would have paid would then be avoided.

VII. Wider use of a Company’s Strength

In a reputable firm merger with one that is not so reputable, the more reputable firm will use the
might of its reputation to the advantage of the less reputable one.
Banks with poor management will lead to low/poor productivity. Therefore the need for merger
with other banks who have the required technical know-how would be very important.

VIII. Means of Attracting Factor Input and Skilled Manpower

Qualified, aggressive management is often hard to find and a merger can provide thus essential
ingredient with minimal problem. Perhaps raw materials could be the reason for the merger. A
firm producing beverage drink can opt to merge with a firm that is the main producer of cocoa,
so as to monopolize the raw material from the firm.

IX. Risk Diversification

An industry might have attained its limit of absorptive capacity and so the need to spread to other
areas of activity might arise. A merger will thus lead to diversification and a reduction of risk.
Merging can reduce instability in earning by opening up how area and strengthening present

22
lines. Since the acquired firm is already producing, there is less risk of loss, and the larger firm
becomes more equipped to absorb the risk of future expansion

X. Resource Transfer
Resources are unevenly distributed across firms and the interaction of target and acquiring firm
resources can create value through either overcoming information asymmetry or by combining
scarce resources.

2.2 Theoretical Review

Of the numerous extant theories available in literatures, the following theories has been selected
in order to provide a closer and vivid look at merger and acquisition and provide a solid
theoretical framework for this study.

2.2.1 Efficiency Theory

This is also referred to as theory of synergy. The theory of efficiency generally involves
improving the performance of incumbent management or achieving some form of synergy.
Synergy expects that there is really something out there, which enables the merged entity to
create shareholders value. This theory held that acquisitions were executed to achieve synergies.
Synergy is believed to occur where the value of the combined firms exceeds the value of the
individual firm brought together by merger. It is expressed in this mathematical equation as
[2+2=5] and sometimes it can also be expressed as [1+1=3]. That is, with synergy: VAB > VA +
VB. Synergy is the advantage that will be enjoyed by the merged companies but which were not
possible when they operated separately. It is generally assumed that when two companies come
together, they will reap certain advantages like economies of scale due to bigger size,
technological research, access to greater fund, bigger market and more managerial competence.
In other words, the synergetic effects resulting from the merging together of firms is such that
their profit when merged exceed what the sum of their individual profit would have been had the
firms remained unmerged.
Rumelt (1986), identified three types of synergies; Financial, Operational and Managerial.
Financial synergy comes from several sources. The first source is the lower costs of internal

23
financing in comparison with external financing. This occurs when firms with large internal cash
flows and small investment opportunities have excess cash flows whereas those with those with
low funds have large growth opportunities. A combination of the two will result in advantages
from the lower costs of internal funds ability. A second source of financial synergy is the ability
to underpay because of the ability to bargain. This comes from the strength of managers at a
given firm with stronger managers will have better bargaining power than that looking to
augment managerial capabilities.
The theory based on Operational synergy assumes that economies of scale and scope do exist in
the industry and that prior to the merger the firms were operating at unfavorable levels of activity
that cannot meet the potential for the economies of scale. Operational synergy targeted achieving
operational excellence from a combined firm's operations.
Finally, managerial synergy was used to enhance a target's competitive position by transferring
management expertise from the bidder to the target firm.
One difficulty in the efficiency theory is that if carried to its extreme, it would result in only one
firm in the economy, indeed in the world—the firm with the greatest managerial efficiency. The
efficiency theory is more likely to be a basis for horizontal mergers.

2.2.2 Market Power or Monopoly Hypothesis

This theory viewed that acquisitions were execute to achieve market power. The implication of
this is to limit competition in more than one market simultaneously, and to deter the potential
entrance of competitors into its market. Increasing market share really means increasing the size
of the firm relative to other firms in an industry.

2.2.3 Free Cash flow Theory

This theory is based on the management function of ensuring maximization of shareholders’
wealth. Managers control the usage of the current and future free cash flows of an organization
(Jensen 1986). Under the pressure of the company’s owners, in case of large free cash flows,
they are expected to pay out these cash flows in form of issuance of dividend or rights issue. The
promise of a permanent increase in dividends has trivial value to the shareholders because the
increase in dividends can be reduced in the future. Moreover, by diverting free cash flow for

24
investment in new or existing entities managers can increase the size of the company, thereby
enhancing their power and their earning ability.
The major assumption of this theory is that shareholders are rational and that they will decline
dividends so that free cash flows can be invested wisely to grow the firm.

2.2.4 Agency Theory

The main assumption of agency theory is that principals and agents are all rational and wealth
seeking individuals who are trying to maximize their own utility functions. In the context of
corporate governance, the principal is the shareholder and the agent is the directors/senior
management.
A simple agency model suggests that, as a result of information asymmetries and self interest,
principals lack reasons to trust their agents and will seek to resolve these concerns by putting in
place mechanisms to align the interests of agents with principals and to reduce the scope for
information asymmetries and opportunistic behavior. Agents are likely to have different motives
to principals. They may be influenced by factors such as financial rewards, labor market
opportunities, and relationships with other parties that are not directly relevant to principals. This
can, for example, result in a tendency for agents to be more optimistic about the economic
performance of an entity or their performance under a contract than the reality would suggest.
Agents may also be more risk averse than principals. As a result of these differing interests,
agents may have an incentive to bias information flows. Principals may also express concerns
about information asymmetries where agents are in possession of information to which principals
do not have access.
The agency cost theory of M&A argues that takeover activity often results from acquiring firm
managers’ acting in their own self-interests rather than in the interests of the firm’s owners
(Shleifer, 1988 and Vishny, 1989). Managers may be motivated to increase their compensation
by increasing the size of the firm through non-value enhancing mergers or engaging in “expense
preference” behavior by over-consumption of perquisites. Managers also may intentionally
acquire businesses that require their personal skills in order to make it costly for shareholders to
replace them. To the extent that M&A are primarily motivated by managerial self interest, they
are unlikely to generate operating or financial synergies that lead to improvements in efficiency
or productivity.

25
2.2.5 Bankruptcy Avoidance Hypothesis
A carefully timed takeover can be an alternative to bankruptcy. Pastena and Ruland (1986) in
Mergers / Bankruptcy alternative noted that shareholders should prefer merger to bankruptcy
because in a merger the equity shareholders receive stock while in bankruptcy they frequently
end up with nothing. However, while the bankruptcy avoidance hypothesis can be justified from
the bidder and target shareholder perspectives, it fails to take the agency problem into account.
Studies found that managers of a distressed company tended to stay in control if there was a
rescue package or the firm was acquired. However, it should be noted that not all distressed firms
welcome acquisition as a survival mechanism.

2.2.6 Valuation Theory

This theory viewed acquisitions as being executed by managers who have superior information
than the stock market about their exact target's unrealized potential value. The assumption here is
that the acquirer possesses valuable and unique information to enhance the value of a combined
firm through purchasing an undervalued target or deriving benefits from combining the target's
business with its own. The leveraged buyout can be categorized into this theory. Trautwein
(1990), outlined that one of the most common criticism about this valuation theory is that it is
impossible to acquire accurate and tangible information about the acquisition results, and further
stated that the concept of private information as a basis for mergers warrants further
consideration, since it shows why the problematic assumption of capital market efficiency can be
avoided.

2.2.7 Managerial Hubris Theory

According to the managerial hubris theory, even if managers try to maximize the value of the
firm, they might overestimate the value of what they buy because of hubris (Roll, 1986) as a
result of overconfidence by the managers. This is particularly true in waves of consolidation,
when managers blindly follow the markets and change their beliefs on conglomeration versus
strategic focus or when multiple bidders compete for the same target. Managers also could
underestimate the cost of post-merger integration or overestimate their ability to control a larger

26
institution. Thus, a transaction that is believed to benefit the acquirer could simply be a poor
strategic decision where benefits are overestimated or costs are underestimated.

2.2.8 Industry Shock Theory

Industry shock theory holds that M&A activities within an industry are not merely firm-specific
phenomena but the result of the adaptation of industry structure to a changing economic
environment or “industry shocks” such as changes in regulation, changes in input costs,
increased foreign or domestic competition, or innovations in technology. Mitchell and Mulherin
(1996) argue that corporate takeovers are the least costly means for an industry to restructure in
response to the changes brought about by economic shocks but that post-takeover performance
of firms should not necessarily improve, compared to a pre-shock benchmark.

2.2.9 Transaction Cost Theory

Transaction costs applies to vertical merger and acquisition aimed at reducing uncertainty or the
cost of procuring a particular factors of production. Following the transaction cost theory, firms
evaluate the relative costs of alternative governance structures (spot market transactions, short
term contracts, long-term contracts, vertical integration) for managing transactions (Coase,
1937). Transaction costs could be defined as the costs of acquiring and handling the information
about the quality of inputs, the relevant prices, the supplier’s reputation, and so on. Contractual
agreements are costly: costs have to be borne in order to negotiate and write the terms of the
arrangements, to monitor the performance of the contracting party, to enforce the contracts.
Firms merge as a way of economising on transaction costs in a world of uncertainty, where
contractual arrangements are too expensive.

27
2.3 Empirical Review

Under this study an extensive review of literatures has been carried out for the purpose of
providing an insight into the work related to Mergers and Acquisitions. Several studies have
been conducted to examine the impact of M & A on different aspects of the banking sector.

Ajayi and Obisesan (2016) evaluated the effects of mergers and acquisitions on the
performance of selected Deposit Money Banks in Nigeria. The profit after tax was used as the
explained variable that served as a function of shareholders’ fund, total assets, loan and advances
and the total deposit that are explanatory variables. The research made used of secondary data
obtained from banks’ annual reports and statements of accounts spanning from 2001-2014, the
study employed Ordinary Least Square Cointegration Techniques. The co-integration result
reveals that there is a dynamic long-run association between the variables. The over-
parameterized error correction model result shows that the variables have short run association
which can actually be felt in the long run. However, the result further shows that the short-run
inconsistencies have been corrected; giving the correctly signed and statistically significant ECM
coefficient of about 80.40%. From the co-integration equation, it is evident that TD has a
significant influence on the level of development in Nigerian Banks. On the short run, PAT and
SHF variables are negatively insignificant with bank performance, TA and TD have positively
significant relationship with bank performance while the LA posit a positive but insignificant
relationship with the Profit after tax of selected banks. However, in the long run LA and TD
portrayed a negative relationship with the earlier formulated apriori expectation of the study.
Hence, the study showed that merger and acquisition has not significantly impact banks’
performance. The study is in consonant with the works of Owolabi and Ogunlalu, (2013),
Odetayo et al. (2013), DeLong and DeYoung (2007) that merger acquisition has no gain effect
on the performance of selected banks.

28
 Appah & John (2011) analysed the profit efficiency effects of Mergers and acquisition in the
Nigerian Banking Industry. The Study used ex-post research design with data drawn the annual
reports of sampled banks for the period 2003-2008 using ROE as proxy for profit efficiency
while the sample size consist of 10 banks. The paired sample T-test statistics and descriptive
analysis was used for analysis. Findings revealed that sampled banks performed better during the
Pre-merger and acquisition period (2003-2005). The study concluded that there is no significant
difference in ROE of all banks combined between the pre and post-merger period. This position
was also confirmed by Taiwo & Musa (2014) who examined the impact of consolidation on the
performance of listed deposit money banks in Nigeria covering a period of 12 years from 2000 to
2011(6yrs pre & post); using a sample of four banks. Paired sample T-test was used to test the
hypothesis formulated with reference to the variables; Return on Asset, Return on Equity and
Net profit margin. The study concluded that the consolidation reform in the Nigerian banking
sector has impacted positively on Return on Assets, Net profit margin, but does not impact on
Banks Return on equity.

However, Onikoyi & Awolusi (2014) differs from the earlier position on equity in their
research; the effects of mergers and acquisitions on shareholders’ wealth in Nigerian banking
industry. In a bid to establish relationship between; increase in capital base and shareholders
wealth, merged and acquired banks market shared and shareholders wealth, increase in merged
banks revenue and shareholders wealth, cost savings and shareholders wealth; exploratory and
correlation research designs were used to analyse a sample of fifteen (15) merged banks. Five
hundred and fifty seven (557) questionnaires were administered to the staff of the merged banks
and a response rate of 58.3% was obtained. The instrument was validated and Cronbach’s Alpha
coefficient result of 0.708 was obtained indicating the internal consistency of the instrument. The
findings of study showed that there was a significant relationship between shareholders wealth
and capital base (ρ-value of 0.000), market share (ρ-value of 0.000), bank revenue (ρ-value of
0.000) and cost savings (ρ-value of 0.000). The study concluded that mergers and acquisitions
have positive effect on the shareholders wealth.

Onaolapo and Ajala (2013) used an econometric perspective to research the post-merger
performance of selected Nigerian deposit money banks. Using judgmental sampling technique,

29
15 listed banks were selected as data (secondary) were extracted from the financial records of ten
years (pre &post). The Pearson’s correlation was used to measure the degree of association
between variables under consideration; Assets profile, capital structure, operating efficiency,
liquidity risk and credit risk while the formulated hypotheses were tested with use of multiple
regression analysis. The study concluded that there is an improved performance on the part of
selected commercial banks. This is in terms of return on equity, return on asset and net profit
margin. It revealed that there is a strong relationship between bank performance and merger.

Umoren & Olokoyo (2007) analysed the impact of consolidation on performance of banks with
focus on their profitability, liquidity and solvency. The study analysed 7 mega banks covering a
period of 3years (2yrs pre & 1 year post). Correlation analysis was used to test the impact of the
performance ratios. Variables used to review the financial statement include; Asset profile,
capital structure, credit risk, cost controlling, liquidity risk, Return on Asset, Return on Equity,
and Size. Findings support the hypothesis that on average, strategically similar institution tend to
improve performance to a greater extent than dissimilar institution. However, the results differ
for individual banks. This position was further corroborated in the work of Ikpefan & kazeem
(2013) who used panel data ordinary least square approach to carryout investigation of the effect
of merger and acquisition on DMBs from the pre and post-merger for 10years (2000- 2009)
using a sample of ten (10) banks to see whether or not there has been any significant effect on
the Nigerian Banking Sector. Five (5) variables were used: ROA, Value of deposit, size of bank,
deposit growth rate, loans to deposit ratio. The study accepted the alternative hypothesis that
merger has a significant effect on bank performance. It noted that merger created synergy as
indicated by the statistically significant increasing post-merger financial performances although
banks should not jump at any merging opportunity that offers itself because the exercise is not an
opportunistic one.

Olokoyo (2013) reviewed bank reforms if they have been able to achieve predetermined goals
and set objectives in Nigeria. The study gathered data for analysis through the instrument of
questionnaire. One hundred (100) copies were administered out of which eighty (80) copies were
collated for the analysis. Analysis of Variance (ANOVA) method was used to test the
hypothesis. The study shows that the recapitalization and consolidation process has had

30
significant effect on the manufacturing sector of the economy and thus on the Nigerian economy
at large. The study further reveals that despite the reforms, post consolidation challenges like
challenges of increased return on investment still exist.

Okpanachi (2011) conducted comparative analysis on the impact of mergers and acquisitions on
financial efficiency of banks in Nigeria. Three (3) banks were chosen as sample and secondary
data were obtained from published annual reports and accounts covering the period of eight (8)
years from 2002 to 2008 for the variables- Gross earnings, profit after tax and net assets. The
collected data were analysed using t - test statistic at 5% level of significant. The results showed
an enhanced financial performance leading to improved financial efficiency, but the t-test
statistic result of the three selected banks depicted an increase in their combined means for gross
earnings and net assets while profit after tax recorded a decline.

Odetayo & Olowe (2013) conducted an empirical analysis on the impact of post -merger on
Nigerian Banks profitability. Multiple regression analysis and the estimation by OLS with the aid
of STATA software was used to analyse date covering 2005-2012 for Net Assets and
shareholders fund. The sample consists of 2 banks. The result showed that post-merger has not
significantly impacted on bank's profitability.

Oghojafor (2012), in his study, evaluated Merger/Acquisition as an intervention strategy in the

Nigerian banking sector. The objective was to identify whether this strategy has actually
achieved the desired result for which it was intended, mostly in the 2005 merger in Nigeria. The
study was carried out using both primary (questionnaire) and secondary (banks financial
statements) data. 100 copies of questionnaire were administered to the management members of
the selected banks. Out of the three tested hypotheses; hypothesis 1 result revealed the calculated
t-statistics to be t = 6.591 P < 0.05, which implies that Merger and Acquisition had helped to
curb the distress that would have occurred in the Nigeria banks during the period it was applied.
On the other hand, Hypothesis two examines performances in pre and post merger.

Adegbagu and Olokoyo (2008) used descriptive research design (Mean and Standard
Deviation) and t-test and test of equality mean analytical techniques to study the effect of

31
recapitalization on the banks’ performance on Nigerian banks. The study found out that the
means of bank profitability ratios such as the Yield on Earning Asset (YEA), Return on Equity
(ROE) and Return on Assets (ROA) were significant. This means that there is statistical
indifference between the mean of the pre and post 2004 bank recapitalization.

Somoye (2008) examined the performance of government induced banks consolidation and
macro-economic performance in Nigeria in a post consolidation period. He found out that banks
consolidation may not necessarily be a sufficient tool for financial system stability and
sustainable development. The study posits that consolidation have not improved the overall
performance of the banking industry significantly and contributed little to the growth of the real
sector for sustainable development.

Olagunju and Obadami (2012) in their study of 10 DMBs found out that merger and acquisition
have improved. They arrived that there exist a significant relationship between pre and post
merger acquisition earnings per shares, and concludes that the overall performance of banks
significantly and also contribute immensely to the growth of the real sector for sustainable
development.

Ahmad (2011) evaluated the performance of banks after merger in terms of Gross Profit
Margin, net profit margin, operating profit margin, return on capital employed, debt equity ratio
and return on equity. Pre merger performance was compared with post merger performance of
selected banks. The results of the study suggested that after the merger the efficiency and
performance of banks has improved.

Badreldin and Kalhoefer (2009) in their study measured the performance of Egyptian banks, by
calculating their return on equity using the basic ROE scheme that had undergone mergers and
acquisitions during the period 2002-2007. The findings of the paper suggest that bank M&A in
Egypt has not shown significant improvement in performance and ROE. Further it was
concluded that M&A doesn’t have a clear effect on the profitability of banks in the Egyptian
banking sector. Only minor positive effects on the credit risk position were found. Their findings
further suggest that the process of financial consolidation and banking reforms in Egypt have not

32
completely achieved their desired results in improving the bank’s profitability and economic
restructure.

Devarajappa (2012) in her research explored various motives of merger in the Indian banking
sector. It further compared pre and post merger financial performance of merged banks by using
various financial parameters. Using independent t-test to analyze her result it showed that after
the merger, the financial performance of the banks have increased and that there have been an
improvement on the return on equity, debt and gross profit margin after the merger . The result
suggested that post merger, the financial performance of the banks have improved, particularly,
the return on equity, debt-equity ratio and Gross Profit margin have shown significant
improvement after the merger. Also Gupta Himani (2013) analyzed the impact of mergers and
acquisition on financial efficiency of banks in India by comparing selected pre and post merger
indices. Gross earnings, profits after tax and net assets of the selected banks were taken as
indices for comparison. Three mergers of Indian Banks were taken as sample for the study.

Viverita (2008) investigated the effects of mergers on banks’ performance in Indonesia during
1997 to 2006. The study employs the traditional financial ratios and non-parametric Data
Envelopment Analysis (DEA) approach to investigate any efficiency gain both in the pre- and
post-merger periods in order to determine efficiency gain of banks’ mergers. The evidence shows
that mergers create synergy and significantly increase the post-merger financial performance.

In Rehana & Irum (2011) a research was carried out on effect of business combination on
financial performance; evidence from Pakistan’s banking sector. It explored the effects of merger
using 6 different financial ratio(Gross Profit Margin, Operating Profit Margin, Net Profit Margin,
Return on Capital Employed, Return on Net Worth & Debt Equity Ratio) extracted from the
annual report of 10 commercial banks that faced M&A during the period 1999 to 2010. Analysis
was done using the paired T-Test and the result revealed that there was a decline in all 6 ratios; it
concluded that there is a negative impact of M&A on bank's performance after M&A.

Yasuhiro and Hideaki (2006) carried out a comparative study which explored factors behind
increased mergers and acquisition activity in Japan from the 1990s when there were an increased

33
number of horizontal mergers. A sample size of 2276 companies listed at the Tokyo Stock
Exchange between 1995 and 2004 was used. They presented two hypotheses as factors that
contributed to a sharp increase in mergers and acquisition activity. The first hypothesis focused
on industry – level shocks to growth opportunities and profitability and the second was the
“market-driven” hypothesis with its major characteristic being its assumption of stock market
mispricing. They found that mergers and acquisition activities in a specific industry were boosted
as a result of some sort of shock that impacted the growth opportunities and/or profitability of the
industry. Examining individual firm level, they concluded that the greater the relative size of
growth opportunities the lower the debt-to-asset ratio and thus the greater the financing capacity
the greater the likelihood for the company to participate in mergers and acquisition activities as
an acquirer. They recommended a further research on the factors that had the greatest impact on
the growth potential and profitability of such industries and companies that had been actively
engaged in mergers and acquisition from the latter half of 1990s onward.

In an exploratory study Luypaert (2008) investigated the determinants of growth through

mergers and acquisitions in a typical Continental European country, Belgium. He collected data
on 378 Belgian bidders that engaged in 816 mergers and acquisition transactions during the
period 1997–2005. Using logit and probit regression analysis he analyzed firm characteristics,
industry variables and market variable. He was able to determine what motives are important in
the decision to acquire. His results showed that intangible capital, profitability and firm size
significantly positively affected mergers and acquisition decision whereas ownership
concentration and bank loans had a negative impact. He concluded that mergers and acquisitions
were significantly more likely in industries where incumbents are operating in a relatively low
scale, which are less concentrated and were recently deregulated. He recommended that firm
size, industry concentration and stock market performance should be particularly focused on
when examining short and long-term operating and stock performance after mergers and
acquisition especially in a Continental European setting.

In literature, number of studies that have been conducted to assess the impact of mergers and
acquisitions on the bank’s performance can be classified as ex-ante studies and ex-post studies.
An Ex-ante study seeks to assess the effect of merger on bank’s performance by analyzing the

34
reaction of stock market to merger announcement. Ex-ante studies are also called event studies.
On the other hand, Ex-post study assesses the effect of mergers and acquisition on the
performance of banks by comparing their pre and post merger financial performance. Although
there is a plethora of literature on mergers and acquisition in developed economies but there is a
dearth of literature in developing economies.
The empirical reviews so far may be summed up that merger and acquisition has mixed
outcomes in developing economies. Findings in the Nigerian situation have also given mixed
signals of post-merger and acquisition financial performance of banks.

2.4 Gaps to be filled

It is vividly seen from the literature review that most research works on the topic made use of a
relatively short term frame of an average of 3-5 years, but this work covers a longer period of ten
(10) years and also a wider sample of seven (7) banks which also is an additional uniqueness.

35
 CHAPTER THREE

METHODOLOGY

3.0 Introduction

Onwumere (2005) observed a research design as a format which the researcher employs in order
to systematically apply the scientific method in the investigation of problems. This research
focused on the empirical analysis of the significance of bank consolidation on bank performance.
This research relied heavily on historic data as data used in the analysis were generated from
annual financial reports of the sampled banks between 2006 and 2015. Therefore, this research
work employed the Ex Post Facto research design. This is because it involves events which have
taken place. The importance of Ex-post facto research is that it is a realistic approach to solving
business and social science problems which involves gathering records of past events, analyzing
the records and using the outcome of the analysis to predict future events (Agbadudu, 2002).
Consequently, as data already exist no attempt will be made to control or manipulate relevant
independent variables apparently because these variables are not simply manipulatable. This
suits the purpose of this research and is appropriate for the study since the study intends not to
manipulate or control variables under investigation. It is nevertheless, advantageous for assessing
large and small populations especially where a small population is to be derived from a large
one. Also, cost is minimized when this method is adopted and employed.

3.1 Research Design

Quantitative research method is used for the purpose of this study. According to Otokiti (2010)
he posits that research design is a plan, structure, and strategy of investigation put in place to
obtain answers to research questions or problems already hypothesized. Research design
involves defining the methodological structure or apparatus within which research is to be
experimented (Oloyede 2002). Research design is a detailed plan for how a research study is to
be completed so as to identify the procedure required to undertake a study and ensure the validity
and objectivity of the research. The purpose of the research can be classified into three different
types; explorative, explanatory and descriptive. This research is designed to study the impact of

36
mergers and acquisition on the banking sector based on the Nigerian experiences. The purpose is
to assess the roles of mergers and acquisition in the Nigerian banking industry, therefore this
research is based on exploratory research design. Exploratory research is a type of research that
seeks to investigate one or few situations similar to the researcher’s problem (Zikmund, 2003) as
cited in the works of (Onikoyi, 2012).

3.2 Population
The population of this study consists of all the twenty-two (22) deposit money banks in the
Nigerian banking industry.

3.3 Sample
The sample size is seven (7) banks out of the twenty-two (22) deposit money banks (DMBs)
representing a 31.8% of the population.
The criteria used to arrive at the sample choice can be summarized as:-
(I).Banks that are stand-alone before and after the 2005 concluded bank consolidation exercise.
(II). Banks that all its merged and or acquired components were quoted on the floors of the
Nigerian Stock Exchange.
(III). Banks that were consistent in the publication of audited annual financial statements.
(IV) Banks that consistently sent their annual audited financial accounts to the Nigerian stock
Exchange.
Consequently, seven (7) out of the twenty two (22) consolidated banks now in Nigeria
constituted our sample size based on all of the above as they particularly met the data availability
criteria set by the researcher as data about them were collected for this study. The banks selected
are:-
1. Zenith Bank Plc.
2. Diamond Bank Plc.
3. Sterling Bank Plc.
4. Access Bank Plc.
5. First Bank of Nigeria Plc
6. Guaranty Trust Bank Plc.
7. United Bank for Africa Plc.

37
3.4 Sources of Data and Type of Data
In line with the approach adopted by Adegbaju and Olokoyo, (2008) in their works on the
significance of bank consolidation and bank performance, this research made use of handpicked
data from the balance sheet and income statements of sampled banks.
The cross sectional survey design was use for this research. Hence this study made use of a
predefined group that is, the past audited financial statements of the selected banks were more
appropriate for the study.
The data for this research work is secondary and were extracted from the published annual
reports and statements of accounts of banks quoted on the Nigerian Stock Exchange, Factbooks
of the Nigerian Stock Exchange as they were believed to constitute the most authoritative and
accessible documents for assessing the performances of the sampled banks for a period of ten
(10) years (2006-2015). This is necessary in order to derive facts and figures from a secondary
source which can be attested and proven at any point in time.

3.5 Model Specification

The model employed in this study is built on the modification of the models in Ikpefan and
Kazeem (2013), in their study the model was specified as:

BPERF=ƒ (SIZE, DGR, LTDR, DMERGER) (Eqn.1)

The model will be modified for the purpose of the study as

ROE= (SHF, TVD, TA) (Eqn.2)

Presenting the model in equation form

ROE= β0 + β1SHF + β2 TVD + β3 TA + εt (Eqn.3)

Where:
ROE = Return on Equity
SHF= Shareholders Fund

38
TVD=Total Volume of Deposit
TA= Total Assets

εt = Error Term
β o – β 3 = Coefficients of independent variables
The model can be specified in a time series form as:

ROE= β0 + β1SHFt + β2 TVDt + β3TAt + εt (Eqn.4)

Where: t =Time series

3.6 Method of Data Analysis

The study adopt a multiple Regression Analysis in analyzing data collected from the financial
statement of each of the selected banks for a whole ten years period from 2006- 2015. The
statistical method chosen for the analysis of the four (4) identified hypotheses of this study is
consistent with the statistical method used by Oghojafor (2012).
The data was collected was analyzed and summarized. The analysis was made using E-views 9.
Descriptive analysis, Correlation analysis and regression analysis were used.

3.6.1 Descriptive analysis

Mean: is the average of a range of values and quantities, computed by dividing the total of all
values by the number of values. It is the most common and best general purpose measure of
midpoint of a set values and central tendency

Median: is the value separating the higher half of a data sample, a population or probability
distribution from the lower half. In simple terms, it is thought of as the middle value of a data set.

Mode: the mode of a set of data values is the value that appears most often. Like the statistical
mean and median, the mode is a way of expressing, in a (usually) single number, important
information about a random variable or population.

Standard deviation: is a measure of dispersion or spread in the series

39
Kurtosis: considers the shape of the peaks in the distribution of data. Kurtosis is a measure that
describes the shape of a distribution’s tails in relation to its overall shape.

Skewness: is a measure of the asymmetry of a data distribution of the series around its mean. The
skewness value can be positive or negative or even undefined, depending on whether data points
are skewed to the left and negative, or to the right and positive of the data average.

Jacque Bera: is a test statistic for testing whether the series is normally distributed. The test
statistic measures the difference of the skewness and kurtosis of the series with those from the
normal distribution.

3.6.2 Correlation analysis

Correlation analysis is a method of statistical evaluation used to study the strength of a
relationship between two, numerically measured, continuous variables. However, correlation
does not signify cause and effect relationship between the variables.
Pearson’s product-moment coefficient is the measurement of correlation and ranges between +1
and -1.
To establish the strength of the model, the study conducted a Statistic-t test. This helped to
establish whether the model is significant in explaining the relationship between mergers and
acquisition on the performance of deposit money banks in Nigeria. A significance test at 5% and
confidence level was conducted at 95% to measure the significance of the determinants in
explaining the changes in the dependent variable.

3.6.3 Regression analysis

Durbin-Watson statistic was also carried out to test for serial autocorrelation in the residuals
from the statistical regression analysis
Also Augmented Dickey-Fuller unit root test was carried out to determine the time series
characteristics and order of integration of the variables that is test for stationarity in the time
series. R2 and R2-adjusted were also carried out to test for the goodness-of-fit of the model that is
the proportion of the dependent variable that was explained by the independent variables.

40
3.7 Apriori Expectation
The a priori expectation shows the expected effects of all control variables on Return on equity.
The variables

β 1 – β 3>0

Depicting thatᵝ1 ᵝ2 ᵝ3 will have positive impact on the dependent variable.

3.8 Operationalization of Variables

 ROE is defined as net income divided by total equity, and is well-accepted as an indicator
for overall bank performance (Rubi, Mohamed and Michael, 2007).

Net Income
ROE = (Eqn.5)
Total Equity Capital
Where; Net income = Profit before Tax. That is profit after interest and similar expenses,
operating expenses, diminution in asset value have been deducted, and provisions made for risk
assets.
Total equity capital = shareholders funds = share capital+ share premium+ retained earnings+
other reserves.

 Shareholders’ fund represent the balance sheet value of the shareholders’ interest in the
company. It represents the net value of a company, or the amount that would be returned
to shareholders if all the company’s assets were liquidated and all its debts repaid.

Total equity capital = shareholders funds = share capital+ share premium+ retained earnings+
other reserves.
Or
Shareholders’ fund= Total assets – Total liabilities
 Total Voalue of Deposit: this consist of money placed in a bank by its customers against
which the depositor can withdraw under prescribed conditions. Total value of deposit is

41
 made up of current or checking account deposits, savings account deposits, time deposit
account deposits and certificate of deposit
 Total assets: is the final amount of all gross investments, cash and equivalents,
receivables and other assets as they are presented on the balance sheet. It also represent
the sum of current and long term assets owned by the bank.
Total assets= Non-current assets + current assets

42
 CHAPTER FOUR

PRESENTATION OF RESULTS AND EMPIRICAL ANALYSIS

Introduction

This chapter present the result generated by the models specified in previous chapter and
afterwards examines critically and analyzes the results empirically. The results to be presented
and analyzed include the descriptive statistics, graphical analysis and unit root test which all
belong to preliminary analysis. It also presents the estimation and empirical analysis
(interpretation and summary of estimation).

4.1 Preliminary Estimation Results

4.1.1 Descriptive Statistics

Descriptive statistics show us the qualities of the data we are using for estimation, the knowledge
of which allow us to define the appropriate methodology for estimation. The table below
summarizes the descriptive statistics:

Table 4.1: Descriptive Statistics

ROE SHF TA TVD

 Mean  0.042194  1.16E+08  8.18E+08  6.15E+08
 Median  0.110000  1.07E+08  6.13E+08  4.86E+08
 Maximum  1.094000  4.06E+08  2.34E+09  1.81E+09
 Minimum -3.943000 -45499114  1.07E+08  70296796
 Std. Dev.  0.536817  96836452  6.37E+08  4.60E+08
 Skewness -6.038258  0.971755  0.839453  0.836082
 Kurtosis  45.32318  3.698364  2.682788  2.825836
 Jarque-Bera  5649.858  12.43941  8.514758  8.243851
 Probability  0.000000  0.001990  0.014159  0.016213
 Sum  2.953600  8.09E+09  5.72E+10  4.30E+10
 Sum Sq.  19.88393  6.47E+17  2.80E+19  1.46E+19
Dev.
 Observation  70  70  70  70
s
Source: Author’s computation using E-VIEW 9 (2018)

43
From table 1 above, ROE represent Return on Equity, SHF represent Shareholders’ Fund, TA
represent Total Assets and TVD represent Total Value of Customers Deposits. The description
shows that the average values of ROE, SHF, TA and TVD from 2006 to 2015 are 0.042194
(4.2194%) ,₦ 1.16E+08 , ₦ 8.18E+08 and ₦6.15E+08 while the mid observations of these
variables when arranged in ascending or descending order are  0.110000(11%), ₦1.07E+08,
₦ 6.13E+08 and ₦ 4.86E+08 respectively. The table also indicate that the maximum obtainable
values of these variables (i.e. ROE, SHF, TA and TVD) given the values of the series from 2006
to 2015 are 1.094000(109.4%), ₦34.8 4.06E+08, ₦ 2.34E+09 and ₦1.81E+09. On the other
hand, the minimum values of the aforementioned variables are, -3.943000(-39.43%),₦-
45499114, ₦1.07E+08 and ₦70296796.
The standard deviation values showed the extent at which the observations are dispersed around
their respective means and the standard deviation to mean ratio ROE, TA and TVD which are
greater than 0.5 suggested high coefficient of variation (i.e. high dispersion) while SHF indicate
a lower dispersion since their standard deviation to mean ratio is less than 0.25. Also,
considering the skewness statistics whose threshold value for symmetry (or normal distribution)
is zero, none of the variable is exactly zero (although some are close to zero). While the
skewness statistics of -6.03 for ROE show that both variables are negatively skewed (since it
isless than zero), SHF, TA, TVD are positively skewed since their skewness statistics are greater
than zero. On the other hand, the kurtosis value whose threshold is three indicate that all
variables are platykurtic (lowly peaked) with the exception of ROE which is leptokurtic (highly
peaked). Although skewness statistics indicate that TA and TVD are normally distributed (since
it is closer to 0) and kurtosis value indicate that only TVD is normally distributed (since it is
closer to 3), neither skewness nor kurtosis can singularly confirm the normality of a series.
Hence, since the Jarque-Bera statistics combines skewness and kurtosis properties, it provides
more comprehensive information. Following the above highlight on Jarque-Bera, since its
probability value for the variables are less than 5%, it therefore suggest that the hypothesis of
normal distribution is rejected and the series cannot be regarded as having a normal distribution.

44
4.1.2 Graphical Analysis

Graphical illustration shows the movements, trends and fluctuation in the panel. It also provides
a qualitative assessment of possible relationship among the panel. The figures below show the
graphical expression of relevant variables.
Figure 4.1 to 4.4 as provided below depict the movements and trends in ROE, SHF, TA and
TVD respectively.

Fig. 4.1
TRENDS IN RETURN ON EQUITY OF THE SAMPLED BANKS FROM2006-2015
2

-1

-2

-3

-4
FCM - 06
FCM - 08
FCM - 10
FCM - 12
FCM - 14

UBA - 06
UBA - 08
UBA - 10
UBA - 12
UBA - 14
DIA - 06
DIA - 08
DIA - 10
DIA - 12
DIA - 14

GTB - 06
GTB - 08
GTB - 10

SKY - 06
SKY - 08
SKY - 10
SKY - 12
SKY - 14
STR - 06
STR - 08
STR - 10
STR - 12
STR - 14
WEM - 06
WEM - 10
WEM - 12
WEM - 14
GTB - 12
GTB - 14

WEM - 08

Source: Author’s computation using E-VIEW 9 (2018)

45
 Fig 4.2

Fig. 4.3
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000

-100,000,000

0
1,200,000,000
1,600,000,000
2,000,000,000
2,400,000,000

400,000,000
800,000,000
DIA - 06
DIA - 06 DIA - 08
DIA - 08 DIA - 10
DIA - 10 DIA - 12
DIA - 12 DIA - 14
DIA - 14 FCM - 06
FCM - 06 FCM - 08
FCM - 08 FCM - 10
FCM - 10 FCM - 12
FCM - 12 FCM - 14
FCM - 14 GTB - 06
GTB - 06 GTB - 08
GTB - 08 GTB - 10
GTB - 10 GTB - 12
GTB - 12 GTB - 14
GTB - 14 SKY - 06
SKY - 06 SKY - 08
SKY - 08 SKY - 10
SKY - 10 SKY - 12
SKY - 12 SKY - 14
SKY - 14 STR - 06
STR - 06 STR - 08
STR - 08 STR - 10
STR - 10

Source: Author’s computation using E-VIEW 9 (2018)

STR - 12

46
Source: Author’s computation using E-VIEW 9 (2018)
STR - 12 STR - 14
STR - 14 WEM - 06
WEM - 06 WEM - 08
WEM - 08 WEM - 10
WEM - 10 WEM - 12
WEM - 12 WEM - 14
WEM - 14 UBA - 06
UBA - 06 UBA - 08
UBA - 08 UBA - 10
UBA - 10 UBA - 12
UBA - 12 UBA - 14
UBA - 14

TRENDS IN TOTAL ASSETS OF THE SAMPLED BANKS FROM2006-2015

TRENDS IN SHAREHOLDERS' FUND OF THE SAMPLED BANKS FROM2006-2015
 Fig.4.4

Fig. 4.5
0
400,000,000
800,000,000
1,200,000,000
1,600,000,000
2,000,000,000

-500,000,000
500,000,000

0
1,000,000,000
1,500,000,000
2,000,000,000
2,500,000,000
DIA - 06 DIA - 06
DIA - 08 DIA - 08
DIA - 10 DIA - 10
DIA - 12 DIA - 12
DIA - 14 DIA - 14
FCM - 06 FCM - 06
FCM - 08 FCM - 08
FCM - 10 FCM - 10
FCM - 12 FCM - 12
FCM - 14 FCM - 14
GTB - 06 GTB - 06
GTB - 08

ROE
GTB - 08 GTB - 10
GTB - 10 GTB - 12
GTB - 12 GTB - 14
GTB - 14 SKY - 06
SKY - 06 SKY - 08
SKY - 08 SKY - 10

SHF
SKY - 10 SKY - 12
SKY - 12 SKY - 14
SKY - 14 STR - 06
STR - 06 STR - 08
STR - 08

47
STR - 10

TA
STR - 10

Source: Author’s computation using E-VIEW 9 (2018)

Source: Author’s computation using E-VIEW 9 (2018)
STR - 12
STR - 12 STR - 14
STR - 14 WEM - 06
WEM - 06 WEM - 08
WEM - 08 WEM - 10

TVD
WEM - 10 WEM - 12
WEM - 12 WEM - 14
WEM - 14 UBA - 06
UBA - 06 UBA - 08
UBA - 08 UBA - 10
UBA - 10 UBA - 12
UBA - 12 UBA - 14
UBA - 14
TRENDS IN TOTAL VALUE OF DEPOSIT OF THE SAMPLED BANKS FROM2006-2015

RELATIONSHIP BETWEEN ROE, SHF, TA AND TVD OF THE SAMPLED BANKS FROM 2006-2015
4.1.3 Formal Pre-test

Unit Root Test

Unit root test shows the result for the test of stationarity of the series to be used for model
estimation. Following the assumptions of the Ordinary Least Square (OLS) technique, it is
required that series must exhibit a constant mean, variance and covariance over time i.e. whether
the series are time invariant in their unconditional moments. In other words, when series are not
stationary, it is said to exhibit a unit root process. If non stationary series are adopted in a
regression analysis, the resulting model is termed as spurious, unstable, and misleading and
thereby, cannot be used for forecast. This is because non-stationary variables features changes as
time progresses. Thus, such variables are said to exhibit unit root and cannot be used for
conventional modelling. This test is primarily important as the use of non-stationary series result
in spurious regression which will generate misleading results. The unit root result using Levin
linchu is provided in the table 4.2

Table 4.2LEVIN, LIN AND CHU UNIT ROOT TEST

LEVEL FIRST DIFFERENCE

VARIABLES I(d)
MODEL MODEL MODEL MODE MODEL MODEL
A B C LA B C
ROE -2.523* -4.842* -6.639* ----- ----- ----- I(0)

SHF 3.624 -1.011 -5.492* ----- ----- ---- I(0)

TA 4.442 - -5.487* ---- ---- ---- I(0)

1.546**
*
TVD 4.670 - -4.168* ---- ---- ---- I(0)
1.506**
*
Model A, B and C are unit root test without intercept and trend, with intercept and with intercept and trend respectively.

* indicate significance at 1% level.

** indicate significance at 5% level.

48
*** indicate significance at 10% level.

Source: Author’s computation using E-VIEW 9 (2018)

The Levin lin chu unit root test in table 4.2 shows the result for both the level and differenced
form. The order of integration indicates the number of times a series is differenced to be
stationary. The optimal lag length was selected using the Schwarz Information Criterion (SIC)
and a maximum lag of 7. From the above test result, all variables are stationary in their level
form.

4.2 Model Estimation Result

Fig. 4.6

Dependent Variable: ROE

Method: Panel Least Squares
Date: 11/23/17 Time: 15:43
Sample: 2006 2015
Periods included: 10
Cross-sections included: 7
Total panel (unbalanced) observations: 68

Variable Coefficient Std. Error t-Statistic Prob.  

LSHF 0.752991 0.102218 7.366535 0.0000

LTA -0.144132 0.133463 -1.079939 0.2846
LTVD -0.481946 0.143199 -3.365578 0.0014
C -1.154303 1.668294 -0.691906 0.4918

Source: Author’s computation using E-VIEW 9 (2018)

R-squared = 0.562013
Adjusted R-squared= 0.494050
F-statistic= 8.269336
Prob(F-statistic)= 0.000000
Durbin-Watson stat =1.616820

49
4.3 Correlation Result
Table 4.4

ROE SHF TA TVD

ROE  1.000000  0.201739  0.184055  0.178300
SHF  0.201739  1.000000  0.889119  0.869395
TA  0.184055  0.889119  1.000000  0.948427
TVD  0.178300  0.869395  0.948427  1.000000

Source: Author’s computation using E-VIEWS 9 (2018)

From table 4.4, the correlation result vividly depict that all the variables are positively correlated
with Return on Equity. Also all the variables shows a positive correlation among themselves.
There is a positive and weak relationship between ROE, SHF, TA and TVD, signifying that as
ROE rises, SHF, TA and TVD rises with it, however, it is weak.
There is a very strong relationship between SHF and TA at 0.88 correlation co-efficient implying
that as SHF rises, TA rises with it. Also SHF has a strong relationship with TVD at a correlation
co-efficient of 0.86.
All the independent variables have a weak but positive correlation co-efficient, implying a weak
relationship among the dependent variable and the independent variables.

4.4 Discussion of Findings

From Fig. 4.6, it can be seen that constant(c) has a insignificant negative relationship with ROE.
It can be said that putting shareholders’ fund, total asset and total value of deposit aside, a unit
rise in other factors other than LSHF, LTA and LTVD will bring about 1.154303 decrease in
ROE.
Shareholders’ fund is positive and significant with ROE. Furthermore Total value of deposit is
negative and significant with ROE. Total asset is negative but insignificant with ROE.

Extensively, if all other variables are held constant, a 1unit increase in LSHF will bring about an
aggregate 0.752 increase in ROE. A 1 unit increase in LTVD will bring about an aggregate

50
0.481decrease in ROE in the short run. Also a 1 unit increase in LTAwill bring about an
aggregate 0.144 decrease in ROE in the short run, however it is insignificant.

However, LSHF and LTVD are statistically significant at 10% in determining ROE; While LTA
and the constant parameter is insignificant in explaining the dependent variable.
All the explanatory variables explained 49.40% of the changes in the dependent variable as
depicted by the Adjusted R-Squared value of 0.494050.
Also the R-Squared co-efficient indicates a 56.20% variation explanation by the regression line
out of the total variation.
The Durbin Watson test disclosed by DW statistic of 1.616820, whose value ranges from 0 to 4
indicates non-autocorrelation thereby making the model statistically fit for forecasting and
absence of autocorrelation among the residual values.
The model is statistically fit considering the probability (F-statistic) of 0.000000.

4.5 Test of Hypotheses

The following hypotheses are formulate and tested in the study

Hypothesis 1
Ho: Mergers and acquisitions has no significant effect on the performance of the selected sample
banks.
Decision
There is a positive relationship between Return on Equity and the independent variables
(shareholders’ fund, total assets and total value of deposit. Since coefficient of correlation (r)
=0.2017, 0.1840 and 0.1783 respectively.
Hence, this study reject the null hypothesis, therefore corporate mergers and acquisitions have
significant effect on performance of the selected banks.

Hypothesis 2
Ho: There exists no positive relationship between increase in shareholders fund and bank
performance.
Decision

51
There is a positive relationship between Return on Equity and Shareholders’ Fund since
coefficient of correlation (r) = 0.2017. This study reject the null hypothesis, as there is significant
relationship between shareholders’ fund and banks performance.

Hypothesis 3
Ho: There exists no positive relationship between total volume of deposit and bank performance.
Decision
There is a positive relationship between Return on Equity and Total Assets since coefficient of
correlation (r) = 0.1840. This study accept the null hypothesis, as there is no significant
relationship between total asset and banks performance.

Hypothesis 4
Ho: There exist no positive relationship between increase in total assets and bank performance.
Decision
There is a positive relationship between Return on Equity and Total Value of Deposit since
coefficient of correlation (r) = 0.1783. This study rejected the null hypothesis, as there is
significant relationship between total value of deposit and banks performance.

52
 CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Introduction
This section entails the summary of the entire project. It provides a clear summary of the entire
project, that is, to establish the effect of corporate mergers and acquisitions on the performance
of Nigerian deposit money banks. Moreover, it also entails the conclusion from the analysis of
statistical results as well as recommendations as observed from the study.

5.2 Summary
This study examined the effect of corporate merger and acquisition on the performance of banks
in Nigeria using panel data spanning from 2006 through 2015. The study employed Ordinary
least square method to ascertain the relationship and short run effect of some independent
variables (Shareholder fund, total asset and total value of deposit) on bank performance proxy by
Return on equity.

From the regression equation, it is evident that SHF and TVD has a significant influence on the
level of performance in Nigerian Banks.
On the short run, TA variable is negatively insignificant with banks’ performance, which is due
to poor asset turnover and under utilization of their assets to generate maximum return. To
forestall under utilization of their assets banks should improve their total asset turnover and
diversify their investment in such a way that they can generate more income.

SHF posits a positively significant relationship with banks’ performance. This is relatively due to
the abundance provision of resources due to combination of resources through merger and
acquisition.

53
TVD have a negatively significant relationship with banks’ performance. Banks deposits are
liabilities to the bank that needs proper management between its liquidity and profitability
objectives. Liquidity in the technical sense refers to banks ability to meet its financial obligations
both to creditors and debtors as at when due. To ensure solvency the bank must keep adequate
level of current assets. However, there is a cost associated with maintaining sound liquidity
position, which is lower profitability. For a bank to keep being a going concern, adequate return
or profitability must be made to compensate the investors and ensure payment of incurred
expenses. Banks need to find adequate balance between liquidity and profitability.

5.3 Conclusion
The results reveal that post merger performance of most of the financial parameter have shown
significant improvement ( positive and negative) in both the cases while some parameter have
not shown any significant improvement but it may be possible that there is improvement in these
parameters in later years as only ten years financial reports are compared. While dealing with
mergers and acquisitions, synergy gains are created in the long run resulting in the improvement
in the efficiency and performance of banks.

Merger between distressed and strong banks have not yield any significant efficiency gains to
participating banks. However, the forced merger among these banks succeeded in protecting the
interest of depositors of weak banks but stakeholders of these banks have not exhibited any gains
from mergers.

The study also concludes that mergers/acquisitions alone cannot result into strong, efficient and
competitive banking systems because financial performance is dependent on several factors.
Mergers/acquisition need to be supplemented by other measures such as enhancing the expertise
and professionalism of the banking personnel and bringing about more management efficiency to
further increase the competitiveness of the banking institutions in the context of the challenges of
a globalized and a very competitive industry.

The empirical findings of this study suggest that trend of merger in Nigerian banking sector has
so far been restricted to restructuring of weak and financially distressed banks. The Nigerian

54
financial system requires very large banks to absorb various risks that have been emerged from
operating in local and global market.

Hence, the result showed that merger and acquisition has not significantly impact banks’
performance. The study is in consonant with the works of Ajayi and Obisesan, (2016), Yusuf and
Sheidu (2015), Imeokparia (2014), Meena and Kumar (2014), Badreldin and Kalhoefer (2009),
Appah and John (2011), Taiwo and Musa (2014) and Onaolapo and Ajala (2013) that merger and
acquisitions have no gain effect on the selected banks.

5.4 Recommendations
With respect to the analysis carried out, it is obvious that mergers and acquisitions (M&A) has
not significantly improved performance of Deposit Money Banks in Nigeria, which in essence,
has not enhanced improvement and global competition of deposit money banks in Nigeria.

In order to avert negative consequences of the banks consolidation exercise in Nigeria and to
realize the maximum benefits derivable from the exercise, the study therefore recommend that:

I. Central Bank of Nigeria should ensure that only strong banks can merge so as to form mega
bank in order to achieve the synergy that the bank consolidation promises; and
II. Management of Nigerian banks should be discouraged from unethical banking practices, and
regulatory authorities should use their searchlights on the Nigerian banking industry in order to
curb financial crimes being perpetuated in Nigerian banks.
III. The Central Bank of Nigeria (CBN), being the apex regulator of the banking industry, should
set and enforce corporate governance standards for commercial banks. This is necessary to
prevent any failure as a result of internal abuse of processes and procedure.
IV. The CBN should also consider the adoption of a Risk based approach to bank supervision.
This will ensure that limited resources are adequately utilised by focus on high risk areas of the
commercial banks activities.
V. The Central Bank of Nigeria (CBN) is enjoined to carry out frequent appraisals and
reappraisals of the performance of banks in Nigeria to avoid the systemic distress that preceded
the banking system before the 2004/2005 consolidation exercise which also reoccurred in 2010.

55
VI. Banks should intensify training and retraining programmes for all staff, particularly the
management staff, to improve management efficiency and also develop adequate credit risk
management skills. This is to reduce or eliminate instances of bad loan provisioning which is
detrimental to the going concern of the firm.
VII. Management should not only undertake mergers and acquisitions in order to improve
operation and sustain failing businesses but also improve their competitiveness and financial
standing. Management should come up with a sound strategy towards asset and liability
management so as to avert the problem of mismatching investments and also the quality of assets
should be enhanced.

5.5 Limitations of the study

First, the major limitation of the study was getting financial information from financial
statements that are prone to manipulation by the management to distort the financial position of
financial institutions in order to please the shareholders.

The second limitation is that the availability of data. Most banks merged within 2006-2010, a
period of about 10 years back coupled with poor management information system this made the
research to sample only a few banks. The data was not readily available for analysis.

Finally, the study was conducted within the constraints of time and limited resources and
inherent problems associated with these limitations. The time period does not give the researcher
enough time to develop a large database.

5.6 Suggestion for further studies

This study focused on the effect of corporate mergers and acquisition on the performance of
Nigerian banks. The study recommends that further research in other sectors that have engaged
in mergers and acquisitions should be done so as to obtain more and diverse results. The studies
should specifically be carried out in a wide range of industries. This is because the industry type
may make a difference to the pre-merger/acquisition and post-merger/acquisition growth of
firms. Also further studies should take in-depth analysis on more variables that measures the
relationship between M&As and profitability.

56
In addition, it is important to study the effect of mergers and acquisitions on shareholder value of
the stated firms and also oil companies.
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 Ugwuanyi, U.B. (2015). Relevance of Mergers and Acquisitions on Performance of
Deposit Money Banks: Evidence from Nigerian Banking Industry. IOSR Journal of
Economics and Finance, 6(4), 68-76.
 Umoren, A.O.,Oyerinde, D.T. and Olokoyo, F.O.(2007). Mergers and Acquisitions in
Nigeria: Analysis of Performance Pre and Post Consolidation. Lagos Journal of
Banking, Finance and Economic Issues, 1(1), 135-150.

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 APPENDIX 1
DIAMOND BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 31,022,326 144,569,685 218,866,192 -0.0029
2007 53,253,989 211,634,824 312,249,721 0.11
2008 117,255,844 403,710,120 603,326,540 0.1
2009 106,093,071 449,020,259 604,361,884 0.049
2010 116,881,159 318,733,066 54,8402,560 0.06
2011 92,522,024 544,282,581 722,965,977 -0.24
2012 107,316,415 823,090,787 1,059,137,25 0.22
7
2013 138,303,224 1,093,784,492 1,354,930,87 0.21
1
2014 205,660,767 1,354,814,914 1,750,270,42 0.11
3
2015 208,076,384 1,075,622,532 1,555,183,06 0.018
7

FCMB BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 25,163,007 70,296,796 106,611,289 0.11
2007 30,968,864 187,990,701 262,805,890 0.19
2008 132,127,473 251,580,103 465,210,901 0.1
2009 127,457,689 322,418,759 514,409,614 0.0207
2010 134,635,822 334,897,851 530,073,488 0.054

59
2011 117,373,161 410,578,646 593,273,465 -0.099
2012 130,890,713 644,268,545 890,313,606 0.096
2013 131,482,189 715,214,192 131,482,189 0.046
2014 130,777,616 733,796,796 131,570,290 0.041
2015 128,349,993 700,216,706 129,378,261 0.019

SKYE BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 26,083,000 125,472,000 174,197,000 0.095
2007 29,175,000 269,316,000 446,114,000 0.189
2008 93,853,000 501,596,000 784,878,000 0.161
2009 88,032,000 452,918,000 622,164,000 0.0128
2010 106,937,000 471,011,000 674,064,000 0.087
2011 99,282,000 645,746,000 876,527,000 0.027
2012 108,088,000 786,960,000 1,071,311,000 0.118
2013 122,437,000 819,736,000 1,114,010,000 0.15
2014 131,953,000 818,457,000 1,209,633,000 0.065
2015 91,749,000 754,882,000 1,181,504,000 0.46

STERLING BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 26,319,328 75,026,350 111,197,074 0.0365
2007 26,800,395 106,933,727 145,974,674 0.023
2008 30,238,878 184,730,209 236,502,923 0.216
2009 22,141,994 160,470,381 205,640,827 -0.301
2010 26,320,487 199,274,284 259,579,523 0.159

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2011 40,953,115 406,515,735 504,427,737 0.113
2012 46,642,394 463,726,325 580,225,940 0.149
2013 63,457,896 570,511,097 707,797,181 0.13
2014 84,715,285 655,944,127 824,539,426 0.11
2015 95,565,747 590,889,216 799,451,417 0.13

UBA BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 47,621,000 757,407,000 851,241,000 0.241
2007 164,821,000 897,651,000 1,102,348,00 0.12
0
2008 188,155,000 1,258,035,000 1,520,093,00 0.213
0
2009 187,719,000 1,151,086,000 1,400,879,00 0.0687
0
2010 187,730,000 1,119,063,000 1,432,632,00 0.0115
0
2011 170,058,000 1,216,464,000 1,655,465,00 -0.096
0
2012 220,317,000 1,461,131,000 1,933,065,00 0.215
0
2013 259,538,000 1,797,376,000 2,217,417,00 0.179
0
2014 281,933,000 1,812,277,000 2,338,858,00 0.142
0
2015 338,231,000 1,627,060,000 2,216,337,00 0.141

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 0

WEMA BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 20,540,001 85,605,312 120,109,069 -0.322
2007 25,182,705 125,475,968 165,081,532 0.101
2008 -44,628,652 108,907,683 110,981,613 0.262
2009 -45,499,114 94,791,074 142,785,723 0.046
2010 14,837,275 121,507,898 203,144,627 1.094
2011 6,721,063 147,387,408 222,238,550 -1.208
2012 1,278,315 174,302424 245,704,597 -3.943
2013 41,395151 217,734,559 330,872,475 0.0386
2014 43,768,649 258,956,478 382,562,312 0.0542
2015 46,064,110 284,977,836 396,743,314 0.0505

GTB BANK
Year SHF TVD TA ROE
₦’000 ₦’000 ₦’000
2006 40,645,023 212,833,770 305,080,565 0.214
2007 47,433,188 290,792,372 478,369,179 0.274
2008 179,550,725 445,740,212 918,278,756 0.156
2009 188,475,788 662,261,026 1,019,911,53 0.127
6
2010 205,167,807 713,080,374 1,067,172,38 0.178
9
2011 235,911,423 964,086,303 1,525,010,48 0.216

62
 3
2012 286,540,000 1,054,123,000 1,620,317,00 0.298
0
2013 359,912,000 1,261,927,000 1,904,366,00 0.259
0
2014 359,912,000 1,439,522,000 2,126,608,00 0.248
0
2015 405,608,000 1,422,550,000 2,277,629,00 0.233
0
SOURCE: Extracted from the annual financial statements of the selected sampled banks from 2006-2015
Where; SHF= Shareholders’ Fund
TVD= Total Value of Deposit
TA =Total Assets
ROE= Return on Equity

APPENDIX 2
REGRESSION RESULT

Dependent Variable: ROE

Method: Panel Least Squares

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Date: 11/23/17 Time: 15:43
Sample: 2006 2015
Periods included: 10
Cross-sections included: 7
Total panel (unbalanced) observations: 68

Variable Coefficient Std. Error t-Statistic Prob.  

LSHF 0.752991 0.102218 7.366535 0.0000

LTA -0.144132 0.133463 -1.079939 0.2846
LTVD -0.481946 0.143199 -3.365578 0.0014
C -1.154303 1.668294 -0.691906 0.4918

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.562013    Mean dependent var 0.038906

Adjusted R-squared 0.494050    S.D. dependent var 0.544098
S.E. of regression 0.387018    Akaike info criterion 1.074362
Sum squared resid 8.687413    Schwarz criterion 1.400760
Log likelihood -26.52832    Hannan-Quinn criter. 1.203691
F-statistic 8.269336    Durbin-Watson stat 1.616820
Prob(F-statistic) 0.000000

64