European Journal of Social Sciences Volume 15, Number 4 (2010)

Mergers and Acquisitions (M&As) in the Nigerian Banking Industry: An Advocate of three Mega Banks
Rasheed Olajide ALAO Department of Economics, Adeyemi College of Education, Ondo, Nigeria E-mail: [email protected] Tel: +2348055795353 Abstract This paper takes an explorative investigation on the Nigerian twenty five (25) Mega Banks recommending further shrink to only almighty three (3) mega-banks with recapitalization of N300 Billion capital base with two years ultimatum. Only ONE best emerged from multifarious performance ratings and world class tests to be conducted by the Central Bank of Nigeria (CBN) after fulfilling the requirement of N300 Billion base will represent the existing Nigerian 25 banks. The rest two will be supplemented through Foreign Bank Penetration (FBP); one from the United States and the other from Europe. The world class three Mega Banks will guarantee a sound, safe and reliable banking sector for Nigerian banking industry in order to meet the development of challenges in the 21st century. The banks shrink will let Nigeria enjoy maximum patronage of foreign investors and fully open Nigerian economy to the world according to the Nigerian Financial System Strategy FSS 2020, with a vision of which to be the safest and fastest growing financial system amongst emerging markets and a mission to drive rapid and sustainable economic growth primarily in Nigeria and Africa.

Keywords: Africa, Nigeria, 3 Mega Banks, Foreign Bank Penetration (FBP), FSS 2020

I. Introduction
Mergers and acquisitions (M&As) are a global phenomenon, with an estimated 4,000 deals taking place every year. However, they are not a recent development; four periods of high merger activity, also known as merger waves, occurred in the United States in 1897-1904, 1916-29, 1965-69, 1984-89 and 1993-2000 (ILO, 2001; Jimmy, 2008; Mangold and Lippok, 2008) while M&As staged in Nigeria in 2004/2005 with effect from January 1, 2006 under governorship of Professor Charles Chukwuma Soludo at the Central Bank of Nigeria (CBN). On one month assumption of office/duties, Charles Soludo worked out details of an agenda for repositioning the CBN and the financial system for the 21st century with an outcome of pruning the Nigerian eighty nine (89) Banks to twenty five (25) on or before December 31, 2005. He visualized a vision coupled with a goal which was to consolidate and build upon the achievements of the sector especially in the previous decade and to take the system to greater heights as stated. Soludos vision at the meeting of Bankers Committee, Abuja, 6 July, 2004 goes thus; As I stand before you today, I can visualize the Nigerian and world economy in the year 2025 and 2050. What I see is a world economy with no more than 10-20 megabanks all over the world. I see national and cross-national mergers and acquisitions taking place in massive scales. It will not be a world for marginal or fringe players. 554

European Journal of Social Sciences Volume 15, Number 4 (2010) Countries that fail to proactively position themselves today will wake up then to continue to complain of marginalization. I can see Asia consolidating. I see consolidation in Europe, America, and South America Soludo (2004) enumerated the fundamental problems of the banks, particularly those classified as unsound, have been identified to include: persistent illiquidity, poor assets quality and unprofitable operations and stated the major problems of many Nigerian banks as follows: a) Weak corporate governance, evidenced by high turnover in the Board and management staff, inaccurate reporting and non-compliance with regulatory requirements, falling ethics and demarketing of other banks in the industry; b) Late or non-publication of annual accounts that obviates the impact of market discipline in ensuring banking soundness; c) Gross insider abuses, resulting in huge non-performing insider related credits; d) insolvency, as evidenced by negative capital adequacy ratios and shareholders funds that had been completely eroded by operating losses; e) weak capital base, even for those banks that have met the minimum capital requirement, which currently stands at N1.0 billion or US$ 7.53 million for existing banks and N2.0 billion or US$ 15.06 million for new banks, and compared with the RM 2.0 billion or US$ 526.4 million in Malaysia. f) Over-dependency on public sector deposits, and neglect of small and medium class savers. Tapping from his global vision, this paper further concurred and aligned with (Soludo, 2004) of the further cut of the Nigerian 25 banks to three (3) mega-banks.

II. Literature Review

Introduction Nigerian banks adopted different strategies to achieve the stipulated minimum capital base of N25 billion during the banking sector consolidation of 2004 and 2005, including Mergers and Acquisitions (henceforth, M&As) and internal growth (Jimmy, 2008). The choice of a consolidation strategy is mainly determined by the organisational form of the involved institutions as well as the driving motive behind its corporate strategy. M&As represents the most widespread corporate/business strategy used by many firms to penetrate into new markets and new geographic regions, gain technical/management expertise and knowledge, or allocate capital. Although a very popular corporate/business strategy, most literatures on the subject reveals that almost 50% of M&A end up being unsuccessful (Gadiesh, Ormiston and Rovit, 2003; Kaplan, 2002; Schneider, 2003; Weber, Shenkar & Raveh 1996). Many literatures indicates that banking sector reforms are propelled by the need to deepen the financial sector and reposition for growth, to become integrated into the global financial architecture; and involve a banking sector that is consulting with regional integration requirements and international best practices (Somoye, 2010). Definition of Mergers and Acquisitions The terms mergers, acquisitions and consolidation may often be confused, look similar and mostly used interchangeably. However, the three have different meanings. Mergers may be of various types and so can acquisitions and consolidation be. A merger refers to the combination of two or more organisations into one larger organisation. Such actions are commonly voluntary and often result in a new organisational name (often combining the names of the original organisations). An acquisition, on the other hand, is the purchase of one organisation by another. Such actions can be hostile or friendly and the acquirer maintains control over the acquired firm. Mergers and acquisitions differ from a consolidation, which is a business combination where two or more companies join to form an entirely 555

European Journal of Social Sciences Volume 15, Number 4 (2010) new company. All of the combining companies are dissolved and only the new entity continues to operate (Okonkwo, 2004). Gaughan (2007: 12) also defines merger as a combination of two or more corporations in which only one corporation survives while Section 590 of the Nigerian Companies and Allied Matters Act 1990 defines merger as any amalgamation of the undertakings or any part of the undertakings or part of the undertakings of one or more companies and one or more bodies corporate. Types of Mergers and Acquisitions Previous studies on Mergers and Acquisitions consistently discussed three types of M&As: Horizontal; Vertical; and Conglomerate mergers. However, Cartwright and Cooper (1992) and other writers mentioned and discussed a fourth type, which is Concentric mergers (Gaughan, 2007: 13; Brealey, et al., 2006: 871; Okonkwo, 2004:3). a. Vertical Merger VM is a merger in which one firms supplies its products to the other. A vertical merger results in the consolidation of firms that have actual or potential buyer-seller relationships (Coyle, 2000; Fitzroy, et al., 1998; Gaughan, 2007). b. Horizontal Merger HM is the merger of two or more companies operating in the same field and in the same stages of process of attaining the same commodity or service (Gaughan, 2007: 13; Brealey, et al., 2006: 871; Okonkwo, 2004: 3). In other words, a horizontal merger is the combination of firms that are direct rivals selling substitutable products within overlapping geographical markets c. Conglomerate Merger CM occurs when unrelated enterprises combine or firms which compete in different product markets, and which are situated at different production stages of the same or similar products combine, to enter into different activity fields in the shortest possible time span and reduce financial risks by portfolio diversification (Brealey, et al., 2006: 871; Cartwright and Cooper 1992; Gaughan, 2007; Okonkwo, 2004: 4). d. Concentric Merger This involve firms which have different business operation patterns, though divergent, but may be highly related in production and distribution technologies. The acquired company represents an extension of the product lines, market participation, or technologies of the acquiring firm under concentric M&A (Cartwright and Cooper 1992; Fisher, 200?; Sharma, 200?). Stages of Merger and Acquisition Saudarsanam (2003: 3) provides a five-stage model that will result in successful pursuit of synergistic gains from M&A: a) Corporate strategy development; b) Organising for acquisitions; c) Deal structuring and negotiation; d) Post-acquisition integration; and e) Post-acquisition audit and organisational learning.

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European Journal of Social Sciences Volume 15, Number 4 (2010) a. Corporate Strategy Development Corporate strategy development is concerned with ways of optimising the portfolios of businesses that a firm currently owns, and how this portfolio can be changed to serve the interests of the corporations stakeholders (Saudarsanam, 2003: 4). b. Organising for Acquisition The firm lays down the criteria for potential acquisitions consistent with the strategic objectives and value creation logic of the firms corporate strategy and business model. c. Deal structuring and Negotiation According to Saudarsanam (2003: 6), this stage of M&As involves: (a) valuing target companies, taking into account how the acquirer plans to leverage its own assets with those of the target; choice of advisers to the deal; (b) obtaining and evaluating as much intelligence as possible about the target from the target as well as other sources through due diligence; (c) determining the range of negotiation parameters including the walk-away price negotiating warranties and indemnities; negotiating the positions of senior management of both firms in the post-merger dispensation; and (d) developing the appropriate bid and defence strategies and tactics within the parameters set by the relevant regulatory regimes. d. Post-Acquisition Integration This stage involves the combination of the distinct organisations into one, resulting in changes in both the target and the acquirer, to deliver the strategic and value expectations that informed the merger (Saudarsanam, 2003). Reasons for Three Mega Banks a) Creation of mega banks was aimed at making Nigerian banks compete with banking institutions from other parts of the world. The creation of mega-banks was to help Nigerias banking sector become Africas financial hub, facilitating intra-regional trade and investments, and join the worldclass bank groups (Adesida, 2008; Moin, 2004; Ogbonna, 2007; Soludo, 2006) b) To act as catalyst to the economic development of Nigeria and the sub-region through the provision of superior services to the banking public. c) Building confidence in the Nigerian banking sector so as to interact favourably with the rest of the world (Soludo, 2008; Steinberg, et al, 2008); and d) Providing good returns to investors through efficiencies and a better range and quality financial services. History of Nigerian Banking Industry Federal Government of Nigeria has been operating series of bank changeovers, takeovers and buyouts since 1892: a. First Stage: The embryonic Phase The African Banking Corporation, headquartered in South Africa pioneered the Nigerian banking system in 1892 followed by the British Bank for West Africa (now First Bank of Nigeria Plc) in 1894 while Barclays Bank D.C.O. (now Union Bank of Nigeria Plc) and the British and French Bank (now United Bank for Africa Plc) were established in 1925 and 1949 respectively (Danjuma, 1993;Ebhodaghe, 1990; Ibru, 2006). The story of indigenous banking in Nigeria began with the establishment of the National Bank of Nigeria Limited in February 1933, Agbonmagbe Bank Limited (now Wema Bank Plc) in 1945, and African Development Bank Limited, which later became known as 557

European Journal of Social Sciences Volume 15, Number 4 (2010) African Continental Bank Plc in 1948. The establishment of these indigenous banks ushered in the era that saw the constant monopoly erstwhile enjoyed by the foreign owned banks challenged (CBN, 2008; Ebhodaghe, 1990). b. Second Stage: The Expansion Phase The chain in banking industry stepped up to stage two (2) which is the expansion of the Nigerian banking sector to the Rural Banking Scheme in1977, Peoples Bank in 1989, and Community Banks (now Microfinance Banks) in 1990 to encourage community development associations, cooperative societies, farmers' groups, patriotic unions, trade groups, and other local organizations, especially in rural areas while between 1985 and 1991, banks sprout from 40 to 120 (Agbaje, 2008; Bichi,1996; Ebhodaghe, 1990,1995; Mordi, 2004). c. Third Stage: The consolidation/reform stage The phase staged on January 1, 2006 when the Nigerian eighty nine (89) banks shrunk to twenty five (25). The consolidation exercise then required banks to raise their minimum capital base from N2 billion to N25 billion, with December 31, 2005 as deadline (see table 2). This increase representing about 1,150% was to amongst other things encourage the consolidation of the banking sector to produce mega-banks from the then existing 89 banks as most of them were just fringe players and financially unsound (Soludo, 2008). Other financial institutions included government-owned specialized development banks: the Nigerian Industrial Development Bank, the Nigerian Bank for Commerce and Industry, and the Nigerian Agricultural Bank, as well as the Federal Savings Banks and the Federal Mortgage Bank. Also active in Nigeria were numerous insurance companies, pension funds, and finance and leasing companies. d. Fourth Stage? This research is clamouring and calling for the fourth stage of only three banks; one of which one will be indigenous while the rest two should come through Foreign Bank Penetration, FBP from the United States and Europe respectively Regulation of Nigerian Banking Indusry The Nigerian banking sector is controlled by the Nigerian Banking Sector regulatory agencies. The regulatory/supervisory authorities that are concerned with the regulation of the Nigerian banking sector, include: (1) the Federal Ministry of Finance; (2) Central Bank of Nigeria; (3) Nigeria Deposit Insurance Corporation; and (4) Securities and Exchange Commission (Onyido, 2004: 13). Banks submits data online through an electronic Financial Analysis and Surveillance System (e-FASS) to Central Bank of Nigeria and Nigeria Deposit Insurance Corporation on a regular basis daily, weekly, mid-month, monthly, quarterly, semi-annually and annually (CBN circular 2007) to enable the regulatory agencies carry-out their oversight functions (Jimmy, 2008). Section 43 and 44 of CBN Act 2007 provides for the establishment of a Financial Services Regulation Co-ordinating Committee, whose responsibilities is to: a) co-ordinate the supervision of financial institutions especially conglomerates; b) cause reduction of arbitrage opportunities usually created by differing regulation and supervision standards among supervisory authorities in the economy; c) deliberate on problems experienced by any member in its relationship with any financial institution; d) eliminate any information gap encountered by any regulatory agency in its relationship with any group of financial institutions; 558

European Journal of Social Sciences Volume 15, Number 4 (2010) e) articulate the strategies for the promotion of safe, sound and efficient practices for financial intermediaries, and f) deliberate on such other issue as may be specified from time to time.
Table 1: List of Banks in Nigeria as at January 1, 2006.
Constituent member Access Bank, Marina Intl Bank & Capital Bank International Afribank Plc and Afribank Intl (Merchant Bankers) Platinum Bank Limited and Habib Nigeria Bank Limited Diamond Bank , Lion Bank and African International Bank EcoBank Plc Equitorial Trust Bank Ltd and Devcom Bank Ltd Fidelity Bank, FSB International Bank and Manny Bank First Bank Plc, MBC International Bank & FBN (Merchant Bankers) First City Monument Bank, Coop Development Bank, Nigeria-American Bank and Midas Bank First Atlantic Bank, Inland Bank (Nigeria) Plc, IMB International Bank Plc and NUB International Bank Limited GT Bank Plc IBTC, Chartered Bank Plc and Regent Bank Plc Intercontinental Bank Plc, Global Bank Plc, Equity Bank of Nigeria Limited and Gateway Bank of Nigeria Plc Nigeria International Bank limited Oceanic Bank International Plc and International Trust Bank Prudent Bank Plc, Bond Bank Limited, Reliance Bank Limited, Cooperative Bank Plc and EIB International bank Plc Citizens International Bank , ACB International Bank, Guardian Express Bank, Omega Bank, Trans International Bank and Fountain Trust Bank Stanbic Bank of Nigeria Limited Standard Chartered Bank Limited Trust Bank of Africa Limited, NBM Bank Limited, Magnum Trust Bank, NAL Bank Plc and Indo-Nigeria Bank United Bank for Africa Plc, Standard Trust Bank Plc and Continental Trust Bank Union Bank of Nigeria Plc, Union Merchant Bank Limited, Broad Bank of Nigeria Limited and Universal Trust Bank Nigeria Plc Intercity Bank Plc, First Interstate Bank Plc, Tropical Commercial Bank Plc, Centre-point Bank Plc, Bank of the North, New African Bank, Societe Bancaire, Pacific Bank and New Nigerian Bank Wema Bank Plc and National Bank of Nigeria Limited Zenith Bank Plc

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Bank Access Bank Nigeria Plc Afribank Nigeria Plc Bank PHB Plc Diamond Bank Plc EcoBank Nigeria Plc Equitorial Trust Bank Plc Fidelity Bank Plc First Bank of Nigeria Plc First City Monument Bank Plc First Inland Bank Plc GT Bank Plc IBTC-Chartered Bank Plc Intercontinental Bank Plc **Nigeria International Bank Limited (Citi Group) Oceanic Bank International Plc Skye Bank Plc Spring Bank Plc **Stanbic Bank of Nigeria Ltd **Standard Chartered Bank Ltd Sterling Bank Plc United Bank for Africa Plc Union Bank of Nigeria Plc Unity Bank Plc

24 Wema Bank Plc 25 Zenith Bank Plc Source: CBN Annual Reports 2005: 45 ** Foreign owned banks

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Table 2: Capital Base of Main Banks Prior to Reform at End of 2004 and at End of 2006.
As of end 2004 Capital (Nbn) 38.6 26 36.0 27 20.0 28 19.5 29 15.7 30 11.6 31 8.9 32 8.9 33 8.8 F 34 8.6 35 8.4 36 8.0 37 6.5 38 5.8 39 5.6 40 5.6 41 5.3 42 5.1 43 4.4 44 3.7 45 3.6 46 3.5 47 3.5 F 48 3.1 49 3.1 50 As of end 2006 Bank Leadbank Manny Platinum Co-operative Bank Allstates FCMB Access MBC Union Merchant Magnum Marina Guardian Express Global FCB Intl Equity EIB Co-op Development Capital NNB Omegabank NNB Nig-America Afribank Merchant INMB First Interstate Pacific Other 39 Top 50 total Nbn In USD Capital (Nbn) 3.0 2.9 2.8 2.8 2.8 2.8 2.7 2.5 2.5 2.5 2.4 2.3 2.3 2.3 2.2 2.0 2.0 1.9 1.9 1.8 1.8 1.7 1.5 0.9 0.6 N/A 307.2 2.3 Bank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Union Bank Zenith Bank First Bank Intercontinental Bank United Bank for Africa Oceanic Bank Guarranty Trust Bank Diamond Bank Skye Bank Wema IBTC-Chartered Bank Unity Bank Access Bank Platinum-Habib Bank Equitorial Trust Bank Ecobank Nigeria Standard Chartered Bank Spring Bank Sterling Bank Citibank Nigeria Stanbic Bank Fidelity Bank Firstinland First City Monument B Afribank Total Nbn Capital (Nbn) 95.70 93.80 59.00 53.90 47.60 37.70 36.40 35.00 34.70 31.90 31.50 30.00 28.90 28.50 28.40 27.50 F 26.70 F 25.00 25.00 25.80 F 25.70 F 25.60 25.40 25.20 24.90 929.8

Bank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 First Bank Union Bank Standard Trust Bank United Bank for Africa Zenith Bank Guarranty Trust Bank Hallmark Bank Oceanic Bank Citibank Intercontinental Bank Equitorial Trust Bank Wema Bank Diamond Bank IBTC NAL Gulf Bank of Nigeria Afribank Chartered First Atlantic Habib Inland Fidelity Eco International City Express Citizens International

Source: Nigeria Banking Bulletin 2005 to 2007, Company Presentations, Team Analysis.

The government ambitious bank consolidation program resulted in the emergence of 25 MegaBanks represented 75 of original 89 banks, and 93.5% of industry deposits. The licenses of the 14 banks did not meet the capital requirement of N25B at the end December 2005 has been revoked. Despite some delays due to legal procedure, the National Deposit Insurance Corporation (NDIC) has liquidated these failed banks (Becker et al 2008).

III. Recommendations
Based on this research, the following recommendations were drawn: a) For the sake of a safe and sound Nigerian financial system, the Nigerian twenty-five (25) banks be shrunk to three (3) with N300 Billion capital base. The recapitalization will hold on ultimatum of two (2) years starting form 1 January, 2011 signifying that by 1 January, 2013, Nigeria will be operating only three banks tantamount to preparing a softlanding for the Financial System Strategy FSS 2020. b) Only ONE best emerged from multifarious performance ratings and world class tests conducted by the Central Bank of Nigeria (CBN) after fulfilling the requirement of N300 Billion base will represent the existing Nigerian 25 banks. 560

European Journal of Social Sciences Volume 15, Number 4 (2010) c) The rest two will be supplemented through Foreign Bank Penetration (FBP) on a rigorous and competitive M&As; one from the United States and the other from Europe.

IV. Concluding Remarks

Takeovers/mergers do not waste resources. Rather, they generate substantial gains. Those value gains represent gains to economic efficiency, not redistribution between various parties (Akintoye and Somoye, 2008). Nigeria has been operating series of bank changeovers, takeovers and buyouts since 18th Century ranging through the embryonic first stage, the second stage of expansion to the third stage of reform/consolidation 1 January, 2006. An eighteen (18) month ultimatum was given by the Central Bank of Nigeria to commercial banks to recapitalize from N2Billion to N25Billion on or before 31 December, 2005. At the end of 31 December 2005, 25 groups emerged from 75 banks out of the 89 licensed banks, these 25 bank groups that were able to meet the N25 billion capital base either through organic growth by raising funds from the capital market by way of public offering or by mergers and acquisition had their operating licenses renewed, while 14 unsuccessful banks had their operating licenses revoked (CBN, 2005: 45; CIBN, 2008) (see table 2). This study therefore conclusively advocate only three banks for Nigeria through Mergers and Acquisitions (M&As) and Foreign Bank Penetration (FBP).

Acknowledgement
The author is grateful to the Nigerian Professor Dibu Ojerinde (OON), Registrar/CEO, Joint Admissions and Matriculation Board (JAMB), Abuja and first Professor of Tests, Measurement and Evaluation in Africa for giving me a Life of Education and Education of Life.

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