AN INVESTIGATION INTO MERGERS AND ACQUISITIONS ON SHAREHOLDERS’ WEALTH IN NIGERIAN BANKING SECTOR
Mergers and acquisitions that took place in Nigerian Banking Industry in 2005 were to create wealth for shareholders, provide solid and reliable banking institutions that can compete favourably with other financial institutions elsewhere. Going by market value of the merged and acquired banks, the wealth of shareholders had been eroded, in some other cases completely destroyed. The visible problems that confront the shareholders of merged banks today are: firstly, melt down of market prices of their shares on the stock exchange market, secondly, depletion of shareholders fund as result of huge losses incurred by the merged banks, thirdly is lack of dividend pay out to the shareholders and lastly, the fact that banks can be nationalised or forcefully taken over by new management with little or nothing for the old shareholders (for example, in the case of defunct Intercontinental Bank plc taken over by Access Bank plc and defunct Oceanic Bank Plc taken over by Ecobank plc), this has become nightmare for the shareholders. Inadequate capital base has been the bane of Nigerian Banking Industry before 2005 consolidation (Soludu, 2006).
This had hindered the progress and performance of banks; hence there was no capital appreciation to the shareholders. The average capital base of Nigerian banks was US$10 million (before consolidation, 2005), which was very low compared to that of banks in other developing countries like Malaysia where the capital base of the smallest bank is US$526 million. Similarly, the aggregate capitalization of the Nigerian banking system at N311 billion (US$2.4 billion) was grossly low in relation to the size of the Nigerian economy and in relation to the capital base of US$688 billion for a single banking group in France and US$541 billion for a bank in Germany (Imala, 2005). One of the benefits of mergers and acquisitions is to eliminate competition and increase market share of the merged companies (Pandey, 2005).
Thus, by limiting competition the merged company can earn super normal profits and strategically employ the surplus fund to further consolidate its position and maximise the shareholders’ wealth. For Nigerian Banking Industry, reverse is the case. One potential area of challenge to banks authorities and stakeholders of Nigerian banking industry is fierce competition that accompanies bank consolidation and its capacity to trigger unethical practices and poor corporate governance (Adedipe, 2005). Many of the merged banks employed unethical strategies to beat competition, in the bid to meet profit target. Some of the banks are in the habit of de-marketing the others by adopting dirty strategy of blackmail. The merged banks listed on the Stock Exchange are cumbered with performance pressures which lead to income inflation, notwithstanding the tax implication thereby eroding and destroying shareholders wealth.
Banks revenue has been on decline from 2009, this has negative effect on the wealth of the banks’ shareholders. The causes of decline in revenue are largely accounted for by the followings: The global economic recession that started in 2008 had led to poor turnover and eroded profits of business organizations. Many companies have closed shops while those who are still operating are barely surviving. As a result of the economic down turn, the financial position of many corporate borrowers is worsening (Olisaemeka, 2010). Many of the merged banks corporate borrowers could not meet their obligations to the banks, let alone take new credit. Inability of customers to meet their obligations directly increased Non Performing Loan Portfolio; this in turn eroded the profit reported by the merged bank which automatically reduced shareholders dividend. The implication of this is that the shareholders wealth is destroyed through depletion of capital base and revenue of the merged banks. Another post consolidation problem that had serious impact on merged bank’s profitability is increasing incidence of fraud practices among all cadres of merged banks staff. Fraud contributed significantly to the failure of banks in the 1990s in Nigeria (Ogunleye, 1999). Fraud is one of the serious economic crimes being perpetrated in our banking industry today. This had brought huge financial losses to banks and their customers, which resulted in depletion of shareholders funds (capital base) and loss of confidence in the sector.
Fraud is therefore of special concern to the regulatory authorities who are saddled with the responsibility of ensuring the safety and soundness of the entire banking system.Many of the merged banks are still operating under weak corporate governance structure and poor internal control systems. The boards of these banks are run by few cliques with selfish motives. There is frequent internal board wrangling amongst directors, high turnover of board members, management staff, inaccurate reporting and noncompliance with regulatory requirements. Gross insider abuses, resulting in huge Non Performing insider related credits (Imala, 2005).
This has impacted negatively on the profit been posted by the merged banks and further translated to low or nil returns to shareholders (Imala, 2005). Operating costs in the Nigerian banking industry have been increasing considerably since consolidation. The increase in services offered and the current branch expansion have resulted in a rising demand for skilled staff, which in turn has led to an increase in salaries. Unstable power supply in the country has also kept operating costs high because the banks require diesel generators to power the branches and ATM machines. The rising price of diesel has also contributed to the increase in operating costs. Despite the harsh business environment, Nigerian banks have been able to grow their earnings at an exponential rate and maintain a high margin because of their ability to easily transfer their costs to customers (Stanbic IBTC Bank, 2008). High cost of banking operations has massive effect on the wealth of the shareholders.