Long Run Post Merger Performance Of Acquiring Banks Finance Essay

This chapter will try to sum up the theoretical models and reexamine bing literature environing the amalgamations and acquisitions phenomenon and besides examine the empirical grounds on the long tally post amalgamation public presentation of geting Bankss although, most of our literature will be based on developed economic systems as amalgamations and acquisitions are still comparatively new in emerging economic systems.

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The reforms in the Nigerian banking sector started due to the background of banking crisis attributed to the failing in the regulative and supervisory model ; weak direction patterns ; deficiency of competition among the fiscal establishments and the tolerance of lacks in the corporate administration behavior of Bankss ( Uchendu, 2005 ) .

The consolidation procedure resulted in the decrease of Bankss from 89 Bankss to 25 Bankss which subsequently reduced to 24 after the amalgamation between IBTC chartered and Stanbic bank in the twelvemonth 2008.


Literature on M & A ; As classified amalgamations as horizontal, perpendicular and pudding stone amalgamations.

Horizontal Mergers occurs when two rivals merge. The chief principle behind horizontal amalgamation is to accomplish economic systems of graduated table by increasing their merchandises line, diminishing their on the job capital and fixed assets investing.

An of import benefit of the horizontal amalgamation is the accomplishment of economic systems of graduated table as the merged company is able to hold wider production volume in comparing to the companies runing individually.

Vertical Amalgamations are combinations of companies which have a buyer- marketer relationship. It normally leads to an addition in the purchasing company ‘s value added. The purchasing house tries to beef up its place through the inclusion of predating or wining phases in the industry concatenation. With perpendicular amalgamations, one distinguishes between downstream perpendicular amalgamations i.e those in which posterior activities, such as the distribution or farther polish of the merchandise are subsumed- and upstream vertical amalgamations i.e those in which anterior activities, such as the extraction of natural stuffs or production of constituents are acquired ( Straub ) .

Vertical amalgamations may do the houses cost- efficient by increasing its distribution and production costs. It is besides helps in cut downing minutess costs such as selling disbursals and gross revenues revenue enhancements and ensures that a house ‘s resources are used expeditiously.

2.1.3 Conglomerate Amalgamations

A pudding stone amalgamation occurs where the companies that merge together are involved in different types of concerns.

The chief motivation behind the pudding stone amalgamations is to cut down hazard through variegation. It besides improves the overall stableness of the acquirer and improves the balance in the company ‘s entire portfolio of varied merchandises and production procedures. This type of amalgamation besides encourages houses to turn by diversifying into other markets. Diversification is a critical scheme for the house when present market does non hold much extra chances for growing.

There are two chief types which are the pure and the assorted pudding stone amalgamations.

The pure is the type in which the meeting companies concerns are wholly unrelated to each other.

The assorted are 1s where the meeting companies are making so with the purpose of deriving entree to a wider market and client base by spread outing the scope of merchandises and services that are being offered by them.

The chief principle behind pudding stone amalgamations is to add value to the portion of the market that is owned by the company and indulgence in cross merchandising. The companies besides look to add to their overall synergism and productiveness by following the method of pudding stone amalgamations. It besides assists the companies to diversify as a consequence the meeting companies can cut down the degree of their hazard exposure.


There are several possible motivations behind Bankss M & A ; A ‘s and the most common is corporate enlargement and growing besides, due to increasing competition in the fiscal services sector, most fiscal establishments now feel that consolidation will function as a necessary requirement for bettering efficiency.

There ‘s an inexplicit hypothesis behind schemes to increase market portion which states that a greater market portion is tantamount to greater profitableness. However, experience has shown that this relationship is non ever clear as some medium sized Bankss are more profitable than many big Bankss. However, there are Bankss that have thought that the best manner of increasing size by a comparatively speedy path is unifying with another bank. In the banking industry, confederations can non be used to accomplish economic systems of graduated table as internal growing is a really slow procedure ( Canals, 1997 ) .

Amalgamations and acquisitions are tactical determinations taking to the maximization of a company ‘s growing by increasing its production and selling operations. They have become popular in recent times due to enhanced competition, breakage of trade barriers, free flow of capital across States and globalisation of concern as a figure of economic systems are being deregulated and integrated with other economic systems.

Harmonizing to Berger et Al ( 1999 ) , Bank M & A ; As must be geared towards working economic systems of graduated table or range, bettering the x-efficiency of the consolidating Bankss and besides enable the incorporate Bankss to exert increased market power, or may merely be motivated by the direction ‘s desire for efficiency, every bit good as on loan and sedimentation pricing.

2.2.1 Synergy

In the chase of enlargement, Bankss prosecuting in M & A ; A ‘s cite possible interactive additions as one of the grounds for the dealing which include

In amalgamations and acquisitions, synergism is the extra benefit that can be derived from uniting the resources of both the command and mark companies. Synergy occurs when the amount of the parts is more productive than the single constituents. When synergism occurs, the entire returns from the combined house exceed the entire returns of the combined companies before the amalgamation or acquisition. It has been described as 2+2=5 consequence and can be an indispensable portion of the fiscal success of a amalgamation. In amalgamations, this translates into the ability of a corporate combination to be more profitable than the single parts of the houses that were combined ( Gaughan, 2007 ) .

The awaited being of interactive benefits allows houses to incur the disbursals of the acquisition procedure and still be able to afford to give mark stockholders a premium for their portions.

Synergy refers to benefits other than those related to economic systems of graduated table. Operating economic systems are one signifier of synergy benefits. But apart from runing economic systems, synergism may besides originate from enhanced managerial capablenesss, creativeness, innovativeness, research and development and market coverage capacity due to the complementarities of resources and accomplishments and a widened skyline of chances. Often, the term synergism is used to intend cost nest eggs and has been associated with redundancies and closings following an acquisition.

In many instances, acquisitions besides have fiscal benefits for the acquirer which include better and cheaper entree to heighten hard currency flows and liquidness, or to funding beginnings, enhanced plus backup for the bidder ‘s portions where the bidder has a lower ratio of net assets to portion value than the mark company.

However, synergism does non ever occur in a amalgamation or acquisition and all excessively frequently, hoped for synergisms ne’er materialize.

Harmonizing to Lawrence ( 2001 ) cited by ( Pasiouras & A ; Tanna, 2005 ) , synergism can originate from three chief primary beginnings which are runing economic systems, fiscal economic systems and increased market power.

As Gammelgaard ( 1999 ) points out, in the classical synergism attack, the geting house improves the public presentation of the acquired house by reassigning resources and cognition to the new subordinate. The most common is the transportation of managerial resources.

The synergisms created by a amalgamation may besides be related to the grade that two banking organisations have overlapping operations. So called in-market amalgamations have a greater possible to recognize cost nest eggs because of greater chances to

consolidate back-office operations and near less efficient local subdivisions. Published intelligence studies often cite an ability to function the same figure of clients at a lower cost as one of the principles for a amalgamation ( Houston & A ; Ryngaert, 1994 )

2.2.2 ECONOMIES OF SCALE ( Pasiouras et al, 2005 )

Achieving economic systems of graduated table is the chief end of horizontal amalgamations. Harmonizing to Dettmer ( 1963 ) cited in Pasiouras ( 2005 ) the amalgamation or acquisition leads of course to the surplus of excess and sometimes fresh production installations, and the intent of the investing is to cut down the operating expense cost per unit.

Early research, particularly in the United States indicated that scale economic systems appeared chiefly in little Bankss instead than in big 1s ( Short, 1979 ; Miller and Noulas, 1996 ) Hughes et Al ( 2001 ) argue that most research finds no economic systems of graduated table because it ignores differences in Bankss ‘ capital construction and hazard pickings and demonstrate that scale economic systems exist but are elusive.

The old record of banking M & A ; As is by and large good as there are many chances for economic systems of graduated table and range.

2.2.3 GROWTH ( Gaughan, 2007 )

Another of import motivation for M & A ; A is growing. Companies seeking to spread out are faced with an option between internal or organic growing and growing through M & A ; A. In add-on, as industries mature, overall growing rates may worsen, coercing companies to look beyond internal schemes to recognize growing. Growth through M & A ; A can come from a figure of beginnings including geting concerns that are in the same or similar industries. By consolidating companies with similar merchandises and services, or markets and clients, the growing of a company can be enhanced through deriving economic systems of graduated table and range. By geting or unifying with companies in industries dissimilar to that of the acquirer, a buyer is able to come in markets or offer merchandises and services that are in industries with higher growing chances than its current concern. While the industries may be different, the acquirer is still able to capitalise on certain fiscal synergisms, therefore speed uping the company ‘s gross and net incomes growing. Internal growing may be a slow and unsure procedure while growing through M & A ; As may be a much more rapid procedure, although, it brings with it its ain uncertainnesss. Companies may turn within their ain industry or they may spread out outside their concern class. If a company seeks to spread out within its ain industry they may reason that internal growing is non an acceptable option. M & A ; As provide a agency whereby a company can turn rapidly.

2.2.4 Tax MOTIVES ( Gaughan, 2007 )

Tax motivations being an of import determiner of M & A ; As has been a much debated subject in finance. Several surveies have concluded that M & A ; As may be an effectual agencies to procure revenue enhancement benefits. Gilson, Scholes and Wolfson ( 1988 ) set forth the theoretical model showing the relationship between such additions and M & A ; As. They assert that for a certain little fraction of amalgamations, revenue enhancement motivations could hold played a important function. Hayn, nevertheless analyzed this relationship through empirical observation and found that “ possible revenue enhancement benefits stemming from net runing loss carry forwards and fresh revenue enhancement credits positively affect proclamation period returns of houses affecting tax-exempt acquisitions and capital additions and the measure up in the acquired assets ‘ footing affect returns of houses involved in nonexempt acquisitions. ” Furthermore, whether the dealing can be structured as a revenue enhancement free exchange may be a premier finding factor in whether to travel frontward with a trade. Sellers sometimes require tax-exempt position as a requirement of O.K.ing a debt.

2.2.5 DIVERSIFICATION ( Hunt, 2009 )

Expansion outside one ‘s industry means variegation. Diversification can come in assorted signifiers but the most common signifier are geographic and merchandise variegation. Geographic offers a decrease of hazard because return on loans and other fiscal instruments issued in different locations may hold comparatively low or correlativity. Besides, merchandise variegation may cut down hazard because the returns across different fiscal services industries may hold negative correlativity. For illustration Berger et Al ( 2000 ) found that correlativities of bank net incomes across international boundary lines are frequently negative, thereby back uping the possibility of variegation benefits from cross-border consolidation of banking organisations. The premise behind variegation prevarications in the fact that firm- based variegation is more efficient than variegation purchased on the market ( Froot and Stein, 1998 )

However, Winton ( 1999 ) argues that variegation may non ever cut down the hazard of bank failure, as variegation may take Bankss into new sectors in which they might hold small or no expertness.

Benston et Al ( 1995 ) argue on the footing of pre-merger net incomes volatility and mark acquirer correlativity that the motive for amalgamations in the first half of the 1980s was likely risk decrease through variegation, instead than the development of the put option on sedimentation insurance financess. Akhavein et Al ( 1997 ) find that bank amalgamations serve to diversify Bankss, leting them to take on more investing hazard for a given degree of house hazard.

Different surveies on variegation have shown assorted consequences from this scheme Berger and Ofek ( 1995 ) cited by Hunt ( 2009 ) looked at the effects of variegation on house value. They concluded that variegation reduces value. In peculiar, they showed that the value loss averaged 13 % to 15 % over the clip period of the analysis and was consistent across all industry sectors. The survey did show, nevertheless, that variegation within an industry mitigated the value loss. Loss in value stems from overinvestment of houses in multiple sections versus houses in one concern line. In add-on, it evidenced that value loss could be attributed to subsidisation of ill executing subordinates.

Despite the conflicting consequences of variegation through amalgamations and acquisitions, the scheme does hold a figure of benefits which are, that it easy accomplishes set ends and mark which may otherwise take a company old ages to accomplish through internal agencies. Besides, it can easy extinguish the dilution associated with constructing a new concern in house and, it has the possible to add direction to the company that already has expertness in the sector or industry being pursued. Finally, M & A ; A goaded variegation can take less clip to transport out than one driven by internal agencies.


Directors may desire to increase the size of their house as in most instances their pay is a map of house size ( Mueller, 1969 ) HUBRIS MOTIVES

Arnold ( 1998 ) suggests that hubris may assist explicate why amalgamations tend to happen in greatest Numberss when the economic system and companies by and large have had a few good old ages of growing reasoning that during such periods directors are experiencing instead pleased with themselves.

Roll ( 1986 ) suggests that directors commit mistakes of over-optimism in measuring M & A ; As chances due to excessive self confidence- hubris. Consequently, they engage in M & A ; As even when there is no synergism. More specifically, the pride of bidders ‘ direction allows them to believe that their ain rating of the mark is right, even if nonsubjective information shows that the mark ‘s true economic value, as reflected in its market rating is lower. Because of this haughtiness ( hubris ) acquirers ‘ terminal up overpaying mark houses, virtually reassigning all additions from the dealing to the mark stockholders.


The jobs that exist in the banking industry likely make them even more complex. In fact, bank amalgamations are non good or bad in abstract footings, they are good or bad on the footing of at least two standards. First, is the natural compatibility of the two meeting organisations, both from a market point of view and an organizational design position point. Second is the lucidity in be aftering the amalgamation procedure and the effectivity of the amalgamation execution procedure, which, to a great extent, depends on the personal empathy between the cardinal people involved and the compatibility of the two establishments civilization ( Canals, 1997 )


Recent surveies on coup d’etats find out that the method of payment plays a important function in explicating command houses ‘ stock returns Travlos ( 1987 ) studies negative unnatural returns for houses financing a coup d’etat with common stock and no unnatural returns for those financing with hard currency ( Chang, 1998 )

The signifier of payment may besides be related to the mark directors ‘ private information about their stock monetary value. In a universe where directors possess private information that stockholders do non, Myers and Majluf ( 1984 ) show that houses will publish stock merely when it is overvalued. It follows that houses will prefer to pay hard currency if their stock is undervalued. However, the two variables are non extraneous. For illustration, Martin ( 1996 ) shows that the signifier of payment is partially endogenous to the manner of acquisition. Amalgamations are more frequently financed with acquirer ‘s stock whereas stamp offers are preponderantly hard currency financed. Martin ( 1996 ) besides shows that stock acquirers have lower book-to-market ratios and a superior historical growing record, which raises the possibility that the acquirer ‘s directors may go excessively optimistic about their house ‘s growing chances ( Loughran, 1997 )

Loughran & A ; Vijh ( 1997 ) besides found that houses that utilize stock in amalgamations earn significantly negative extra returns of 25 per centum while those who utilize hard currency have positive extra returns.

Agrawal, Jaffe & A ; Mandelker ( 1992 ) found out that hard currency stamp offers are followed by undistinguished unnatural returns, but amalgamations chiefly financed by stock had important unnatural returns of -10 per centum five old ages after the amalgamation.

Firms that offer hard currency are less likely to overpay in comparing to houses that offer stock that may be overvalued in the eyes of direction.


Rau and Vermaelen ( 1998 ) put frontward the public presentation extrapolation hypothesis to explicate differential public presentation of glamor and value acquirers. They found the public presentation extrapolation to be the most compelling in explicating the hapless stock market public presentation of geting houses. They concluded that low book-to-market glamor houses earn important negative unnatural returns of -17 per centum regardless of the method of payment or impact on net incomes per portion. The ground behind their consequences is that low book-to-market houses are frequently glamourous companies for which the market extrapolates past public presentation of direction in measuring the ability of the house to do sound determinations. Therefore, a “ hubris ” consequence ( Roll, 1986 ) may be present in which direction is glorified to the point where their actions are non as closely monitored as that of other houses.

Conversely, houses with lesser stature ( with high book to value ratios ) are likely to take a more pessimistic position of direction by the puting populace. Unlike glamour houses, the bidder houses are non affected by hubris in their determination devising, and rather the antonym, are cautious in their appraisal of their ain abilities and those of amalgamation campaigners.


2.5 Empirical Consequence

Our reappraisal of the empirical surveies on the public presentation of M & A ; As will try to happen out whether or non the accrued literature suggest that post-merger public presentation is negative and, what the possible accounts are for these findings. Agrawal and Jaffe ( 1999 ) , nevertheless point out in their reappraisal that no account is needed if long-term public presentation is insignificantly different from nothing.

Gilbert ( 1984 ) cited by Pasiouras et Al ( 2005 ) , in a reappraisal of 45 surveies using the structure-conduct-performance paradigm ( SCP ) , harmonizing to which Bankss in extremely concentrated markets tend to conspire and therefore earn monopoly net incomes, found that merely 27 provided grounds in support of this hypothesis, while Berger ( 1995 ) points out that the relationship between bank concentration and public presentation in the US depends critically on what other factors are held changeless.

Craig and Santos ( 1996 ) study that merged Bankss surpass the industry in the post-merger period. Pilloff ( 1996 ) finds no important alteration in post-merger ROE ( Knapp et al, 2005 )

A figure of surveies document the returns to command and mark houses at the proclamation of bank amalgamations. Most surveies reported positive returns to marks in bank amalgamations, e.g. Hawawini and Swary ( 1990 ) and Comett and De ( 1991 ) . The grounds for bidders, nevertheless, is assorted. Desai and Stover ( 19851, James and Weir ( 1987 ) and Comett and De ( 1991 ) all report positive unnatural returns to bidding houses in banking acquisitions. However, Neely ( 1987 ) , Houston and Ryngaert ( 1992 ) , and Comett and Tehranian ( 1992 ) study negative returns to bidders. Closer review of these surveies suggests that samples that emphasize larger acquisitions are more

apt to happen negative bidder returns.

Jensen and Ruback ( 1983 ) cited by Raghavendra R and Vermaelen ( 1998 ) sum up the consequences of six surveies that examine the consequences to bidders in the twelvemonth following the coup d’etat. The grounds shows that after stamp offers, bidders earn statistically undistinguished positive unnatural returns, while after amalgamations, command houses consistently underperform. However, this grounds is controversial, with different research workers happening different consequences. Bradley and Jarrell ( 1988 ) , Franks, Harris and Titman ( 1991 ) , do non happen important underperformance in the two three old ages after the acquisition. Others, such as Asquith ( 1983 ) and Agrawal et Al ( 1992 ) , conclude that these houses do experience significantly negative unnatural returns in the first few old ages after the amalgamation. Loderer and Martin ( 1992 ) happen some grounds of negative returns in the first three old ages following the acquisition, but none after the 4th twelvemonth ( Raghavendra, 1998 )

The work of Linder and Crane ( 1992 ) cited by Piloff ( 1997 ) is besides notable. They analyze the operating public presentation of 47 bank-level intrastate amalgamations that took topographic point in New England between 1982 and 1987. Of the 47 amalgamations in the sample, 25 were consolidations of bank subordinates owned by the same keeping company. The writers aggregate acquirer and mark informations one twelvemonth before the amalgamation and compared it to public presentation of all non-merging Bankss in the same province as the meeting entities. The consequences indicate that amalgamations did non ensue in improved operating income, as measured by net involvement income plus net non- involvement income to assets.

Besides, available statistical information shows that the consolidation of the Nigerian banking sector through M & A ; As has resulted in a singular betterment on the sector as a whole ( Ekundayo, 2008 ) as most Bankss balance sheet size have more than doubled since the consolidation exercising took topographic point.

The overall additions from big bank amalgamations

Joel F. Houston * , Michael D. Ryngaert Journal of Banking & A ; Finance 18 ( 1994 ) 1155-1176


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