Merger Effects On Bank Performance In Nigeria Finance Essay

“ Amalgamations and acquisitions are undertaken by companies to accomplish certain strategic and fiscal aims. They involve the conveying together of two administrations with frequently disparate corporate personalities, civilization and value systems ” P.S Sudarsanam ( 1995 ) .

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INTRODUCTION AND BACKGROUND OF STUDY

Amalgamations and acquisitions ( M & A ; A ) activities have been common for more than four decennaries. Examples can be found North America and Europe before making adulthood in the 1990s. There is a huge sum of literature devoted to both the North American and European markets. Harmonizing to Rhoades ( 1996 ) , there were a sum of 6,347 bank amalgamations in the United States between 1980 and 1984. M & A ; A are defined as, strategic determinations which lead to the maximization of a house ‘s enlargement by increasing its production and selling operations. They have become really popular in recent times. They have emerged as a premeditated tool for the realisation of corporate enlargement and growing. As a consequence of enhanced competition, free flow of capital across states and convergence of concern, more and more concerns are incorporating themselves with international markets.

The chief purpose of meeting should be to better overall public presentation. Although, theoretical plants suggest that amalgamation may better the public presentation of the geting house, empirical surveies do non back up the decisions of the theoretical plants ( Lubatkin,1983 ) . This therefore, brings us to the inquiry ; make amalgamations and acquisitions increase the public presentation of the geting companies?

Extensive research has shown that there is no consensus for the evident popularity of amalgamations. Prior surveies analysing stock monetary values around the dictum of an acquisition largely reported negative unnatural returns ( Asquith, 1983 ; Jensen & A ; Ruback, 1983 ; Rau and Vermaelen ( 1998 ) . However, Bradley and Jarrell ( 1988 ) do non enter negative unnatural returns. A general decision, based on surveies of long-term stock public presentation following acquisitions, is that there is a negative unnatural return for bidders ( Jensen and Ruback ( 1983 ) , Asquith ( 1983 ) , Agrawal and Jaffe ( 2000 ) , Magenheim and Mueller ( 1988 ) , Rau and Vermaelen ( 1998 ) etc ) . Surveies by Porter ( 1987 ) besides suggested that M & A ; A have a really high failure rate. Harmonizing to these surveies, directors of the geting houses rated half of all acquisitions as unsatisfactory. However, a decision of negative unnatural returns is non clearly justified based on past research as consequences are non subjective. Results get down to go inconclusive once research workers consider the type of acquisition ( amalgamations, coup d’etats or acquisitions, ) the method of payment ( hard currency or equity ) , the pre-bid public presentation of the bidder and the post-merger consequence on net incomes per portion ( EPS ) . It is these incompatibilities in findings which make the survey of M & A ; A truly of import in adding to the established work.

The banking industry has been in the head of the moving ridge of M & A ; A. It is presumed that M & A ; A aid to increase market power, diversify hazard, cut down costs and have an obvious advantage of efficiency related benefits. The focal point of this thesis is on M & A ; A in the Nigerian banking industry. In researching nevertheless, the literature refering to the capable affair is missing. This can be due to a figure of factors including the deficiency of resources and research in the state sing fiscal M & A ; A. Due to this fact most of the literature reviewed is of theoretical nature. The subjects and capable affair nevertheless, are still applicable in the Nigerian context.

In Nigeria, M & A ; A activities became popular after the consolidation of the banking sector by the former Central Bank Governor Professor Charles Soludo. Under Soludo, Bankss were compelled to increase their capital base to a lower limit of 25 billion naira ( $ 169.5m ) before the 31st of December 2005. The principle for this is that prior to the consolidation, a bulk of the Bankss were non competitory as demonstrated by their low capital base of 2 Billion Naira and the Bankss had a greater hazard of fall ining. As a consequence of the consolidation exercising, the figure of Bankss reduced from 89 to 25 in 2005 and farther reduced to 24 Bankss in 2008.

The banking sector has experienced an extraordinary degree of consolidation as amalgamations and acquisitions among fiscal establishments have taken topographic point at record degrees ( Pilloff, 1996 ) . The ground is based on a strong belief that additions can roll up through increased market power, cost decrease, graduated table and range economic systems and decreased net incomes volatility ( Pilloff, 1996 ) . However, M & A ; A have come under the perceptual experience that they are non the value making tools they are perceived to be. If M & A ; A are non value making mechanisms, the inquiry remains: why are they still the preferable method of enlargement for corporations in accomplishing competitory advantage?

1.1. AIMS AND OBJECTIVES OF THE STUDY

The survey aims to measure the consequence of M & A ; A on bank public presentation in Nigeria during the period 2003-2008.

Specifically this survey will take to:

Analyze the post-merger and acquisition runing public presentation of geting Bankss involved in M & A ; A. The clip frame will be three old ages before and three old ages after M & A ; A. To besides try to place synergisms, if any, ensuing from the amalgamation.

Analyze the effects of bank amalgamations on profitableness.

Establish the stock monetary value reactions of geting Bankss.

1.2. RESEARCH HYPOTHESIS

The public presentation of geting Bankss is significantly positive.

1.3 Decision

The balance of the thesis is organized as follows: chapter 2 takes a thorough expression at the theoretical and empirical models environing M & A ; A. The accent of chapter 2 is on long tally post amalgamation public presentation of the acquirer. Chapter 3 justifies and explains the methodological analysis and informations used. Chapter 4 presents the findings while the concluding chapter draws a decision from the survey.

Chapter TW0

2.0. Introduction

This chapter will try to sum up the theoretical models and reexamine bing literature environing the amalgamations and acquisitions phenomenon. It will besides analyze the empirical grounds on the post-merger 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.

2.1 AN OVERVIEW OF BANK CONSOLIDATION IN NIGERIA

The reforms in the Nigerian banking sector started due to the background of the banking sector crisis of the 1990s. The factors which are responsible for the crisis include failing in the regulative and supervisory model, extremely undercapitalization sedimentation taking Bankss, weak direction patterns, deficiency of competition among the fiscal establishments and the tolerance of lacks in the corporate administration behavior of Bankss Adegbaju ( 2008 ) . Nigeria ‘s fiscal indexs such as liquid liabilities, bank assets, private recognition or fiscal system sedimentations remained comparatively low throughout the 1990s by historical criterions and merely started to significantly increase after twelvemonth 2000 ( Hesse, 2007 ) .

The chief aim of the reforms was to increase the mean size of Bankss. The principle behind this was to accomplish economic systems of graduated table, bring forth new merchandise development and bring forth a more stable banking system with a higher part to fiscal intermediation ( Hesse, 2007 ) . A figure of incorporate Bankss were formed.A expression at the Bankss that emerged after consolidation show that Bankss that were regarded as hard-pressed or in crisis merged with stronger Bankss or regrouped under new names to rectify the insufficiency of their operating system. This activity led to a decrease in the figure of Bankss in Nigeria. As already stated, by 2008, the figure of Bankss had gone down to 24.

Besides, in the procedure of consolidation, Bankss were able to raise over $ 3billion in the stock market. Banks had extra liquidness and equity. Hesse ( 2007 ) .

2.2 THEORETICAL FRAMEWORK

CATEGORIES OF MERGERS AND ACQUISITIONS

The FTC ( Federal trade committee ) classifies amalgamations as horizontal, perpendicular and pudding stone amalgamations. Horizontal amalgamations occur between direct rivals ( Gaughan, 2007 ) . The chief principle behind the horizontal amalgamation is to accomplish economic systems of graduated table. It can be achieved by increasing merchandise lines, diminishing their on the job capital and fixed assets investing. However, when two rivals merge, industry competition is reduced which may take to higher monetary value for consumers. An of import benefit of the horizontal amalgamation is the accomplishment of economic systems of graduated table and range. The merged company is able to hold a wider production volume in comparing to the companies runing individually.

Vertical amalgamations on the other manus, are between companies which have a buyer-seller relationship ( Gaughan,2007 ) . 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. Vertical amalgamations may do the houses cost- efficient by diminishing its distribution and production costs. Fan and Goyal ( 2006 ) argues that perpendicular amalgamations provide geting houses with ownership and control over next phases of production. It 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. There ‘s a general perceptual experience that horizontal and perpendicular amalgamations are most likely to give more operating synergism compared to the pudding stone amalgamation.

A pudding stone amalgamation occurs where the companies that merge together are involved in different types of concerns Gaughan, ( 2007 ) . The chief motivation behind the pudding stone amalgamation is variegation of hazard. It improves the overall efficiency of the acquirer and besides, the balance in the company ‘s entire scope of different merchandises and production procedures. It adds value to the market portion of the company. This type of amalgamation encourages houses to turn by diversifying into other markets. Therefore, it is a really of import attack for the house when its present market does non hold many chances for growing.

2.2 MOTIVES BEHIND BANK MERGERS AND ACQUISITIONS

There are several conflicting positions as to the grounds why amalgamations are undertaken. These include corporate enlargement and growing, seeking to derive market power ( monopolize ) by geting direct rivals, providers or clients. ( Porter, 1980 ) . Due to increasing competition in the fiscal services sector, most fiscal establishments now feel that consolidation is a necessary requirement to bettering efficiency. Harmonizing to Berger et Al. ( 1999 ) , Bank M & A ; A must be geared towards increased market power from some types of consolidation, betterments in net income efficiency and variegation of hazards, or working economic systems of graduated table or range. Some empirical surveies have nevertheless been undertaken to prove the theories. However, no definite decision has emerged.

2.2.1 Synergy

In the chase of enlargement, Bankss prosecuting in M & A ; A cite possible interactive additions such as economic systems of graduated table, resource complementarities, and improved production methods as the chief grounds for the dealing. Synergy 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. The expected being of interactive additions allows companies to incur the costs of the acquisition procedure while being able to hold the financess for mark stockholders as a premium for their portions. In amalgamations, this means that the station amalgamation consequences are greater than the amount of the combined houses.

Synergy refers to those benefits which are non merely related to economic systems of graduated table. One signifier of synergy benefits is runing economic systems. Aside runing economic systems, synergism can besides originate as a consequence of improved managerial capablenesss, ingeniousness, innovativeness, research and development and market coverage capacity due to the complementarities of capital and accomplishments and a broad scope 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 acquirers which include better and cheaper entree to heighten hard currency flows and liquidness or to funding beginnings, or 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, the acquirer improves the public presentation of the acquired house by reassigning resources and cognition to the new subordinate. The most common transportation is of managerial resources. The synergisms created by a amalgamation may besides be related to the grade that two banking organisations have overlapping operations. Alleged in-market amalgamations have a greater chance to acknowledge 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.

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 logically to the excess of extra or sometimes fresh production installations. The intent of the consolidation is to decrease the operating cost per unit. Early research, particularly in the United States ( Short, 1979 ; Miller and Noulas, 1996 ) indicated that economic systems of graduated table appeared chiefly in little Bankss instead than in big Bankss. Hughes et Al ( 2001 ) argue that most research finds no scale economic systems because it ignores differences in Bankss ‘ investing composing and hazard pickings and demonstrate that scale economic systems exist but are elusive. The old record of banking M & A ; A is by and large good as there are many chances for economic systems of graduated table and range. An illustration of a amalgamation which tried to work economic systems of graduated table is the amalgamation between Chemical Bank and Chase Manhattan Bank in 1995 in the USA which was predicted to cut down cost by $ 1.5billion a twelvemonth from the consolidation of operations and riddance of interrelated occupations.

2.2.3 INCREASED MARKET POWER

Gaughan ( 1996 ) argues that there are three major beginnings of market power. They are merchandise distinction, market portion and barriers to entry. Franks, Broyles and Carleton ( 1985 ) say that one house may get its rivals so as to cut down competition in order to increase monetary values and net income borders. Gaughan ( 1996 ) argues that an addition in market portion without merchandise distinction or barriers to entry could forestall a company from increasing the monetary value above fringy cost, as this may merely pull new rivals who will drive monetary value down towards fringy cost.

2.2.4 GROWTH ( Gaughan, 2007 )

Another of import motivation for M & A ; A is growing. Companies seeking to spread out are faced with a pick between internal growing or 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 ; A may be a much more rapid procedure, although, it brings with it its ain uncertainnesss. Companies may turn within their ain concern or they may distribute out outside their industry class. If a company decides to distribute out within its ain concern field, they may presume that internal growing is non a suited pick. M & A ; A provide a agency whereby a company can turn rapidly.

2.2.5 Tax MOTIVES ( Gaughan, 2007 )

Tax motivations being an of import determiner of M & A ; A have been a much debated subject in finance. Several surveies have come to the decision that M & A ; A may be an efficient agencies to procure revenue enhancement additions. Gilson, Scholes and Wolfson ( 1988 ) set forth the theoretical model showing the relationship between such additions and M & A ; A. They assert that for a certain little fraction of amalgamations, revenue enhancement motivations could hold played a important function. Hayn ( 1989 ) , nevertheless analyzed this relationship through empirical observation and found that “ possible revenue enhancement benefits stemming from net operating 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. ”

2.2.6 Diversification

Expansion outside one ‘s industry means variegation. Harmonizing to Hunt, ( 2009 ) , variegation can come in assorted signifiers. The most common signifiers 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 no correlativity. Deng and Elyasiani ( 2005 ) study that geographic variegation is connected with unimportant value effects and a important decrease in Bankss ‘ hazard. 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. 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. 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. Some of which are it easy accomplishes in one measure what may otherwise take a company old ages to accomplish through internal agencies Hunt ( 2009 ) . 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 ( Hunt,2009 ) .

2.2.7 MANAGERIAL MOTIVES

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

2.2.7.1 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 ; A chances due to excessive self confidence- hubris. He farther predicts that directors on mean overpay for their mark acquisitions. Consequently, they engage in M & A ; A 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.

2.3 FACTORS AFFECTING POST MERGER PERFORMANCE

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. Canals ( 1997 ) argue that 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 organisational 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 ‘ civilizations.

2.3.1 METHOD OF PAYMENT HYPOTHESIS

Recent surveies on coup d’etats find out that the method of payment plays a important function in explicating command houses ‘ stock returns. The command house may offer hard currency, stock, or a mixture of both hard currency and stock. Travlos ( 1987 ) cited in Chang ( 1998 ) studies negative unnatural returns for houses financing an acquisition with common stock and no negative unnatural returns for houses financing with hard currency.

The signifier of payment may besides be related to the mark directors ‘ unrevealed information about their stock monetary value which is known as asymmetric information. Cash commands cut down asymmetric information job that would originate in the event of common stock. In a state of affairs whereby directors possess information that stockholders do non hold entree to, 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. Amalgamations are normally financed with acquirer ‘s stock whereas stamp offers are largely financed by hard currency. He besides records that houses that get with stock have lower book-to-market ratios and a higher historical growing record. This in bend raises the opportunities that the acquirer ‘s directors may go overly confident about their company ‘s growing chances. Loughran & A ; Vijh ( 1997 ) besides records that in amalgamations, companies which finance with stock earn well negative extra returns while those who get in hard currency have positive extra returns. Agrawal, Jaffe & A ; Mandelker ( 1992 ) besides found out that hard currency stamp offers are followed by undistinguished unnatural returns. However, amalgamations chiefly financed by stock had positive returns five old ages after the amalgamation.

Firms that offer hard currency are likely non to overpay compared to companies that offer stock which direction may see as overvalued.

2.3.2 PERFORMANCE EXTRAPOLATION HYPOTHESIS

Rau and Vermaelen ( 1998 ) brought frontward the public presentation extrapolation hypothesis in order to explicate the difference in public presentation between glamor and value acquirers. The public presentation extrapolation hypothesis states that the market extrapolates the past public presentation of the geting house when it assesses the value of an acquisition and indirectly feeds this information to the directors and board of managers of the geting house. They found out that houses with high yesteryear stock returns i.e. glamour houses are assumed to do good acquisitions and houses with hapless path records i.e. value houses are assumed to do bad acquisitions. Therefore, a “ hubris ” consequence may be present in which the organisation is overrated to the extent whereby their activities are non as closely observed as those of other companies.

Unlike glamour houses, the bidder houses are non affected by hubris in their determination devising, and rather the antonym, are careful in their rating of their ain abilities and those of amalgamation campaigners.

2.4 Empirical Consequence

The 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 Dos Santos ( 1996 ) records that Bankss that merged performed better in the post-merger period. Pilloff ( 1996 ) records no relevant alteration in post-merger ROE.

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 ( 1985 ) , James and Weir ( 1987 ) all report positive unnatural returns to bidding houses in banking acquisitions. However, Houston and Ryngaert ( 1992 ) and Comett and Tehranian ( 1992 ) all study negative returns to bidders. A closer expression at these surveies suggests that samples that emphasize larger acquisitions are more apt to happen negative bidder returns.

Jensen and Ruback ( 1983 ) cited by Raghavendra 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 under perform. 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 or 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 Pilloff ( 1996 ) 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 ; A has resulted in a singular betterment on the sector as a whole ( Soludo, 2008 ) . Most Bankss balance sheet size has more than doubled since the consolidation exercising took topographic point.

Decision

This chapter examined the theoretical model environing the M & A ; A phenomenon and besides the literature on the station amalgamation public presentation of M & A ; A.

Chapter THREE-RESEARCH METHODOLOGY

3.0 Introduction

This chapter will concentrate on discoursing the methodological analysis used and warrant the ground for the choice.

JUSTIFICATION OF RESEARCH METHOD

DATA COLLECTION AND ANALYSIS

The survey relied chiefly on secondary informations. Panel information is besides used for the research. Datas were obtained from diaries, books, relevant publications of the Central Bank of Nigeria, The Nigerian Deposit Insurance Corporation, The Nigerian Stock Exchange publications, and the Federal Office of Statistics. Data gotten from the fiscal statements of the Bankss were besides analyzed so as to avoid any colored sentiment. The information being examined is being drawn from the completed bank amalgamations and acquisitions that occurred in Nigeria in 2005. The informations analyzed are three old ages before the amalgamation took topographic point and three old ages after the amalgamation.

Fiscal ratios will be analyzed which are the liquidness ratios and profitableness ratios.

3.2.1 LIQUIDITY RATIOS

RETURN ON EQUITY ( ROE )

Measures the profitableness of the Bankss from the position of the stockholders. This step is of import since most of the Bankss were able to run into the recapitalization demand through the issue of equity to new and bing stockholders.

Tax return ON ASSETS ( ROA )

This is a comprehensive index of direction efficiency as it measures overall bank public presentation. This is the net income relation to entire assets.

Net Interest MARGIN ( NIM )

This is the difference between involvement grosss and involvement costs.

Capital ADEQUACY REQUIREMENT ( CAR )

This is an index of the capital strength of the Bankss

Loan TO DEPOSIT RATIO ( LDR )

Measures the liquidness of Bankss

3.3 METHOD OF DATA ANALYSIS

In an effort to look into the pre-and post-consolidation public presentation of Bankss, a descriptive analysis of public presentation ratios will be carried out with focal point on the Bankss that acquired other Bankss during the consolidation exercising of 2005.

The Ordinary Least Square ( OLS ) for simple arrested development technique will be applied on the premise that there is a additive relationship between the variables. The preliminary measure in our analysis is to find the grade of integrating of each variable. For this intent, we test for the being of unit root in degrees and first difference of each of the variables since most clip series informations are non stationary in their degrees and several of these series are most adequately represented by first difference. The Augmented Dickey-Fuller and Phillips Perron trials are used to find the presence of unit roots.

If the variables are found to be of unit roots, a co integrating trial is farther carried out to find whether a long tally relationship exist between the variables. Error rectifying theoretical account will be used to analyse the remainder.

RESTATEMENT OF RESEARCH QUESTIONS AND HYPOTHESES

Research HYPOTHESES

The public presentation of the geting Bankss is significantly positive.

3.5 SPECIFICATION OF THE MODEL

Pulling from the theoretical and empirical literature, we examine the consequence of entire bank capitalisation, plus quality and bank militias on the return on equity of Bankss and the consequence of entire bank capitalisation, plus quality and bank militias on the return on assets of Bankss.

Therefore, the inexplicit signifier of the theoretical account is specified as:

ROE = degree Fahrenheit ( BNKCAP, AQ, LDR, BR )

ROE = degree Fahrenheit ( BNKCAP, AQ, LDR, BR )

Where ;

ROE is return on equity

BNKCAP is entire bank capitalisation

AQ is plus quality of Nigerian Bankss

LDR is entire loan to lodge ratio of Nigerian Bankss

BR is bank militias

By presuming a additive relationship between the variables, the expressed signifier of the theoretical accounts can be specified as:

ROEt = b0 + b1BNKCAPt + b2AQt + b3LDRt + Aµt aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( 1 )

ROAt = b0 + b1BNKCAPt + b2AQt + b3LDRt + Aµt aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦ ( 2 )

In equations ( 1 ) , and ( 2 ) , we expect b1, b2, b3 to be a positive value. This implies that the variables are expected to hold a positive impact on the station consolidation public presentation of Nigerian Bankss.

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