Mergers and Acquisitions – M & As in Nigeria banking sectors

Mergers and Acquisitions – M & A in Nigeria banking sectors

Mergers and Acquisitions – M & As in Nigeria banking sectors and its challenges are outlined here for you.

The challenges posed by the banking consolidation programme that was conceded in 2005 and other development within the economy made the nation to experience another round of financial crisis in 2008/2009, as revealed by the CBN/NDIC joint special examination carried out in 2009.

The challenges posed by the banking consolidation programme that was conceded in 2005 and other development within the economy made the nation to experience another round of financial crisis in 2008/2009, as revealed by the CBN/NDIC joint special examination carried out in 2009.

The examination results revealed among others, that 10 of the 24 deposit money banks were in grave financial condition. The findings from the examination led to the removal of eight CEos of the distressed banks and members of their executive management teams and their replacement with new executive management appointed by the CBN. The CBN also infected N620 billion in the effected banks as tier capital.

Mergers and Acquisitions in Nigeria Banking

Out of the 10 Banks owners of Wema Bank and Unity Bank Plc were able to adequately recapitalize their banks. The efforts of the Regulatory authorities to ensure that the remaining eight banks were recapitalized were stated by various court injunctions obtained by the share holders of the banks. In order to address that challenge, the CBN gave the banks a deadline of 30th September, 2011 to recapitalize or have their liecence revoked. In response file of the bank namely. Intercontinental Bank Plc, Finbank Plc and Equatorial trust Bank Plc got the court injunction vacated and entered into negotiations with prospective core investors.

Prior to the deadline, five banks had executed transaction implementation Agreements (TIAS) and held court ordered extra ordinary General Meetings where the shareholders approved the recapitalization merger transactions. the banks and their preferred investors were: Intercontinental Bank Plc (Access Bank Plc) Oceanic Bank Plc (Eco-Bank Plc), Union Bank Plc (shareholders and African capital Alliance Group), Finbank Plc (First city Monument Bank Plc) and Equatorial. Trust Bank Plc (sterling bank).

However, the three banks that could not find a preferred investor/merger partner had three bride banks established for them by NDIC to assume their assets and liabilities on a going concern basis. The bridge bank were main-street, keystone and enterprise Bank for former Afribank Plc, Bank PHB Plc and Spring Bank Plc respectively. The Bridge Banks were immediately sold to AMCON through share subscription, while the banking licences of Afribank Plc, Bank PHB Plc and Spring Bank Plc were revoked by the CBN.

CONTEMPORARY ISSUES OF MERGERS AND ACQUISITIONS
These are issues associated with Mergers and Acquisitions in Nigeria banking sectors. There are highlighted below.
PAYMENTS SYSTEM EFFICIENCY

As Mergers and Acquisitions has the direct effect of positively affecting the payments system by improving scale efficiencies in bank office may yield scale efficiencies in processing payments information institutions. In addition, may of the remaining inter-bank payments may be cleaved more quickly and efficiently because there fewer end point to which to send payment information or payment instruments.

Thus, even if individual’s institutions are not more proficient in handing cheques, credit card, debt cards, automated clearing system, wire payments, etc the payment system efficiency increases as the humble of institutions declines.

The issue that crisis in this regard is how quickly the merging entities are able to integrate into a formidable entity that can produce scope and scale economies in the payments system. It is however worthy of note to indicate that since all the affected banks are product of Mergers and Acquisitions of the recent consolidator programme, they will bring their experience to bear in this regard. The regulatory authorities should, however, pay close attention to the integration. Process with a view to quickly detecting problems when they occur and proffering remedies to address such problems.
DISTRESS RESOLUTION

Mergers and Acquisitions transactions are usually encouraged as they serve as an efficient way of resolving problems of financial distress. Institutions that as troubled because of their own inefficiency or under performing investment are often taken over as an efficient alternative to bankruptcy or other means of exit.

In that types of situation, the ideal merger would be for the ailing financial institution to be merged with a conservatively leveraged one that has a complementary mix of financial products, services and target markets.

While that may be desirable, the possibility that the depth of distress of the weaker bank May adversely affect the soundness of the healthier one remains an issue of concern to the regulatory authorities. The comfit in this regard is that the exact depth of distress in all the affected weak bank was unearthed by the management teams of the respective banking institutions that were appointed by the regulatory authorities and the financial advisers.

RANGE OF PRODUCT LINES AVAILABLE TO CONSUMERS
Successful Mergers and Acquisitions transactions should potentially be in the public interest, particularly in the area of service delivery as the outcome is expected to add some depth to the local banking sector and make a worthwhile contribution to banking services and the banking industry in a particular country.

A frequent factor in motivating mergers is the possibility of scope efficiencies economic of scale. The pursuit of these often result in large product line of the two entities being rationalized, with consequent cost benefits, cost reduction, since a single delivery system is used to sell a better range of products.

The issue here is that the development may compound such measures may include placing limitations on the size or business activities by separating core banking services from other speculative investment activities and proprietary trading operations.

Leveling the playing field:
The distortion to the level playing field created by funding advantages by banks perceived to be too-big to fail has remained an issue of concern to regulators and other key stakeholders. Several attempts have been made to quality such funding advantages and the general conclusion has been that the advantage is huge.

Measures such as capital surcharge, restrictions on certain business activities and imposition of special recovery and resolutions regimes such as creation of living will and direct policy intervention, cure often put in place for the big banks to help reduce the undue advantage by making transactions in the market fairer for small banks which could ensure the creation of a level playing field.

ACCESS TO FINANCIAL SERVICES BY SMALL FIRMS

Typically, small banks lend a larger proportion of their assets to small business than do large banks. The large institutions created through Mergers and Acquisitions transactions may shift away from providing retail-oriented services for small depositors and borrowers because of new opportunities to provide wholesale services for large capital market participants.

This is because it may be scope inefficient for the emerging large banking entity produce outputs/services that are suitable for small businesses because this economies may most likely arise in providing services to information-ally opaque small businesses.

In the main, M&A may inadvertently eliminate small banks, thereby raising the concern that small firms may find it difficult to access banking services. In view of the strategic importance of small businesses in the development process of any vation, the need to strengthen the non-bank financial institutions, particularly microfinance banks that capable of rendering services to this group of economic against has became imperative.
Mergers and Acquisitions effectiveness
The effectiveness of it system might be impaired, at least in the short-run. It system should be able to provide management information that is accurate, timely and relevant to managing a bank’s risks. It is most probably the biggest risk if not properly planned and managed. For example, there could be a lack of management information, an increased possibility of fraud and incorrect measurement of risk, since manual intervention is required until proper It systems are in place.

In the long run however, successful Mergers and Acquisitions transactions expected to lead to the deployment for highly sophisticated it system that would be of immense advantage to the industry in particular and the economy in general.

EXECUTIVE CAPACITY
Management of bans should befit and proper, competent, adequately skilled and prudent. The ability of executive management to build and mold a management team that is able to lead the emerging banking entity after Mergers and Acquisitions through the painful process of merging it systems, business and products, cultures and people is of critical importance. In that regard, the management of the emerging entity needs to have the ability to identity the migration risk at an early state and manage them effectively in the shortest possible time.

In addition to the above, the management of the emerging banking entity must at all times places the interest of the bank and its depositor before their own interests and should at all times act in-line best interests of depositor and other stakeholders, regardless of the demands shareholders.

The foregoing implies a change of orientation attitudes, values system and above all capacity building by the operators at all levels in general and at the management level, in particular.

STAFF RATIONALIZATION:
In a service industry such as banking motivation of staff is a key factor in ensuring that efficiency is maintained. When banks merge, there is the tendency that jobs might be lost as part of the repositioning strategies the new management may want to undertake.

Apart from the adverse impact on employment level, the dev elopement could also impact negatively on the morale of the remaining workforce. This development should be envisaged; at least in the short run hence appropriate strategies must be put in place by the new managements of the emerging banks to boost the morale of staff. In addition, adequate attention should be given to trade unions in the industry in order to minimize disruptions from their activities which rationalization of staff might inadvertently prompt.

The adverse effects on employment is, however expected to wane with  time as a stronger banking sector would inevitably recruit more staff when the respective bank grow and open new branches. In addition, the induced employment generation from the real sector of the economy might more than compensate for job loss, not of attrition after a successful Mergers and Acquisitions.

The oligopolistic structure of the market where only a few banking institutions dominate and dictate quality and prices of products and service offered to assumes. it is instructive to note that when banks merge, the number of players will reduce and hence, the intensity of competition.

This might have implication for the prices, products and quality of services in the banking sector.
In that regard, rather than deriving arising from scope and scale economies of the emerging large entities consumers may be getting less quality products/services at high prices.

Mergers and Acquisitions – CHALLENGES IN M&A (Mergers and Acquisitions)

Bank, although stringently regulated, are prone to runs.

This is because they are known to be highly geared. Confidence is there crucial for banks to attract and retain deposits. Big banks have observes to be less vulnerable to external shocks. It could therefore, be said that big banks enhance the confidence of the creation of large and strong banks.

Mergers and Acquisitions – M & A in Nigeria banking sectors