An Evaluation of Organic growth, and Mergers and

Acquisitions as Strategic Growth options in

the Nigerian Banking Sector

By

Anthony Efe Jimmy

BSc., MBA.

A dissertation presented in part consideration for the degree of

MA in Corpoate Strategy & Governance.

August 2008
 ABSTRACT

In response to a Central Bank of Nigeria’s policy to increase the minimum paid-up

share capital requirement of Nigerian banks from N2 billion to N25 billion in July
2004, with December 31, 2005 as deadline, more than half of the 89 banks in Nigeria
as at July 2004 were engaged in one form of merger and acquisition, some sourced for
additional capital through public offering of their share, and others a combination of
merger and acquisition and public offering. The Central Bank of Nigeria’s policy to
increase the paid-up share capital was to amongst other things to strengthen the
financial capacity and effectiveness of the Nigerian banking sector.

This dissertation evaluated organic growth, and mergers and acquisitions as strategic
growth options in the Nigerian banking sector, with a view to ascertaining which of
the growth strategies result in superior financial performance. Access Bank and
Zenith Bank were used as case studies.

Through the use of various financial ratios in analysing five years financial statements
and other relevant information on both banks from 2003 to 2007, the analysis suggests
a mixed result: Access Bank that pursued M&A witnessed a faster growth rate,
whereas Zenith Bank that pursued organic growth was able to sustain its quality
performance trends and achieved a slower growth rate during the period under review,
in line with past literatures on mergers and acquisitions, and organic growth
respectively.

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 Table of Contents

Page
Title page i
Abstract ii
List of tables and Figures v
Acknowledgement vii
Dedication viii

Chapter 1 - INTRODUCTION
1.1 Background 1
1.2 Overview of the Nigerian Banking Sector 1
1.3 Literature Review 1
1.4 Research Methodology 1
1.5 Data Analysis and Presentation 2
1.6 Discussion and Conclusion 2

Chapter 2 – OVERVIEW OF THE NIGERIAN BANKING SECTOR

2.0 Introduction 3
2.1 Nigerian Banking sector regulatory Agencies 3
2.2 Embryonic phase of Nigerian Banking 5
2.3 The expansion phase of Nigerian Banking 6
2.4 Consolidation/reform phase 8
2.4 Post-consolidation 12

Chapter 3 – LITERATURE REVIEW

3.0 Introduction 14
3.1 Organic (Internal) Growth 14
3.1.1 Benefits of Organic (Internal) Growth 15
3.1.2 Limitations of Organic (Internal) Growth 15
3.2 Merger and Acquisition defined 16
3.3 Mergers and Acquisitions research paradigms 17
3.4 Types of Mergers and Acquisitions 18
3.5 Stages of Mergers and Acquisitions 20
3.6 Merger and Acquisitions wave 23
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3.7 Merger and Acquisitions activities in the Nigerian Banking sector 25
3.8 Legal hurdles for M&A in Nigerian Banking sector 27
3.9 Reasons for Mergers and Acquisitions 27
3.10 Limitations of Merger and Acquisitions 29
3.11 Effects of Merger and Acquisitions on bank performance 30
3.12 Summary 30

Chapter 4 – RESEARCH METHODOLOGY

4.0 Introduction 32
4.1 Research purpose 32
4.2 Research approach 32
4.3 Type of research 32
4.4 Case studies selection criteria 33
4.5 Data collection and analysis procedure 33
4.6 Limitations 36
4.7 Summary 36

Chapter 5 – DATA ANALYSIS AND PRESENTATION

5.1 Introduction 37
5.2 An overview of the case studies 37
5.3 Findings 42
5.3.1 Liquidity 42
5.3.2 Profitability 44
5.3.3 Capital Adequacy 48
5.3.4 Asset Quality 50
5.3.5 Growth rate 52
5.3.6 Investment Valuation ratios 58
5.3.7 Share price movement 59
5.3.8 Actual versus projected performance of Access Bank 61

Chapter 6 – DISCUSSION AND CONCLUSION 63

REFERENCES 67

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 List of Tables and Figures

Pages
Table 2.1 List of banks in Nigeria as at January 1, 2006 11
Table 2.2 Basic indicators of Banking sector consolidation results 12
Table 3.1 Summary of major M&A waves in the US 24
Table 3.2 Bank M&A in Nigeria between 2004 and 2005 26
Table 3.3 Reasons for merger and acquisitions 28
Table 5.1 Summary of Access Bank’s 5 Years Profit & Loss Account 39
Table 5.2 Highlights of Access Bank’s 5 Years Balance Sheet 39
Table 5.3 Summary of Zenith Bank’s 5 Years Profit & Loss Account 41
Table 5.4 Highlights of Zenith Bank’s 5 Years Balance Sheet 41
Table 5.5 Loan: Deposit Ratios 43
Table 5.6 Return on Assets 45
Table 5.7 Net Interest Income: Total Asset Margin 47
Table 5.8 Cost: Income Ratio 47
Table 5.9 Equity to Asset Ratio 49
Table 5.10 Equity to Loans Ratio 50
Table 5.11 Provision for Loan Losses to Total loans 51
Table 5.12 Provision for Loan Losses to Profit before Tax 52
Table 5.13 Profit before Tax growth rate 54
Table 5.14 Deposits growth rate 55
Table 5.15 Shareholders’ Equity growth rate 56
Table 5.16 Total Assets plus Contingencies 57
Table 5.17 Dividends Payout Ratios 58
Table 5.18 Profit and Loss Accounts (highlight of forecast and actual) 62
Table 5.19 Balance Sheet highlights (forecast and actual) 62
Table 6.1 Growth rate between 2005 and 2007 64
Table 6.2 Access Bank’s 2008 performance highlights 65
Table 6.3 Zenith Bank's 2008 3Q Operation Statement 65
Figure 5.1 Cash & Short-term Investment to Current Liabilities 43
Figure 5.2 Returns on Assets 45
Figure 5.3 Returns on Equity 46
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Figure 5.4 Returns on Capital Employed 46
Figure 5.5 Cost: Income ratio 48
Figure 5.6 Equity: Total Assets 49
Figure 5.7 Provisions for Loan Losses to Total loans 51
Figure 5.8 Provisions for Loan Losses to Profit before Tax 52
Figure 5.9 Gross Earnings growth rate 53
Figure 5.10 Deposit growth rate 55
Figure 5.11 Shareholders’ Equity growth rate 56
Figure 5.12 Total Assets plus Contingencies 57
Figure 5.13 Growth in Earnings per Share 58
Figure 5.14 Share price movement pre Access Bank merger 60
Figure 5.15 Share price movement during merger 60
Figure 5.16 Share price movement post Access Bank merger 61

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 ACKNOWLEDGEMENT

I will like to express my profound gratitude to my supervisors, Kevin Amess (PhD), for

his insightful professional guidance, valuable suggestions, patience, and attention.

My sincere gratitude also goes to the following individuals and others too many to

mention, who in no small way contributed to the success of this research and Masters

programme: Professor Bob Berry, Professor Andy Lockett, Professor Dave Wastell,

Professor John Hasseldine, Rodion Skovoroda (PhD), and Qi Xu (PhD). Mr Emma

Egbabor, Felix Soh Chick, Kim Jungmo, Gino Miller, Hung Lin, Xu Ma, Kayode Ajani,

Godwin Emefiele, Udom Emmanuel, Gideon Jarikre, Stanley Amuchie, Biodun

Durosinmi, Alex Tobi, Tajudeen Ahmed, Nnamdi Owoh, Dokun Faniran, Okezi Orioko,

Godwin O’Fidel Ogbepia, Baba Sege Okunnade, John Chijindu Onuoha, Zek

Enamegwono Bazunu, Josephine Bazunu, Ofurio Moses, Andy and Ajiri Evanwawerae,

Fovie Jude & family, Mr & Mrs Bode Betiku, Mr & Mrs Patrick Atamu, Virtue

Omolamai & family, Jacob Ogbekene & family, Billy & Priya Johal, Ted-Mukoro Oboh

Esq. & family, Martins Emozino Edoja Esq. & family, Jimmy Solomon, Gladys Jimmy,

Obruthe Jimmy, Edwin Jimmy, Abigael and Reuben Jimmy. Also Engr. T.K. Elelewor,

Sam Elelewor and family, Rev. Paul Omasere & family, Israel Omasere & family,

Sunday Onaimor & family, Adueniwomah Williams & family, Sunday Ojaigho & family,

Felix Uchenunu & family, and Simon Uchenunu & family. And most especially to Mrs

Doreen Onome Uchenunu, and Ambrose Oroboh Uchenunu (Ph.D), who were very

inspirational to my choice of and exceptionally comfortable stay during my studies in the

University of Nottingham.

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 DEDICATION

To:
my parents – Freeborn A. Jimmy and Martha Ada Jimmy; and
my friend/wife (Jimmy Rita), and our children: Zino, Maro and Karo.

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Chapter 1: Introduction

1.1 Background
Following the 18 months ultimatum given by the Central Bank of Nigeria on July
2004 to all deposit taking banks in Nigeria to increase their paid-up share capital to a
minimum of N25 billion with a deadline of December 31, 2005, most banks resorted
to mergers and acquisition while a few to organic growth to achieve the feat. This
directive led to an unprecedented number of mergers among Nigerian banks within
the spate of eighteen months, between July 2004 and December 2005.

This study seeks to evaluate organic growth, and mergers and acquisition as strategic
growth options in the Nigerian banking sector, with a view to ascertaining which of
the strategies result in superior financial performance. To achieve the purpose of this
study, two banks: Access Bank Plc that was involved in a merger during the
consolidation of 2004 and 2005; and Zenith Bank Plc that achieved the N25 billion
requirement through organic growth, are used as case study.

1.2 Overview of the Nigerian banking sector

Chapter two of this study gives a general overview of the Nigerian banking sector. It
dwelt briefly on banking regulation and regulatory authorities in Nigeria, and a
synopsis of banking history in Nigeria from its embryonic phase in the late 19th
century to events leading to the spate of mergers and acquisitions witnessed in Nigeria
between July 2004 and December 2005.

1.3 Literature –Review

Chapter three is a review of scholarly academic literatures and analytical views on
merger and acquisition. It focused on the organic growth, meaning and types of
mergers and acquisitions, different paradigms to the study of mergers and acquisitions,
and mergers and acquisitions in the Nigerian banking sector.

1.4 Research Methodology:

Chapter four is a discussion of research methodology used in the study. The study
used qualitative research approach from the economic/finance and strategy
perspectives of M&A, relying on simple statistical tools and methods to analytically
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review financial performance, market valuation, and market share – pre and post
M&A period of the selected case studies. Qualitative approach was chosen for this
study, because it is the most suitable means of research that can lead to a better
understanding and evaluation of the financial performance of the case studies.

1.5 Data Analysis and Presentation

This part of the study gives an analysis and presentation of findings on the case
studies. Access Bank and Zenith Bank’s financial statements for the period 2003 to
2007 were analysed using a procedural approach of liquidity, profitability, capital
adequacy, asset quality, growth rate, and stock price movement.

1.6 Discussion and Conclusion:

I do believe the outcome of this research would be instrumental in inspiring other
empirical studies in the future on the Nigerian banking sector.

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Chapter 2: An overview of the Nigerian banking system

2.0. Introduction
Banking in Nigeria went through phases and covers a wide span of time, from an era
of free banking or virtually absolute freedom in tune with the dictate of the economies
of classical liberalism, to the era of rigid or strict prudential regulations (Agbaje,
2008; Nwankwo, 1980). The sector is one of the most dynamic sectors of the Nigerian
economy, it responds quickly and significantly to policy adjustments of government
from time to time. The sector mobilises funds from the surplus-spending units into the
economy and by on-lending such funds to the deficit-spending units for investment,
banks in the process increase the quantum of national savings and investment (Mordi,
2004). Banks are the most regulated institution in Nigeria because of their role as
financial intermediaries. It will be worthwhile to discuss briefly the agencies
responsible for the regulation of the Nigerian banking sector. This will be followed by
a history of banking in Nigeria divided into four phases: the embryonic; expansion;
consolidation/reform; and post-consolidation phases.

2.1.0. Nigerian banking sector Regulatory Agencies

The Nigerian banking sector is highly regulated due to the strict surveillance on
banking activities by regulatory authorities. 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 20071) to
enable the regulatory agencies carry-out their oversight functions.

According to Llwellyn (1986, as cited by Alashi, 2002), banking regulation is defined

as a body of specific rules or agreed behaviour either imposed by government or other
external agency or self imposed by explicit or implicit agreement within the industry
that limits the activities and business operations of banks. The set of rules and
regulations guiding the Nigerian banking sector are made by regulatory/supervisory
authorities set up by government. 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
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Corporation; and (4) Securities and Exchange Commission (Onyido, 2004: 13).
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;
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.

2.1.1 Federal Ministry of Finance

The Federal Ministry of Finance (FMF) advises the Federal Government on its Fiscal
operations and cooperates with CBN on monetary matters. Prior to 1991, the Federal
Ministry of Finance and CBN were jointly responsible for the licensing of banks, but
now the sole responsibility of CBN. Section 43 (2f) of CBN Act 2007 that set up the
Financial Services Regulation Co-ordinating Committee makes the Federal Ministry
of Finance part and parcel of the regulatory committee.

2.1.2 Central Bank of Nigeria

The Central Bank of Nigeria is the apex regulatory authority in the financial system.
Among its primary functions, the Bank promotes monetary stability, promotes a
sound financial system, and acts as banker and financial adviser to the Federal
Government of Nigeria, as well as banker of last resort to the banks (Onyido, 2004).
Central Bank of Nigeria Act 2007, gave the CBN more flexibility in regulating and
overseeing the banking sector and licensing finance companies.

Section 45(1)(a-b) of the CBN Act 2007 provides that the apex bank shall from time
to time determine and through circulars cause banks to maintain specified reserve
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requirements and liquidity ratios. Also Section 44 (e) and (f) empowers CBN and
other members of the Financial Services Regulation Co-ordinating Committee to
articulate strategies for the promotion of safe, sound and efficient practices for
financial intermediaries, and deliberate on such other issue as may be specified from
time to time.

Central Bank of Nigeria through its Banking Supervision Department carryout

functions and responsibilities of ensuring the soundness of the banking system,
promote monetary stability and a sound financial system. In discharging this
responsibility, the Department carries out on-site as well as off-site supervision of
banks (Onyido, 2004).

2.1.3 Nigerian Deposit Insurance Corporation

The Nigerian Deposit Insurance Corporation (NDIC) was set up in 1988 to insure
deposits of all licensed banks in order to promote confidence in the Nigerian banking
industry. It is funded by a tax deductible premium paid on the insured deposits of
deposit taking banks. Although an autonomous entity from the CBN, it complements
the regulatory and supervisory role of the CBN and also acts as the liquidator for
banks which the CBN decides to take over and close down (Umoh, 2004).

2.1.4. Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is the apex regulatory organ of the
capital market in Nigeria. Its major objective is to promote an orderly and active
capital market by ensuring adequate protection of securities, registering all securities
dealers in order to maintain proper standards of conduct and professionalism,
approving and regulating mergers and acquisitions and maintaining surveillance over
the market to enhance efficiency. Section 43 (2c) of CBN Act 2007 that set up the
Financial Services Regulation Co-ordinating Committee name the Securities and
Exchange Commission as a member of the committee regulating the activities of
financial institutions in Nigeria.

2.2 The embryonic phase of Nigeria banking

The concept of banking in the contemporary sense was unknown to the natives and
customs of the geo-political entities and units making up the present day Nigeria until
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the second half of the 19th century when Elder Dempster started the movement of
money in specie from one part of the country to another to boost its shipping business.
In 1892, African Banking Corporation with its headquarters in South Africa
established its presence in Nigeria and took over specie movement from Elder
Dempster Company, and was subsequently absorbed in 1894 by ‘The British Bank for
West Africa’ (now First Bank of Nigeria Plc) (Danjuma, 1993).

The British Bank for West Africa was for many years the sole banker to the colonial
government and all the important expatriate companies of that time. Its monopoly
remained unchallenged until 1917 when the Colonial Bank which later became
Barclays Bank D.C.O. in 1925 (now Union Bank of Nigeria Plc), and in 1949 when
the British and French Bank (now United Bank for Africa Plc) were established in
Nigeria (Ebhodaghe, 1990; Ibru, 2006).

In its early period, the first commercial banks: The British Bank for West Africa;
Colonial Bank; and British and French Bank, were all wholly foreign owned until the
Federal Government of Nigeria purchased majority shareholdings of each in the mid
1970s (Ibru, 2006; UBN Plc, 2008). 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 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).

2.3 The expansion phase of Nigerian banking sector

The comparatively solid and not so selfish motive for the establishment of banks is to
aid commerce, general economic development and profit maximisation. The cardinal
policy of government has been the studied encouragement of indigenous banking
institutions. In 1977 for example, the Federal Government literally forced the then
existing banks to open branches in the rural areas known as the Rural Banking
Scheme. In 1989, Peoples’ Bank was established by the government, and a year later,
the investing public were asked to establish Community Banks (Ebhodaghe, 1990).
Government pursued this policy vigorously by giving financial assistance to banks to
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enable them provide credit facilities to indigenous businessmen who have profitable
projects in which to invest the funds thus provided them (Nwankwo, 1980).

The Nigerian banking sector witnessed phenomenal expansion from 1986 to the early
part of the 1990s following a major policy shift initiated by the monetary authorities
with the relaxation of controls and liberalisation of the Nigerian economy.
Government policy to liberalise the economy (banking sector inclusive) within the
framework of the Structural Adjustment Programme (SAP) in 1986 led to the increase
in the number of licensed banks from 40 in 1985 to 120 in 1991 (Agbaje, 2008; Bichi,
1996; Ebhodaghe, 1995; Mordi, 2004). The avalanche of banks all rendering the same
services engendered stiff competition as the banking sector became more market
driven. The available resources particularly, human resources was grossly inadequate
to support the growth in the sector, resulting in sharp practices and unorthodox
banking culture to the extent of threatening the existence of some banks, which could
not cope with the volatile and competitive situation. This eventually drew the
attention of the Central Bank of Nigeria (Bichi, 1996; Okoduwa, 1995; Umaru, 1993:
31).

The introduction of the Prudential Guideline by the Central Bank of Nigeria

(henceforth CBN) in 1990 exposed the true health of most banks then in operation.
With the Prudential Guideline in place, only incomes from performing loans were to
be considered in banks’ Profit and Loss Accounts. This development led to the demise
of five banks (Alpha Merchant Bank Plc, Financial Merchant Bank Limited, Kapital
Merchant Bank Limited, Republic Bank Limited, and United Commercial Bank
Limited) out of the 120 banks between 1994 and 1995 (Bichi, 1996). In another
development, between 1994 and 1995, CBN obtained a High Court order to acquire
12 banks with manifestation of distress for N1.00 each, the purpose of this was to
afford CBN and Nigerian Deposit Insurance Corporation (henceforth NDIC), the
major banking regulatory agencies in Nigeria, unrestricted powers to develop and
execute the most cost-effective measures to resolve the problems of the banks and
execute an eventual sale to the public (Augusto and Co., 1996: 7).

A common feature of all the distressed banks was their ownership structure. The
maxim, ‘he who pays the piper dictates the tune’ cannot be more apt than where
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shareholding of a bank is concentrated in a single individual whether directly or
indirectly. Most of the banks were privately owned by individuals and in few
instances by state government. According to the CBN Director of Banking
Supervision, Imala (2004), ‘… interference in the affairs of a bank could lead to
distress, … loans granted through the influence of those in authority, were hardly
repaid’. Ownership structure was one of the factors responsible for banking distress in
Nigeria during the 1990s.

2.4. Consolidation/Reform phase

The banking sector reforms were guided by the provision in the National Economic
Empowerment and Development Strategy (henceforth NEEDS) document (a process
of development anchored on clear vision, sound values and enduring principles), that
the financial sector needed ‘to play a key role in pricing and trading risks and
implementing monetary and fiscal policies’ as part of the process of ‘a shift in
emphasis to a private sector led economy’ (NPC, 2004: 75). The policy thrust was to
build and foster a competitive and healthy financial system to support development
and to avoid systemic distress in the Nigerian banking sector (NPC, 2004; Soludo,
2006). The reform was to address: shallow dept of the Nigerian capital market, over-
dependence of banking institutions on public sector and foreign exchange trading as
sources of funding; somewhat erroneous returns made by banks to the monetary
authorities, and noticeable lack of harmony between fiscal and monetary policies
(NPC, 2004). Furthermore, the policy thrusts included amongst other things:

• deepening the financial system in terms of asset volume and instrument

diversity;
• drastic reduction and ultimate elimination of financing of government deficits
by the financial systems in order to free-up resources for on-lending to the
private sector;
• a review of the capitalisation of financial institutions; and
• development of a structure of financial sector incentives that would support
real sector financing.

The above policy thrust was to be achieved through the adoption of the following
strategies: (i) embarking on a comprehensive reform process aimed at substantially
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improving the financial infrastructure; (ii) restructuring, strengthening and
rationalising the regulatory and supervisory framework in the financial sector; (iii)
addressing the issue of low capitalisation of financial institutions; (iv) developing a
structured financing for cheap credit to the real sector; and (v) fostering financial
deepening and accommodation for small and rural financial market (NPC, 2004: 75-
76; Soludo, 2008).

The need for a radical overhaul of Nigeria’s banking system was evident with the
introduction of the Prudential Guidelines in 1990 by the CBN. The sector was highly
fragmented, with just about 10 of the 89 banks controlling more than 70 percent of the
industry’s total assets and savings deposits (CIBN, 2008; Soludo, 2008). The then
banks could not compete with their regional counterparts due to their relatively small
size and thus had little, if any, tangible impact upon the economy. Following the
sudden demise of five banks between 1994 and 1995 and the acquisition of 12 banks
by the CBN/NDIC, it was clear that the sector needed urgent reforms to avoid
systemic collapse (Augusto and Co., 1996: 7).

On 6 July 2004, the CBN Governor, Professor Charles Soludo released a

revolutionary consolidation/reform timetable for the banking sector in line with the
policy thrust of the NEEDS document (Ibru, 2006; NPC, 2004; Soludo, 2008),
requiring banks to raise their minimum capital base from N2 billion to N25 billion,
with December 31, 2005 as deadline. 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).

Why mega-banks?
• 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 Nigeria’s banking sector become Africa’s financial hub, facilitating
intra-regional trade and investments, and join the world-class bank groups
(Adesida, 2008; Moin, 2004; Ogbonna, 2007; Soludo, 2006);
• To act as catalyst to the economic development of Nigeria and the sub-region
through the provision of superior services to the banking public. With a single-
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 obligor-limit of 35% of equity, the maximum loan amount that can be granted to a
single customer was N700 million (that is, 35% of N2 billion capital base), this
was a far cry from what most customers actually needed. An increase of capital
base to N25 billion meant an increase of single-obligor-limit to N8.75 billion, thus
enabling banks to handle big-ticket transactions (Adesida, 2008; Ogbonna, 2007;
Soludo, 2006; Soludo, 2008);
• 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
• Providing good returns to investors through efficiencies and a better range and
quality financial services.

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). Alphabetically itemised in Table 2.1 below are the successful
banks that attained the N25 billion capitalisation by December 31, 2005:

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Table 2.1 List of Banks in Nigeria as at January 1, 2006.
Bank Constituent member
1 Access Bank Nigeria Plc Access Bank, Marina Int’l Bank & Capital Bank International
2 Afribank Nigeria Plc Afribank Plc and Afribank Int’l (Merchant Bankers)
3 Bank PHB Plc Platinum Bank Limited and Habib Nigeria Bank Limited
4 Diamond Bank Plc Diamond Bank , Lion Bank and African International Bank
5 EcoBank Nigeria Plc EcoBank Plc
6 Equitorial Trust Bank Plc Equitorial Trust Bank Ltd and Devcom Bank Ltd
7 Fidelity Bank Plc Fidelity Bank, FSB International Bank and Manny Bank
8 First Bank of Nigeria Plc First Bank Plc, MBC International Bank & FBN (Merchant Bankers)
9 First City Monument Bank Plc First City Monument Bank, Coop Development Bank,
Nigeria-American Bank and Midas Bank
10 First Inland Bank Plc First Atlantic Bank, Inland Bank (Nigeria) Plc, IMB International Bank
Plc and NUB International Bank Limited
11 GT Bank Plc GT Bank Plc
12 IBTC-Chartered Bank Plc IBTC, Chartered Bank Plc and Regent Bank Plc
13 Intercontinental Bank Plc Intercontinental Bank Plc, Global Bank Plc, Equity Bank of Nigeria
Limited and Gateway Bank of Nigeria Plc
14 **Nigeria International Bank Limited Nigeria International Bank limited
(Citi Group)
15 Oceanic Bank International Plc Oceanic Bank International Plc and International Trust Bank
16 Skye Bank Plc Prudent Bank Plc, Bond Bank Limited, Reliance Bank Limited ,
Cooperative Bank Plc and EIB International bank Plc
17 Spring Bank Plc Citizens International Bank , ACB International Bank, Guardian Express
Bank, Omega Bank, Trans International Bank and
Fountain Trust Bank
18 **Stanbic Bank of Nigeria Ltd Stanbic Bank of Nigeria Limited
19 **Standard Chartered Bank Ltd Standard Chartered Bank Limited
20 Sterling Bank Plc Trust Bank of Africa Limited, NBM Bank Limited, Magnum Trust Bank,
NAL Bank Plc and Indo-Nigeria Bank
21 United Bank for Africa Plc United Bank for Africa Plc, Standard Trust Bank Plc and Continental
Trust Bank
22 Union Bank of Nigeria Plc Union Bank of Nigeria Plc, Union Merchant Bank Limited, Broad Bank
of Nigeria Limited and Universal Trust Bank Nigeria Plc
23 Unity Bank 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
24 Wema Bank Plc Wema Bank Plc and National Bank of Nigeria Limited
25 Zenith Bank Plc Zenith Bank Plc
** Foreign owned banks
Source: CBN Annual Reports 2005: 45

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2.5. Post Consolidation
Apart from the three foreign-owned banks that survived the consolidation/reform
exercise, there is a considerable modification to the ownership structure of the banks;
ownership is now widespread and better diversified. The emergent well diversified
ownership structure promotes better corporate governance as banks can now be
subjected to discipline from the capital market (CIBN 2008; Ekundayo, 2008). With
over a US$1 billion in Tier 1 capital, some Nigerian banks can now compete
favourably with their counterparts from other parts of the world (Soludo, 2008: 15).
Basic indicators in the Table 2.2 below show that Nigeria banking is coming out
stronger compared to what it used to be.

Table 2.2 Basic Indicators of Banking Sector Consolidation Results

Pre- Post-
consolidation consolidation Growth
2004 2006 (%)
Number of banks 89 25 (71.9)
Number of bank branches 3,382 4,500 33.1
Total assets base of banks (N’Billion) 3,209 6,555 104.3
Capital and Reserves (N’Billion) 327 957 192.7
Industry Capital Adequacy Ratio (%) 15.2 21.6 42.6
Ratio of non-performing credit to total 19.5 9.5 (51.3)
(%)
Source: Central Bank of Nigeria, Abuja

Since December 31, 2005, a number of Nigerian banks have in their pursuit of growth
resorted to raising additional capital from the capital market via public offering
(Agbaje, 2008), others have been acquiring those banks that were unable to
recapitalise (CIBN, 2008). With the merger between IBTC Chartered Bank Plc and
Stanbic Bank of Nigeria Limited in 2007, the number of banks have been further
reduced from 25 to 24 (Adesida, 2008; Ekundayo, 2008). These developments are
indication that Nigerian banks are poised for aggressive growth, either organically or
by merger and acquisitions. The rest of this study is to ‘evaluate organic growth and
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merger and acquisition as strategic growth options in the Nigerian banking sector’,
with a view to ascertaining which of the strategies result in superior financial
performance.

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Chapter 3: Literature Review

3.0 Introduction
The consolidation/reform process in the Nigerian banking sector during 2004 and
2005 resulted in the reduction of the number of operating licensed banks from 89 to
25 as at December 31, 2005 and further reduced to 24, courtesy of the merger
between Stanbic Nigeria Bank Limited and IBTC Chartered Bank Plc in 2008.
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&A) and internal growth. 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&A 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).

Given past research results and continued interest in M&A activities, this approach to
organisational growth seem worthy of evaluation. The main objective of this study is
to evaluate ‘M&A’ and ‘organic growth’ as strategic growth options. The literature
review begin with an explanation of organic growth, the meaning of M&A,
classification of previous M&A research concepts, different types of M&A, and
different stages involved in M&A process. This is followed with an overview of
M&A activities in the Nigerian banking sector, the legal hurdles for M&A in the
Nigerian banking sector, and the reasons for M&A. Relying on previous studies, this
section conclude with the effect of M&A on organisational performance.

3.1. Organic (Internal) Growth

This is the rate of business expansion through increasing output and sales (growth
achieved by internal investments of the firm) as opposed to mergers, acquisitions and
take-overs which involves an outside firm (Samara, 2007). Organic growth is a
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straightforward mechanism for achieving business growth. The essential feature of
organic growth is the reinvestment of the previous years’ profit in the existing
business, together with finance provided by shareholders.

Unlike other businesses, banks’ article of trade is brand and trust (Emefiele, 2008;
Emmanuel, 2008), therefore to achieve organic growth, banks need to have a formal
strategy that is anchored on: customer retention; customer service; employee
satisfaction; dynamic branch management; leveraging a multi-brand portfolio to
create attractive value propositions for each market segment; and customer
profitability (Atkearney, 2005; Business Wire, 2008; Daruvala and Yulinsky, 2001;
Emmanuel, 2008; Highbeam, 2008; Milligan, 2006).

3.1.1. Benefits of organic growth

Organic growth provides more corporate control, encourages internal
entrepreneurship, and protects organisational cultures and core values (Denrell, Fang
and Winter, 2003; Emefielie, 2008). It also provides managers with a better
understanding of their own firm and assets, and internal investment is likely to be
better planned and efficient. Organic growth result in the creation of sustainable
competitive advantages since the firm’s value-creating process and positions are less
likely to be duplicated or imitated by other firms (Barney, 1998). It is a cheaper
growth strategy compared to M&A.

3.1.2. Limitations of organic growth

Organic growth is a slower way of growth compared to M&A since it requires the
development of new resources (setting up the whole business, hiring and recruiting
human capital, investing in machineries) internally, which is susceptible to Penrose
Effect (Dierickx and Cool 1989; Thompson & Wright, 2005: 58). The logic of the
Penrose Effect is that firm-level managers have firm-specific experiences internal to
the firm and that in successive time periods the firm may not likely be able to adjust
timely its managerial resources to the desired level due to dynamic adjustment costs.
Since the more experienced managers need to explain to the new managers’ firm-
specific details, if one were to continually add new managers at a rapid rate,
eventually current operation effectiveness is expected to decline.
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Also, businesses that choose organic growth strategy will be bearing the whole risk by
themselves.

3.2. Mergers and Acquisitions defined

The terms merger, acquisition and consolidation are often used interchangeably.
However, there are some differences. 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 new company. All of the combining companies are dissolved and
only the new entity continues to operate (Okonkwo, 2004).

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’. In the
same vain, Gaughan (2007: 12) defines merger as ‘a combination of two or more
corporations in which only one corporation survives’. He further stated that the
acquiring company assumes the assets and liabilities of the merged firm. Okonkwo
(2004) writes that a merger may be achieved through an acquisition, in this case, the
shareholders of the acquired company are paid off and the acquirer becomes the
owner of all or a substantial part of the assets of the acquired company. Also,
Sudarsanam (2003: 2-3) stated that terms such as ‘merger’, ‘acquisition’, ‘buyout’ and
‘takeover’ are used interchangeably and are all part of the M&A parlance, but was
quick to point out the differences when he described merger as the process whereby
corporations come together to combine and share their resources to achieve common
objectives with the shareholders of the merged firms still retaining part of their
ownership and this may sometimes lead into a new entity being formed while
acquisition resembles more of an arm’s-length deal, with one firm purchasing the
assets or shares of the other and the shareholders of the acquired firm ceasing to be
owners of the new firm. The views of Sudarsanam conforms with those of Okonkwo
(2004: 2), who maintained that the major difference between a merger and acquisition
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is essentially what the fate of shareholders becomes: (a) ‘shareholders of acquired
firms are paid off in the case of acquisition; (b) there is no disinvestment of the
shareholders of the amalgamating companies in the case of merger’. From the above
distinction, it is apparent that a merger occurs when two or more companies transfer
their businesses and assets to a new company (or to one of themselves) and in
consideration, their members receive shares in the transferee company.

3.3. Mergers and Acquisitions research paradigms

There are different perspectives to the study of M&A. Datta, et al (1992: 68)
acknowledged strategic management and financial economics as two major literature
frameworks for identifying sources of shareholders’ wealth in M&A activities.
However, Larsson and Finkelstein (1999) gave a more detailed categorisation of
M&A paradigms: economic and finance; strategy; organisational behaviour; and
human resource management perspectives.

3.3.1. Economic and Finance perspective

The economic and finance paradigm is primarily interested in the efficiency impact
of M&A on the economy through economies of scale and market power with
emphasis on ‘market for corporate control’. The main argument of this ‘market for
corporate control’ paradigm is that M&A are viewed as ‘contests between competing
management teams for the control of corporate entities’ (Datta et al.1992: 69). One of
the key arguments of the market for the corporate control paradigm is that economic
value created through acquisition activities is decided by market characteristics,
including its competitiveness (Denis and McConnel, 2003: 266). These researchers
measure the success of M&A with accounting numbers by considering their profit
margins and return on equity. The finance scholars typically study M&A performance
using stock market based measures. Event studies are used to examine the
performance impact of the acquisitions and changes in stock prices that occur over a
short period of time (Flanagan & O’Shaughnessy, 2003; Ramawamy & Waegelein,
2003; Rao, Mahajan & Varaiya, 1991).

3.3.2. Strategy Perspective

Researcher using the strategy paradigm sees M&A as a means of corporate growth
and diversification, primarily emphasising factors that are management controlled
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such as diversification strategies (that is, related vs. unrelated diversification) as a
crucial factor in determining post-acquisition performance. They also consider the
identification of differences between types of acquisition (merger vs. tender offer);
and types of payment (cash vs. stock). The common variables used in this field are
size, market share, pre-acquisition profitability and growth. Problems of measurement
and convenience sampling are given as reasons for inconsistent findings (Marks &
Mirvis, 2001; Datta, et al, 1992).

3.3.3. Organisational Behaviour Perspective

Organisational behaviour researchers are interested in post combination integration
process emphasising both cultural clash and conflict resolution (e.g., Buono, 2003;
Birkinshaw, Bresman & Hakanson, 2000). Constraining time-pressure or too high
work pace, deficiencies concerning working conditions, incompatible or ambiguous
demands and expectations around roles, tasks and responsibilities and uncertainty at
work are issues of concern to organisational behaviour researcher of M&A.

3.3.4. Human Resource Management Perspective

Primary interest in the Human Resource management perspective is the psychological
effects M&A have on individuals such as feelings of tension, alienation, and
uncertainty. However, the importance of communication, and career planning are the
interest of researchers in this field (Millward & Kyriakidou , 2004; Ford & Harding,
2003; Marks & Mirvis, 2001).

The organisational behaviour and human resource perspectives indicate that it is

basically the “people problem” that contributes to the success and failure of M&A. As
the value creation of M&A mainly depends on the implementation process where
people problem plays a key role (Jemision & Sitkin, 1986), the financial results of
M&A can not be explained without considering the human and organisational side of
M&A. The people problem not only prevents the creation of synergistic values, but
can also be a direct cause of M&A failures (Larsson & Finkelstein, 1999).

3.4. Types of Mergers and Acquisitions

Literatures on M&A consistently discussed three types of M&A: Horizontal; Vertical;
and Conglomerate mergers. However, Cartwright and Cooper (1992) and other
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writers mentioned and discussed a fourth type, which is Concentric mergers.
(Gaughan, 2007: 13; Brealey, et al., 2006: 871; Okonkwo, 2004: 3).

Vertical merger 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). On
the other hand, a conglomerate merger 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). Concentric M&A 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?).

A horizontal merger 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. The purpose of this
type of merger is to eliminate a competitor company, to increase market share, buy up
surplus capacity or obtain a more profitable firm in order to gain a competitive
advantage. Besides such benefits, this type of mergers has the drawbacks of restricting
new entrants into the market, thus harming outsiders due to diminishing competition
(Gaughan, 2007). Typical examples of horizontal M&As are: IBTC-Chartered Bank
merger with Stanbic Bank Nigeria Limited, Access Bank’s merger with Capital Bank
and Marina International Bank, and Platinum Bank Limited merger with Habib
Nigeria Bank Limited in Nigeria (Adesida, 2008; CBN, 2005: 45; Ekundayo, 2008);
and JP Morgan Chase’s acquisition of Bank One (Brealey, et al., 2006: 871).

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3.5. Stages of Merger and Acquisition:
Saudarsanam (2003: 3) provide us with a five-stage model that will result in
successful pursuit of synergistic gains from M&A:
• Corporate strategy development;
• Organising for acquisitions;
• Deal structuring and negotiation;
• Post-acquisition integration; and
• Post-acquisition audit and organisational learning.

3.5.1. Corporate strategy development

Corporate strategic planning has been emphasised by organisations as an essential
ingredient for business success, therefore, the success or failure of M&A to a large
extent depends on the alignment of corporate strategy and M&A strategy (Harding
and Rovit, 2004). 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 corporation’s stakeholders’
(Saudarsanam, 2003: 4). The effectiveness of M&A in achieving corporate strategic
objectives depends on the conceptual and empirical validity of the models (industry
structure-driven, competition among strategic groups or resource-based) upon which
corporate strategy is based (Barney, 1991; Lockett, Thompson and Morgenstern,
2008). In agreement with the stance of Saudarsaram, a study by Harding and Rovit
(2004) that reviewed more than 1,700 M&A and interviewed 250 Chief Executives
Officers (CEOs) revealed that almost 60% of the CEOs interviewed do not understood
the contribution of M&A to their company’s long-term financial performance, while
those with a clear rationale underpinning their M&A activity came to realise after the
deal that their rationale were altogether wrong. This implies that for a merger to be
successful it would require serious planning which includes screening and
identification of clear and realistic goals with proactive strategies to overcome
resistance by the target firm or competitors bidding for the same firm.

3.5.2. Organising for acquisition

The firm lays down the criteria for potential acquisitions consistent with the strategic
objectives and value creation logic of the firm’s corporate strategy and business
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model. Haspeslagh and Jemison (1991, cited in Saudarsaram, 2003) pointed out two
contrasting perspectives of acquisition decision making process: (i) the rationalist; and
(ii) the organisational process. Success of post-acquisition integration is determined at
least partly by the thoroughness, clarity and forethought with which the value creation
logic is blueprinted at the acquisition decision stage. Therefore, an understanding of
the acquisition decision process is important, since it has a bearing on the quality of
acquisition decision and its value creation logic (Saudarsanam, 2003).

3.5.3. Deal structuring and negotiation

M&A is tricky business and it can have serious financial implications for both the
acquirer and the acquired that do not posses the necessary experience or professional
guidance due to asymmetric information (Angwin, 2001). According to Saudarsanam
(2003: 6), this stage of M&A 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.

The use of third-party in the negotiations stage can be very valuable in giving the
client time to consider options, or keeping the client from giving into emotions and
making costly and unnecessary concessions in the heat of matters at the bargaining
table (Angwin, 2001; Murphree & Hollander, 2003; Perry & Herd, 2004; Sinickas,
2004). The use of wrong valuation methods during the deal structuring stage and over
optimism have resulted in the failure of many M&As in achieving the anticipated
results as in the case of AT&T and NCR; Vodafone, AOL and Vivendi; and Mizuho
(Rafferty, 2000; Saudarsanam, 2003: 7).

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3.5.4. 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). Schuler (2003),
emphasised the importance of: an early planning; careful attention to leadership
selection; an insider’s view of knowledge networks and information flow; a clear,
coherent and timely communication strategies; and the dedication of adequate
resources to the transition management team are necessary ingredient that can lead to
a successful post-acquisition integration. The value of most firms depends on its
human assets-managers and skilled workers, therefore, utmost care must be taken to
avoid situation whereby the valuable human assets leave to join a rival firm (Brealey,
et al, 2006; Weber & Camerer, 2003).

Lubatkin, Schweiger and Weber (1999) find that cultural differences and the removal
of managerial autonomy were associated with significantly greater management
turnover in the first year after acquisition. Consistent with Lubatkin et al, (1999),
Krug and Hegarty (2001) also find that most managers who departed within five years
of acquisition were those who felt that the acquirer firm did not understand their
firm’s culture.

Another important area to consider in post-acquisition integration is the integration of

the merging firms’ information system. Effective integration of information system in
any organisation is a function of technical and organisational factors (Henderson &
Venkatraman, 1993: 4; Kawalek & Wastell, 2005: 84; Luftman & Brier, 1999:109;
Orlikowski, 1992; Wastell, 1999: 591)

Although post-acquisition integration stage of M&A involves intangible assets which

can not be easily quantified, synergy may be elusive if not strategically handled.
Issues around control and appropriate incentives for the acquired firm’s employees
should all be carefully handled.

3.5.5. Post-acquisition audit and organisational learning.

This stage involves long-term plan evaluation, adjustment and capitalising on success
of M&A. Specific performance measures, such as financial measures as well as
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information system integration may be assessed for further development of
capabilities and learning (Cossey, 1991; Datta, 1991; Healy, et al, 1992; Ghosh, 2001;
Robbins & Stylianou, 1999 and Sudarsanam, 2003).

Post-acquisition audit and organisational learning enables the emergent firm to

continue developing common tools, practices and processes that will be of immense
relevance for future M&As.

3.6. Mergers and Acquisitions waves

Mergers and acquisitions have often occurred in waves, with different motives behind
each wave. Five M&A waves in the United States of America between 1897 and 2004
were characterised by cyclic activities, caused by a combination of economic,
regulatory, and technological shocks (Gaughan, 2007; Mitchell & Mulherin, 1996;
Sudarsanam, 2003). Some of today’s business giants such as USX Corporation, Du
Point Inc, General Electric, Standard Oil (ExxonMobil, Chevron and Amoco) and
Eastman Kodak are result of merger and acquisition (Gaughan, 2007: 36; Sudarsanam
2003: 14). A global view of competition, in which companies often find that they
must be big to compete led to once-unthinkable combinations, such as the mergers of
Pfizer and Pharmacia, Bank of America and FleetBoston Financial Corporation,
Citibank and Travelers, Chrysler and Daimler Benz, Exxon and Mobil, Sanofi and
Aventis, Boeing and McDonnell Douglas, AOL and Time Warner, and Vodafone and
Mannesmann (Brealey, et al., 2006; Gaughan, 1999, 2007; Lipton, 2006; Sidel, 2003).

Table 3.1 below summarises the five major M&A waves that occurred in the United
States of America.

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Table 3.1 Summary of major Mergers and Acquisitions waves in the US
Wave
1st wave (1897 – 1904)
‘Merging for Monopoly’
2nd wave (1916-1929)
‘Merging for Oligopoly’
3rd wave (1963-1971)
“Conglomerate Mergers”
4th wave (1984-1990)
“The Mega merger”
5th wave (1993-?)
“Strategic Restructuring”
Adapted from: Ensico & Garcia, 1996; Gaughan, 1999, 2007; Lipton, 2006;
Shleifer and Vishny, 1991; Sudarsanam, 2003.
Underlying Factors
Technological developments
Rapid Economic Expansion
Corporation laws relaxed
Voluntary code of ethical
behaviour
Post-World War I economic boom
Technological developments
Government encouraged firms to
work together
Booming economy
Rising stock prices
High interest rates
Tough antitrust enforcement
Management science
developments
Financial manipulations
Expanding economy
Technological developments
International competition
Deregulation
Increased pension fund assets
Financial innovations
Investment banking industry much
more competitive
Failure of conglomerates
Expanding economy, rising stock
prices
Technological developments
Globalization
Reduced government regulation
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Characteristics
Horizontal mergers
Heavy manufacturing industry
Emergence of oligopolies,
vertical mergers, and
conglomerates (usually related)
Used significant proportion of
debt to finance deals
Primarily conglomerate mergers
Some bidders smaller than
targets
Primarily owners financed-
investment banks did not play
central role
Executive managers with vision
to create conglomerate
Size and prominence of
acquisition targets much greater
than before
Foreign M&As became
common
Heavy use of debt to pay for
acquisitions
More hostile takeovers
Emphasized longer-term
strategy rather than immediate
financial gains
More often financed with equity
than debt
Consolidation in the telecoms.
and banking industries
3.7. Mergers and acquisitions’ activities in the Nigerian banking sector
An 18 month ultimatum given by the apex bank, CBN, to all banks to recapitalise and
shore-up their paid-up capital to a minimum of N25 billion with December 31 2005 as
deadline jolted most of the banks in Nigeria. As a result of the directive, the Nigerian
banking sector went through a radical transformation within the spate of 18 months:
aggressive consolidation through M&A, and organic growth by retaining previous
years profit as general reserves or public offerings from the capital market. The rate of
bank mergers within this period (2004 and 2005) has been unparalleled in Nigeria
banking history. Prior to the M&A wave of 2004 and 2005, the acquisition of African
Banking Corporation in 1894 by ‘The British Bank for West Africa’ (now First Bank
of Nigeria Plc), and Union Bank of Nigeria’s acquisition of Citi Trust Merchant Bank
Limited for N167.75 million in 1995 (Danjuma, 1993; IBTC, 2007) were the major
bank M&A in Nigeria. Growth in the banking sector before the 18 month ultimatum
has been through licensing of new banks or organic growth aided by government
regulation (Agbaje, 2008; Bichi, 1996; Ebhodaghe, 1995; Mordi, 2004).

Between July 6, 2004 and December 31, 2005, the number of banks in Nigeria
reduced from 89 to 25 courtesy of M&As and forced withdrawal of banking license
from institutions that were unable to achieve the new paid-up capital of N25 billion.
Out of the 25 banks that achieved the N25 billion requirements, Table 3.2 below
showed that 14 of them were the product of M&A involving 69 banks, while only 6
grew organically (CBN, 2005: 45). The wave of M&A that began in 2004 has not
abated as the merger between IBTC Chartered Bank Plc and Stanbic Bank of Nigeria
Limited after the December 31, 2005 deadline has further reduced the number of
banks from 25 to 24 (Adesida, 2008; Ekundayo, 2008), while those banks that were
unable to recapitalise which were earmarked for liquidation by the banking regulatory
authorities have virtually been acquired by successfully recapitalised banks (Adesida,
2008b; Okwe, 2006; Olajide, 2008; Kilner, 2008).

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Table 3.2 Bank mergers and acquisition in Nigeria between 2004 and 2005
Bank Constituent member
1 Access Bank Nigeria Plc Access Bank, Marina Int’l Bank & Capital Bank International
2 Afribank Nigeria Plc Afribank Plc and Afribank Int’l (Merchant Bankers)
3 Bank PHB Plc Platinum Bank Limited and Habib Nigeria Bank Limited
4 Diamond Bank Plc Diamond Bank , Lion Bank and African International Bank
5 Equatorial Trust Bank Plc Equatorial Trust Bank Ltd and Devcom Bank Ltd
6 Fidelity Bank Plc Fidelity Bank, FSB International Bank and Manny Bank
7 First Bank of Nigeria Plc First Bank Plc, MBC International Bank & FBN (Merchant
Bankers)
8 First City Monument Bank Plc First City Monument Bank, Coop Development Bank,
Nigeria-American Bank and Midas Bank
9 First Inland Bank Plc First Atlantic Bank, Inland Bank (Nigeria) Plc, IMB International
Bank Plc and NUB International Bank Limited
10 IBTC-Chartered Bank Plc IBTC, Chartered Bank Plc and Regent Bank Plc
11 Intercontinental Bank Plc Intercontinental Bank Plc, Global Bank Plc, Equity Bank of
Nigeria Limited and Gateway Bank of Nigeria Plc
12 Oceanic Bank International Plc Oceanic Bank International Plc and International Trust Bank
13 Skye Bank Plc Prudent Bank Plc, Bond Bank Limited, Reliance Bank Limited ,
Cooperative Bank Plc and EIB International bank Plc
14 Spring Bank Plc Citizens International Bank , ACB International Bank, Guardian
Express Bank, Omega Bank, Trans International Bank and
Fountain Trust Bank
15 Sterling Bank Plc Trust Bank of Africa Limited, NBM Bank Limited, Magnum Trust
Bank, NAL Bank Plc and Indo-Nigeria Bank
16 United Bank for Africa Plc United Bank for Africa Plc, Standard Trust Bank Plc and
Continental Trust Bank
17 Union Bank of Nigeria Plc Union Bank of Nigeria Plc, Union Merchant Bank Limited, Broad
Bank of Nigeria Limited and Universal Trust Bank Nigeria Plc
18 Unity Bank 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
19 Wema Bank Plc Wema Bank Plc and National Bank of Nigeria Limited

Source: CBN Annual Reports 2005: 45

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As earlier stated in the preceding chapter, the consolidation in the Nigerian banking
sector was induced by government regulation to: avoid a systemic distress of the
banking sector; create mega banks that can compete with banking institutions from
other parts of the world; and act as catalyst to the economic development of Nigeria
and the sub-region through the provision of superior services to the banking public
(Adesida, 2008; Euromoney, 2006; Moin, 2004; Ogbonna, 2007; Soludo, 2006b &
2008).

3.8. Legal hurdles for M&A in Nigerian banking sector

M&A in the Nigerian banking sector is guided by the provisions of:
• Sections 99 - 123 of the Investment and Securities Act (ISA) No. 45 of 1999
and the Rules and Regulations of the Securities and Exchange Commission
pursuant to the ISA;
• Banks and Other Financial Institutions Act (BOFIA) No. 25 of 1991; and
• Sections 538 and 539 of the Companies and Allied Matters Act (CAMA) 1990.

The objective of M&A regulation by the Investment and Securities Act, Banks and
Other Financial Institutions Act and the Companies and Allied Matters Act is to
prevent restraint of competition and monopolistic tendencies. They provide that a
majority agreement is required at a court-ordered meetings before approval of the
Securities and Exchange Commission is sought for: the transfer to the transferee of
property and liabilities; allotting or appropriation by transferee company shares,
debentures, policies or other like interest; continuation by or against the transferee
company of any legal proceedings pending; and dissolution, without winding-up, of
any transferee company. The Acts also have provision for dissenting shareholders
(Okonkwo, 2004; Ogwu, 2004). Section 7(1) of the Banks and Other Financial
Institutions Act (BOFIA) stated emphatically that banks must obtain the approval of
the Governor of CBN before any merger and/or acquisition is announced and/or
consummated.

3.9. Reasons for Mergers and Acquisitions

Economic literatures provide various reasons why companies engage in M&A, with
the concept of synergy as the underlying factor (Brealey, et al., 2006; Coffee, 1988;
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Gaughan, 2007; Hadlock et al, 1999; Bliss and Rosen, 2001; Trautwein, 1990).
Synergy is the interaction or cooperation of two or more organisations to produce a
combined effect grater than the sums of the two organisations operating
independently (Coyle, 2000). Mathematically, this can be stated as: Value (A + B) >
Value (A) + Value (B). The explanation for this occurrence is either the firms were
not performing to optimal level prior to merging or that benefits were achieved by the
merger. Following this logic, companies are motivated to involve in M&A in order to
create synergies (Coyle, 2000). Companies derive synergy from M&A’s activities
through, but not limited to: economies of scale; economies of vertical integration;
complementary resources; surplus funds; elimination of inefficiencies (Brealey, et al.,
2006). Coffee (1988) was of the view that managers might also engage in growth-
oriented or empire building strategies in order to create a diversified portfolio within
the firm to lower their employment risk but not necessarily due to business synergy.
In the same vain, Trautwein (1990: 284) stated that M&A may occur as a result of:
rational choice; process outcome; and macroeconomic phenomenon. These reasons
are further broadened as shown in the Table 3.3 below:

Table 3.3 Reasons for merger and acquisitions

Merger as rational Net gains through Efficiency theory

choice synergies

Merger benefit Wealth transfers from Monopoly theory

bidder’s customers
shareholders Wealth transfers from Raider’s theory
target’s shareholders

Net gains through Valuation theory

private information
Merger benefits managers Empire-building
theory
Merger as process outcome Process theory

Merger as macroeconomic phenomenon Disturbance theory

Source: Trautwein 1990: 284.

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Like any business, banks have reasons why they engage in M&As. In this study, we
focus on the business motive while acknowledging that other motives, such as
managerial incentives, can play an important role (Bliss and Rosen, 2001). Berger
(1988) identified the Relative Efficiency and Low Efficiency hypotheses as the
drivers of business motives for M&As by banks. The relative efficiency hypothesis
provides that the acquiring bank seek to bring in the target bank to its own higher-
level of efficiency by transferring its superior management capacities or its business
procedures. On the other hand, low efficiency hypothesis is where one or both of the
merging banks are inefficient relative to their peers. M&A may at this instance serve
as a corrective tool to improve the performance of the bank or as a means of
implementing radical business changes. While the low efficiency hypothesis and the
relative efficiency hypothesis are not mutually exclusive, researchers find more
evidence for the former. Vennet (1996) in his research confirms this result for
European bank takeovers between 1988 and 1992. In a related study by Koetter et al.
(2007), which focused on the German banking market, observed that many mergers
serve as a pre-emptive distress resolution measure. Studies by Avkiran (1999) and
Worthington (2004) also support the relative efficiency hypothesis. Support for a
‘reverse’ Relative Efficiency Hypothesis is provided by Resti (1998), who stated that,
merger among Italian bank between 1987 and 1995, showed that the acquirers
appeared even less efficient than their targets. In a study of the US market, Wheelock
and Wilson (2000) find that, contrary to the low efficiency hypothesis, inefficient
banks are less likely to be acquired, this finding contradict an earlier study by
Hadlock et al. (1999) who opined that poorly performing banks are more likely to be
acquired.

From the above, one can summarise that the main reasons for M&As is to improve the
financial performance of the firms. This could be achieved through cost reduction,
extending the range of products and services, increase in market share, obtaining tax
advantages, improvement of solvency and knowledge transfer.

3.10. Limitations of merger and acquisitions

Acquisitions can result in the destruction of value if management reinvests the firm’s
resources, or free cash flows, for their own personal interest in inefficient projects.
Amihud and Lev (1981) who empirically examined the motives for the widespread
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and persisting phenomenon of conglomerate mergers conclude that managers are
engaging in conglomerate mergers ‘to decrease their largely undiversified
employment risk. According to Jensen (1986), agency costs occur when there are
substantial free-cash flows that are reinvested inefficiently by the managers, instead of
redistributing them directly to their shareholders through dividend payments.
Manager-specific investments also provide the opportunity for managers to extract
higher wages and to have more control over the corporate strategy of the company
(Shleifer and Vishny, 1989). Another limitation of M&A is value-destruction that
results from poor post-merger integration (Stewart, 2006).

3.11. Effects of merger and acquisitions on banks performance

Considerable amount of studies have been carried out to test whether M&A result in
successful improvement of banks’ profitability and efficiency. A wide range of
performance indicators has been applied in these studies, ranging from simple
Balance Sheet and Profit and Loss ratios to more advanced statistical efficiency
measures. Some of these studies find little or no evidence of M&A-enabled
productivity gains (Berger and Humphrey, 1992; Lang & Welzel, 1999; Rafferty,
2000). However, results from other studies showed that M&A does result in improved
profitability (Akhavien, et al, 1997; Cuesta and Orea, 2002; Focarelli, et al, 2002;
Houston, et al, 2001).

Available statistics show that the consolidation of the Nigerian banking sector through
M&A and organic growth resulted in a remarkable improvement on the sector as a
whole (Ekundayo, 2008; Soludo, 2006; Soludo, 2008: 15). The Balance Sheet size
and Profit and Loss profile of most banks in Nigerian have more than doubled since
December 2005 to date.

3.12. Summary
From the preceding scholarly discourse on M&A, the simple major reason why firms
opt for growth and the expansion of their operations is because growth affects
business and the general public opinion as it stands for stability, safety and
profitability. Strategy is the engine that drives the expansion and consolidation of
business. Businesses can grow organically by internal investments or externally by
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acquiring other businesses. Which of these growth options result in superior financial
performance in the Nigerian banking sector? The right choice and mix of both
strategic options depends on the planned growth rate and on available internal and
external resources to achieve that goal. The subsequent part of the study is set to
evaluate M&A and Organic growth as strategic growth options in the Nigerian
banking sector.

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Chapter 4: Research Methodology

4.0 Introduction
This chapter discusses the methodology used in this study. The aim of this discussion
is to highlight the key activities that were undertaken, and to indicate their relevance
to this study. The purpose of the research; the research approach; methods of data
collection; case study selection criteria; and profile of the companies used as case
studies are discussed in this chapter.

4.1 Research purpose

This study is to evaluate organic growth, and merger and acquisition (M&A) as
strategic growth options in the Nigerian banking sector. Zenith Bank Plc that pursued
organic growth and Access Bank Plc that was involved in M&A in 2005 are used as
case study.

The study aim to answer the question: ‘which of the strategies (organic growth and
M&A) result in superior financial performance in the Nigerian banking sector?’

4.2 Research approach

To address the above stated objectives, the study used qualitative research approach
from the economic/finance and strategy perspectives of M&A, relying on simple
statistical tools and methods to analytically review financial performance, market
valuation, and market share – pre and post M&A period of the selected case studies.

Qualitative research using case studies is an in-dept investigation, using different

methods in collecting and analysing data and information upon which inferences are
made. This approach was chosen for the study, because of the great wealth of
empirical materials that is the most suitable means of research that can lead to a better
understanding of the research question.

4.3 Type of research

The research purpose and question indicates that this study is exploratory through
case study because of its ‘multiple wealth of details for the development of nuanced
view of reality’ (Flyvbjerg, 2004: 392). Exploratory research is a type of research that
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seeks to investigate one or a few situations similar to the researcher’s problem
(Zikmund 2003 p.115). The results of exploratory research through case studies
though may not be useful for decision-making by themselves because of the ‘context-
dependent’ nature of the outcome (Flyvbjerg, 2004), the strategic choice of case may
add to the generalisability of a case study in providing significant insight into a given
situation.

To eliminate the risk of delayed or non-response from the banks, which is the usual
phenomenon with interviews and surveys considering time constraint, this study made
use of case study with empirical data from audited and CBN approved annual reports
of the banks. Although the use of the banks’ own data eliminate to a large extent
biases from the researcher, it has the inherent problem of providing information that
favours the reporting bank, therefore, where necessary, additional information from
third party sources such as banking regulatory authorities and stock market
information were used.

4.4 Case studies selection criteria

One of the critical decisions to make in a research of this nature is the determination
of the right case study. Time and availability of data are important considerations in
the determination of the case study.

In this study, Access Bank Plc and Zenith Bank Plc were selected based on their
different recapitalisation strategies and performance over the years. The two banks are
relatively of the same age since they were incorporated almost the same time,
February 1989 and May 1990 respectively. Also, both banks commenced operation as
commercial banks before the advent of universal (retail and wholesale) banking in
Nigeria.

4.5 Data collection and analysis procedure

The study relied primarily on secondary data from academic journals, text books,
magazines, newspapers, companies’ annual reports, and internet sources. Furthermore,
it was more objective to analyse data from the published accounts of the banks to
eliminate personal opinion, this will to a large extent guarantee the validity and
reliability of empirical data and further analysis. The data analysis procedure in this
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study involved the use of numerical data from the banks’ published accounts from
2003 to 2007. Robustness against outliers is achieved by using the percentage ranking
of variables instead of their absolute values.

Although financial ratios have their own limitations (Casu, et al, 2006: 221), the
massive amount of numbers in a bank’s financial statements can be bewildering and
intimidating, however, with financial ratio analysis, these can be presented in an
organised form (Rees, 1995: 85). Multiple performance indicators such as liquidity;
profitability (return on assets, return on equity and return on capital employed); size
(the levels and growth rates of total assets and revenue); productivity (the ratio of total
revenue to non-interest expense); and investment valuation ratios (Hirthle, 1991;
Mishkin, 2006) were applied in this study.

4.5.1 Liquidity ratio

Liquidity ratios attempt to measure a company’s capability to meet its short-term debt
obligations. This is done by comparing most liquid assets to short-term liabilities.
This study used current ratio with the formula:

Current ratio = Current Assets/Current liabilities

4.5.2 Profitability ratio

These ratios give users a good understanding of how well the company utilised its
resources in generating profit and shareholder value. Return on equity (ROE), return
on capital employed (ROCE), and return on asset (ROA) are used in the data analysis.

4.5.2.1 Return on equity

Return on equity (ROE) ratio indicates how profitable a company is by comparing its
net income to its average shareholders' equity (Mishkin, 2006: 232). The ratio
measures how much the shareholders earned for their investment in the company. The
higher the ratio percentage, the more efficient management is in utilising its equity
base and the better return is to shareholders.

ROE = Net profit after taxes/Average shareholders’ equity

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4.5.2.2 Return on capital employed
The return on capital employed (ROCE) expressed as a percentage, complements the
return on equity (ROE) ratio by adding a company’s debt liabilities, or funded debt, to
equity to reflect a company's total "capital employed". This measure narrows the
focus to gain a better understanding of a company's ability to generate returns from its
available capital base.

ROCE = Net profit after taxes/Capital Employed

4.5.2.3 Return on Assets

This ratio shows how profitable a company is relative to its total assets (Mishkin,
2006: 232). The return on assets ratio illustrates how well management is employing
the company's total assets to make a profit. The higher the return, the more efficient
management is in utilising its asset base. The ROA ratio is calculated by comparing
net income to average total assets, and is expressed as a percentage.

ROA = Net profit after taxes / Total Assets

4.5.2.4 Cost-Income ratio

This ratio is a quick test of the efficiency that reflects bank non-interest (operating)
cost as a proportion of income (Casu, et al, 2006: 215). This ratio is obtained by the
formula below:

C/I = Non-interest expenses/(net interest income + non-interest income)

4.5.3 Investment valuation ratios

Investment ratios act as a forecast parameter which predicts the anticipated returns
that the investors would earn (O’Regan 2001).

4.5.3.1 Dividend payout ratio (DPR)

This ratio identifies the percentage of earnings (net income) per common share
allocated to paying cash dividends to shareholders. DPR is an indicator of how well
earnings support the dividend payment.

DPR= Dividends per common share/Earnings per share.

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4.5.3.1 Earnings per share (EPS)
This is part of a company's profit apportioned to each outstanding ordinary share. EPS
is used by investors as a profitability variable in determining share price.

EPS = (Net Income – Dividends on preferred stocks)/Average outstanding ordinary

shares

4.6 Limitations
Besides the usual limitations existing as a natural and permanent part or quality of
research study and errors in data gathering and analysis, this study acknowledged that
a case study of two out of twenty-fives banks in the Nigerian banking sector could not
form the basis of generalisation. Also, the technical suspension of Access Bank shares
from trading before during its public offering, and the commencement of merger talk
could not afford this study the opportunity of determining the actual effect of the
merger announcement on the bank’s stock price.

4.7 Summary
This chapter has presented the methodology of the study. The research process was
illustrated and choice of the methods were presented and explained. The research
purpose, research approach, method of data collection, and case study selection was
discussed in this chapter. The next chapter is a presentation of the empirical study.

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Chapter 5: Data analysis and presentation

5.1. Introduction
This study was embarked upon to evaluate organic growth and merger and acquisition
(M&A) as strategic growth options in the Nigerian banking, to ascertain which of the
growth strategy result in superior financial performance. Data collected from five
years financial statements of the banks which covered three years before the merger
of Access Bank with Capital Bank and Marina International Bank Limited and two
years post-merger were analysed using financial ratios and other valuation techniques
and the results are presented in tables and graphs with necessary explanations..

This chapter begins with an overview of the case studies, thereafter, the findings are
presented in the form of ratio analysing the performance of Access Bank Plc and
Zenith Bank Plc in terms of liquidity, profitability, capital adequacy, assets quality,
and growth rates. The stock market reaction to Access Bank’s merger will be
presented using price movement before and after the merger.

5.2 An overview of the case studies

5.2.1. Access Bank Plc

Access Bank Plc was incorporated in Nigeria as a private limited liability company in
February 1989 and commenced commercial banking operations in May 1989.
Consequent to the bank conversion to a public limited liability company on March
1998, its shares were listed on the Nigerian Stock Exchange in November 1998.
Following the unification of banking activities in Nigeria, the Central Bank of Nigeria
issued Access Bank Plc a universal banking license in February 2001.

From a modest beginning in 1989, Access Bank Plc grew its Balance Sheet size to
almost N70 billion, and shareholders’ equity N14.07 billion with a fully paid share
capital of N4.056 billion comprising 8,111,214,625 ordinary shares of 50 kobo each
as at March 31, 2005. Following the review of minimum capital base to N25 billion
by the Central Bank of Nigeria, the bank acquired Capital Bank International Limited
and Marina International Bank Limited on November 1, 2005 through share exchange

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consideration and continued trading as Access Bank Plc. The Bank has two overseas
and two local subsidiaries namely Access Bank (Gambia) Limited, Access Bank
Sierra Leone, Access Investments and Securities Limited and United Securities
Limited (Access Bank annual report, 2007; Access, Capital & Marina Scheme of
Merger, 2005: 40).

5.2.1.1 Rationale for the Merger

The merger was driven by the need to meet the new minimum capital requirement of
N25 billion as set by the Central Bank of Nigeria with a December 31, 2005 deadline.
It also provides Access Bank Plc with an inorganic growth opportunity to achieve its
strategic objective of being one of the top banks in Nigeria by 2007 (Access, Capital
& Marina Scheme of Merger, 2005: 20). According to the Access, Capital and Marina
Scheme of Merger (2005: 21), the merging banks were expected to benefit from the
followings:

• Wider geographical spread of branch network;

• Economies of scale resulting from cost reduction and increased product scale;
• Brand enhancement and improved market positioning; and
• Leveraging on the combined bank’s balance sheet size and shareholders’ funds
to provide more credit to a larger spectrum of customers.

Table 5.1 and 5.2 below shows the summary of Access Bank’s financial statements
Access Bank from 2003 to 2007:

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Table 5.1 Summary of Access Bank’s 5 Years Profit & Loss Account
2007 2006 2005 2004 2003
(N’m) (N’m) (N’m) (N’m) (N’m)

Gross Earnings 27,881 13,360 7,495 5,515 4,368

Interest and Discount Income 16,894 8,733 3,929 2,746 2,530
Interest Expense -4,952 -2,472 -1,577 -1,445 -1,183
Net Interest Income 11,942 6,261 2,353 1,301 1,347
Provision for Risk Assets -1,775 -1,386 -984 -386 -328
10,167 4,876 1,368 915 1,019
Other Income 10,988 4,628 3,566 2,769 1,838
21,154 9,503 4,934 3,684 2,857
Operating Expense -13,111 -8,384 -4,183 -2,732 -1,846
PBT & Exceptional items 8,043 1,119 751 952 1,011
Exceptional items - - - - -200
PBT 8,043 1,119 751 952 811
Taxation -1,960 -382 -250 -314 -254
Profit After Taxation 6,083 737 502 637 557

Earnings Per Share (Kobo) 87k 7k 12k 21k 21k

Dividend Per Share (Kobo) - - - 10k 5k
Avg. no of ordinary shares issued 6,978 11,139 4,330 3,000 2,700
Source: Access Bank Annual Reports.

Table 5.2 Highlights of Access Bank’s 5 Years Balance Sheet

2007 2006 2005 2004 2003
(N’m) (N’m) (N’m) (N’m) (N’m)
Total Assets 328,615 174,554 66,918 31,342 22,582
Total Liabilities 300,230 145,660 52,846 28,339 20,082
Shareholders' fund 28,384 28,894 14,072 3,003 2,365
Liabilities and equity 328,615 174,554 66,918 31,341 22,447
Commitments and Contingencies 80,130 30,091 14,763 13,394 6,377
Total Assets and Contingencies 408,745 204,645 81,681 44,735 28,959
Source: Access Bank Annual Reports.
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5.2.2. Zenith Bank Plc
Zenith Bank Plc was incorporated in Nigeria (under the Companies and Allied matters
Act of 1990, as amended) as a private limited liability company and commenced
commercial banking operations in 1990. The bank was issued a universal banking
license by the Central Bank of Nigeria in 2001. Zenith Bank Plc became a public
limited liability company in July 2004, and its shares were listed on the Nigerian
Stock Exchange in October 2004, after a successful Initial Public Offering (IPO).

During the consolidation exercise of 2004/2005, Zenith was already sufficiently

capitalised to meet the new minimum requirements imposed by the Central Bank of
Nigeria, and therefore did not merge with any other organisations within the industry.
However, in line with the bank’s growth strategy, Zenith Bank raised N53.63 billion
by a Public Offer of three billion ordinary shares in February 2006 (IBTC, 2007;
Zenith Bank, 2006).

From a humble beginning in 1990, Zenith Bank as at 2007 financial year end has
grown both in profitability and balance sheet size with over 200 branches and
business offices in Nigeria. The bank also owned 100% stake of Zenith Bank, UK,
Zenith Bank Ghana, besides Zenith Pension Custodian Limited, Zenith General
Insurance Limited and Zenith Securities Limited (Zenith Bank Annual Report, 2007).

Table 5.3 and 5.4 below shows the summary of Zenith Bank’s financial statements
from 2003 to 2007:

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Table 5.3 Summary of Zenith Bank’s 5 Years Profit & Loss Account
2007 2006 2005 2004 2003
(N’m) (N’m) (N’m) (N’m) (N’m)
Gross Earnings 89,194 58,222 34,913 23,931 17,844
Interest and Discount Income 62,017 37,295 22,885 15,708 11,996
Interest Expense -18,733 -10,463 -5,620 -3,332 -2,289
Net Interest Income 43,284 26,832 17,265 12,376 9,707
Provision for Risk Assets -1,783 -1,307 -1,975 -397 -65
41,501 25,525 15,290 11,979 9,642
Other Income 27,177 20,927 12,028 8,223 5,848
68,677 46,452 27,318 20,202 15,490
Operating Expense -45,388 -31,298 -18,154 -13,797 -10,049
Profit Before Taxation 23,289 15,154 9,165 6,405 5,440
Taxation -5,780 -3,665 -2,009 -1,214 -1,016
Profit After Taxation 17,509 11,489 7,156 5,191 4,424
Earnings Per Share (Kobo) 189k 191k 13k 168k 375k
Dividend Per Share (Kobo) 100k 110k 70k 70k 70k
Avg. no of ordinary shares issued 9,266 9,173 5,274 3,097 1,180
Source: Zenith Bank Annual Reports.

Table 5.4 Highlights of Zenith Bank’s 5 Years Balance Sheet

2007 2006 2005 2004 2003
(N’m) (N’m) (N’m) (N’m) (N’m)

Total Assets 883,941 610,768 332,885 193,321 112,535

Total Liabilities 771,108 510,368 291,927 177,647 99,883

Shareholders' fund 112,833 100,401 37,790 15,674 12,652
Liabilities and equity 883,941 610,768 329,717 193,321 112,535
Commitments and Contingencies 294,445 103,745 41,005 21,905 40,911
Total Assets and Contingencies 1,178,386 714,513 373,890 215,227 153,446
Source: Zenith Bank Annual Reports.
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5.3 Findings

5.3.1. Liquidity.

To evaluate the short-term liquidity position of both banks, cash and short-term
investment to current liabilities; and loans to deposits ratios were used. Liquidity ratio
expresses a company’s ability to meet its short-term obligations

Table 5.5 measuring the proportion of customers deposit given-out as loans by the
banks indicated that Access Bank has a higher rate of 70%, 51% and 53% compared
to Zenith Bank’s 45%, 41% and 39% during the period 2003, 2004 and 2007
respectively. A higher loan to deposit ratio is an indication that most of customers’
deposit are given out as loans, implying that should there be a surge in the number of
depositors calling off their deposit, the bank will be faced with a temporary illiquidity
until it is able to recall its risk assets.

Using cash and short-term investment as a cover to current liabilities, Figure 5.1
showed both banks as having adequate liquidity levels. The data also showed that
both banks witnessed a significant drop in liquidity in 2005; this might not be
unconnected to the consolidation in the banking sector during the period as depositors
embarked on flight to safety by investing in other form of assets instead of deposits
with banks. During the liquidity squeeze of 2005, Access Bank’s ratio was below the
required rate of 40%. During 2006 financial year (first year post-merger), Access
Bank recorded a significant improvement in liquidity ratio from 37% in 2005 to 58%
and 66% in 2006 and 2007 financial years respectively. However, besides 2005
financial year that Access Bank recorded 37% liquidity ratio, both banks surpassed
the regulatory liquidity benchmark of 40% as set by the Central Bank of Nigeria
(CBN, 2005:21).

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Table 5.5 Loans: Deposit Ratio
Access Bank Zenith Bank
Loans Deposits Loans Deposits
Year (N 'm) (N 'm) % (N 'm) (N 'm) %
2003 6,508 9,309 70 27,765 61,574 45
2004 11,507 22,724 51 54,239 131,095 41
2005 16,334 32,608 50 123,336 233,413 53
2006 54,407 110,879 49 201,424 392,864 51
2007 108,775 205,235 53 220,750 568,012 39
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.1 Cash & Short-term Investment to Current Liabilities

Cash & Short-term Investment : Current

Liabilities

100

80
Ratios (% )

60 Access
40 Zenith

20

0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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5.3.2 Profitability Ratios
In this section, the study assessed the profitability and efficiency of both banks to
ascertain which of the growth strategies produces better results. Key performance
indicators such as return on assets (ROA), return on equity (ROE), return on capital
employed (ROCE) and the cost-income ratio (CI) were utilised. These indicators are
considered as measures of a bank’s profitability and efficiency. In order to facilitate
the presentation, the study considered and analysed performance during the three
years (2003, 2004 and 2005) before merger of Access Bank and two years thereafter
(2006 and 2007), the last years for which information was available. These
profitability and efficiency indicators were used to evaluate the long-term profitability
of the case studies to ascertain how well both banks utilised resources at their disposal
in generating profit and shareholders’ value creation. The log-term profitability of
both banks is vital for their survival and the benefit received by shareholders.

Table 5.6 and Figure 5.2 indicated a decline in both banks returns in assets (ROA)
between 2003 and 2006. Access Bank’s ROA declined from 2.5% in 2003 to 0.4% in
2006 (the first post-merger year), but increased significantly to 1.9% in 2007. On the
other hand, Zenith Bank’s ROA declined from 3.9% in 2003 to 1.9% in 2006. Access
Bank’s recorded improvement in profitability in 2007 is underpinned by strong
volume growth that lifted non-interest earnings and improved efficiencies. This
served as a buffer narrowing net interest margins, which have been impacted by
increasing competition and maintaining a highly liquid balance sheet.

Figures 5.3 and 5.4 indicate that returns on equity and returns on capital employed
also exhibited the same pattern as ROA. Net interest income by both banks witnessed
a steady decline between 2003 and 2007 as shown in Table 5.7. Zenith’s net-interest
to total asset margin declined from 8.6% in 2003 to 4.4% in 2006 while Access’
decline was from 6% to 3.5% between 2003 and 2005 but stabilises at 3.6% during
2006 and 2007 financial years.

On the average, Zenith Bank maintained a cost to income ratio of 64.8% for the
period under review, while Access Bank had an average of 66% (Table 5.8 and Figure
5.5). Access Bank’s cost to income ratio peaked at 77% in 2006 most of which is
related to merger expenses but reduced drastically to 57% in 2007. This significant
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improvement was due mainly to strong growth in net earnings, although operating
expenses actually increased to N13.1 billion in 2007due to increase in the number of
personnel from 327 in 2003 to 729 in 2007: an indication that in the event of static
earnings or slow earnings growth in the medium to short term, Access Bank’s cost to
income ratio could deteriorate sharply. On the other hand, Zenith Bank’s operating
expenses growth was driven significantly by increase in the number of personnel to
complement the bank’s increased branch network: personnel increased from 1,592 in
2003 to 5,435 in 2007 while branch-network increased from about 120 in 2005 to
over 200 in 2007 (Cashcraft, 2008, Zenith Bank, 2007).

Table 5.6 Return on Assets

Access Bank Zenith Bank
Profit Total Profit Total
After Tax Assets After Tax Assets
Year (N’m) (N’m) % (N’m) (N’m) %
2003 557 22,582 2.5 4,424 112,535 3.9
2004 637 31,342 2.0 5,191 193,321 2.7
2005 502 66,918 0.7 7,156 332,885 2.1
2006 737 174,554 0.4 11,489 610,768 1.9
2007 6,083 328,615 1.9 17,509 883,941 2.0
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.2 Returns on Assets

Retuns on Assets

5.0

4.0
ROA (%)

3.0 Access
2.0 Zenith

1.0

0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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Figure 5.3 Returns on Equity

Returns on Equity

40.0
30.0
R O E (% )

Access
20.0
Zenith
10.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.4 Return on Capital Employed

Returns on Capital Employed

4.5
4.0
3.5
ROCE (%)

3.0
2.5 Access
2.0 Zenith
1.5
1.0
0.5
0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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Table 5.7 Net Interest Income: Total Asset Margin
Access Bank Zenith Bank
Net Interest Total Net Interest Total
Income Asset Income Asset
Year (N’m) (N’m) % (N’m) (N’m) %
2003 1,347 22,582 6.0 9,707 112,535 8.6
2004 1,301 31,342 4.1 12,376 193,321 6.4
2005 2,353 66,918 3.5 17,265 332,885 5.2
2006 6,261 174,554 3.6 26,832 610,768 4.4
2007 11,942 328,615 3.6 43,284 883,941 4.9
Source: Access Bank and Zenith Bank Annual Reports.

Table 5.8 Cost: Income Ratio

Access Bank Zenith Bank

Non- Net interest Non- Net interest

interest income + non interest income + non
expense interest income expense interest income
Year (N’m) (N’m) % (N’m) (N’m) %
2003 1,846 3,185 58 10,049 15,555 65
2004 2,732 4,070 67 13,797 20,599 67
2005 4,183 5,918 71 18,154 29,293 62
2006 8,384 10,889 77 31,298 47,759 66
2007 13,111 22,930 57 45,388 70,461 64
Source: Access Bank and Zenith Bank Annual Reports.

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Figure 5.5 Cost: Income Ratio analysis

Cost : Income Ratios

90.0
80.0
70.0
Ratios (%)

60.0
50.0 Access
40.0 Zenith
30.0
20.0
10.0
0.0
2003 2004 2005 2006 2007
MY PM
Years

Source: Access Bank and Zenith Bank Annual Reports.

5.3.3 CAPITAL ADEQUACY

Capital adequacy ratios are appraisal of the amount of a bank’s capital, expressed as a
percentage of its loan exposures or assets. Zenith’s equity grew from N12.6 billion in
2003 to N112.8 billion in 2007 (representing 795% increase), and Access Bank also
recorded a phenomenon growth in equity from N2.3 billion in 2003 to N28.3 billion
in 2007 (representing 1,130% increase). But equity to asset ratio as a measure of
capital adequacy indicates a fluctuation for the respective years by both banks. Access
Bank recorded a drop from 21% to 16.6% and further to 8.6% for 2005, 2006 and
2007 financial years. On the other hand, Zenith witnessed an increase from 11.4% in
2004 to 16.4% in 2006 and then dropped to 12.8% in 2007 (Table 5.9 and Figure 5.6).
The weakened capital adequacy ratios of Access Bank are as a result of quantum leap
in loans and advances. Also, Access Bank’s equity to assets drop in equity is related
to a write-off of N6.59 billion balance of goodwill arising from consolidation against
a reserve (Access Bank, 2007: 56). When measured against the minimum capital
adequacy (equity to total assets) requirement of 10% as set by the Central Bank of
Nigeria (CBN 2005: 21), Zenith Bank exceeded the minimum for the period - 2003,
2005, 2006 and 2007 but failed in 2004; while Access Bank surpassed the minimum
in 2003, 2005 and 2006 but failed in 2004 and 2007.
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Table 5.9 Equity to Total Asset Ratio
Access Bank Zenith Bank
Equity Total Assets Equity Total Assets
Year (N’m) (N’m) % (N’m) (N’m) %
2003 2,365 22,582 10.5 12,652 112,535 11.2
2004 3,003 31,342 9.6 15,674 193,321 8.1
2005 14,072 66,918 21.0 37,790 332,885 11.4
2006 28,894 174,554 16.6 100,401 610,768 16.4
2007 28,384 328,615 8.6 112,833 883,941 12.8
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.6 Equity to Total Assets analysis

Equity to Total Assets

25.0

20.0
Ratios (%)

15.0 Access
10.0 Zenith

5.0

0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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Table 5.10 Equity to Loans Ratio
Access Bank Zenith Bank
Equity Total Loans Equity Total Loans
Year (N’m) (N’m) % (N’m) (N’m) %
2003 2,365 6,508 36.3 12,652 27,765 45.6
2004 3,003 11,507 26.1 15,674 54,239 28.9
2005 14,072 16,334 86.2 37,790 123,336 30.6
2006 28,894 54,407 53.1 100,401 201,424 49.8
2007 28,384 108,775 26.1 112,833 220,750 51.1
Source: Access Bank and Zenith Bank Annual Reports.

5.3.4 ASSET QUALITY

When asset quality was measured using loan loss provision to total loans as indices,
the result in Table 5.11 and Figure 5.7 indicates both banks as having quality assets.
Zenith Bank’s non-performing loans to total loans ratio was below 1% except for
2005 financial year that its non-performing loans reached 1.6% of total loans against
an industry average of 10%. Access Bank’s non-performing loans to total loans
improved significantly from 5% in 2003 to 1.6% in 2007. The point of interest in the
case of Access Bank is the fact that in 2006, its non-performing loans dropped from
6% in 2005 to 2.5% in 2006. Both bank’s loan loss provision to total loans was very
satisfactory compared to the statutory tolerable rate of 20% (CBN, 2005: 23)

Table 5.12 and Figure 5.8 showed that non-performing loans provisions took a greater
percentage of Access Bank’s profit before tax; showing that better loans quality could
lead to improved profitability.

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Table 5.11 Provisions for Loan Losses to Total loans
Access Bank Zenith Bank
Provision for Total Provision for Total
Loan Losses Loans Loan Losses Loans
Year (N’m) (N’m) % (N’m) (N’m) %
2003 328 6,508 5.0 65 27,765 0.2
2004 386 11,507 3.4 397 54,239 0.7
2005 984 16,334 6.0 1,975 123,336 1.6
2006 1,386 54,407 2.5 1,307 201,424 0.6
2007 1,775 108,775 1.6 1,783 220,750 0.8
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.7 Provisions for Loan Losses to Total Loans

Provision for Loan Losses to Total Loans

7.0
6.0
5.0
Ratios (%)

4.0 Access
3.0 Zenith
2.0
1.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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Table 5.12 Provisions for Loan Losses to Profit Before Tax
Access Bank Zenith Bank
Provision for Profit Before Provision for Profit Before
Loan Losses Tax Loan Losses Tax
Year (N’m) (N’m) % (N’m) (N’m) %
2003 328 811 40.4 65 5,440 1.2
2004 386 952 40.5 397 6,405 6.2
2005 984 751 131.1 1,975 9,165 21.5
2006 1,386 1,119 123.8 1,307 15,154 8.6
2007 1,775 8,043 22.1 1,783 23,289 7.7
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.8 Provisions for Loan Losses to Profit before Tax

Provision for Loan Losses to Profit Before Tax

140.0
120.0
100.0
Ratios (%)

80.0 Access
60.0 Access
40.0
20.0
0.0
2003 2004 2005 2006 2007
MY PM
Years

Source: Access Bank and Zenith Bank Annual Reports.

5.3.5 GROWTH RATES

The study used annualised growth rate to evaluate the performance of Access Bank
and Zenith Bank. Annualised growth rate is the hypothetical constant year-to-year
growth rate necessary to take the beginning-year value of a series to its ending-year
value. Gross earnings, profit before tax, deposit, shareholders’ equity and total
assets/contingencies were measured.
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5.3.5.1 Gross Earnings
This measured the growth in gross earnings (interest income and other operating
income) between one period and the other. Figure 5.9 showed Access Bank achieved
a 78% increase in gross earnings in 2006 whereas Zenith Bank recorded 67% increase.
In 2007, Zenith Bank only increased its gross earnings by 53% while Access Bank
achieved 109% increase. Prior to merger, Access Bank achieved 26% and 36% in
2004 and 2005 respectively as against Zenith Bank’s 34% and 46% for the same
period. Improved gross earnings by Access Bank are manifestation of the synergy
derived from its merger in November 2005.

Figure 5.9 Gross Earnings

Gross Earnings Growth Rate

120.0
100.0
Growth (%)

80.0
Access
60.0
Zenith
40.0

20.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

5.3.5.2 Profit before Tax Growth rate.

Table 5.13 shows Zenith Bank’s profit before tax growth rate surpassed Access
Bank’s achievement before its (Access Bank) merger in November 2005. From a
decrease of 21% in 2005, Access Bank achieved a growth of 49% and 618% in 2006
and 2007 respectively compared with Zenith’s growth rate of 43%, 65% and 54%
during the same period. Like growth in gross earnings, Access Bank has been able to
harness the advantages of its merger synergy.
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Table 5.13 Profit before Tax

Access Bank Zenith Bank

Current Preceding Current Preceding
Year PBT Year PBT Year PBT Year PBT Growth
Year (N’m) (N’m) % (N’m) (N’m) Rate

2003 811 -17 4,733 5,440 3,999 36

2004 952 811 17 6,405 5,440 18

2005 751 952 -21 9,165 6,405 43

2006 1,119 751 49 15,154 9,165 65

2007 8,043 1,119 618 23,289 15,154 54

Source: Access Bank and Zenith Bank Annual Reports.

5.3.5.3 Deposit Growth Rate

Although Table 5.14 and Figure 5.10 showed both banks exhibiting appreciable
growth in total deposits, Access Bank was able to grow its deposit base from N32.6
billion in 2005 to N205.2 billion in 2007, a very impressive accomplishment. Access
Bank’s deposit mobilisation capacity was further enhanced through increased branch
network and business combination with erstwhile Capital Bank and Marina Bank in
November 2005. Zenith Bank notwithstanding maintains a significant lead in total
deposit over Access Bank.

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Table 5.14 Deposits Growth Rate
Access Bank Zenith Bank
Current Preceding Current Preceding
Year Total Year Total Year Total Year Total
Deposit Deposit Deposit Deposit
Year (N’m) (N’m) % (N’m) (N’m) %
2003 9,309 6,475 44 61,574 50,688 21
2004 22,724 9,309 144 131,095 61,574 113
2005 32,608 22,724 43 233,413 131,095 78
2006 110,879 32,608 240 392,864 233,413 68
2007 205,235 110,879 85 568,012 392,864 45
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.10 Deposit Growth rate

Deposit Growth Rate

300.0
250.0
Growth (%)

200.0
Access
150.0
Zenith
100.0

50.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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5.3.5.4 Shareholders’ Equity
Table 5.15 showed both banks achieving significant growth in shareholders’ equity in
2005. However, much of the growth could not be traced to retained earnings but fresh
capitalisation in the form of public offerings. Zenith Bank raised over N48 billion
during its Initial Public Offering of 2004 wherein only about N15.8 billion was
absorbed and the balance returned, and also a public offering in 2006 where N53.6
billion was realised. In the same vain, Access Bank also raised fresh capital through
public offering in 2005 and 2006. Access Bank also realised N12.1 billion from the
merger with Capital and Marina Bank which was paid for by way of share exchange
(Access Bank, 2006: 26). The drop in Access Bank’s shareholders’ equity by 2% was
occasioned by a write-off of the unexpired goodwill of almost N6.6 billion against
share premium reserve (Access Bank, 2007: 57).

Table 5.15 Shareholders’ Equity

Access Bank Zenith Bank

Preceding Current Year Preceding

Current Year Year Equity Equity Year Equity
Year Equity (N’m) (N’m) % (N’m) (N’m) %
2003 2,365 1,944 22 12,652 9,306 36
2004 3,003 2,365 27 15,674 12,652 24
2005 14,072 3,003 369 37,790 15,674 141
2006 28,894 14,072 105 100,401 37,790 166
2007 28,384 28,894 -2 112,833 100,401 12
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.11 Shareholders’ Equity Growth rate

Shareholders' Equity Growth Rate

400.0

300.0
Growth (%)

200.0 Access
Zenith
100.0

0.0
2003 2004 2005 MY 2006 PM 2007
-100.0
Years

Source: Access Bank and Zenith Bank Annual Reports.

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5.3.5.5 Total Assets plus Contingencies
Table 5.16 and Figure 5.12 showed a steady growth in total asset plus contingencies
by both banks between 2004 and 2006. Access Bank’s balance sheet size doubled
each year since merger: 151% and 100% in 2006 and 2007 respectively, while Zenith
Bank balance sheet size also grew by 91% and 65% during the same period. This
growth is closely related to the growth in shareholders’ equity and increased deposit
mobilisation.

Table 5.16 Total Assets plus Contingencies

Access Bank Zenith Bank
Preceding Preceding
Current Year Year Total Current Year Year Total
Total Assets Assets Total Assets Assets
Year (N’m) (N’m) % (N’m) (N’m) %
2003 28,959 14,079 106 153,446 112,549 36
2004 44,735 28,959 54 215,227 153,446 40
2005 81,681 44,735 83 373,890 215,227 74
2006 204,645 81,681 151 714,513 373,890 91
2007 408,745 204,645 100 1,178,386 714,513 65
Source: Access Bank and Zenith Bank Annual Reports.

Figure 5.12 Total Assets plus Contingencies

Total Assets plus Contingent Grow th Rate

200.0
Growth (%)

150.0
Access
100.0
Zenith
50.0
0.0
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

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5.3.6 Investment Valuation ratios

Figure 5.13 and Table 5.17 shows the performance of both banks on earnings per
share and dividends payout ratios respectively. Although Access Bank witnessed a
remarkable growth in EPS, Zenith Bank nevertheless maintained its superiority in
dividend pay-out.

Figure 5.13 Earnings per Share

Earnings Per Share

4.00
3.50
Earnings (Naira)

3.00
2.50
Access
2.00
Zenith
1.50
1.00
0.50
0.00
2003 2004 2005 MY 2006 PM 2007
Years

Source: Access Bank and Zenith Bank Annual Reports.

Table 5.17 Dividends Payout Ratio

Access Bank Zenith Bank
Dividend
per Dividend Dividend
ordinary Earning Dividend per ordinary Earning Payout
share Per Share Payout share Per Share ratio
Year (kobo) (kobo) ratio (%) (kobo) (kobo) (%)
2003 5 21 24 70 375 19
2004 10 21 47 70 168 42
2005 0 12 0 70 136 52
2006 0 7 0 110 191 58
2007 0 87 0 100 189 53
Source: Access Bank and Zenith Bank Annual Reports.
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5.3.7 Shares prices movement

The share price movement is analysed under three periods: pre-merger (21/10/2004 -
31/05/2005), actual-merger period (01/06/2005 - 31/10/2005), and post-merger period
(01/11/2005 - 22/07/2008) using share price information from the Nigerian stock
exchange.

From Figure 5.14 below, there was no movement in the price of Access Bank within
the period preceding its merger with Capital Bank and Marina Bank, because its share
was on technical suspension due to its initial public offering. The share price
stagnated at N3.42 during period, while Zenith was trading for about N14.

Figure 5.15 which covered the actual merger period of Access Bank showed that the
price of Access Bank dropped from N3.42 to N2.99 on August 22, 2008 and remained
unchanged till December 9, 2005, a month after the consummation of the merger
process in November 1, 2006. However, post-merger price movement of Access Bank
showed a remarkable improvement between December 2005 and July 2008 as shown
in Figure 5.16 below. Access Bank share peaked at N25.50 per share on January 2008,
while Zenith Bank peaked at N66.14 per share in June 2007 before dividend and
bonus were paid to shareholders in August 2007. From a pre-merger share price of
N2.99 in August 2005 to N15 as at July 22, 2008, Access Bank share experienced a
growth of 402% while Zenith Bank’s share price experienced a 193% growth in share
price within the same period besides dividend of N0.70 per share in 2005, N1.10 per
share in 2006 and N1.00 per share plus one bonus share for every four ordinary share
held as at the close of its register in August 2007.

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 P ric e (N a ira ) P r ic e (N a ira )

2008.
2008.
-

-
5.00
10.00
15.00
20.00
25.00

2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
0 6 /0 1 /2 0 0 5 1 0 /2 1 /2 0 0 4
0 6 /0 9 /2 0 0 5 1 1 /0 2 /2 0 0 4
6 /1 7 /2 0 0 5 1 1 /2 3 /2 0 0 4
6 /2 7 /2 0 0 5 1 2 /0 2 /2 0 0 4
1 2 /1 3 /2 0 0 4
0 7 /0 3 /2 0 0 5
1 2 /2 4 /2 0 0 4
0 7 /0 8 /2 0 0 5
0 1 /0 5 /2 0 0 5
7 /1 8 /2 0 0 5
1 /1 4 /2 0 0 5
7 /2 6 /2 0 0 5
1 /3 1 /2 0 0 5
0 8 /0 3 /2 0 0 5
0 2 /0 9 /2 0 0 5
0 8 /1 2 /2 0 0 5

Date
2 /1 8 /2 0 0 5

Date
8 /2 2 /2 0 0 5
0 3 /0 1 /2 0 0 5

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8 /3 0 /2 0 0 5 0 3 /1 0 /2 0 0 5
0 9 /0 7 /2 0 0 5 3 /2 1 /2 0 0 5
9 /1 5 /2 0 0 5 0 4 /0 1 /2 0 0 5
9 /2 3 /2 0 0 5 4 /1 3 /2 0 0 5

Actual Merger Share Price Movement

Pre-Merger Share Price Movement

1 0 /0 4 /2 0 0 5 4 /2 5 /2 0 0 5
1 0 /1 2 /2 0 0 5 0 5 /0 5 /2 0 0 5
Figure 5.14 Share price movement pre Access Bank merger

1 0 /2 0 /2 0 0 5 5 /1 6 /2 0 0 5

Figure 5.15 Share price movements during Access Bank merger

1 0 /2 8 /2 0 0 5 5 /2 5 /2 0 0 5

Zenith Bank
Zenith Bank

Access Bank
Access Bank

Source: Securities & Exchange Commission, Nigerian Capital Market Data Bank
Source: Securities & Exchange Commission, Nigerian Capital Market Data Bank
Figure 5.16 Share price movements post Access Bank merger

Post-Merger Share Price Movement

80.00
70.00
60.00
Price (Naira)

50.00
Access Bank
40.00
Zenith Bank
30.00
20.00
10.00
-
11/01/2005
12/20/2005
2/13/2006
04/07/2006
06/01/2006
7/20/2006
09/07/2006
10/30/2006
12/18/2006
2/13/2007
04/04/2007
06/01/2007
7/19/2007
09/06/2007
10/30/2007
12/18/2007
02/12/2008
04/04/2008
5/26/2008
7/15/2008
Date

Source: Securities & Exchange Commission, Nigerian Capital Market Data Bank
2008.

5.3.8 Actual versus projected performance of Access Bank

Tables 5.18 and 5.19 below reveal that Access Bank was unable to attain its projected
profit and loss target for 2006 financial year, but surpassed the balance sheet
projections. On the other hand, the Bank surpassed its profit and loss projections for
2007. The increase in operating expense in 2007 by about 83% is closely related to
the write-off of N6.6 billion unamortised goodwill that ought to be written-off over
five years. The attainment of the projected performance by Access Bank is an
indication that the expected financial synergies from the merger were achieved.

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Table 5.18 Profit and Loss Accounts highlight (forecast and actual)
2006 2007
Forecast Actual Variance Forecast Actual Variance
(N'm) (N'm) (%) (N'm) (N'm) (%)
Gross Earnings 17,283 13,360 -0.23 21,273 27,881 0.31
Interest Income 10,199 8,733 -0.14 12,751 16,894 0.32
Interest Expense 5,192 2,472 -0.52 5,421 4,952 -0.09
Other Income 7,084 4,628 -0.35 8,522 10,988 0.29
Operating Expense 6,148 8,384 0.36 7,164 13,111 0.83
Profit Before Tax 2,953 1,119 -0.62 6,117 8,043 0.31
Dividends 1,109 - -1.00 2,080 - -1.00
Source: Access, Capital and Marina Scheme of Mergers, 2005: 117
Access Bank Plc, Annual Report, 2007: 7

5.19 - Balance Sheet highlights (forecast and actual)

2006
Forecast Actual Variance
(N'm) (N'm) (%)
Total assets 133,536 174,554 0.31
Total assets & Contingencies 154,651 204,645 0.32
Total liabilities 105,138 145,660 0.39
Deposits 72,062 110,879 0.54
Loans & Advances 39,035 54,111 0.39
Shareholders' fund 28,398 28,894 0.02
Source: Access, Capital and Marina Scheme of Mergers, 2005: 115;
Access Bank Plc, Annual Report, 2007: 6

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Chapter 6: Discussion and Conclusion

This study was aimed at evaluating organic growth and mergers and acquisitions as
strategic growth options in the Nigerian banking sector, with Access Bank Plc and
Zenith Bank Plc as case studies. It was aimed at answering the research question,
‘which of the strategies (organic growth or mergers and acquisitions) result in
superior financial performance?’

In order to answer the research question, the study started with an overview of the
Nigerian Banking sector and a review of relevant literatures on organic growth, and
mergers and acquisition. Different perspectives to the study of M&A were considered.

The methodology of this study was qualitative, based on the economic and finance
perspectives of the study of mergers and acquisitions, using financial ratio analysis.
The study considered liquidity, profitability, capital adequacy, asset quality, and
growth rates as measures of financial performance.

Liquidity: As shown in the data analysis in the previous chapter, though both banks
surpassed the regulatory benchmark of 40%, Zenith Bank outperformed Access Bank.

Profitability: Evaluating profitability on the basis of ROCE, Zenith Bank

outperformed Access Bank on a year by year basis. However, Access Bank grew its
ROCE from 0.7% pre-merger in 2005 to 1.9% in 2007: a growth of 171%. On the
other hand, Zenith Bank’s ROCE declined by 9% from 2.2% in 2005 to 2% in 2007.
In this regard, M&A produced a superior financial performance.

Capital Adequacy as a measure of performance showed Zenith Bank as having more

quality assets as indicated in Tables 5.9 and 5.10 in the preceding chapter.

Growth: Access Bank witnessed a higher growth rate than Zenith Bank during the
period under review as shown in Table 6.1, an indication that M&A resulted in
superior financial performance.

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Table 6.1 Growth rate between 2005 and 2007
Bank Pre- Post- Growth
merger merger rate
2005 2007 (%)
(N’m) (N’m)
Gross Access 7,495 27,881 272
Earnings Zenith 34,913 89,194 155
Profit Before Access 751 8,043 971
Tax Zenith 9,195 23,289 154
Deposit Access 32,608 205,235 529
Zenith 233,413 568,012 143
Shareholders’ Access 14,072 28,384 102
Fund Zenith 37,790 112,833 199
Total asset + Access 81,681 408,745 400
contingencies Zenith 373,890 1,178,386 215

Earnings per Access 12 kobo 87 kobo 625

share Zenith 136 kobo 189 kobo 39
Source: Access Bank and Zenith Bank Annual Reports.

When considering Access Bank’s post-merger performance for the period under
review, I was initially cynical if the result of just two years will be sufficient to draw a
conclusion, especially with regard to 2007 profitability and growth of Access Bank.
Fortunately, the 2008 financial year end result of Access Bank was released before the
conclusion of this study and the performance as highlighted in Table 6.2 below,
reinforced the opinion that Access Bank did enjoyed positive synergies from its
merger of 2005. Shareholders funds growth in 2008 was mainly due to N136.5 billion
raised through public offering of over 9.16 billion ordinary shares of 50 kobo each at
N14.90 in July 2007 (Access Bank, 2008: 52), an expression of public confidence in
the bank. Also for the first time post-merger, a dividend of 40 kobo per share was
declared.

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Table 6.2 Access Bank’s 2008 Performance Highlights
2008 2007 Growth
(N’million) (N’million) (%)
Gross Earnings 57,627 27,881 107
Profit Before Tax 19,042 8,043 137
Deposit 351,789 205,235 71
Loans & Advances 244,596 107,761 127
Total assets 1,043,465 328,615 218
Total liabilities 871,463 300,230 190
Shareholders' fund 172,002 28,385 506

Source: Access Bank, Annual Report, 2008: 26 – 27.

On the other hand, Zenith Bank has been able to sustain its quality financial
performance, achieving all regulatory ratio requirements. Its core management team
and values are retained and sustained. Also, during the study, I was thinking that
Zenith Bank must have reached the zenith of its performance and diminishing returns
must have started setting-in; however according to a nine month unaudited interim
report as shown in Table 6.3 obtained from the Nigerian Stock Exchange, indicate
that the Bank is set to continue in its profitability streak as the most profitable bank in
Nigeria by the time its 12 months financial report for 2008 is released.

Table 6.3 Zenith Bank's 2008 3Q Operation Statement

9 months to 31 9 months to 31
March 2008 March 2007 Growth
(N’million) (N’million) (%)
Gross Earnings 120,306 62,660 92
Profit Before Tax 40,638 17,650 130
Taxation 7,314 2,650 176
Profit After Tax 33,320 15,000 122
Source: http://www.cashcraft.com/interimresult.asp

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The study showed that Access Bank that pursued M&A witnessed a faster growth rate,
whereas Zenith Bank that pursued organic growth was able to sustain its quality
performance trends and achieved a slower growth rate during the period under review,
in line with past literatures on mergers and acquisitions, and organic growth
respectively.

The choice of strategy adopted by either bank was dependent upon their individual
circumstances and organisational strategy. Organic growth requires time and
development of additional managerial resources (Dierickx and Cool 1989); whereas
mergers and acquisitions are driven by seeming synergies which the emergent firm
harnesses by managing the interrelationships existing between the merging businesses
(Goold and Luchs, 1993).

This study recommends that researchers undertaking similar studies on the Nigerian
banking sector should focus on evaluating the performance of at least 75% of the total
banks, using quantitative methods to find out the correlation between strategies and
performance to enable generalisation of the outcome.

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