By Omoh Gabriel, Business Editor.
The bomb shell dropped by the CBN last week asking banks to raise their equity base to N25 billion minimum has sent most banks managing directors and their boards to meetings and marshalling of game plans. From prelimenary report from the negotiation tables banks have several options to explore.There is the window for merger, acquisition, merger and acuisition. Mr. Ebibomoh Timitimi managing Director Allstates Trust Bank in chat last Friday described the CBN move as a welcome development. He said that Nigeria banks were rather small in size. He said what the CBN has done should have been the initiative of banks but for the simple reason that every body want to be an MD or a chairman. He said that meetings are going on among banks for merger or acquisition. He said that there are many options open to banks to raise their equity urging that the banking public should be rest assured that their deposit are safe. Mr Lanre Alabi Principal manager Corporate Affairs, Afribank and president of Association of corporate Affairs managers of banks said that every bank in the country stand a good chance of raising the required minimum equity prescribed for banks. According to him banks are exploring the option of inviting foreign investors to buy into the banks others are looking at the possibility of getting local investor to shore up their capital, some are looking at the capital market option, while others are considering merger and acquisition. From available data and information from banks chiefs as of today five banks can meet the 25 billion without peering with any other bank. Such banks include Union Bank PLC which equity base of the group is in the region of N35billion. All the bank needs to do is consolidate the asset of Union Bank group, Union Merchant and possibly Union homes. The second is First Bank PLC which group equity is in the region of 35 billion naira. Without inviting any outsider it can reasonably consolidate its group asset, FBN Merchant Bankers and stand on its own. UBA PLC, Mrs Fumi Olayinka corporate Affairs manager, said has an equity base of about N17.4 billion and has plans to raise the sum of N10billion from the capital market in the last quarter of 2004 through right Issues and offer for subscription. If all goes well with the plan the bank will certainly meet the minimun equity base. Standard Trust Bank with an equity base of N17.4 billion can easily merge with Continental Trust and possibly raise the balance funds from the capital market. Zenith International on its part has an equity base of N16.6 billion at the moment. The bank’s offer for subscription of N8 billion is ongoing in the capital market. From fillers the bank is confident that at the end of the day its shareholders fund will be beefed up to N32 billion. With that the bank is capable of standing on its own. Guaranty Trust Bank at the moment has an equity base of N11.7 billion as at December 2003. The bank also is in the capital market scouting for N10billion. If fully subscribed the bank will meet the CBN equity requirement without merging with any other bank. Intercontinental Bank PLC may not need any outsider to merge with it. It definitely will consolidate its equity along the line of the group holdings. Banks in the family which assets are goning to be consolidated are, Intercontinental Bank N10.2 billion, Gatewaybank, Equity Bank, Global and Fidelity bank. These combined can easily raise the required minimum equity stipulated by the CBN. According to Lanre Alabi, Principal manager Afribank, the bank group has an asset base of N8.6 billion with five subsidiaries. Afribank he said will simply consolidates its equity base without merging with any outsider institution. He said Afribank has come to stay. In the case of Equitorial Trust Bank and Devcom Bank, they are of the same Adenuga junior family. They say they are not in the market of mergers with strange bed fellows. The owners will find the money and remain in business. What is not so clear as the time of going to press is what Otumba Shubumi Balogun will do to save First Monument Bank, the first indegenous Merchant Bank. No one is sure of the direction of the bank. Diamond Bank spokesman Nkem Ossai in a release said the bank has approached Almagamated Bank of South Africa for capital acquisition. He said talks have reached advanced stage with the South Africa bank. If the bid falls through and enough capital injection comes in from this arrangement, Diamond bank will have pulled through the minimum equity hurdle. Mr Effiong Bassey Managing Director of Finacorp Bulding Society major shareholders in Platinum Bank said that the group will consolidate and take appropriate measure to meet the new minimum equity requirement for the bank to continue operation. But Mr. Charles Odibo corporate Affairs manager of the bank said the bank is making its internal arrangement and at the appropriate time it will issue a statement. To him it is just too early in the day to start commenting on the issue. At the weekend the Board and management of Prudent Bank met and said they will issue a statement today (Monday) as to its plan to raise the new minimum equity for banks in the country. Those close to moves being made in the industry said that Standard Charttered Bank and Citi Bank are either going to have capital injected into them from their parent banks offshore or pull out of banking business in Nigeria. They argue that if their offshore shareholders feels the return on investment in Nigeria is not high enough to warrent further capital injection they will simply pull out. According to negotiators, The middle level banks are going to play a mediatiating role in the entire merger saga. They are Wema Bank with equity of N7.4 billion, Oceanic Bank N7billion, IBTC N5.8 billion, NAL Bank N5.5billion and Gulf Bank N5.5 billion. NAL Bank for instance say they are negotiating with bank of the same size for merger. At the end the bank may merge with four other banks that have the same level of capital with its own. The bank it was gathered from officials who would not want their names in print is also considering buying other weaker banks.These middle level banks it is argue will become the beutiful bride for other banks to woo for merger. Most other banks have their equity below N5billion and are not in very strong position to negotiate. Bankers at the heart of the search for banks to merge with said that the eleven banks classified by the CBN as unsound were the first to ask the sound ones for talks and for talks and were asked to hold on. Infact most banks board are said to be looking beyond these eleven banks. These eleven may have to be acquired or liquidated as no bank at the moment is ready to make any deal with them. The fourteen marginal bank in themselves are also not in particularly good position to negotiate. They may just be lucky to find willing bank to take them over. So out of the 89 banks in the country, 25 are considered out and about eight can go it alone so about 56 are ready for talks on merger. Bankers say that going by the equity base of these bank about six or eight banks may emerge from the group, meaning that in the end only 20 banks may emerge from the current exercise. MBC international Bank managing director Mr. Raymond Bariou and his deputy Mr Kofo Majekkodunmi reocently in a media chart said the bank was considering the possibility of merger with other banks with good assets as that of their bank. Officials of Citizens Bank said that the bank board has been meeting and is yet to come up with a position. The official said that the name of the bank is precious to the owners and that they will do everything to keep the bank’s identity, indicating that the bank intend to raise the N25billion minimum equity base. Mr Ebimomo Timitimi said that Allstate Trust Bank has been approached by a bank for merger and that talks were on going between him and four other managing directors of banks. He said that the board of the bank has given the management of the bank the approval to consider the various option available and advise on which to adopt. He disclosed that the equity base of the bank is N3.2 billion. Timitimi said that before the December 2005 deadline the bank would have met the new minimum capital requirement.
Whether at international or local level Merger is usually the amalgamation of two or more firms, whether by consideration into a new legal entity or by acquisition of one firms by another. Globally, when the data of merging firms are presented in terms of acquisition the largest firms involved in a consolidation is normally considered as the acquirer. In Nigeria merger series have ocurred in the manufacturing sector but none has been recorded in the financial sector. The number of firms disappearing as a result of merger varies considerably over time. In Nigeria most of the mergers have been motivated from outside the shores of Nigeria as many of such excercise were done by multinationals such as John Holt, Lever Brothers and PZ industries. Mergers in Nigeria has been mainly horizontal involving the amalgamation in the same industry group. The merger of Lipton Tea with Lever Brothers In the United Kingdom evidence establish firmly that mergers in the postwar period were mainly horizontal. Of the 488 quoted companies in manufacturing industry acquired in Britain at the time nearly 60 per cent involved almagamation within the same industry group. The situation is different in the United States of America where conglomerate merger have been of increasing importance. One possible reason for the difference is the impact of the US antitrust law.
Reasons for merger several reasons have been given for merger. Stigler the noble price winner for economics categorised the turn of the century merger in the united States as merger for monopoly and the late twenties as merger for oligopoly. The more important reasons advanced for merger are :
Synergy Voluntry mergers of companies world wide are usually driven by profit motives and economies of scale. profit maximising firms, within the framework of tradional theory of the firm, will further profit objective by merging if monopoly power enabling monopoly profit is created or if if economies of scale, broadly construed, yielding lower costs are realised. These consequences of mergers are together sometimes referred to as synegestic effects, effects resulting from the messing together of firms in such a way that their nprofit when merged exceed what the sum of their individual profit would have been had the firms remained unmerged. The greation of market power is most likely to be a consequence of horizontal merger. Economics of scale may result with almost equal likelyhood from horizontal or vertical merger.
Emperical studies are often contradictory and inconclusive. Some studies have suggested that merger wave in the United States tend to demostrate the existence of a fairly strong desire avoid rigolous competition. Many merger were formed for other purposes. In most of the cases of merger few had market monopoly as their goals. What is the goal of the propsed merger in Nigeria.
Economist have argued that direct evidence on the importance or otherwise of scale economies as motive as being suggested by the CBN governor is sparse. Stigler, has argued that the conspicuous ability of different-sized firms to survive in the same industry suggests prima facie that economies of scale are relatively unimportant over a wide range of America industry. However Cook and Cohen have suggested based on detailed study of industry behaviour that mergers are unlikely to be successful unless there are considerable economies of scale, that they are unlikely to take place unless those economies of scale are difficult to realise in the absence of merger. In the Nigeria banking system there a lot of economies of scale to derived from merger. In the first place by banks pulling their resources together they are most likely going to have large sum of money at their disposal to do intermediation in the maritme industry which the limited capital in the hands of Nigeria banks at the moment can not allow. Secondly banks in Nigeria will be able to effectively finance oil and gas project without recourse to offshore loans, also the present high cost of operation in the industry will be reduced as merging banks will use one technology instead of the currewnt heavy investment in technology infrastructure by individual banks.
Expectation and market valuation
Some economist have argued that in place of monopoly power and scale economies forces which generate discrepancies in valuation are decisive in determining variations in merger rates both among industries and over time. By discrepancies in valuation are meant situations in which potential buyer and seller, although neither foresees a rise in stock market valuation result from the merger, both expect to gain from the transaction. In Nigeria today this where a number of the mergers will run into difficulty. Most Nigeria banks are not quoted on the stock exchange. The assets of some are really bad. Evaluating the assets and determinig their worth that will be beneficial to the merging firms will pose some difficulty. Right from the word go some banks are in very disaadvantaged position. Their bargaining power is relatively weak goiung by the quality of their assets. Also to nbe able to do this several federal agencies are involved from SEC, To the Nigeria Stock Exchange, Corporate Affairs Commission, etc the process may just be tedious. Normally discrepancies in valuation for income -producing assets arise from differences in expectations about future income streams and the risk associated with expected income. When such discrepancies are characterised by a higher value being placed on the assets of a firm by non owners than by owners, acquisition becomes possible. Economist have always argued that economic disturbances generate the sort of valuation discrepancies required to bring about mergers. This the case of Nigeria where the policy of the CBN has required that banks raised their minimum equity base to N25 billion. This new equity requirement has brought
about economic disturbance in the banking industry in Nigeria that has now generated the sort of discrepancies required to bring about mergers.
Merger for Growth
Another reason given by economist for companies wanting to go into vulontary merger is growth maximasation. This is based on the premise of seperation of ownership from control, shareholders seeking profit and managers seeking growth. The essence of the difference between growth and stockholders welfare maximising behaviour is the lower cost of capital or discount rate employed by growth maximising managers. The cost of capital or discount rate employed is lower for managers than for shareholders because the former only consider internal investment opportunities being interested in the growth of the firm they control , whereas the latter consider both internal and external investment opportunities, being interested in the return on their investment. The situation in Nigeria is that most of the banks operating in the country ownership have not been divourced from mangement. Most of the new generation banks are managed by their owners and most time professional managers are subjected to the control of the chairman who may know next to nothing in financial management. Mergers have not thrived as he should be because thase owners manager prefer to hol;d onto their investment even on the bick of collapse. Their attitude is such that they preffer to own nothing than own a frction of something. This attude explain why quite a few successful Nigeria businesses have failed to be listed on the Nigerian stock exchange. But with the new minimum equity requirement some banks are being forced by the circustance of the situation to start negotiation with other banks.
THe environment, uncertainty and rivalry
Changes in the environment in which a firm has been operating, which may include change in policy, merger by competitors, may cause a firm to experience increased uncertainty. Ofcourse this is the situation in the Nigeria banking industry as of today. Even before the CBN pronouncement, the banking public have been skeptical about many banks. Many are mot sure of which of the banks especially the banks that is healthy. With the CBN policy prescription another dimention was added to the level of uncertainty. The desire of the CBN to withdraw public sector funds from bank has brought about the question of continued survval of some banks which depends solely on public sector funds. These category of banks were referred to as rent seekers which depend on government funds for survival. For the class of banks owners are not sure of their continued existence. Similarly the bank public base on their experincde with some failed banks are not taking chances with banks as most have embarked on panic withdrawal of their deposit in banks they consider unsafe. This has added to the level of uncertainty in the industry.This increased uncertainty has produced a desire to merge in order to reduce uncerntainty. Many banks have initiated discussion on merger. Starting a discussion on merger is just a step and actual Merger occurs if the desire to merge is accompanied by managerial ability and willingness to carry through an actual merger. THe question is are the managers of these bank willing to merge?Are they ready to lose their lucrative jobs as managing directors? What about the pecusite of the office? This ability and willingness depends in part on the number of other mergers currently being undertaken and the extent of managerial uncertainty. Two processes are at work. On the one hand, as the degree of uncertainty increases the desire to merge increases; this tends to increase the number of actual mergers, and this in turn increases the degree of uncertainty. On the other hand, the more that uncertainty increases the more hesitancy there is in undertaking any actual merger, while the more actual mergers there are the lower is the ability to carry through further mergers. An increase in uncertainty sets in motion both a self-sustaining process of merger and pressures tending to curb that process.