Globally, business combination strategy is one of the tools financial institutions adopt to increase revenues, minimise cost and enhance their market share, writes Obinna Chima
Nigeria’s banking sector has seen tremendous development in the past few years.
No doubt, the impact of globalisation has caused many changes in terms of regulations and structure in the sector.
As a result of this, institutions have continued to adopt different strategies to remain efficient and also to ensure they develop leading brands. One of such strategies is merger and acquisition.
Swati Pawar, in a paper titled: “Merger and Acquisition Strategies in Banking Industry: Issues and Implications,” pointed out that hardly does a week or two pass that there is no news of mergers and acquisitions globally.
According to her, mergers result in reduction in the number of banks, but an increase in the size of the merged institutions.
Pawar, also noted that such inorganic growth strategy has become the most significant measure to create world class banking system.
Some other objectives behind mergers in banks includes increasing customer base and expanding into new activities.
Another important advantage of merger is that the process reduces competition and eliminates competitors from the banking industry.
Clearly, these strategic benefits are the factors that influenced the ongoing business combination deal between Access Bank Plc and Diamond Bank Plc.
The deal which aims to produce Africa’s largest retail bank by customer base would be concluded in April, two months earlier than initially expected.
Based on the agreement reached by the Boards of the two financial institutions, Diamond Bank shareholders would receive a consideration of N3.13 per share, comprising N1 per share in cash and the allotment of two New Access Bank ordinary shares for every seven Diamond Bank ordinary shares held as at the Implementation Date.
The offer represents a premium of 260 per cent to the closing market price of N0.87 per share of Diamond Bank on the NSE as of December 13, 2018, the date of the final binding offer.
Immediately following completion of the merger, Diamond Bank would be absorbed into Access Bank and it will cease to exist under Nigerian law.
Embracing the Future
Group Managing Director/Chief Executive Officer, Access Bank, Mr. Herbert Wigwe, pointed out that the combined enterprise would be a large and diversified bank with an extremely extensive retail footprint.
He added, “Together, we would have 27 million customers, which is the largest customer base of any bank on the continent. We would have 33,000 point of sale (PoS) terminals, 3,300 automated teller machines (ATMs) and all of that.
“Of course, we have obtained a ‘no objection’ letter from the Central Bank of Nigeria, which is a very important part of the approval process.
“Access Bank has grown over time and has built a very strong wholesale banking capability. We have also shown significant expertise as far as treasury is concerned, risk management as well as our capital management plan.
“We created and pushed a very strong value chain strategy which was our own way of building our retail business.
“This was because we realised that the creation of a large diversified bank is critical, not just for Nigeria, but in Africa and the world. If you go to any part of the world, what you tend to see is that the top three or top five banks technically control market share.”
Speaking further, Wigwe said the combination of Access Bank and Diamond Bank would ensure that “we are able to take and solve customers’ issues right from the wholesale end, down to the man in the village, just because of the use of technology.”
He expressed optimism that the process of combining both institutions would not pose any challenge.
According to him, “For us, we have built a very strong capability as far as mergers and acquisitions are concerned. One of the benefits we have is the fact that having done it before, we have learnt from the mistakes of the past and the benefits of what had been.
“So, integrating Diamond Bank is going to be better than all the ones we have done in the past. The Intercontinental Bank transaction gave us the learning point we needed as far as this transaction is concerned. Our expectation is that this transaction will be finished before the end of next year.”
He assured staff of Diamond Bank that the motive of the deal was not to throw workers out of jobs.
On his part, the Chief Executive Officer of Diamond Bank Plc, Mr. Uzoma Dozie, said the deal was driven by value.
He stated, “The merger is positive for all of Diamond Bank stakeholders, including customers, employees and shareholders. In particular, customers will benefit significantly through the unrivalled combination of the best of Diamond Bank’s retail and digital leadership with the size of Access Bank’s balance sheet, corporate names and geographical reach.
“In reaching this decision, the shared passion for leveraging Nigeria’s youthful and entrepreneurial talent, and a commitment to better outcomes through financial inclusion have convinced us that this is the right combination.
“I believe that the combination of two strong and admired brands, with shared values and complementary strengths, will be a strong force for positive change in the Nigerian and African retail landscape. As a result, this merger creates significant potential for sustainable long-term growth which stands to benefit customers, employees and shareholders alike.”
The Deputy Managing Director of Access Bank, Mr. Roosevelt Ogbonna, also said the deal would create value, saying ultimately the main beneficiaries would be the shareholders.
“This is not about ego, but about creating value for our shareholders,” he added.
Benefit for Industry
One of the leading global rating agencies, Moody’s Investors Service, stated that the deal was “credit positive” for the overall Nigerian banking system.
In its review of the deal, Moody’s stated: “We view the potential merger of Access Bank Plc and Diamond Bank Plc, two of Nigeria’s systemically important banks, as credit positive for the Nigerian banking system overall.”
Also, the Chief Executive Officer of Cowry Assets Management Limited, Mr. Johnson Chukwu, hailed the deal.
“Diamond Bank had huge non-performing loans (NPLs) which were weighing down the performance of the bank. And when you have huge NPLs, it leads you to lose your liquidity.
“Diamond Bank was already having some stress as a result of high NPLs. But this for me was one of the easiest and smoothest ways to resolve an emerging banking crisis.
“The reality is that the bank had challenges and took a wise decision, instead of waiting for the central bank to intervene and drive its consolidation. For Diamond Bank, this was a good deal for its shareholders and directors,” Chukwu explained.
On their part, analysts at Lagos-based CSL Stockbrokers Limited, stated that Diamond Bank shareholders stand to benefit considerably from the merger, considering that the offer was at a premium of 260 per cent over the market price as at the date of the final binding offer (December 13) while Access Bank was priced at market price.
The financial advisory firm noted in a report that the transaction would be, if it goes ahead seamlessly, a good strategic deal for the shareholders of both entities.
“Diamond Bank shareholders apart from getting a premium at the point of merger over current holdings will also in the long term stand to benefit from expected positive synergies from the merger.
“Access Bank on the other hand stands to benefit considerably from Diamond Bank’s strong retail franchise.
“Diamond Bank has a strong retail franchise especially on the liability side giving it the lowest funding cost among peers.
“A merger with Access Bank, which still has a relatively high funding cost will be positive for Access Bank and in the long run, for the shareholders of the bank,” it explained.
They, however, pointed out that mergers and acquisitions are complex and “we do not expect to begin to see synergic benefits translate into profit in the near term.”
“We also expect that integration issues which are not strange to Access Bank, considering its prior acquisition of Intercontinental Bank, will slow down growth of the combined entity in the near term,” the firm added.
Also, Prof. Uche Uwaleke of the Banking and Finance Department, Nasarawa State University, welcomed the merger.
He said: “Given the strengths of the two banks, there is little doubt that the union involving Access Bank’s strong fundamentals with CAR of over 20 per cent and Diamond Bank’s digital-driven services will produce synergies that will be positive for financial inclusion in Nigeria.”
Uwaleke added that the scheme of the merger is a win-win for the shareholders of the two banks.