Abnormal returns refers to the excess returns that are generated by an investment over and above the expected return. Abnormal returns are positive if the actual returns are higher than the expected and negative if the actual returns are lower than the expected returns. This section seeks to compare the pre merger and post merger abnormal returns of the Access Bank of Nigeria. It also seeks to analyze how abnormal returns relate to mergers and acquisition.
In July 2004, the Central Bank of Nigeria (CBN) announced a new bank policy on the minimum paid-up capital requirement of banks in Nigeria. The policy raised the minimum paid-up capital to N25 billion from the previous N2 billion. The policy aimed at enhancing the effectiveness and financial capacity of the country’s banking sector. Banks were given up to December 31, 2005 to comply with the new policy. In a bid to meet the set deadline, most Nigerian banks engaged in a form of merger and acquisition, public offering or a combination of both. One such bank was Access Bank Nigeria Plc. Access Bank merged with Capital Bank and Marina International Bank to form Access Bank Nigeria Plc in 2005. Access Bank Plc experienced positive abnormal returns between the years 2004/2005 and 20006/2007. The most logical and obvious explanation is that the significant improvement in performance attracted more investors to their counter. The high demand pushed the share price up hence increasing the actual returns above the expected.
The annual reports of Access Bank Nigeria Plc for the financial years 2004/2005 and 2006/2007 indicate a remarkable improvement in the post merger period. The return on average equity (pre-tax) for the financial year ended 31 march, 2005 was 5.3%. On the other hand, the return on average equity (pre-tax) for the financial year ended 31 march, 2007 was an abnormal return of 28.3%. This could be attributed to the major improvements in the financial performance between the two periods. The gross earnings increased from 7,945 million in the financial year 2004/2005 to 27,881 million in the financial year 2006/2007. The net interest income after deducting interest expense also increased from 2,353 million in the financial year ended 2005 to 11,942 million in the financial year ended 2007. Other income equally increased from 3,566 million to 10,988 million. The improvement in financial performance could have raised shareholders expectations of higher dividend cash flows which pushed prices up.
The abnormal returns of Access bank Nigeria Plc in the financial year ended 2007 could be attributed to the expectation of shareholders that synergies will result from mergers. This can be explained by the efficiency theory. Mergers result in three forms of synergies; revenues, expenses and cost of capital. When two or more companies combine they are likely to realize higher revenues as compared to when they operate separately. This could explain the drastic improvement in the revenues of Access bank Plc after the merger. The bank had a larger market share, a wider spread of branches geographically and a superior market positioning after the merger. Leveraging on a consolidated balance sheet size and shareholder’s equity also meant that the bank could increase credit to a wider spectrum of borrowers.Combining two or more companies also results in lower expenses as compared to if the companies operated separately. This could be attributed to economies of scale that resulted from an increased scale of operation and improved operating efficiencies. Cost savings also results from elimination of services that have became redundant as a result of the merger. Such services include accounting, human resource and information technology.
Cost of capital for the consolidated company after a merger is likely to be lower than the individual companies’ cost of capital. The interest expense in proportion to interest income of Access Bank Plc reduced from 40% in 2004/2005 to 29% in 2006/2007. This could be attributed to improved liquidity position in the post merger period. Improved liquidity position lowers the liquidity risk because a firm is less likely to be unable to settle short term debts when they fall due. Lower liquidity risk lowers the risk premium; therefore, the firm is able to obtain capital more cheaply. These synergies could have raised shareholders optimism of the performance of Access Bank Plc in the future which put an upward pressure on stock prices.
The abnormal returns of Access Bank Nigeria Plc could also be explained by strategic reasons. The first strategic reason is organizational competencies. Mergers and acquisitions improve the skills, knowledge base and business intelligence to the consolidated company. The abnormal returns of Access Bank Plc in the post merger period could be attributed to combined intellectual capital of the banks that merged which improved development and innovative thinking within the company. The other strategic reason that could have lead to financial success of Access Bank Plc in the post merger period is gap filling. Every company has its own unique weakness which may be strength in another company. By combining two or more companies, each of the companies would fill-in the strategic gaps. This will not only result in improved financial performance but also ensure long-term survival. This could have made the counter attractive to investors putting an upward pressure on Acess Bank Plc shares.
In conclusion, it is evident that Access Bank Plc realized significant abnormal returns in the post merger period. This could be attributed to change in fundamental and a positive improvement in investors’ sentiments about Access Bank Plc future caused by the reasons discussed above.
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