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The uneasy process of acquiring bailed out banks
January 19, 2010

Recently Fidelity bank announced that its management has informed the Central Bank of Nigeria (CBN) of their intention to acquire one of the nine bailed out banks.  While it is great that a domestic rather than a foreign bank is interested in acquiring one of these bailed out banks, it is important that any acquiring bank must have the wherewithal to buy or assume the assets and liabilities of the target bank.
For example, in a recently published newspaper story, the Banks Representative, Reginald Ihejiahi, MD & CEO, stated that " whereas past takeovers of failed banks in Nigeria involved buying assets of institutions whose licenses had been revoked, the nine rescued banks still had shareholders, meaning the acquisition process would be more complicated. He further noted that "This is the first time that we are seeing this sort of structure," he said. "I wouldn't call it a concern, I would classify it as an issue that has to be on the checklist and see how it is treated and how it is going to be considered for anybody who is making a bid in a circumstance that is new".

Although Mr. Ihejiahi's, MD & CEO, assertion that past takeovers in Nigeria involved the acquisition of the assets of failed banks is partially correct, his claim that acquiring an institution with existing shareholders will be complicated because it is the first time we are seeing this type of structure in Nigeria is not necessarily correct. Although, there has probably not been an instance where an NSE listed company has acquired 100 percent of another NSE listed company,  Bank PHB successfully acquired a majority stake in Spring Bank Plc in  2008 by increasing its stake in the bank from 33 percent to more than 51 per cent through the purchase of three billion additional shares of the bank in a N21 billion naira transaction. Although the acquisition process was later adjudged to be flawed because Bank PHB did not perform a detailed due diligence, we have a domestic test case that can be utilized as a starting point of reference. Additionally, acquisition of publicly traded companies with existing shareholders, assets, and liabilities are not new. These are constant and continual occurrences worldwide and the CBN will have lots of experts to consult during this process.

 In considering the merger or acquisition of a company, there are three primary methods that are commonly utilized:
• Option #1: Acquiring all assets and liabilities of a firm through the use of cash/or securities. At the conclusion of this process, the target company ceases to exist and the current shareholders receive cash/or securities. This acquisition method requires at least 50 percent approval of the current shareholders.
• Option #2: Acquiring firms can use a tender offer by buying shares directly from shareholders and by passing the management of the company.
• Option#3:The acquirer can directly purchase the assets of the target firm and payment is made to the firm rather than directly to its stockholders
The best method to safeguard the interest of the existing shareholders is option #1, because it requires the approval of current shareholders and allows the current shareholders to either accept cash, or exchange their existing shares for the shares of the acquiring firm.  Although, in a normal situation when companies are acquiring financially strong or stable companies, the acquiring firm usually pays more than the current share price of the target firm. However  in the case of these bailed out banks,  most of the acquiring banks will probably have to pay less than their current share price because of CBN's cash infusion, large amounts of non-performing loans, and the possibility of large recorded/unrecorded liabilities that are over hangs for most of the bailed out institutions.
Regardless of the circumstances surrounding most of the bailed out institutions, it will be a very expensive venture for any of the non-bailed out banks to purchase one of their bailed out "brethren". From the acquiring company's viewpoint, share dilution and earnings-per-share calculations should predominate the decision making process. The acquiring bank's considerations should focus on the number of shares to be issued (i.e., the fixed ratio of acquiring company shares to be issued for each target company share). It is usually not advisable in a merger situation for the acquiring firm to issue new shares greater than 20 per cent of their pre-deal total outstanding.

Although, Fidelity Bank have not mentioned their target bank, it seems very unlikely that it will be any of the first five banks that were bailed out by the CBN based on the calculation presented in the schedule below.
 As noted in the above schedule, of the first five bailed out banks, the least expense for Fidelity Bank to acquire will be Finbank, since it will require approximately N56.8 billion (not taking into consideration other liabilities). Additionally, the transaction will add approximately eight per cent (pro-rated) additional shares to the current 34 billion outstanding shares of Fidelity Bank which is below the 20 per cent reasonable threshold.  Although, the CBN has not made it clear how the funds injected into the bailed out banks will be handled, we incorporated the funds in the above calculation.

In conclusion, I believe that while it might be best for the current shareholders and the country for some of the non-bailed out banks to acquire the bailed out banks, these banks should consider the dilutive impact the transaction will have on their existing shareholders and understand there is usually extreme difficulty in merging the business cultures of both institutions after an acquisition.

The Financial Standard, Tuesday January 19, 2010

 

 

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