Ayoade Mathews
One of the most challenging assignments for any corporate Board of Directors and Management Team is the strategic focus of the business that their shareholders have charged them with. This is characterized by the fact that within the same industry and given the same set of conditions, some companies perform exceptionally well while others fail miserably. Yet, a third group manages to just hang on. In a capitalist economy, those who fail get taken over either by new entrants, or those who survive. The Nigerian banking sector and the on-going recapitalization of those who failed offers a rare situational case study of this phenomenon.
Two financial institutions – Citibank and Standard Chartered, have decided to stay small. They are not retail focused – and in at least one case, closed a number of retail accounts – and are able to use their extensive international network and lower cost of dollar funding to win lucrative corporate business. Whether by choice or circumstances, they have maintained that profile and with their relatively small balance sheet size, achieve returns on equity of over 20% per year. They are sitting on the sidelines and watching the process unfold.
Our indigenous champions, the new tier 1 Banks – GTB, UBA, First Bank, Zenith and Stanbic IBTC have travelled different paths to their leadership positions but find themselves in unusual circumstances. UBA has been built over time through acquisitions and now boasts the most number of branches as well as the most extensive regional and foreign network. Institutionally, they have decided to forego short term profitability and focus on long-term scale and reach.
GTB and Zenith, on the other hand, have built successful organizations based on organic growth. Their Board of Directors have decided that their focus and attention is best trained on execution and organic expansion and true to form, they have stayed away from the current banking consolidation. While perfectly understandable from a shareholder’s perspective, it is nevertheless a loss to the industry that such strong hands are on the sidelines.
First Bank views itself as a scale player but lags far behind UBA on branch network. They appear to be looking to use this opportunity to close that gap and also extend their leadership in size. They are therefore focused on the larger institutions like an Oceanic. They do not have a traditional history of growth through acquisitions but appear to have management depth. If structured primarily as a branch network expansion, they could be fine. Stanbic IBTC on the other hand, has a limited branch network but national ambitions of scale and size. For them as well, an institution like Oceanic gets them there. They have also recently completed the acquisition of IBTC which compared to a potential elephant-sized Oceanic transaction, is mouse-sized. However, Stanbic IBTC has global reach and resources and that should help an integration process.
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The other local players range from Access, the largest and arguably most aggressive of the bunch, to EcoBank, the subsidiary of a regional player. Some of them managed to squeeze through the CBN audit of last year and have been given a second chance. Let’s see what a select few of them are now trying to do.
Sterling, for example, is not participating in this banking consolidation. Being a product of a fairly recent amalgamation, they understand the challenges of merging cultures, technology and people while maintaining operational integrity and are focused on their core business. This appears to be a smart decision for an institution that knows itself well. Some shareholders might be concerned about their bank being left behind. However, the two focused foreign players and GTB demonstrate every quarter that being left behind could be very profitable.
Ike and Herbert, true to their aggressive expansionist strategy, are heavily invested in the process and looking at several options. Their institution is on the outside looking into the top echelon of banks and they appear to want a seat at that table. They do have a history of acquisition, which was how they got their start but institutionally, have not grown that way. Thus, their attempt to add size through a PHB or Intercontinental is a rather bold move. For shareholders, this is a potential game changer.
FCMB and Fidelity are also aggressively in the mix. For their size and market positioning, this is another strategy worth thinking about. The obvious reason appears to be growth and size. However, although almost every institution that they go after will more than double their size, they will still remain smaller than the top institutions. Obviously, they have decided that is a good place to be and like all mergers, the verdict is still out.
For all the potential bidders in this process, there are still a number of questions that will need to be answered. First, how will you pay for this acquisition? Most likely it will be a combination of cash and equity – after all, what is the use of the equity if not for this. This scenario however, puts them all under the microscope. This is because the Board of Directors of the various target banks are obliged to retain advisors – legal, financial and accounting, to conduct appropriate due diligence on the buyers to ascertain the real value of the equity being offered. Considering the fact that some of these institutions are either not profitable or trading under 1.0x book, the market has definitely taken a view on them.
Additionally, this reverse due diligence will also answer another important question, “Do I want to be married to these people?” The very nature of this question gets us to very different answers. The Board of Directors of the target bank, in answering this question, will have to decide if the acquirer has the right strategy, whether this is a partnership or an outright acquisition, and more importantly, whether the combined futures are brighter together. Some of these are subjective to be sure but that is the value of an experienced Board. Thus, even though some of the financial proposals might appear better on paper, the net effect of the combination could be worse for both parties.
Finally, the Board of the target banks will have to answer a few questions – “Is this the best solution for the bank?” “Would we be better off with new blood and new cash?” “Is the current CBN appointed management team doing a good enough job to be allowed to raise money?” I would love to be a fly on the wall in the Boardroom when the Board, advisors and CBN representatives (if they are allowed to) have this discussion.
If any of the Boards inadvertently skip rigorous due diligence or satisfactory answers to these issues, the consequences will be dire – it will shatter the long term interest of all shareholders and call to question the rationale for the fight of the past one year.
