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When the announcement of the new capital requirement of GH¢400m for all commercial banks in the country was made by Governor of Bank of Ghana in September last year, it became apparent that the financial landscape will witness some wrenching changes. Truly, the industry is currently undergoing such tempestuous and tortuous moments that had never happened.

Now, the market is agog with customers’ apprehension arising from insolvency of some banks which led to the establishment of the Consolidated Bank. Both local and international observers are keenly expectant of the banks that will meet the new minimum capital requirement and be in existence by January 2019.

According to the speech by the Governor of the Bank of Ghana on the state of the financial sector in Ghana, the financial sector was characterized by lack of corporate governance, co-mingling of board and management responsibilities which significantly undermined credit and risk management policies, owner/management conflicts, connected lending practices without due processes laid down to guide such practices, poor banking practices, coupled with weak supervision and regulation by the Bank of Ghana. These factors have significantly undermined the stability of the banking and other non-bank financial institutions in the country.

In order to drive the objectives of the new capital requirement, the Bank of Ghana has implemented some initiatives within the last eighteen months purposely to ensure that the process is successful. Among these initiatives are issuance of guidelines on Corporate Governance, Fit and Proper, Basel Regulatory and Capital requirement, Merger and Acquisition, Basel II/III supervisory framework and implementation of IFRS9 by Banks, establishment of Ethics and Internal investigation unit in the Bank of Ghana and many others. It must be posited that these reforms are beginning to douse the hitherto tense and apprehensive environment thereby improving confidence in the financial services sector.

Historically, mergers and acquisitions are almost always an offshoot of a steep increase in capital requirement in many jurisdictions especially in the financial services sector. For instance, when share capital of banks in Nigeria was increased from N2b to N25billion in 2005, the number of banks reduced from 89 to 25 (only five banks did not merge nor were they acquired).

Mergers and Acquisitions have happened and is also currently underway in Kenya where the commercial banks have up to December 2018 to raise minimum shareholders’ funds to Sh5 billion from the current level of Sh1 billion. Under this scenario, some of the reasons for mergers and acquisitions are to meet the increased levels of share capital; expand distribution network and market share; and to benefit from best global practices among others.

It is imperative for the owners of banks that will be involved in Mergers and Acquisitions (M&A) to meet the new minimum capital requirement to consider some salient factors before the consummation of such deals. The appointment of seasoned experts by both the target and the acquirer is ‘sine qua non’ for an effective and successful M&A to happen. These experts including financial adviser, Legal adviser as well as transaction assurance are to provide a systematic, orderly approach and best global practices in executing mergers and acquisitions transactions. The success or otherwise of a merger deal depends heavily on the services provided by these experts although it may increase the pre-acquisition cost.

Head of terms and valuation reports are critical documents for both parties in M&A discussion. The Head of Terms which should be prepared by Legal advisers of both entities will clearly document the nature and conditions of the proposed transactions vis a vis the post- merger shareholding structures, the timelines for the execution of the transaction, the responsibility of each party as it relates to cost and confidentiality and the governing laws. Essentially, this document is to guarantee understanding of the details of the transaction by both parties from the initiation to the end.

The valuation report of each entity before merger discussions is to determine the equity value at which the complete ownership of the banks would change hands. This valuation goes beyond the current balance sheet of the entities because many factors including historical performances as well as trading multiples of comparable entities would be considered in arriving at appropriate equity values of each entity.  It is important that both parties agree and sign off on the valuation report because differences in opinion on valuations, have been seen to impact deal closure.

The critical exercise for a merger and acquisition is Due Diligence (DD) because it helps both the target and the acquirer to identify potential issues earlier rather than discovering them after the deal as well; as it helps to address all identified risks appropriately. This exercise must cover all aspects of the banking activities including Financial, Tax, Human Resources, Information Technology, Governance, Anti-Money Laundering, Risk Governance Framework, Environmental Issues, Material Contracts, Related Party Transactions, compliance with regulations, properties and many others.

The report of the Due Diligence should elicit issues including Net Asset Value, inherent risks, customers’ segmentation and business opportunities for discussion, negotiation and agreement by both parties. The decision to go forward or cancel the deal is actually determined at this stage. Therefore, it is obligatory on the two parties to take this aspect of the merger and acquisition much more seriously than any other aspect of the process.   

Beyond the immediate need of meeting the minimum capital requirement, it is equally important to consider the strategic fit of the target within the larger buyer organization in term of products, services, technology, branch network as well as people. The more these items are complementary and similar, the lower the cost and period of integration process. At this stage, the buying/acquiring party should carry out an in-depth analysis to identify and quantify the anticipated synergies either in term of economies of scale, efficiency, cost, capital and revenue. This will also create a platform or roadmap to measure post acquisition benefits whether they are within the set horizons. Aptly put, there should be a cogent business strategy with a clear value-creating plan that is aligned to the acquirer’s business objectives.

Before the completion of the merger exercise, there should also be an integration planning/discussion at the senior management level with representatives from both entities to thrash out strategic issues involving consolidation of duplicated products and services, deciding on who will lead the new organization, prevention of flight of key personnel, retention and preservation of customers’ confidence as well as consolidation of compensation plans, corporate policies and operating procedures.

These insights are to guide the banks that are currently contemplating or would be involved in merger and acquisition either to meet the increase in share capital requirement or to scale up their businesses. Paying careful attention to and implementing these processes will largely bring about the much anticipated synergies of the merger and acquisition.