In December 2021, Union Bank Plc announced that 3-year old Titan Trust Bank Ltd had acquired 89.39% of its share capital. The takeover will go down in history as one of the biggest upsets in Nigeria’s Merger & Acquisition (M&A) landscape. When considering mergers and acquisitions, Credit Rating Agencies (CRA) play a significant role.
Credit ratings contribute to the information set that bidders use to price targets. The presence of ratings significantly affects the premium paid in M&As. M&A premium paid are generally lower in deals involving rated entities as opposed to non-rated.
Studies have shown that the presence of ratings mitigate the problem of information asymmetry and allow bidders to pay a fair price for a target. The post-M&A performance of bidders of rated targets are also generally superior.
The presence of ratings and bidders post-M&A operating performance are generally positively related.
By using ratings as an independent, unbiased “second opinion”, a bidder can more accurately match the premium it pays to the true worth of the target. The overall result should be a more efficient allocation of capital.
Surendranath R. Jory, Thanh N. Ugo & Daphe Wang C.(2016), in a study titled “Credit Ratings and the Premiums Paid in M&As”, posited that “A bidder has every incentive to see that the amount paid for a target in an M&A transaction is a true reflection of its net-worth. In their attempt to minimize the likelihood of overpaying for target, bidders will benefit from the checks and balances performed by CRAs.”