CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

A sound and competent banking sector is essential for a stable macroeconomic environment, therefore, the importance of commercial banks in a country cannot be overemphasized, because they occupy key positions in a country’s financial system and are essential agents that would lead to the growth of any economy (Oloye & Osuma, 2015). Commercial banks also act as the agents of financial intermediation within a country by moving funds between the surplus and the deficit sectors within an economy and they facilitate the implementation of monetary policies.

Banks mobilize and facilitate the efficient allocation of national savings, thereby increasing the quantum of investments and hence national output (Afolabi, 2004). Through financial intermediation; banks facilitate capital formation (investment) and promote economic growth (Olagunju & Adebayo, 2012). Prequel to the above statements, commercial banks have experienced a lot of banking hardship, especially between the decade (1993-2003) which was tagged the era of bank distress which became a source of concern not only to the regulatory bodies (Central Bank of Nigeria, Nigeria Deposit Insurance Commission etc.) but also to the general public and the policy analyst. Therefore, there was a need for the overhaul of the Nigerian banking sector in order to restore the already dying confidence of the general public and other foreign investors who could not sleep with their two eyes closed as a result of the weak financial system that Nigeria operated. 

The Central Bank of Nigeria (CBN) as a regulatory body came up with the recapitalization and consolidation exercise in the banking industry under the leadership of the then governor of CBN Professor Charles Soludo who called on banks to increase their paid-up capital through public offers or corporate restructuring exercise (mergers and acquisition) with the view of eradicating the expansion bottlenecks, volatility between the deposit and lending rates and some other constraints faced by the banks. This made some of the commercial banks to consider Merger and Acquisition as a survival strategy. This reform was announced by Professor Chukwuma Soludo on July 6th 2004 that the Nigerian commercial banks should beef up their minimum capital base from N2billion to N25 billion on or before 31st December 2005, with the major objective of creating a sound and a more secure banking system which will strengthen our financial system that depositors can trust. This will enhance the operational capital base of the Nigerian banks. A total of 89 commercial banks were in existence in Nigeria before the announcement in 2004. According to CBN report, 25 banks emerged at the end of the consolidation exercise from the previous 89 banks, while 14 banks liquidated. The 14 banks under liquidation include: Fortune Bank, Gulf Bank, Liberty Bank, Triumph Bank, Metropolitan Bank, Trade Bank, Afex Bank, City Express Bank, Eagle Bank, Societe Generale Bank of Nigeria, Assurance Bank, All State Trust Bank, Hallmark Bank and Lead Bank. The number of banks further declined to 24 in 2007 following the market induced merger of IBTC Chartered Bank PLC with Stanbic Bank Ltd.

Merger and acquisition as a means of corporate restructuring exercise have been known to provide some forms of economic and financial benefits such as; economies of scale, risk diversification, ability to compete locally and internationally with other banks (John & Acha, 2012).

1.2 Statement of Problem

A strong and virile economy depends to a very large extent on a robust, stable and reliable financial system, particularly the banking sector. With the successful recapitalization exercise, commercial banks in Nigeria were expected to be virile and optimally efficient. But how far the exercise has made commercial banks in Nigeria to be virile, sound, strong and efficient so as to maximise their contribution to the growth of the economy is not very clear. It is in the light of the above that this study seeks to evaluate the effects of mergers and acquisitions on the growth banks in Nigeria.

1.3 Research Questions

Based on the problems identified above, the following research questions were raised for the study;

i. Is there any significant difference between Nigerian banks’ capital adequacy before and after merger or acquisition? 

ii. Is there any significant difference between Nigerian banks’ return on performing loan before and after merger or acquisition?

iii. Is there any significant difference between Nigerian banks’ return on assets before and after merger or acquisition?

1.4 Objectives of the Study

The broad objective of this study is to examine the effect of mergers and acquisitions on the growth of Nigerian banks. However, the following specific objectives were raised;

i. Examine whether there is a difference between banks’ capital adequacy management before and post-merger. 

ii. Determine the difference in pre and post-merger return on performing loans of banks.

iii. Determine if there is a significant difference in banks’ return on asset pre-merger and post-merger.

1.5 Hypotheses of the Study

For the purpose of this study, the following null hypotheses were raised;

H01: There is no significant difference between Nigerian banks’ capital adequacy management before and after merger or acquisition 

H02: There is no significant difference between banks pre and post-merger return on performing loans.

H03: There is no significant difference between banks pre and post-merger return on assets.

1.6 Justification of Study

Quite a number of research have been carried out in relation to this topic such as Oloye and Osuwa (2015) who thoroughly examined the impact of mergers and acquisition on the performance of Nigerian banks. In the same vein, many other authors have reviewed similar subjects. This research however seeks to examine deeply the effect of mergers and acquisitions on the performance of commercial banks. The outcome of this study could be beneficial to managers, investors, entrepreneurs and other stakeholders in the Nigerian banking system as it will help to understand and see the importance of synergy which will lead to the better performance of the banks involved and the Nigerian banking system as a whole.

1.7 Scope of the Study 

Numerous mergers and acquisitions of banks have taken place since the inception of banking in Nigeria in the year 1896. The most of the mergers and acquisition activities took place in the year 2004-2005 when the Federal Government of Nigeria through the Central Bank of Nigeria enforced a minimum capital base of ₦25 Billion on commercial banks operating in Nigeria. However, due to the distance in time, the mergers and acquisitions that occurred in that time will not be considered but latter M&A. For the purpose of this study, the acquisition and merger activities that occurred between the years 2011-2015 were reviewed.

1.8 Definition of Terms

Mergers: A merger is said to occur when two or more companies combine into one company.

There are two forms of merger; Merger through absorption is a combination of two or more companies into an existing company whereby only one company retains its identity and the rest loses theirs while merger through consolidation is a combination of two or more companies to form a new one. In this type of merger all companies are legally dissolved and a new entity is formed. In a consolidation, the acquired company transfers its assets, liabilities and shares to the new company. 

Acquisition: Acquisition may be defined as an act of acquiring effective control over asset or management of a company by another company without any combination of businesses or companies. It is also defined as the process of taking a controlling interest in a business (Dictionary of Finance and Banking).

Takeover: A takeover can be said to be an acquisition. A takeover occurs when the acquiring firm takes over the control of the target firm. In some case it can be said to be an assumption of control of a corporation achieved by buying a majority of its shares (Encarta dictionary), a takeover can also be a conglomerate merger.

Corporate restructuring: Corporate restructuring can also be termed business combination and it includes merger and acquisition (M&A), amalgamation, takeover, leveraged buyouts, capital reorganization, sale of business units and assets etc.

Return on asset: Statistic calculated by dividing a company’s annual earnings by its total assets. It indicates how profitable a company is relative to its total assets (Encarta dictionary).

Return on equity: The return on equity is net profit after tax divided by shareholders’ equity which is given by net worth. This is the net income of an organization expressed as a percentage of its equity capital, i.e. it indicates how well the firm has used the resource for owners (shareholders).

Recapitalization: This is defined as the process of changing the balance of the debt (leverage) and equity financing of a company without changing the total amount of capital. Recapitalization is often required as part of reorganization of a company under bankruptcy legislation.

Consolidation: Consolidation is a combination of two or more companies into a new company. In this form of merger, all companies are legally dissolved and a new entity is created. In a consolidation the acquired company transfers its assets, liabilities and shares to the new company for cash or exchange of shares.

1.9 Plan of the Study

This study comprise chapters one to five.  The chapter one is the introduction which entails the statement of problems, the objectives, the research questions as well as the hypotheses of the study amongst others.  The second chapter is the relevant literature to the study.  The theoretical, empirical as well as the conceptual framework were examined in this chapter. The third chapter, chapter three is the methodology in which the sample size and technique were highlighted. In this chapter, the method of data collection and analysis were indicated. The second to the last chapter, chapter four is the data analysis, presentation and interpretation. Lastly, chapter five comprise the summary, conclusion and recommendations of the study.