1.1 Background to the Study
The banking sector plays a pivotal role in any economy worldwide. They play a fundamental role in the financial intermediation process in the economy through the enhancement of a link between the surplus and deficit unit in the economy. In line with this submission Onikoyi (2012) assert that the economies of all market-oriented nations depend on the efficient operation of complex and delicately balance systems of money and credit. Banks are an indispensable element in these systems. They provide the bulk of the money supply as well as the primary means of facilitating the flow of credit. Consequently, it is submitted that the economic well being of a nation is a function of advancement and development of her banking industry (Obadan, 1997).
According to Oloye and Osuma (2015) the Central Bank of Nigeria (CBN) as a regulatory body came up with the recapitalization and consolidation exercise in the banking industry requesting banks to increase their paid-up capital through public offers or corporate restructuring exercise (merger 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 as stipulated by the apex monetary authority in 2004 mandated Nigerian commercial banks to beef up their minimum capital base from N2billion to N25billion 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.
Oloye and Osuma (2015) posit that the recapitalization resulted to 25 banks at the end of the consolidation exercise from the previous 89 banks while 14 banks liquidated. The number of banks further declined to 24 in 2007 following the market induced merger of IBTC Chartered Bank PLC with Stanbic Bank Ltd. In 2014, Skye Bank and Heritage bank performed a near impossible feat of acquiring Mainstreet (Hitherto Afribank) and Enterprise Bank( Hitherto spring bank) respectively. Thus, the surviving number of banks in Nigeria is 20.
According to John, Udoidem and Acha (2012) 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. Nigeria Deposit Insurance Corporation (NDIC, 2009) outlined some specific reasons for consolidation which includes the following:
- To halt the incessant bout of distress
- To promote competitiveness and transparency in the sector;
- To enable the sector effectively play its developmental role in the economy;
- To strengthen the sector to be an active participant in the regional and global financial system and
- To enhance public confidence in the banking industry.
Oloye and Osuma (2015) assert that synergy has been one of the key benefits of merger and acquisition, which includes: rapid growth, stronger capital base, economies of scale through greater output, ability to compete favorably with foreign banks etc. Since the importance of consolidation (merger and acquisition) as a measure of revamping the banking sector cannot be overemphasized, this topic became an area of interest to assess the benefits/consequences (impacts) of mergers and acquisitions on the performance of the commercial banking sector in Nigeria.
1.2 Statement of the Problem
The emergence of bank mergers and acquisitions in Nigeria is attracting much attention, partly because of heightened interest in what motivates firms to merge and how merger and acquisition affects performance or efficiency. The capitalization policy of the Nigerian government through central bank of Nigeria as its regulatory agencies on banking sector reform had forced many banks to merge or be acquired which resulted to the formation of Mega banks. Most Nigerian banks were becoming personalized in ownership and management structure which made the banks incapable to finance large scale and long term projects due to limited liquidity at their disposal. The sector was characterized with import financing rather than encouraging domestic growth in the economy; there was loss of public confidence due to fear of liquidation, customer dissatisfaction on banking services as well as some obnoxious, unprofessional and other sharp practices within the industry. All these caused great distortion in the financial system resulting to financial inefficiency, which made investors not to get constant and high dividends as a result of inefficiency in terms of gross earnings, profit after tax and net assets. In line with the aforementioned, this study attempts to investigate the effect of merger and acquisition of the performance of Nigerian bank.
1.3 Aim and Objectives of the Study
The general objective is to investigate the effect of merger and acquisition of the performance of Nigerian bank.
However the following specific objectives will be examined
- To examine the effects of merger on return on equity of Nigerian banking sector in the pre and post merger era.
- To assess the effects of merger on return on asset of Nigerian banking sector in the pre and post merger era.
- To ascertain the effects of merger on profit after tax of Nigerian banking sector in the pre and post merger era.
1.4 Relevant Research Questions
The following research questions will be answered in the study;
- What is the effect of merger on return on equity of Nigerian banking sector in the pre and post merger era?
- What is the effect of merger on return on asset of Nigerian banking sector in the pre and post merger era?
- What is the effect of merger on profit after tax of Nigerian banking sector in the pre and post merger era?
1.5 Relevant Research Hypotheses
The following hypotheses will be tested in the study;
H0: Merger and acquisition does not have significant impact on return on equity of Nigerian banking sector in the pre and post merger era.
H1: Merger and acquisition have significant impact on return on equity of Nigerian banking sector in the pre and post merger era.
H0: Merger and acquisition does not have significant impact on return on asset of Nigerian banking sector in the pre and post merger era.
H1: Merger and acquisition have significant impact on return on asset of Nigerian banking sector in the pre and post merger era.
H0: Merger and acquisition does not have significant impact on profit after tax of Nigerian banking sector in the pre and post merger era.
H1: Merger and acquisition have significant impact on profit after tax of Nigerian banking sector in the pre and post merger era.
1.6 Significance of the Study
The significance can thus be summarized as follows:
The findings generated in this study may be used to test the effect of merger and acquisition in the banking sector with emphasis on selected banks in Nigeria which representing banking institutions in developing economies. Because of the immense contribution of the capital market in the bank recapitalization, this study will create more awareness of the opportunities to the investing public on benefits of investing in the banking industry that emerged from the merger and acquisition process. The study will acquaint investors/suppliers of fund on the relevant information to help them make good investment decisions in institutions that emerged from the merger and acquisition exercise. The study will also lead to improved technical knowhow in the banking industry. This study will in addition service as a guide and a reference material to other students conducting similar research work on the same or related topic.
1.7 Scope of the Study
This study seeks to investigate the effect of merger and acquisition of the performance of Nigerian bank. To achieve the objectives of this study, the scope will be limited to Access Bank Nigeria Plc. The scope of the study will also cover a period of ten (10) from 2007-2016. This period was considered because it covered the pre and post merger of access bank with Intercontinental Bank plc in 2012.
1.8 Definition of Terms
Mergers: Mergers entails the coming together of two or more firms to become one big firm while acquisition is the takeover or purchase of a small firm by a bigger firm, which are both pursuing similar motives.
Profitability: Profitability is the state of yielding a financial profit or gain.
Recapitalization means increasing the amount of long term finances used in financing the organization. Recapitalization entails increasing the debt stock of the company or issuing additional shares through existing shareholders or new shareholders or a combination of the two.
Return on equity – This is measured as net income after taxes divided by total equity capital. It measures the rate of return to the shareholder.
Return on Asset – This is defined as net income after taxes divided by total assets. This ratio is an indicator of managerial efficiency; it indicates how capable the management of the banks has been converting the bank’s assets into net earnings.