CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Mergers and acquisition are consolidation, strategy used to correct the deficiencies in the financial sector. Merger is said to occur where two or more companies combine into one company. One or more company may merge with an existing company or they may merge to form a new company. In merger there is complete amalgamation of the assets and liabilities as well as shareholders’ interest and business of the merging companies while an acquisition on the other hand is an act of acquiring effective control over assets or management of a company by another company without combination of business or companies. The Nigerian banking sector regulator; Central Bank of Nigeria (CBN) employed merger/acquisition as a consolidated instrument to correct the deficiencies in the financial sector in 2005. This was done under the leadership of the then CBN Governor; Professor Charles Soludo. The economic rationale behind this domestic consolidation policy as at this time was highly indisputable. The justifications being that, Nigeria as at this time had 89 banks with 3,382 branches predominantly situated in the urban centers as at June 2004 (Soludo, 2006). Besides, these branches were characterized by structural and operational weaknesses such as; low capital base, dominance of a very few banks, insolvency and illiquidity, overdependence on public sector deposits and foreign exchange trading, poor asset quality and weak corporate governance, low depositors’ confidence, banks that could not effectively support the real sector of the economy and banking sector with credit to the domestic economy at 24% economy and banking sector with credit to the domestic economy at 24%) of GDP compared to African average of 87% and 272% for developed countries (Soludo, 2006). Given these bedeviled circumstances, it became sensible to ensure quick and spontaneous intervention strategies to save the system from total collapse and to improve the performance of the industry. Therefore, the driving forces behind the consolidation (merger and acquisition) agenda included; effective performance of the industry, better risk control, advancement of marketing and product initiatives, improvement in overall credit risk and technology exploitation, effective banking supervision, evolution of a strong and safe banking system, improved transparency and accountability, cost reduction and effective global competition, depositors’ trust among other factors. These drivers were anticipated to improve the operational efficiencies and operations of the players in the banking sector that will survive the consolidation era. However, Forlong (1998) claimed that, merger and acquisition in the banking industry has had more impact on the structure rather than the performance which has been harder to discern. The decade (1995 and 2005) was particularly traumatic for the Nigeria banking industry, with the magnitude of distress reaching an unprecedented level, thereby making it an issue of concern not only to the regulatory bodies but also to the public. It was this that actually necessitated the need for an overhauling strategy of the entire financial system which made the CBN introduced a very major reform agenda that changed the banking landscape of the country in 2004. The reform was a 13 agenda reform which main thrust was the prescription of a minimum capital base of 25 billion Naira. This reform further led to merger and acquisition in the industry and scaled down the Nigeria banks from 89 to 25 and much later 24. This study aims to evaluate merger and acquisition as a viable option for effective performance of banking industry in Nigeria. It is interested to measure the extent to which this twin strategy has fared among the emerged banks from the consolidation and the attendant effect on the nation’s aggregate economy.