Following the announcement by the Central Bank of Nigeria on July 6, 2004 about a major reform program that would transform the banking landscape of the country, an unprecedented process of merger and acquisition has taken place in the Nigerian Banking Sector shrinking the number of banks from 89 banks to 25 banks or banking groups involving 76 banks which altogether account for 93.5% of the deposit share of the market. Thirteen (13) out of the 89 banks, accounting for only 6.5% of the deposit share of the industry were not able to make it (CBN, 2006).
The main thrust of the 13-point reform agenda was the prescription of a minimum shareholders’ funds of N25 billion for a Nigerian deposit money bank not later than December 31, 2005. The banks were expected to shore up their capital through the injection of fresh funds where applicable, but were most importantly encouraged to enter into merger/acquisition arrangements with other relatively smaller banks thus taking the advantage of economies of scale to reduce cost of doing business and enhance their competitiveness locally and internationally.
Mergers and acquisitions represent the ultimate in change for a business and it is expected to add value to the business. No other event is more difficult, challenging, or chaotic as a merger and acquisition. It is imperative that everyone involved in the process has a clear understanding of how the process works. However, merger and acquisitions do not add value in all cases (Ajayi, 2005). There are cases where the synergies projected for merger and acquisition deals are not achieved. “People” problems and cultural issues are often cited as the top factors in failed integrations.
While merger and acquisition activities constitute a growing area of study, the research currently suffers from several limitations. The problem most commonly cited is that the vast majority of work in the area is either based on case study in developed countries or is primarily anecdotal.
Furthermore, there have been no studies that evaluate the effects of merger and acquisition in bank recapitalization in Nigeria as it is a rare occurrence in the country not until the recent banks mergers and acquisitions witnessed in the banking sector as occasioned by the banking reform. This study shall attempts to bridge this gap.
1.2 STATEMENT OF THE PROBLEM
The recent outbreak of bank mergers in Nigeria is attracting much attention, partly because of heightened interest in what motivates firms to merge and how mergers affect efficiency. However, there are often two distinct views to the rationale behind merger and acquisition. The first held view of mergers, especially those involving mega firms, is that firms are merging just to get bigger and not to get more efficient. Accompanying that notion is the fear that as merging firms grab greater market share, individual freedoms, competition and efficiency are threatened, because bigger is perceived as greater concentration of power.
The second view holds that firms merger not just to get bigger but also to be more efficient. It is claimed that mergers enable the banking industry to take advantage of new opportunities created by changes in the technological and regulatory environment. A Fallout of this is the reduction in the number of banks nationwide but the concentration of power in local banking markets has not increased. And the very force of regulatory change that spurred bank mergers is also bringing new sources of competition to local banking markets (especially the management of the country’s external reserves). The post-consolidation performance of all Nigerian banks was overcast in 2009 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States. Sanusi (2010) attributed the post-consolidation challenges of Nigerian banking industry to the inability of the industry and the...