Chapter
one
INTRODUCTION
1.1 Background of the
Study
Business
combination through the mergers and acquisition has become a global phenomenon
to achieve economies of scale and higher productivity. The need for financial
institutions to merge becomes even more imperative in the face of greater
competition arising from globalization and pressure under the World Trade
Organization (WTO) for the countries to open up their financial markets to
further entry of foreign banks. For this reason, many countries are moving
towards consolidating their banking system and Nigeria cannot be an exception.
The Nigeria banking
institutions has undergone remarkable changes over the years, in terms of the
number of institutions, ownership structure as well as the depth and breadth of
operations. These changes have been influenced largely by the challenges pose
by the deregulation of the sector, globalization of operations, technological innovations
and the adoption of supervisory and prudentially requirements that conform to
international standard.
Majority of the
players, poor management, poor credit policy, insider dealings/abuses and
economic recession etc lead to high incidence of distress in the banking
industry.
There were eighty
nine (89) banks with 3,382 branches predominantly in the urban centres as at
June 2004. These banks were characterized by structural and operational
weaknesses such as low capital base, dominance of a few banks, insolvency and
liquidity, overdependence on public sector and foreign exchange trading, poor
asset quality and weak corporate governance evidencing banking inability to
effectively support the real sector of the economy with credit to the domestic
economy at 24% of GDP, compared to Africa average of 87% and 272% for developed
countries. Soludo (2006)
One major element
in the reform package was the requirement that the minimum capitalization for
banks should be N25 billion with effect from end of December 2005 and that
consolidation of banking institutions through the merger and acquisition should
be initiated. The guidelines stated that the only legal modes of consolidation
allowed are mergers and outright acquisition/takeover.
A mere group
arrangement is not accepted for the purpose of meeting the stipulated N25
billion capitalization requirement for banks. Due to this, requirement Nigeria
currently has 21 listed money deposit
banks
1.2 Statement of the Problem
Shareholders and
managers of the financial institutions (Banks) turns to merger and acquisition
in the hope of improving performance in their institutions but studies on this
subject have produced mixed results some studied have subjected that merging institutions
perform better than the individual institutions performed before merger whereas
other studies have not found any meaningful improvement in financial
performance as result of a merger. The study Sample (2000) observed that Merger
and acquisition do not lead to an improvement in performance as measured by
profitability adjusted for the industry average. Other than indicators with
legal requirement by the bank of Nigeria merger restructuring has not improve
the final performance of the majority of merger institutions as indicated by
the profitability earnings ratios (Chesang 2008). The shareholders
contemplating mergers are at a loss due to the inconsistent findings by
research studies by this subject. The conflicting findings have made it
difficult for players and financial institutions to say with certainty whether
merging two institutions is a worthwhile undertaking (Athanasoglou &
Brissimis, 2004 and Straub, 2007).
1.3 Objectives of the Study
The main objective
of this study is to comprehensively analyze the effect of pre and post mergers
and acquisition, on the performance of Banks in Nigeria. A study of United Bank
for Africa (UBA).
Other objectives
are:
1. To
determine the effect of Equity share capital and debt capital on the Gross
Earnings of UBA before mergers and acquisition
2. To determine the effect of Equity share
capital and debt capital on the Gross Earnings of UBA after mergers and
acquisition
1.4 Research Questions
For the purpose of
this study we formulated the following research question.
1.
What is
the effect of equity share capital and debt capital on gross earnings of UBA
before mergers and acquisition?
2.
What is
the effect of equity share capital and debt capital on gross earnings of UBA
after mergers and acquisition?
1.5 Research Hypothesis
Ho1: There is no significant effect of the equity
capital and debt capital on the gross earnings of UBA before merger and
acquisition.
Ho2:
There is no significant effect of equity
capital and debt capital on the gross earnings of UBA after merger and
acquisition.
1.6 Significance
of the Study
It is hope that
this study will be of benefit to United Bank for Africa (UBA) and other money
deposit banks in the country to indicate whether merger and acquisition policy
should be maintained or sustained in the Nigeria Banks, it will also further
provide more insight in the relationship between merger and acquisition and
performance on Banks Gross Earnings which would be of value to academics and researchers
in the same field.
This study can also
be used by Central Bank of Nigeria (CBN), Securities and Exchange Commission
(SEC) Nigeria Stock Exchange (NSE) to assess the result of merger and
acquisition and make plans to improve upon the observed short comings and
introduce laws to support and empower the merger and acquisition success, and
make provision in order to remedy any damage caused by the policy. Researchers
and publishers will use the study as reference material.
1.7 Scope
/Limitation of the Study
This study is undertaken to examine the merger and
acquisition and performance on United Bank for Africa (UBA) in terms of timer
series a period of 13 years between pre and post Mergers and acquisition.
Before (M & A) (1993-2005) and after (2005-2018) as means of assessing the
merger and acquisition and performance on deposit money Banks. With hope that
this will help to achieve the objectives of the study.
1.8 Operational Definition Of Terms
Pre
Mergers and Acquisition: This is the performance and financial
position of the banks before mergers and acquisition.
Post
Mergers and Acquisition: this is the performance and financial
position of the banks after mergers and acquisition
Merger: it
can be into an existing company or a new company is formed to take over the
assets, shareholders interest, business and liabilities of the amalgamating
bank except one loss his identities this is absorption(either all the other
company are absorbed by only one of the merging bank).
Acquisition: it the
taken over of one bank by another. That is by the bank taking over or acquiring
purchasing control in the bank acquired. In both cases the objective is to reap
the benefit synergy (either the combination being more profitable than the
separate).
Mergers
and Acquisition: it is
the joining of two or more separate companies to be a single entity.