EFFECT OF MERGER AND ACQUISITION ON ORGANIZATIONAL PERFORMANCE

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CHAPTER ONE

INTRODUCTION

1.1   Background to the study

Banks play a crucial role in propelling the entire economy of any nation of which there is need to reposition it for efficient financial performance through a reform process geared towards forestalling bank distress. In Nigeria, the reform process of the banking sector is part and parcel of the government strategic agenda aimed at repositioning and integrating the Nigerian banking sector into the African regional and global financial system.  To make the Nigerian banking sector sound according to Akpan (2007), the sector has undergone remarkable changes over the years in terms of the number of institutions, structure of ownership, as well as depth and breadth of operations. These changes have been influenced mostly by the challenges posed by deregulation of the financial sector, operations globalization, technological innovations, and implementation of supervisory and prudential requirements that conform to international regulations and standards.

Similarly, a strong and virile economy depends to a very large extent on a robust, stable and reliable financial system including the banking sector. This explains the frequency with which the Nigerian banking sector has witnessed repeated reforms aimed at fine-tuning it to meet the challenges for economic stability and developmental goals which are not only limited to domestic savings mobilization and financial intermediation, but also the elimination of inefficiency to enhance financial efficiency. The financial efficiency parameters are determined and measured by gross earnings, profit after tax and net assets. Soludo (2004) opined that, the Central Bank of Nigeria (CBN) chose to begin the Nigerian banking sector reforms process with the consolidation and recapitalization policy through mergers and acquisitions.

This was done in order to arrest systems decay, restoration of public confidence, building of strong, competent and competitive players in the global arena, ensuring longevity and higher returns to investors. Considering the inability of most Nigerian banks to perform well due to operational hardship, expansion bottlenecks as a result of heavy fixed and operating costs coupled with volatility between deposits and lending rates, the present banking sector reforms in Nigeria was announced by Professor Chukwuma Soludo, the then CBN governor on July 6th, 2004 with the objective of creating a sound and more secure banking system that depositors can trust through mergers and acquisitions which enhanced operational capital base.  These and many more, act as a spring board to achieving improved efficiency. (Ajayi, 2005, Garba, 2006 & Augustine, 2007) stated that, other programmes in the Nigerian banking sector reforms agenda includes; ensuring exchange rate and price stability, managing interest rate for stability and development, macro economic coordination, improvements of the payment system and financial sector diversification to avoid a situation of boom and bust that can result to bank distress.

The current reforms framework anchored on two critical pillars; firstly, to provide effective protection against systemic financial crises in the interest of the depositors; and secondly, to fast track the growth and development of the national economy. However, for Akpan (2007), recapitalization through mergers and acquisitions is not a new development in the Nigerian banking sector but a chain of similar events that have been on since 1952. For instance, between 1952 and 2005, there have been nine re-capitalization requirement targets that banks were made to achieve. The first was in 1952, and the second in 1964 which both minimum capital base were pegged at thousand brackets. The million bracket capital base was introduced in 1988 when banks were made to capitalize at N10 million while the existing capitalization is N25 billion.

1.2  Statement of the problem

Prior to the consolidation of the banking sector in Nigeria initiated by Chukwuma Soludo in 1995, it was assumed that the Nigerian banking sector was in comatose, therefore, Mergers and acquisitions were part of the reforms strategies adopted to reposition the sector. These were done to achieve improved financial efficiency, forestall operational hardships and expansion bottlenecks. This study therefore critically looks at the effect of merger and acquisition on organizational performance, with a focus on the Nigerian banking sector.

1.3  Purpose of the study

This research work will study the following:

1. Determine the effect of merger and acquisition on bank performance.
2. Differentiate between merger and acquisition.
3. Evaluate the performance of UBA before and after the bank consolidation exercise; and
4. To know the banks that UBA acquired and those that merged.

1.4   Relevant Research Questions

In studying merger and acquisition on organizational performance, the following questions would be pertinent:

• Does merger and acquisition impact organizational performance?
• Is there a difference between bank merging and acquisition?
• How did UBA perform before and after the consolidation exercise?
• Which banks either merged with or were acquired by UBA?

1.5 Relevant Research Hypothesis

H₀:  Merger and acquisition is not significantly related to bank performance.

H₁:  Merger and acquisition is significantly related to bank performance.

1.6 Significance of the Study

This study would serve as eye opener to government agencies that are involved in making policies on bank reforms. It would also be of use to corporate organization and individuals that are involved in making transactions with banks. Again the study would serve as a resource for further knowledge and investigation by scholars who wish to study further on banking reforms, merger and acquisition in Nigeria. Above all the study would serve as a theoretical contribution to UBA on strengthening its policy on merger and acquisition.

1.7   Scope Of The Study

This research studies the effect of merger and acquisition on organizational performance. Since it will be difficult and cumbersome in terms of time, financial resources and other logistics to study the whole banks in Nigeria, study shall limit its  scope to United Bank for Africa, plc.

• Definition Of Terms

For a better understanding of this research work, the following terminologies are hereby explained:

1. Bank Performance: statement that indicates the profitability of an organization.
2. Merger: Coming together of two organizations to become one.
3. Acquisition: the process whereby one organization buys over the ownership and control of another organization.

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