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MERGERS AND ACQUISITION AND THE PERFORMANCE OF FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

A sound and competent banking sector is essential for a stable macroeconomic environment, therefore, the importance of commercial banks in a country cannot be overemphasized, because they occupy key positions in a country‟s financial system and are essential agents that would lead to the growth of any economy. Commercial banks also act as the agents of financial intermediation within a country by moving funds between the surplus and the deficit sectors within an economy and they facilitate the implementation of monetary policies. Banks mobilize and facilitate the efficient allocation of national savings, thereby increasing the quantum of investments and hence national output (Afolabi, 2004) as cited in the work of (Olagunju Adebayo and Obademi Olalekan, 2012). Through financial intermediation; banks facilitate capital formation (investment) and promote economic growth (Olagunju Adebayo, 2012). Prequel to the above statements, commercial banks have experienced a lot of banking hardship, especially between the decade (1993-2003) which was tagged the era of bank distress which became a source of concern not only to the regulatory bodies (CBN, NDIC e.t.c) but also to the general public and the policy analyst. Therefore, there was a need for the overhaul of the Nigerian banking sector in order to restore the already dying confidence of the general public and other foreign investors who could not sleep with their two eyes closed as a result of the weak financial system that Nigeria operated.

The Central Bank of Nigeria (CBN) as a regulatory body came up with the recapitalization and consolidation exercise in the banking industry under the leadership of the then governor of CBN Professor Charles Soludo who called on banks to increase their paid-up capital through public offers or corporate restructuring exercise (mergers 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 was announced by Professor Chukwuma Soludo on July 6th 2004 that the Nigerian commercial banks should beef up their minimum capital base from N2billion to N25 billion 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

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