On Tuesday, August 6th, 2024, the banking sector awoke to the news of a sudden merger between Unity Bank and Providus Bank. In a press release issued by the Central Bank of Nigeria (CBN), it was announced that the CBN had approved financial accommodation for the merger of Unity Bank and Providus Bank. According to the release, the merger is contingent upon financial support from the CBN, which will be instrumental in addressing Unity Bank’s total obligations to the Central Bank and other stakeholders. This arrangement between the two banks is in accordance with the provisions of Section 42(2) of the CBN Act 2007, as it is crucial for the financial health and operational stability of the post-merger organisation.
It is no surprise that announcements of this nature are often met with mixed feelings, especially among the larger bank customers. The CBN, perhaps anticipating these mixed reactions, further stated in their press release that no Nigerian bank currently faces a precarious situation comparable to that of Heritage Bank, which was recently liquidated. The CBN also reaffirmed its commitment to safeguarding depositors’ interests and ensuring the smooth functioning of the banking sector through proactive measures and strategic interventions.
A merger is an arrangement where two or more firms come together to form a new firm. In practical terms, both firms are jointly run and managed. Interestingly, mergers can be achieved in various forms, such as acquisition, absorption, amalgamation, and consolidation. Acquisition occurs when one firm acquires another, and the acquired firm becomes a subsidiary of the parent firm, also known as a takeover. Absorption happens when company X is liquidated and a new company Y is formed to absorb its assets, liabilities, and operations. Amalgamation involves two or more firms merging to form a new firm, with the old firms being dissolved to create a new entity, typically company Z, which takes over the assets, liabilities, and operations of companies X and Y. Consolidation occurs when two or more firms combine to form a new firm, with the old firms ceasing to exist and giving rise to the new entity.
Read also: Strengthening Nigerian banking sector: The strategic Unity-Providus merger
Mergers can take three major forms: conglomerate, horizontal, and vertical. A conglomerate merger involves firms in unrelated lines of business merging to diversify their operations and reduce their risk profiles. A horizontal merger occurs when firms in the same line of business, such as Unity Bank and Providus Bank, merge to increase their market share and compete more effectively within the industry. A vertical merger takes place when firms at different stages of production or distribution merge to control the supply chain.
Mergers between companies or banks often face several challenges, including meeting regulatory requirements, managing financial risks, overcoming cultural and language barriers, dealing with integration difficulties, and the potential loss of identity after the merger. However, if properly executed, the merger between Unity Bank and Providus Bank could result in several benefits. These include diversification in the products and services offered, a reduction in unwanted rivalry and unhealthy competition among players, and significant improvements in supply chain management, especially in vertical mergers.
Additionally, the merger could enhance research and development in new areas within the banking market, distribute risk across different operations, and enable the acquisition of talent from merging firms or banks. The banks involved could also see significant cost reductions, increased financial resources in the long run, and greater access to new markets or technologies.
Furthermore, the merger could expand the customer base, resulting in increased brand loyalty, gain a formidable market share within the banking industry, eliminate inefficiencies, and lead to increased operational efficiency. Most importantly, the merger could strengthen financial stability within the Nigerian financial system, thereby avoiding potential systemic risks.
Kingsley Ndubueze Ayozie: FCTI, FCA a Public Affairs Analyst cum Chartered Accountant by profession writes from Lagos.
