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Domestic merger and acquisition in Pakistan
University of Lahore | DECLARATION i
Domestic merger and acquisition in Pakistan
A Thesis Presented
By
WAISM AFZAL
Registration No. MCM 05093016
To
The Committee on Academic Degrees
in partial fulfillment of the requirements
for a degree with honors
M.com
School of Accountancy and Finance
The University of Lahore
Session 2009-2011
Domestic merger and acquisition in Pakistan
University of Lahore | DECLARATION ii
SIGNATURE PAGE:
The Thesis committee for Ejaz Ali) that this is the approved version of the following thesis:
Domestic Merger and Acquisition in Pakistan
APPROVED BY
SUPERVISING COMMITTEE:
Supervised By SIR UMER SADIQUE
Domestic merger and acquisition in Pakistan
University of Lahore | DECLARATION iii
DECLARATION
I Wasim Afazl Reg. # No:- MCm05093016 of Master in Commerce in the course of
Accounting Section 2009-2011, hereby declares that this thesis “Domestic of Merger and
Acquisition “ is my own work .
Dated:-
Domestic merger and acquisition in Pakistan
University of Lahore | DEDICATION iv
DEDICATION
I would like to dedicate this Thesis to my parents and teachers who have always
encouraged me throughout in my academic career and make possible for me to
stand where I am today. And I would also like to detect to my class fellows.
Domestic merger and acquisition in Pakistan
University of Lahore | ACKNOWLEGMENT v
ACKNOWLEGMENT
First of all we are grateful to ALLAH ALMIGHTY, who bestowed us with health, abilities and guidance to
complete the project in a successful manner, and without HIS help I was unable to perform this
task
More than anybody else, I would like to acknowledge my thesis advisor Sir Umer Sadique for
his never ending support and untiring efforts. He was always there to guide me whenever I felt
stuck off and his encouragement always worked as morale booster for me. I have found him very
helpful while discussing the tricky issues in this dissertation work.
I am very thankful to Sir UMER SADIQUE who helped me during the project whenever any
problem arose before me.
Domestic merger and acquisition in Pakistan
University of Lahore | Abstaract vi
Abstaract
In merger two or more companies are combined with each other and in acquisition one company
buy or get the ownership of another company.
The main reason of merger and acquisition is the firms wants to enjoy synergic affect of merger
and to grow the business rapidly. There are three main reasons of merger synergic affect, growth
and expansion.
There are some benefits of merger. Firms can enjoy tax benefits as result of merger. It is very
economical way to grow and expand business. The firm is strong financially as result of merger
because the capital of the companies is merged.
The merger is called successful if it increases the value of the firms. Merger can improve the
performance of company the company can get earn profits than it was before.
In Pakistan so many merger has been take place in different industries. In this thesis I have
analyze the performance of ABN AMRO before and after merger I concluded that the merger
cannot create value for the bank and it could be failure in the history of banks. Second analysis is
done on merger of union bank and standard chartered. After analyzing I conclude that merger
create value for standard chartered. It increases the bank‟s profit and grow the operations.
It is time for merger in Pakistan because companies can earn more profits by combining their
business that‟s why so many companies are going for merger for growth and expansion of
business.
In this thesis I covered background of merger and acquisition, benefits reasons for failure of
merger and acquisition, and impact of merger on management.
Domestic merger and acquisition in Pakistan
University of Lahore | Table of Contents 1
Table of Contents
DECLARATION ........................................................................................................................... iii
DEDICATION ............................................................................................................................... iv
ACKNOWLEGMENT.................................................................................................................... v
Abstaract ........................................................................................................................................ vi
Table of Contents ............................................................................................................................ 1
List of tables.................................................................................................................................... 5
Chapter # 1 ...................................................................................................................................... 6
Introduction of Merger and Acquisition ......................................................................................... 6
1.1 History:.................................................................................................................................. 6
1.2 Introduction:.......................................................................................................................... 6
1.3 Merger:.................................................................................................................................. 7
13.1Absorption:....................................................................................................................... 7
1.3.2Consolidation: ................................................................................................................. 7
1.4 Amalgamation:...................................................................................................................... 7
1.5 Acquisition or takeover:........................................................................................................ 7
1.6 Difference between merger and acquisition: ........................................................................ 7
1.7 Reasons of merger and acquisition: ...................................................................................... 8
1.8 The reasons of merger and acquisition failure: ..................................................................... 8
1.8.1 Ignorance:....................................................................................................................... 8
1.8.2 No common vision: ........................................................................................................ 8
1.8.3 Poor governance:............................................................................................................ 9
1.8.4 Poor communication: ..................................................................................................... 9
Domestic merger and acquisition in Pakistan
University of Lahore | Table of Contents 2
Chapter # 2 .................................................................................................................................... 10
Research process and design of Merger and Acquisition ............................................................. 10
2.1Research design: .................................................................................................................. 10
2.1.1 Title: ............................................................................................................................. 10
2.1.2 Purpose:........................................................................................................................ 10
2.1.3 Hypothesis: .................................................................................................................. 10
2.1.4 Methodology ................................................................................................................ 10
2.1.5 Data analysis: ............................................................................................................... 10
2.2 Research process: ................................................................................................................ 10
2.3 Research objective: ............................................................................................................. 11
2.4 Research questions:............................................................................................................. 11
Chapter# 3 ..................................................................................................................................... 12
Literature review ........................................................................................................................... 12
3.1 Effect of Merger on banks performance ............................................................................. 12
3.1.1 Literature review .......................................................................................................... 12
3.1.2 Methodology ................................................................................................................ 13
3.1.3 Conclusion: .................................................................................................................. 14
3.2 Stock Price Reaction to Acquisition on Banking Sector .................................................... 14
3.2.1 Literature review .......................................................................................................... 14
3.2.2 Results:......................................................................................................................... 15
3.2.3 Conclusion: .................................................................................................................. 16
Chapter# 4 ..................................................................................................................................... 17
Classification and merits and Demerits of Merger and Acquisition ............................................. 17
Domestic merger and acquisition in Pakistan
University of Lahore | Table of Contents 3
4.1 Classification of merger: ..................................................................................................... 17
4.1.1 Horizontal merger: ....................................................................................................... 17
4.1.2 Vertical merger: ........................................................................................................... 17
4.1.3 Conglomerate merger:.................................................................................................. 17
4.1.4 Congeneric merger:...................................................................................................... 17
4.2 Types of acquisition: ........................................................................................................... 17
4.2.1 Friendly takeover: ........................................................................................................ 18
4.2.2 Hostile takeover: .......................................................................................................... 18
4.2.3 Horizontal takeover:..................................................................................................... 18
4.2.4 Benefits and Drawbacks of merger and acquisition: ................................................... 18
4.3 Benefits of merger:.............................................................................................................. 18
4.3.1 Tax advantages:............................................................................................................ 18
4.3.2 Increase liquidity for the owners:................................................................................. 18
4.3.3 Synergism: ................................................................................................................... 19
4.3.4 Gaining access to funds: .............................................................................................. 19
4.3.5 Growth: ........................................................................................................................ 19
4.3.6 Diversification:............................................................................................................. 19
4.3.7 Greater value generation: ............................................................................................. 20
4.3.8 Gaining cost efficiency: ............................................................................................... 20
4.4 Drawbacks of merger and acquisition................................................................................. 20
4.4.1 Increased unit cost:....................................................................................................... 20
4.4.2 Conflict between employees: ....................................................................................... 20
4.4.3 Overlapping jobs: ......................................................................................................... 21
Domestic merger and acquisition in Pakistan
University of Lahore | Table of Contents 4
4.4.4 High legal cost: ............................................................................................................ 21
4.4.5 Turnover of unsatisfied customers:.............................................................................. 21
Chapter# 5 ..................................................................................................................................... 22
Analysis......................................................................................................................................... 22
5.1 Analysis of ABN AMRO bank and RBS bank ................................................................... 22
5.1.2 History of ABN AMRO:............................................................................................. 22
5.1.3 History of RBS:............................................................................................................ 22
5.1.3 Date of merger: ............................................................................................................ 22
5.1.4 Analysis:....................................................................................................................... 22
Conclusion: ............................................................................................................................... 27
5.2 Analysis of union bank and standard chartered bank ......................................................... 28
5.2.1 History of standard chartered Bank: ............................................................................ 28
5.2.2 History of Union Bank:................................................................................................ 28
5.2.3 Date of merger: ............................................................................................................ 28
5.2.4 Analysis:....................................................................................................................... 28
5.3 Conclusion: ......................................................................................................................... 33
Conclusion: ................................................................................................................................... 34
Recommendations:........................................................................................................................ 35
References ..................................................................................................................................... 36
Domestic merger and acquisition in Pakistan
University of Lahore | List of tables 5
List of tables
Domestic merger and acquisition in Pakistan
University of Lahore | Chapter # 1 6
Chapter # 1
Introduction of Merger and Acquisition
1.1 History:
According to facts and figure in 1991 the worth of merged and acquisition market is 2.9 trillion.
In the twenty first century merger and acquisition become the most frequent method for business
growth.
In the USA merger and acquisition is started in twentieth century. These events were appearing
in 1929, in the last half of 1960, in the first half of 1980 and in the last half of 1990. Here i need
to clear that i have mentioned those years here where the maximum number of merger and
acquisition had been happened. In the current period (1994-present) mega deals had been
happened. In this period large number of M&As has been taken place. Most of deals were
horizontal in nature. But the major merger and acquisition has been undertaken in the financial
industry like insurance companies banking companies. In USA the period in which maximum
merger and acquisition has been took place is 1990. The reasons were in those days the stock
market of USA was very strong and this supports the merger and acquisition. Big brands and
huge dollars were involved in this period of merger and acquisition.
1.2 Introduction:
Although the merger and acquisition are used together but actually these are two different
concepts. In merger two companies are combined with each other whereas in the acquisition one
company gets the ownership of other company.
This process is normally kept secret from the public so it is very challenging to determine how
many good mergers occur in a given year.
A merger is considering successful if it increases the value of the merged companies. Merger
gives benefits to the both competitor and consumers by allowing firm to operate more efficiently.
Merger and acquisition has capacity to reduce the competition. Due to advancement in
technology which makes transaction with other organization is more effective and efficient it
becomes more common today than ever before. There are many categories in the business
combinations. For example amalgamation, absorption and acquisition.
Domestic merger and acquisition in Pakistan
University of Lahore | Introduction of Merger and Acquisition 7
1.3 Merger:
In merger two companies are combined with each other to create a new company. There are two
forms of merger that are given below
Absorption
Consolidation
13.1Absorption:
The mergers where two or more companies are combined with each other a manner where one
lose its individual identity but the other remains.
1.3.2Consolidation:
The combination of two or more companies that become a new company is called consolidation.
In this all the merged companies are lose their identity.
1.4 Amalgamation:
The process when a new company comes into existent as result of merger is called
amalgamation.
1.5 Acquisition or takeover:
It is process where one company get the ownership of another company. It may be friendly or
hostile.
1.6 Difference between merger and acquisition:
The merger and acquisition are used with each other and the most of the people consider it as the
same terminologies. but actually these are two different terminologies and have different
meanings.
In a acquisition one company purchase to anther or get the ownership of another company. On
the other hand merger has been happened with the mutual interest of both the companies to
establish a new company or when a new entity comes into existence with the combination of two
or more than two companies it is said to be merger. In very simple words a purchase deal is
called merger when both the companies are agreed to join with each other for their interest and
the deal is said to be acquisition when one company is not happy with this.
Domestic merger and acquisition in Pakistan
University of Lahore | Introduction of Merger and Acquisition 8
1.7 Reasons of merger and acquisition:
The following are some reasons of merger and acquisition:
When two companies are combined with each other they can earn more profits. It gives a
synergic effect on the merged companies. Synergic effect means the companies can work more
effectively and efficiently than they were before merger activities. The organization can enjoy
economies o scale, managerial expertise, greater value generation and raise huge amount o f
capital.
One company may have some weakness and the other may have some strength in this situation
merger activities gives the maximum benefits. Merger activities fill the gap and keep the
organization on track. Another benefit of merger is it reduces the cost and improves the quality.
We may also come forward to access the new markets.
1.8 The reasons of merger and acquisition failure:
There are many reasons of mergers and acquisitions failure some of them are discuss below:
Ignorance
No common vision
Poor governance
Poor communication
1.8.1 Ignorance:
The parties involve in merger and acquisition can not share commercially sensitive information
that are very beneficial for the business growth. Most o f the executive don‟t know about this and
they waste the time in preparing different strategies that can not give them desire results.
1.8.2 No common vision:
In the absence of clear statement of what the merged company wants to do, how can they operate
and what will be different compare to how things are today. They can not create convergence
with each other and this will negatively effect on merger and finally it becomes the reason of
failure of merger.
Domestic merger and acquisition in Pakistan
University of Lahore | Introduction of Merger and Acquisition 9
1.8.3 Poor governance:
The organizations do not have clear idea who will govern the business. The employees are
confused who will direct them and who will give them answer in case of any confusion.
1.8.4 Poor communication:
There is a lack of communication. The strategies can not communicate effectively from the
higher management to lower management. With this the organization can not accomplish the
strategies effectively and even sometimes these strategies are failed.
Domestic merger and acquisition in Pakistan
University of Lahore | Chapter # 2 10
Chapter # 2
Research process and design of Merger and Acquisition
2.1Research design:
2.1.1 Title:
Domestic merger and acquisition.
2.1.2 Purpose:
The study purpose is to know why merger and acquisition appear and why it is failed. What is
the effect of merger and acquisition on the company‟s performance?
2.1.3 Hypothesis:
To fulfill the main objective of the study following hypothesis is formulated:
Null hypothesis: On the basis of accounting ratios analysis performance of banks is improved
after merger activity.
Alternative hypothesis: Performance of Banks does no improve.
2.1.4 Methodology:
Research method is classified as quantitative and qualitative. The qualitative method is opposite
to quantitative. The both method are used for research purpose. This could form of descriptive
quantitative design. It is based on qualitative secondary data that is collected from different
financial statements of the companies. Data is analyzed using different qualitative techniques.
2.1.5 Data analysis:
Financial data is collected from balance sheet, income statements, and cash flow statement of the
companies. It is used to calculate and analyze the accounting ratios.
2.2 Research process:
The broad problem area of my research is to know the effect of merger and acquisition on the
Bank‟s performance. To achieve this objective I selected different Banks and analyze their
performance before and after merger.
Domestic merger and acquisition in Pakistan
University of Lahore | Research process and design of Merger and Acquisition 11
2.3 Research objective:
My aim of study is to know the reasons of mergers and acquisitions. What are the effects of these
mergers and acquisitions on the organizations whether it is positive or negative?
2.4 Research questions:
Q. #1 what is merger and acquisition?
Q. #2 Differences between merger and acquisition.
Q. #3 Reasons of merger and acquisition.
Q. #4 Reasons of failure of merger and acquisition.
Q. #5 Effects of merger and acquisition on banks performance
Q. #6 what is the effect of merger on ABN AMRO with RBS?
Q. #7 what is the effect of merger on standard chartered with UNION BANK?
Domestic merger and acquisition in Pakistan
University of Lahore | Chapter# 3 12
Chapter# 3
Literature review
3.1 Effect of Merger on banks performance
(Case study of a Bank)
3.1.1 Literature review
In today‟s globalize economy the ratio of merger and acquisition is increasing day by day. The
porpoise of merger and acquisition is to rapid growth of the business and to minimize the risks of
the businesses. Recently the entire Pakistani economy is facing exceptional challenges.
Regulatory measures are being taken in order to improve the economy. In order to overcome
these financial crises allot of merger and acquisition has been takes place in Pakistan.
Different financial ratios are used to evaluate the company whether it is attractive for investment
or not.
The articles discuss that the most of domestic merger and acquisition improves the cost
efficiency. Other article says that merged banks have improved their efficiency.
In this articles writer highlights various techniques to evaluate the performance of the company.
It also explains that merger and acquisition effect positive and long lasting effect on the
performance of banks and society as well. It explain that efficiency improve only when the both
partners are inefficient. It states that the banks that have underground deals can fail to show the
significant improvement after merger or acquisition. The writer of these articles read the articles
and concludes that Egyptian banks had not achieved any significant improvement after merger
and acquisition. It only found little improvement in their credit positions. In another article he
read about the Malaysian banks analysis on merger and acquisition and concludes that merger
and acquisition made a significant positive effect on small banks but large banks still facing
inefficiency problems from it.
he read the Mylonidis & Kelnikola analysis on banking sector of Greek and conclude that
operating efficiency and labor productivity is not improve of merged banks but when we
compare it with non merged banks we conclude that program has a positive impact of on banks
operating performance but it has a negative impact on the liquidity of the banks. Burki &Ahmed
said the winners of the governance change are private banks and these banks are selected from
merger and acquisition. Their governance change efficiency can enable them to exploit new
profit making opportunities.
Domestic merger and acquisition in Pakistan
University of Lahore | Literature review 13
After a deep study on the Indian industries the result suggests that their are minor variations in
terms of impact of merger and acquisition in different industries in India. Merger and acquisition
favorable for the banking sector of India on the other hand it is unfavorable for some other
industries and can not give the required results.
3.1.2 Methodology
The aim of the study is to answer “Does merger of the banks improves the profitability?” It also
investigates the impact of merger on performance of the bank by using different accounting
ratios. For this purpose, RBS is chosen as sample Company for this study. Profitability ratios,
liquidity ratios, market value ratios have been considered
as the most reliable and efficient ratios to check the profitability of the companies. Financial
reports of Royal Bank of Scotland (RBS) and ABN AMRO is selected as sample for this
propose.
The following hypothesis is formulated for to fulfill the main objective
Null Hypothesis: profitability of Royal Bank of Scotland is improved after merger.
Other hypothesis: profitability of RBS does not improve after merger.
In order to analyze the performance of the bank financial statements including Cash flow
statement, Balance Sheet and Income statement of these two banks would be used. The data of
(2006-2009) is used to calculate and analyze the accounting ratios.
In this study following performance indicators have been used:
Liquidity Ratios.
Profitability Ratios.
Solvency / Leverage Ratios.
Return on Investment Ratios.
Market Stock Ratios.
If we consider it with the liquidity point of view we can say that the ABN AMRO was better
before merger. The average of the entire ratio is better before merger activity so we can conclude
that the status of ABN AMRO in terms of liquidity was better before this deal.
Domestic merger and acquisition in Pakistan
University of Lahore | Literature review 14
The results after calculation is clear indication that the bank‟s profitability is better before merger
because of the
Reason that out of 7 average ratios 6 are in favor of ABN AMRO.
In terms of bank‟s long-term debt paying ability, the status of RBS improves after merger deal.
The status of ABN AMRO was better than RBS due the reason that the earnings available to the
stakeholders of the bank were higher before merger.
3.1.3 Conclusion:
This study is conducted to find the profitability of the RBS after merger deal. In all, 20 ratios
using financial statements have been calculated. Instead of comparing individual ratios their
averages have been compared. Out of 20 ratios, score for the „better‟ ratios after merger is just 6
(i.e. 30% only).Although mergers play an imperative role in boosting up the financial sector of
the country. But in this case we can say that the merger of RBS does not succeed to grow the
profitability of ABN AMRO. From the ratio analysis it is proved that the RBS merger proves to
be a failure in banking history.
3.2 Stock Price Reaction to Acquisition on Banking Sector
3.2.1 Literature review
During 2001-2007 the financial sector in Asia regions have experienced significant raise in the
M&A activities local government is start to implement the polices that encourage foreign
investment. Many foreign institutions are seeking growth potential in the Asia regions by
forming mergers or taking a stake of them. In China the banking sector dominate the M&A scene
as foreign banks looks forward to gain this opportunity. Because they are watching allot of
opportunities in china‟s market. To avail this opportunity allot of big merger has been takes place
in china. The Asian emerging global champions are continuously seeking opportunities to grow
into regional power through aggressive growth plan involving acquisitions. During the third
quarter of 2008 the Asian banking sector has shown signs of pressure particularly conditions in
the international market too a significant turn for the worse. However banking sector of Asia get
benefited from the disposal of Asians assets of previously held by bothered western banks to
consolidate their global business to save their capital.
The aim of this study is to discover stock price reaction to acquisitions announcement in the
Asian banking industry. We consider short run and long run impact of merger and acquisition on
Domestic merger and acquisition in Pakistan
University of Lahore | Literature review 15
the stock price in different periods. Activities from 2003-2007 has been constantly on the rise
and then it starts to fall in 2008-2009 during the world wide financial crises.
Hannan and palioff (2007) said that less profitable banks are targeted for acquisition. Knap at al
(2006) and koetter et al (2007) said that acquisition is the process of transfer of assets from poor
management to better management. Vergos and Christopolous (2008) find that bank acquisition
is beneficial for a short time period. Soussa and Wheeler (2006) observe that banks acquisition in
emerging market is not beneficial. Berger (2000) find that improve risk to reward ratio by
engaging in merger. He also said that cross border merger offer the potential affiance gains
resulting from economies of scale. Amihud (2002) said that cross border merger gives negative
results but it reduce the risks and increase the implicit guarantee. Chari (2004) said that merger
gives positive results for both firms because target firm is being twice as larger. Altunbas (1997)
study on European banks and said that aggregate cost is more increase than decrees. BIS (2001)
said that stock price does not affect by the annulment of any merger and acquisition activity.
Andre (2004) Canadian acquirer significantly underperforms over three year after event.
We select six countries in our analysis Hong Kong, china Taiwan, Singapore, Indonesia and
Malaysia. Daily‟s index price for is considered. Daily data range from one year before and after
merger and acquisition is considered. They used 123 major Banks M&A events in selected six
countries. In sample selection process the following criteria is followed: the corporation
acquiring the bank is publically traded corporation, the acquisition is completed and the
acquiring company‟s country has stock index. The countries‟ stock indices are Hang Sang,
Taiwan Weighted, Straits Times, and SSE composite indices, FTSE Bursa Malaysia KLCI,
Jakarta composite index. Events are retrieves from Reuters a service that provides news repor ts
around the world. In Taiwan 27 banks acquisition is occur “between” 2001-2010. Out of these
we select 9 major publically traded firms that meet our criteria. In China 71 acquisition has been
takes place during 2001-2010. We chose 10 companies based on our criteria. In Hong Kong we
select 19 major companies; from Singapore we select 14 companies, 38 companies from
Malaysia and 28 companies from Indonesia.
3.2.2 Results:
All the results of the events that could occur after analysis is presented below. First we present
the scase of china. We retrieve that CAR were negative only in 2 from 66 different events. The
cumulative average was positive which 0.02172035 is.
It implies that in china bank acquisition provide significant gain of 2.17% on average. Based on
this study we see the 240 days before acquisition and 230 days after it. We extract that there is
Domestic merger and acquisition in Pakistan
University of Lahore | Literature review 16
significant TSARs. We would say that china merger and acquisition events convey significant
new information. Based on the above we can say that the excessive leakage did occur.
Now we present the case study of Hong Kong. We conclude that cumulative abnormal return is
negative only in 12 out of 66 events. Soothe cross average is positive which is 0.02904971
We can say that M&A provide significant gain 2.9% on average to the banking sector of Hong
Kong. We find that this will convey new relevant information to the public. Further more
excessive leakage will occur within 15 days before and after acquisition.
Now come towards Taiwan. We extract that CAR is negative only in 7 out of 66 events. The
average of CAR is positive which 0.03177813 is. It shows that acquisition provide significant
gain of 3.177% on average which is higher than other Asian markets.
The next analysis is on Singapore. The average of CAR is negative which -0.81% from 66
different events. Only in 4 events CAR is positive. We conclude that Singapore banks have
positive AR before acquisition announcement. The acquisition would not create big value for the
banks of Singapore. After further investigation of statistical data we
Conclude that excessive leakage did occur within 15 days before and after announcement. The
next two countries for the analysis are Malaysia and Indonesia. We investigate 30 events of
Malaysia and 9 of Indonesia. After making analysis we conclude that abnormal return for the
acquiring banks of Malaysia and Indonesia are much greater than other four countries in the
Asia.
3.2.3 Conclusion:
This paper determines the impact of merger and acquisition on the baking sector of Asian
countries. Whether they are getting abnormal returns or not? We find that acquisition create
value for the acquirer in a long run. it gives a mixed results in the short term. The market
reaction of china Hong Kong Taiwan gives a same result and they all get abnormal returns as a
result of acquisition. The results of Malaysia and Indonesia are different from other four
countries. In Malaysia there is insignificant positive or negative impact of acquisition. There is a
significant negative abnormal return in Indonesia before acquisition.
Domestic merger and acquisition in Pakistan
University of Lahore | Chapter# 4 17
Chapter# 4
Classification and merits and Demerits of Merger and Acquisition
4.1 Classification of merger:
The following is the classification of merger:
4.1.1 Horizontal merger:
This type of merger involves the combination of direct competitors. They are trying to sell the
same product to he customers. Example: ABN AMRO merges with RBS
4.1.2 Vertical merger:
This merger involves the combination of two companies who are producing different goods for
one product. Example: Apple merges with Intel Corporation.
4.1.3 Conglomerate merger:
This is a combination of two companies who are producing unrelated products. It has two types:
pure and mix. Example: Textile Company merges with jewelry.
4.1.4 Congeneric merger:
A merger where the companies are combined who are producing the different products in the
same industry. Example: Banks merge with Lease Company.
4.2 Types of acquisition:
The following are classification of acquisition:
Friendly takeover.
Hostile takeover.
Horizontal merger.
Domestic merger and acquisition in Pakistan
University of Lahore | Classification and merits and Demerits of Merger and
Acquisition
18
4.2.1 Friendly takeover:
In friendly takeover the management of Target Company is agreed with the terms and conditions
of acquisition. In this the publically offer of stock or cash is made by acquiring firm to a target
firm.
4.2.2 Hostile takeover:
In this the acquiring company is made a takeover without the permission of a target company. In
this the acquiring company directly buys shares from the stock exchange.
4.2.3 Horizontal takeover:
It is an acquisition that could occur in the same industry. In this the business of the acquirer is
expanded or diversified. Example: Faysal Bank acquires the RBS Bank.
4.2.4 Benefits and Drawbacks of merger and acquisition:
The following are some benefits and drawbacks of merger and acquisition. I can explain it one
by one.
4.3 Benefits of merger:
The following are the benefits of merger and acquisition.
4.3.1 Tax advantages:
Tax advantages are differing on different countries. This benefit is available in mergers. If a
company has a tax lose the other company may want to acquire it to reduce their tax. He can able
to claim tax benefits after merger. But he can claim this carry forward for limited years that are
mentioned by tax department.
4.3.2 Increase liquidity for the owners:
If one company is large and other is small in merger the small company get benefits from the
acquirer company. This merger activity will improve their marketability and liquidity.
Domestic merger and acquisition in Pakistan
University of Lahore | Classification and merits and Demerits of Merger and
Acquisition
19
4.3.3 Synergism:
A merger can affect synergism on the merged companies. Synergism occurs when the merged
company‟s value is greater than sum of the parts. We can understand it with the help of
following equation:
2+2=5
4.3.4 Gaining access to funds:
In the merger if one company may have high leverage ratio where as the other has high liquidity
ratio the company who have high leverage ratio can acquire the company that have high liquidity
position to improve their leverage position.
4.3.5 Growth:
It is very common advantage of merger. It is very economical and less risky for the company to
expand its business by merging it with other company who is producing the same products. Ii is
very faster way of business growth.
4.3.6 Diversification:
This is less risky way to diversify business. One entity may acquire company which is located in
different state.
Synergy occurs when some is greater than parts. It means the performance of company will
better than before. It has two types that are given below:
Economies of scale
Cross selling
4.3.6.1 Economies of scale:
It reduces the duplication cost. The small company enables to enjoy the benefits of large
company. By using it we can utilize the best recourses.
Domestic merger and acquisition in Pakistan
University of Lahore | Classification and merits and Demerits of Merger and
Acquisition
20
4.3.6.2 Cross selling:
It means if any product is differs of the merged companies we cab sell it to the other firms
customers to increase their sales.
4.3.7 Greater value generation:
Companies take interest to go on merger because joint company is better is better than single. It
will be able to generate more value for the business. It expects that newly generated shareholder
value is greater than the sum of both the companies‟ share value.
Merger and acquisition is considered to be successful when it increases the value of both the
companies. A company who is facing many problems and he has failed to solve it than he can go
for merger deal for their survival. A strong company can take interest to buy Week Company or
Small companies to reduce their competition and increase their market share.
4.3.8 Gaining cost efficiency:
When the two companies are joint as a result of merger or acquisition the merged company get
cost benefits. As a result of merger good technology is replaced with the old technology, skilled
labor is replaced with unskilled or inefficient labor that result in reduce the cost. The merged
companies can also enter into new market by making less efforts and bearing less market cost.
4.4 Drawbacks of merger and acquisition
The following are drawbacks of merger and acquisition:
4.4.1 Increased unit cost:
When two companies are combined with each other the merged company is becomes very big
that increase the unit cost.
4.4.2 Conflict between employees:
In merging activity two group of worker can work together. There is very big conflict between
them. Their style of working is different from each other. So it is very difficult to perform some
work together. When they can not work together they can not give good results.
Domestic merger and acquisition in Pakistan
University of Lahore | Classification and merits and Demerits of Merger and
Acquisition
21
4.4.3 Overlapping jobs:
As a result of merger job descriptions, positions and roles are overlapped. Normally it is
common in management. It can not only social cause but it can also damage the motivations of
the employees.
4.4.4 High legal cost:
Firms must pay high legal cost of they want to merge with each other. It is also very
common drawback of merger due to this so many firms cannot merge with big firms
because they cannot pay high cost.
4.4.5 Turnover of unsatisfied customers:
The customers who are not satisfied with the organization can switch t another supplier of
the same products as a result of sudden take over because when they see that the
existence of the company is finished and there is no one to listen and solved their
problems and issues.
Domestic merger and acquisition in Pakistan
University of Lahore | Chapter# 5 22
Chapter# 5
Analysis
5.1 Analysis of ABN AMRO bank and RBS bank
5.1.2 History of ABN AMRO:
The period of ABN AMRO is from 1998 till 2007 one of the big bank of the Europe and 63 other
countries around the world. It starts working in 1824. In Asia ABN AMRO starts working in
1826 when it opened its first branch in Jakarta. It starts its working in Pakistan to provide good
banking services to the Pakistani customers.
5.1.3 History of RBS:
The RBS is started its structure in 1727 with a very few staff. The members of the staff are eight.
The first building of RBS was in old town of Edinburgh. After more than half a century we
traded solely from the Scottish capital, but in 1783 the RBS opened its first branch in Glasgow.
After this achievement many branches were opened in scotlandand then in 1874 our first office
was opened in London.
5.1.3 Date of merger:
On October 8, 2007, merger has been take place between ABN AMRO Bank and RBS Bank.
RBS accept offer to purchase 86 % outstanding shares of ABN AMRO.
5.1.4 Analysis:
By using financial data available in financial statements of ABN AMRO and RBS we have
calculate different finical ratios (liquidity ratio, profitability ratio, solvency ratio, return on
investment ratio, market stock ratio) to measure the performance before and after merger or to
knew the impact of merger on the banks performance
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 23
First of all we calculate liquidity ratio of banks before and after merger. The following table
shows the liquidity position of RBs before and after merger.
Table 5.1 Liquidity Ratios Comparison
Liquidity Ratios Before Merger
ABN AMRO
(Averages)
After Merger
RBS
(Averages)
ABN AMRO
(Status)
RBS
(Status)
Current Ratio 0.82 0.52 Better -
Acid test Ratio 1.36 0.53 Better -
Cash Ratio 0.67 0.38 Better -
Working Capital (3,407,954) (9,658,680) Better -
It is clear from the above table that liquidity position of ABN AMRO was better before merger
deal. So on the basis of this table we conclude that the merger gives a negative impact on
liquidity position of ABN AMRO.
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 24
After liquidity comparison we compare the profitability Ratios of the banks before and after
merger. The following table shows the profitability of ABN AMRO and RBS before and after
merger.
Table 5.2 Profitability Ratios Comparison
Profitability
Ratios
Before Merger
ABN AMRO
(Averages)
After Merger
RBS
(Averages)
ABN AMRO
(Status)
RBS
(Status)
Return on Assets 0.20% (0.96%) Better -
Return on Equity (3.44%) (10.17%) Better -
Gross Profit
Margin
2.33% 3.86% - Better
Net Profit Margin 0.26% (1.14%) Better -
Pre- Tax Profit
Margin
0.96% (1.52%) Better -
Operating Profit
Margin
3.67% 2.05% Better -
The above table gives clear results that profitability of Bank‟s profitability was better before
merger. Out of 6 ratios 5 ratios are in the favor of ABN AMRO. So we can conclude on the basis
of this the merger put a negative impact on the profitability of the Banks.
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 25
Now we calculate the Solvency Ratios of the Banks to know the impact of merger. Solvency
means the ability to pay long term debts. The following table shows the Average of Solvency
Ratios.
Table 5.3 Solvency Ratios comparison
Solvency Ratios Before Merger
ABN AMRO
(Averages)
After Merger
RBS
(Averages)
ABN AMRO
(Status)
RBS
(Status)
Debt to Equity
Ratio
17.80 10.68 - Better
Proprietary Ratio 0.06 0.09 - Better
Interest Coverage
Ratio
(0.24) 0.20 - Better
Debt Ratio 0.94 0.91 - Better
Long term Debt
to Equity Ratio
14.36 7.55 - Better
As you that firms are financed by both debt and equity. These ratios determine firm‟s solvency
position. In terms of bank‟s long-term debt paying ability, the status of RBS improves after
merger deal which means that bank‟s long-term paying capacity improves after merger.
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 26
Now I will calculate the return on investment Ratio by using data given in financial statements.
The following table shows the average of the Ratios.
Table 5.4 Return on Investment Ratios comparison
Return on
Investment Ratios
Before Merger
ABN AMRO
(Averages)
After Merger
RBS
(Averages)
ABN AMRO
(Status)
RBS
(Status)
Return on Capital
Employed
1.46% (2.50%) Better -
Return on
Shareholder
7.24% (13.56%) Better -
The above table shows that the Return on Investment was better before merger because the
returns are than the cost of capital. All the ratios are in the favor of ABN AMRO because all the
earning was better before merger.
The following table shows the Market Stock Ratios of the Banks before and after merger
Table 5.5 Market stock Ratio Comparison
Market Stock
Ratios
Before Merger
ABN AMRO
(Averages)
After Merger
RBS
(Averages)
ABN AMRO
(Status)
RBS
(Status)
Earning per Share 0.31 (0.59) Better -
Earning yield
Ratio
0.05 0.01 Better -
All the Market Stock Ratios are in the favor of ABN AMRO. Merger gives a negative impact on
Market Stock Ratios and they convert into negative from positive.
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 27
Conclusion:
The following table shows the total of all the ratios calculated above and their status before and
after merger.
Table 5.6 Total Ratios Comparison
Ratios Total number of
ratios calculated
Number of favorable
ratios before merger
Number of favorable
ratios after merger
Liquidity Ratio 4 4 -
Profitability Ratio 6 5 1
Solvency Ratio 5 - 5
Return on Investment
Ratio
2 2 -
Market Stock Ratio 2 2 -
Total 19 13 6
On the basis of above analysis I can conclude that this merger could be failure in the history of
banking because out of 19 ratios only 6 ratios are in the favor of RBS Bank and remaining 13 are
in the favor of ABN AMRO. So we can say this merger cans not synergic effect on the banks
ABN AMRO was better before merger.
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 28
5.2 Analysis of union bank and standard chartered bank
5.2.1 History of standard chartered Bank:
Standard chartered starts its operation ion 1969 through merger of two banks. The names of the
merged banks are standard bank of British South Africa and chartered bank of India, Australia
and China.
5.2.2 History of Union Bank:
The union bank was started its working in 1991. Its headquarter is in Karachi. Before merger
with standard chartered it was eighth largest bank in Pakistan. It has 65 branches in 22 cities.
5.2.3 Date of merger:
On 30 December 2006 standard chartered merged with its own subsidiary who‟s name is union
bank. The merged bank name is standard chartered bank Pakistan. It is now sixth larges bank in
Pakistan.
5.2.4 Analysis:
By using financial data available in financial statements of union bank and standard chartered
bank we have calculate different finical ratios (liquidity ratio, profitability ratio, solvency ratio,
return on investment ratio, market stock ratio) to measure the performance before and after
merger or to knew the impact of merger on the banks performance.
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 29
First of all we calculate liquidity ratio of banks before and after merger. The following table
shows the liquidity position of standard chartered before and after merger.
Table 5.7 Liquidity Ratios Comparison
The above table shows the liquidity position before and after merger. We can see that all the
liquidity ratios are in the favor of standard chartered.
Liquidity Ratios Before Merger
(Averages)
After Merger
(Averages)
Before merger
(Status)
After merger
(Status)
Current Ratio 0.2675 0.53 - Better
Acid test Ratio 0.2675 0.76 - Better
Cash Ratio 0.10995 0.76 - Better
Working Capital (93442) (279704) - Better
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 30
After liquidity analysis we compare the profitability Ratios of the banks before and after merger.
The following table shows the profitability of standard chartered before and after merger.
Table 5.8 Profitability Ratios Comparison
The above table gives a clear idea that merger gives a positive effect on the profitability of banks
because out of 6 ratios 5 are in the favor of Standard chartered. The profitability ratios are better
and increase. So we can say that profitability is increase as result of merger.
Profitability
Ratios
Before Merger
(Averages)
After Merger
(Averages)
Before merger
(Status)
After merger
(Status)
Return on Assets 1.05% 82% - Better
Return on Equity 17.1% 11.9% Better
Gross Profit
Margin
45.3% 61% - Better
Net Profit
Margin
20.3% 30% - Better
Pre- Tax Profit
Margin
27.57% 43% - Better
Operating Profit
Margin
72% 118% - Better
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 31
Now we calculate the Solvency Ratios of the Banks to know the impact of merger. Solvency
means the ability to pay long term debts. The following table shows the Average of Solvency
Ratios.
Table 5.9 Solvency Ratios comparison
The bank‟s ability to pay its long term debt is improved as result of merger or the solvency is
improved after merger. All the above ratios are in the favor of standard chartered. So we
conclude that merger gives a positive effect on the solvency of the banks.
Solvency Ratios Before Merger
(Averages)
After Merger
(Averages)
Before merger
(Status)
After merger
(Status)
Debt to Equity
Ratio
1.79 0.95 - Better
Proprietary Ratio 0.059 0.401 - Better
Interest Coverage
Ratio
1.42 3.024 - Better
Debt Ratio 0.93 0.93 - Better
Long term Debt
to Equity Ratio
1.76 2.2 - Better
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 32
Now we will calculate the return on investment ratios. The following table shows the details of
the ratios before and after merger.
Table 5.10 Return on Investment Ratios comparison
The above table shows that return on investment ratios is better before merger. On the basis table
we conclude that merger give a negative impact on the bank.
The following table shows the Market Stock Ratios of the Banks before and after merger.
Table 5.11 Market stock Ratio Comparison
Market Stock
Ratios
Before Merger
(Averages)
After Merger
(Averages)
Before merger
(Status)
After merger
(Status)
Earning per
Share
149.3 179.05 - Better
Earning yield
Ratio
2 3 - Better
The above table gives a clear indication that after merger the earning per share and market price
of stock is improved. We conclude that as result of merger the market stock ratio us improved.
Merger gives a positive effect on the banks.
Return on
Investment
Ratios
Before Merger
(Averages)
After Merger
(Averages)
Before merger
(Status)
After merger
(Status)
Return on Capital
Employed
14.7% 11.95% Better -
Return on
Shareholder
15.37% 12% Better -
Domestic merger and acquisition in Pakistan
University of Lahore | Analysis 33
5.3 Conclusion:
The following table shows the total of all the ratios and their status before and after
merger.
Table 5.6 Total Ratios Comparison
On the basis of above table we conclude that the merger gives a positive effect on the standard
chartered. Out of 19 ratios 16 ratios are in the favor of merger. Merger only reduce the return on
investment of the bank.
Ratios Total number of
ratios calculated
Number of favorable
ratios before merger
Number of favorable
ratios after merger
Liquidity Ratio 4 - 4
Profitability Ratio 6 1 5
Solvency Ratio 5 - 5
Return on Investment
Ratio
2 2 -
Market Stock Ratio 2 - 2
Total 19 3 16
Domestic merger and acquisition in Pakistan
University of Lahore | Conclusion: 34
Conclusion:
A merger is happened when two or more companies are decided to combine their business with
each other. The main reason of the merger is the companies wants to get synergic effect and to
improve their profits. Merge is the most economical method for rapid growth and expansion of
business. Merger is considered successful if it increases the value of the business. The merger of
ABN AMRO and RBS is failed when I make analysis on the performance before and after
merger. The merger of standard chartered with union bank is successful and it increase the value
of the business and become the reason of future growth. Now the standard chartered is earning
high profit and growing day by day. So we can say hat the success of merger is mostly depends
on the management with which the company is going to merge.
Domestic merger and acquisition in Pakistan
University of Lahore | Recommendations: 35
Recommendations:
Domestic merger and acquisition in Pakistan
University of Lahore | References 36
References
Domestic merger and acquisition in Pakistan
University of Lahore | References 37