MERGER, ACQUISITION AND CORPORATE RESTRUCTURINGFaysal Bank acquires RBS Pakistan

Presented to: Prof. Imad-ud-DinPresented By:

Irfan Haider Haseeb-ur-Rehman

Omer Ejaz

IntroductionMerger and Acquisition

Royal Bank of Scotland Faysal Bank

Merger & AcquisitionMergers and acquisitions are the part and parcel of every field, especially in banking industry. This research is focused on the performance of mergers in the last decade. As evident from recent past the banking industry in Pakistan has to cop with many mergers. Mergers are not opted only for the sake of synergy and economic benefits but there are certain other reasons. In Pakistan the other stimulant is the State Bank of Pakistans capital requirement, which is being raised with the passage of time. This study has analyzed the performance of 6 mergers (Prime and ABN AMRO, ABN AMRO and Royal Bank of Scotland, RBS and Faysal Bank, Saudi Pak Commercial Bank and Silk Bank, Union Bank and Standard Chartered Bank and Cres and Samba Bank), occurred in the last decade in Pakistan banking industry

The phrase mergers and acquisitions (abbreviated M&A) refer to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly, without having to create another new business entity.

Royal Bank of ScotlandThe Royal Bank of Scotland is one of the retail banking subsidiaries of the Royal Bank of Scotland Group, and together with some other local banks, provides branch banking facilities throughout the British Isles in addition to having a global reach in many other countries. When RBS entered Pakistan it developed local knowledge and combined it with global expertise and financial strength and strived to deliver value to Pakistani customer. RBS had offices in all major cities including Karachi, Lahore, Islamabad and Rawalpindi and a significant presence in the Pakistani market. It claimed to focus on providing personal and business banking services as well as building extensive relationships with corporate and financial institutions.

ServicesFinancial markets

Transaction banking

Financial advisory

Mergers and acquisitions

Faysal BankFaysal bank limited started its operations in Pakistan on October 3, 1994 as a public limited company under the companys ordinance 1984. Currently Faysal bank has its shares listed on Karachi, Lahore and Islamabad stock exchange and is actively handling its operations in these cities. It is engaged in customer, commercial, corporate and Islamic banking activities. The bank has a bright future and has a long term credit rating of AA and a short term rating as A1+ as determined by Pakistan credit rating agency limited (PACRA) and JCR-VIS credit rating company. Faysal bank strives to achieve excellence in whatever they do and are working towards achieving leadership in providing financial services in chosen markets through innovation.

ServicesDeposit productsConsumer lendingRetail servicesCorporate and banking servicesIslamic bankingPriority banking

Acquisition of RBS by Faysal BankRBS had a merger with the Dutch bank ABN Amro a few years back, but that too did not help much in supporting and firming the shaky financial condition of the bank, and thus the subsequent downfall of the bank led to the decision of the management at RBS to end their operations in Asia by withdrawing their business in the retail and commercial sectors.

Later, Faysal bank limited took over the controlling interests in the Pakistan operations of Royal Bank of Scotland Limited (RBS Pakistan), from the RBS Group for Euro 41 million which culminates in a share price of 2.5. In local currency this amount stands at 4.298 billion. This acquisition has extended and rooted Faysal Banks hold to over 200 branches, with combined business assets of over 260 billion, strengthening its balance sheet and improving its position amongst its competitor in the market. The merger of RBS Pakistan into Faysal Bank Limited was completed by January, 2011 thereby achieving a significant milestone in its growth strategy. RBS had 1,717,981,931 ordinary shares listed on the Karachi stock exchange, Lahore stock exchange and Islamabad stock exchange which are now owned by Faysal bank.

Obvious Advantages

According to the analysts there were two main reasons behind this merger for the management at Faysal Bank, first was to increase its market share, and the second to develop themselves as the providers of premium banking products.Also the motivation of becoming the 10thbiggest bank of the country and the obvious probability of Faysal Bank getting larger than Bank Al Habib and Askari Bank.Another reason was also that the brand equity of the bank is quite large and the brand itself, RBS is a plus point, as it is globally well recognized. The acquisition also helped Faysal bank in acquiring the some of the best human capital in Pakistan in terms of banking talent.

Acquisition and the after Effects

In one of the recent statementsto the media, Naved A Khan, President & CEO Faysal Bank Limited said:The acquisition is a significant milestone in Faysal Banks strategy to expand its presence and commitment to Pakistan, whilst offering a wider range of products across all business segments, with continued focus on improving customer experience. This expansion has resulted in positioning the bank as one of the key players in the financial sector, which is undergoing consolidation. The bank remains committed to all its stakeholders, customer and employees, while continuing to fulfill its corporate responsibilities. At another place Syed Naseem Ahmed, Chairman Faysal Bank Limited said:This acquisition significantly complemented our ambitious growth plans. We will ensure that we optimize on the opportunities arising from this acquisition through providing the necessary support, investment and resources to the management of the bank with time further.

Ratios and Quantitative Analysis Ratio analysis, being a time-tested technique, is most frequently employed in all financial decision-making processes.There is a clear decrease in the profits and the net income of the bank; this is due to the decision of the bank to acquire the RBS. According to the Bahrain parent company Ithmaar, the finances for the acquisition were to be arranged by local operations and capital reserves of Faysal bank here in Pakistan. The effect of the acquisition in the short-term with the help of the ratios, is that it seems as if the financial health of the bank has weakened, though the high rate of taxes along with the high rate of inflation and the market condition itself which is going through a slump nowadays, also has played a very important part in the current operative conditions of the bank. Also the reason for the decline in the ratios and resultantly the financial health of F.B is due to the increase in operating expenses attributed to operations of RBS. After excluding administrative expenses of Rs. 1,251 million relating to RBS operations, administrative expenses increased by Rs. 300 million primarily on account of general inflation, salary increments and IT related expenses.

Conclusion

As the ratios and the financial analysis of the bank for this quarter compared to the last quarter same year shows that there has been a decrease in the overall net profit in the short term, but the addition of the assets and the huge customer base of the RBS will benefit the company in the long run, and thus the company is sure to recover and come back to a healthy recovery in the future.