Sana Tauseef

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<p>Wealth Effect of Mergers &amp; Acquisitions in an Emerging Market: A Case Study of Pakistans Banking Sector</p> <p>Sana Tauseef Lecturer, Economics and Finance Institute of Business Administration (IBA), Karachi Email: and Mohammed Nishat, PhD Professor, Economics and Finance Institute of Business Administration (IBA), Karachi Email:</p> <p>AbstractThis study investigates the short term market response associated with the announcement of seven mergers and acquisitions (M&amp;As) in the banking sector of Pakistan during the period 2003 to 2008 using the event study methodology. We categorize the sample M&amp;A deals as (1) Acquisition of Pakistani banks by the foreign investors, (2) Merger of Pakistani banks with the other domestic banks and (3) Merger of Pakistani banks with the foreign banks operating in Pakistan. The results indicate statistically significant investor reactions around the merger announcements. For individual target and bidder banks, the cumulative abnormal returns (CARs) range from significant positive to significant negative. The combined mean CARs for the target banks group and bidder group are both positive and statistically significant. The mean CAR for the combined banks in the domestic mergers is also positive but is largely impacted by the substantial positive CAR of one bidder bank.</p> <p>Key Words: Merger &amp; Acquisition, Wealth effect, emerging market, banking JEL: G34, G38, E21, G21, F40</p> <p>1</p> <p>Electronic copy available at:</p> <p>Wealth Effect of Merger &amp; Acquisition in an Emerging Market: A Case Study of Pakistans Banking Sector</p> <p>1. IntroductionIn the face of technological advancement, globalization, and increased competition, the firms all over the world are trying to maintain their competitive position. There is a growing trend towards consolidation to reap the benefits through synergies, thereby, enhancing efficiency and performance. The same trend has been observed in Pakistan. In the recent past, after 1998, there are a large number of mergers taking place every year, both within and across sectors. Although there is mounting evidence available for developed economies on the issue, little research exists to examine the value creation through mergers in smaller and less developed markets. Considering the large number of mergers and acquisitions taking place in different sectors of Pakistan, there is a need to study the wealth creation for the shareholders of targets and bidders. Building on the earlier studies done on the topic in developed and other less developed countries, we attempt to examine the wealth impact of mergers deals in Pakistan. Of all the mergers that took place during the mentioned period, more than 50% occurred in the financial sector, including banks, leasing companies, modarabas, and mutual funds. This resulted mainly due to the SBPs regulatory policies, which focused on consolidating the weak financial institutions by strengthening their capital base. According to the State Bank of Pakistans BSD Circular No. 06 dated October 28, 2005, all locally incorporated banks were required to raise their minimum Paid up Capital (net of losses) to Rs. 5 billion by December 31, 2008, Rs. 6 billion by December 31, 2009, Rs. 10 billion by December 31, 2010, Rs. 15 billion by December 31, 2011, Rs. 19 billion by December 2012, and Rs. 23 billion by December 31, 2013. With this policy of SBP, the banks which were not able to meet the requirements were merged with other banks or were acquired by some large banks. Keeping in view the global crisis and domestic economic slowdown, the State Bank of Pakistan as per the BSD Circular No. 07 dated 15th April 2009 has slashed the paid-up capital limit to be maintained by the banks. The banks are now required to raise their minimum Paid up Capital (net of losses) to Rs. 10 billion by December 31, 2013, but the trend towards consolidation continues and therefore there is a need to study the wealth impact of the merger and acquisition deals in the banking sector. A lot of empirical research has been done to explore the wealth effect of merger activity in the developed economies, especially U.S., U.K., and Europe. The studies conducted to analyze the wealth creation through mergers use different measures. One set of studies uses the event study methodology, looking at the short to medium run stock performance of the bidder, target and the merged entity. This methodology is based on the assumption of efficient market where the stock prices react in a timely and unbiased manner to new information (Fama 1970; Roberts 1967).2</p> <p>Electronic copy available at:</p> <p>The other set of studies looks at the accounting performance indicators, like ROE and various cash flow measures, to compare the pre and post merger performance. Such studies believe that the gains or losses resulting from a merger eventually appear in the firms accounting records (Tuch and Sullivan 2007). Both set of studies have ended in variable results. Short run event studies including the US takeovers during 1960s (Asquith 1983) and UK takeovers during 1950s (Franks and Harris 1989) reported significant positive returns to the acquirers. However, the remaining event studies, both short run and long run, conducted on US and UK takeovers provide either no significant change or report significant negative returns for the acquirers (Tuch and Sullivan 2007). On the other hand, the target firms announcement returns in US and Europe are found to be large and significantly positive (Kiymaz and Baker 2008). According to these researches, the mergers merely transfer the wealth and the target shareholders gain at the expense of the acquiring firms and no wealth is created in process. A study covering 54 mergers including 13 European banking markets of European Union and the Swiss market for the period 1988 to 1997 has reported positive and significant increase in the shareholder wealth of bidder and target banks (Cybo-Ottone and Murgia 2000). Campa and Hernando (2004) found a negative return around the bid announcement for the regulated European Union acquirers and reported no significant return for the bidders from unregulated industries. In Canada, the acquiring firms are reported to have positive returns (Ben-Amar and Andre 2006). The evidence from the research using accounting information is also mixed. The studies examining the post-bid accounting performance of the acquirers for the period between 19481977 in UK reported either a decline in the profitability following the merger (Meeks 1977; Ravenscroft and Scherer 1987) or significantly lower returns for the acquirers compared to the non-acquirers (Dickerson 1997). The study by Healy (1992) reports an improvement in the asset productivity (measured through operating Cash flow return on market value of assets) of the acquiring firms in US. Andrade (2001) also finds an improvement in the post merger performance (measured through ratio of cash flow to sales) for the US mergers. The study conducted by Altunbas and Marques (2004) on mergers taking place during the period 19922001 in Europe reported superior post merger performance; however, the improvement in performance following the cross border mergers is reported to be more compared to the performance improvement of banks entering into domestic mergers. Since the researches using the accounting information use different measures to capture the change in performance, they are difficult to compare. The mixed evidence on the returns from mergers encouraged the researchers to examine the different bid characteristics to identify the drivers of differential performance. These studies report that for strategically closer institutions the performance improves more than for dissimilar institutions, thereby supporting the synergy hypotheses (Altunbas and Marques 2004; Tuch and Sullivan 2007). Moreover, the institutions performing very well prior to mergers are not able to improve their performance as much as the low performers in both the domestic and cross border mergers. The studies also report that the3</p> <p>Electronic copy available at:</p> <p>hostile takeovers, where the takeover activity takes place despite of the target managements opposition, are associated with better performance if excessive takeover premiums are not paid. This is taken as an indication that the hostile takeovers play a governance role and target the firms where managers are under performing (Tuch and Sullivan 2007). Although there is extensive evidence available for developed countries on the issue, little research exists for the emerging and less developed economies. In a study of cross border mergers and acquisitions by the Chinese firms positive and significant wealth gains were found for the acquiring firms (Boateng, Qian and Tianle 2008). Mishra and Goel (2005) in their study of a merger deal in Indian energy and petrochemical sector found that despite the deal appearing favorable to the shareholders of bidder company, the announcement returns for bidders were found to be negative. The returns for the target firm were positive but the combined firm was reported to have negative excess returns. Such negative returns were linked to the managerialism hypothesis, indicating that the acquirers management is motivated by its own self-interest and is not pursuing the merger deal for their shareholders benefit (Nishra and Goel 2005; Tuch and Sullivan 2007). In the Indian banking Industry, merger announcements were found to have a positive and significant wealth effect both for the bidder and the target banks (Anand and Singh 2008).</p> <p>2. Data and Research DesignOur research uses the standard event study methodology to measure the impact of merger announcements on the wealth of the merging firms shareholders. To conduct the study, we consider the following seven mergers/acquisitions that occurred in the banking sector of Pakistan during the period 2003 to 2008: Acquisition of Saudi Pak Commercial Bank Limited by M/s Shaukat Tarin &amp; Consortium, merger of PICIC commercial bank with and into NIB, merger of Prime Commercial Bank with and into ABN Amro (Pakistan) Limited, acquisition of majority shares of Crescent Commercial Bank Limited by SAMBA Financial Group, merger of Union Bank Limited with and into Standard Chartered Bank (Pakistan), merger of Trust Investment Bank Ltd., Fidelity Investment Bank Ltd., and Doha Bank into Trust Commercial Bank Ltd (a new entity), and merger of Platinum Commercial Bank with and into Khadim Ali Shah Bukhari and Co.1 Table 1Serial Number Bidder Bank Target Bank/s Announcement Date Merger/ Acquisition Date March 31,</p> <p>11</p> <p>Consortium including</p> <p>Saudi Pak Bank Bank January 07, 2008</p> <p>Table 1 illustrates the sample mergers/acquisitions with the respective announcement dates and the effective merger dates.</p> <p>4</p> <p>2 3 4 5 6 7</p> <p>Muscat and Japans Nomura NIB ABN Amro (Pakistan) Limited Samba Financial Group Standard Chartered Bank (Pakistan), Trust Commercial Bank (new entity) KASB</p> <p>2008 PICIC Commercial Bank Prime Commercial Bank Crescent Commercial Bank Union Bank Limited Trust Inv.Bank Ltd, Fidelity Inv.Bank Ltd., and Doha Bank Platinum Commercial Bank June 29, 2007 Mar 05, 2007 Nov 17, 2006 August 09, 2006 August 06, 2003 February 25, 2003 Dec 31, 2007 Sept 01, 2007 March 31, 2007 Dec 30, 2006 May 05, 2004 May 08, 2003</p> <p>The sample mergers and acquisitions fall into three broad categories: I. Acquisition of Pakistani banks by the foreign investors. The acquisition of Saudi Pak Bank (renamed as Silkbank) by a Consortium comprising of IFC, Bank Muscat, Nomura International and Sinthos Capital and the acquisition of Crescent Bank by SAMBA Financial group were the foreign ventures attracted by the Pakistan's strongly performing banking sector and reflected the investor-friendly policies pursued by the Government of Pakistan. Merger of Pakistani banks with the other domestic banks. The merger of NIB and PICIC has resulted in NIB Bank becoming the seventh largest bank in the country in terms of the distribution network. The amalgamation of Trust Investment Bank Limited (TIBL) and Fidelity Investment Bank Limited (FIBL) together with the Doha Bank Pakistan Branches created Trust Commercial Bank Limited which was then merged with and into the Crescent Commercial Bank. The acquisition of Platinum Commercial Bank Limited by KASB was the first merger of a stock brokerage firm with a commercial bank in Pakistan and the name of the company was subsequently changed to KASB bank Limited. Merger of Pakistani banks with the foreign banks operating in Pakistan. After the acquisition of and amalgamation with Union Bank, the new entity Standard Chartered Bank (Pakistan) Limited was incorporated in Pakistan and currently it is the largest international bank operating in Pakistan. The amalgamation of Prime Bank with ABN Amro allowed the new entity ABN Amro Pakistan limited to increase its branch network in the country and become the second largest international bank in Pakistan.</p> <p>II.</p> <p>III.</p> <p>The study tests the following hypothesis:</p> <p>5</p> <p>The merger announcements in the banking sector of Pakistan do not create shareholders wealth for the merging banks In order to test the hypothesis, the study requires the announcement dates for each of the five mergers, the window period and the clean period data for each merger deal. Announcement date (t=0) is the date on which the information about the merger deal was first made public. These dates are obtained from the news clipping available on the websites of Daily Business Recorder ( and Daily Dawn ( The event window has been taken from t=-30 to t=+30, where t=-30 represents 30 days before the merger announcement date (t=0) and t=+30 represents 30 days after the merger announcement is made. We employ the single-factor market model to compute the abnormal return for each bank stock in the 60-day window. The market model parameters are computed using an estimation period of 180 days before the window period for each participating firm. The period of 30 days prior to the announcement date is not included in this clean period to prevent the events influence on the parameter estimates. The following market model is employed for the parameter estimations: ARit = Rit E(Rit) where, ARit = Abnormal return for bank stock i on day t. Rit = Actual return of bank stock i at time t. E(Rit) = Expected return on bank stock i at time t. This is measured by the following equation: E(Rit) = + Rmt = Ordinary least squares estimate of the intercept of the market model regression. = Ordinary least squares estimate of the coefficient in the market model regression. Cumulative abnormal returns are used to explore whether the share holders of the each bidder and target bank gained or loosed from the respective merger deal. These CAR...</p>