project report assignment, Assignments of Finance

Download project report assignment and more Assignments Finance in PDF only on Docsity!

CHAPTER NO.

INTRODUCTION

PROBLEM STATEMENT

“Impact of merger & acquisition in banking sector” OBJECTIVE The main objective of the research report are as following  Reason of merger Why companies do merger? What are the main reason behind the Merge ring of different companies?  Benefits of merger What benefits drive from the merger by shareholder and companies?  Analysis the impact of merger in banking sector an as well as economy What will be the impact of merger on banking sector and as well as economy. What will be the future trend of merger?  Compare it to other merger like ABN-AMRO and Prime Bank Comparison of merger in different banks like ABN-AMRO and Prime Bank, Union Bank and Standard Chartered.

CHAPTER NO.

LITERATURE REVIEW

LITERATURE REVIEW

Standard Chartered Bank has become the largest bank in Pakistan in terms of paid-up capital after the acquisition of the local Union Bank, the DAWN newspaper reported Wednesday. After the merger, the bank has been named Standard Chartered Bank Pakistan (SCBP), the largest foreign bank in Pakistan, said the report. Standard Chartered PLC announced on Sept. 5 this year that its subsidiary company, Standard Chartered Bank (Pakistan) Limited, had completed the acquisition of a 95. percent interest in Union Bank Limited, and paid 487 million U.S. dollars in cash for the purchase, said the report. On Monday, the bank announced to pay 2.5 shares of SCB to buy one share of Union Bank. The current free float of Union Bank is estimated at 16 million shares. "By applying this swap ratio (2.5:1), the paid-up-capital of SCBP would reach 8.9 billion Pakistani rupees (about 148.3 million U.S. dollars), ordinary shares of 892 million," Muhammad Imran, analyst at JS brokerage house, was quoted as saying. The paid-up capital of SCBP is the highest among all banks operating in Pakistan. The second highest paid-up capital is of National Bank of Pakistan which stands at 7. billion rupees (about 118.16 million U.S. dollars), with the largest branch network and the biggest number of account holders, said the report. The high growth of financial sector in Pakistan during last couple of years has generated a new wave of investment from overseas, it said. Source: Xinhua Acquisition makes Standard Chartered largest foreign bank in Pakistan: report

number one in terms of growth during the financial year 2005-06. They said the average economic growth of seven per cent for the last three years was another reason that attracted foreign banks like HSBC and Standard Chartered Bank. “HSBC has shown keen interest in Prime Bank which has the potential to grow fast, while the cost will be much less than Union Bank,” said a senior banker. When Standard Chartered Bank had initiated to buy Union Bank, a number of bankers predicted this initiation would create a great interest in the international market and more foreign banks might come to buy local banks. It proved correct with latest development in the banking industry. “The presence of international banks like Standard Chartered and HSBC in Pakistan will improve country’s image abroad and send a very positive signal to the global markets,” said a senior banker, adding that banks had provided record credit to the private sector in the last three years. As per March 31, 2006 quarterly report, Prime Commercial Bank is operating with 62 branches, having deposits of Rs40.6 billion. In 2005, it posted a profit after tax of Rs495m as compared to Rs345m last year, indicating a growth of 43 per cent. Prime Commercial Bank came into existence on September 30, 1991, with presence in all the stock exchanges. Some of the foreign investors belong to a well-diversified business group, Bin Mahfooz group of Saudi Arabia. In case of Union Bank, the Saudi investor was the majority shareholder who initiated the dialogue to sell the bank. The Saudi group would earn at least eight times more than what they invested in Union Bank. Analysts said the Saudi group would also earn much more than what they invested in Prime Bank.

The bank focuses primarily on the middle market commercial banking segment, consumer banking initiatives as well as agricultural, housing, financing of small and medium sized enterprises and Islamic banking. Total asset of Prime Bank during the period from December 1992 to December 2005 has grown at an annual compound rate of about 23 per cent to Rs53.8 billion. Within this period, shareholders’ equity grew from Rs371 million to Rs3.4 billion, deposits to Rs38. billion and advances (net) to Rs25.5 billion. http://www.dawn.com/2006/06/30/ebr1.htm Khuree Jul 13 2006, 07:10 PM KARACHI[18 Jul 2006] - Emerging markets giant Standard Chartered is completing a deal to buy Pakistan's Union Bank in what would be the South Asian country's largest corporate takeover. The British-based bank plans to acquire a 49 percent stake in the company from a Saudi investor, banking officials said Tuesday. "Due diligence of the transaction has been completed and regulatory approval may take some time for formal completion of the deal," State Bank of Pakistan spokesman Syed Wasimuddin told AFP. "(The deal) is good for the country, for the banking sector," Union Bank President Shaukat Tareen said, without giving details of the sale. Reports said the deal would be worth at least 500 million dollars but the central bank would not confirm it.

CHAPTER NO.

MERGERS & ACQUISITIONS

DEFINITIONS OF MERGER

“A merger is a general term for the combination of two or more companies. Strictly speaking, only a corporate combination in which one of the companies survives as a legal entity is called a merger.” DEFINITION OF ACQUISITION “ The act of contracting or assuming or acquiring possession of something; “the acquisition of wealth”; “the acquisition of one company by another” MECHANICS OF MERGERS AND ACQUISITIONS These corporate combinations can be accomplished in three different ways:

1. By pooling of interests
2. By purchase acquisition
3. By consolidation By pooling of interests A pooling of interests is generally accomplished by a common stock swap at a specified ratio. Such mergers are only allowed if they meet certain legal requirements. Pooling of interests is less common than purchase acquisitions. By purchase acquisition Purchase acquisitions involve one company purchasing the common stock or assets of another company. In a purchase acquisition, one company decides to acquire another, and offers to purchase the acquisition target’s stock at a given price in cash, securities or both. This offer is called a tender offer because the acquiring company offers to pay a certain

paid back to its shareholders by dividend or through liquidation. However, one of the advantages of an asset purchase for the buyer is that it can "cherry-pick" the assets that it wants and leave the assets - and liabilities - that it does not. This leaves the target in a different position after the purchase, but liquidation is nevertheless usually the end result. The terms "demerger", "spin-off" or "spin-out" are sometimes used to indicate the effective opposite of a merger, where one company splits into two, the 2nd often being a separately listed stock company if the parent was a stock company. CLASSIFICATIONS OF MERGERS  Horizontal mergers take place where the two merging companies produce similar product in the same industry.  Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine. Conglomerate mergers take place when the two firms operate in different industries. WHY DO MERGERS OCCUR? There are a number of reasons that mergers and acquisitions occur. These issues generally relate to business concerns such as competition, efficiency, marketing, product, resource, and tax issues. They can also occur because of some very personal reasons such as retirement and family concerns. However, let’s begin our exploration of why corporate combinations occur by discussing an often-cited reason - corporate greed. Corporate Greed? Some people say that mergers and acquisitions occur because the greedy corporations want to acquire everything. As far as economic theory is concerned, the primary

objective of a firm is to maximize profits, and thereby maximize shareholder wealth. We can argue about the firm’s approach to maximizing profits (e.g., whether being a good corporate citizen increases profits long term, etc.), but any firm, corporation or not, should make decisions designed to increase its profits. At this point, I am usually accused of paraphrasing the character, Gordon Gecko in the movie Wall Street, who said, “Greed is good.” I am not saying greed is good; I am saying that the desire for more rather than less is an integral part of the human psyche. However, the interesting thing about studying mergers and acquisitions is that it appears that corporations sometimes make decisions that run counter. As we shall see when discussing the economic impact of corporate combinations, firms sometimes make decisions that seem to lessen shareholder wealth. SPECIFIC REASONS WHY MERGERS AND ACQUISITIONS OCCUR? (Other than Greed) Eliminate Competition One important reason that companies combine is to eliminate competition. Acquiring a competitor is an excellent way to improve a firm’s position in the marketplace. It reduces competition, and allows the acquiring firm to use the target’s resources and expertise. Unfortunately, combining for this purpose is per se illegal under the antitrust acts as a predatory practice in restraint of trade. Consequently, whenever a merger is proposed, a major part of the resulting press release often deals with how this combination of firms is not anti-competitive, and is done to better serve the consumer. Even if the merger is not for the stated purpose of eliminating competition, regulatory agencies may conclude that a merger is likely to be anti-competitive. The combination would prompt a series of

This is a two-part reason that companies merge. If firm A has a great deal of liquid assets, it becomes a tempting takeover target because the acquiring firm can use the liquid assets to expand the business, pay off shareholders, etc. If A invests existing funds in a takeover, it has the effect of discouraging other firms from targeting firm A because A has increased in size, and will require a larger tender offer. Thus, the company has found a use for its excess liquid assets, and made itself more difficult to acquire. Often firms will state that acquiring a company is the best investment the company can find for its excess cash. This is the reason given for many conglomerate mergers. Improve Earnings and Sales Stability Improving earnings and sales stability are concerned with reducing corporate risk. If company A has some sort of earnings or sales instability, merging with company B may reduce or eliminate the instability provided company B’s instability is negatively correlated with company A’s instability. Suppose company A manufactures lawnmowers. Suppose further that company B manufactures snow blowers. Thus, company A makes money in the summer while company B makes money in the winter. If the companies are approximately the same size and have approximately the same sales, then by merging, they can eliminate the seasonal instability. Unfortunately, this is an economically inefficient way of eliminating instability. Market/Business/Product Line Issues Often mergers occur simply because one firm is in a market that another wants to enter. All of the target firm’s experience and resources (the employees’ expertise, business relationships, etc.) are available by buying the targeted firm. This is a very common

reason for acquisitions. Whether the market is a new product, a business line, or a geographical region, market entry or expansion is a powerful reason for a merger. Closely related to these issues are product line issues. A firm may wish to expand, balance, fill out or diversify its product lines. For example, merger and acquisition activities of Nortek/Peachtree Companies are primarily product line related. Acquire Needed Resources One firm may simply wish to purchase the resources of another firm or to combine the resources of the two firms. These resources may be tangible resources such a plant and equipment, or they may be intangible resources such as trade secrets, patents, copyrights, leases, etc., or they may be talents of the target company’s employees. One reason given for the mergers in the petroleum industry is that companies wish to acquire the leases of their competitors. Synergy Synergy, a term made popular in the 1960’s, states that there are efficiencies gained in all the things you do because you do more than one thing. The related popular catch phrase of the time was “two plus two equals five.” Synergy is similar to the concept of economies of scope. Economies of scope would occur if a meat processing company merged with a leather goods manufacturer, and the combined company was more cost efficient at both activities because each requires the same raw material. Although synergy is often cited as the reason for conglomerate mergers, cost efficiencies due to synergy are difficult to document. Corporate Tax Savings

STRATEGIES FOR A SUCCESSFUL ACQUISITION

Why are so many organizations apparently unable to overcome such difficulties? A merger or major acquisition is often a unique, one-off event in the lifetime of a firm; companies therefore have no opportunity to learn from their experience and develop tried-and-tested methods to ensure that the process is carried out smoothly. Through experience, we learnt four basic lessons:

1. The integration of acquired companies is an ongoing process that should be initiated before the deal is actually closed. During the period in which the acquisition is being negotiated and subjected to regulatory review, the management of the two companies can liaise with each other and draw up a clear integration strategy. Starting earlier not only allows the integration to proceed faster and more efficiently, but also gives the opportunity to identify potential problems (such as drastic differences in management style and culture) at a stage when it is not too late to abandon the deal if the difficulties encountered seem so severe that the acquisition is likely to fail. Unfortunately, however, even if a very thorough investigation is done prior to the acquisition, there are often potential problems that will not manifest themselves until long after the deal has been done. It is also impossible to take early steps towards integration in the case of a hostile takeover bid (where the managers of the company being acquired refuse to co- operate with their potential buyers).
2. Integration management needs to be recognized as a "distinct business function", with an experienced manager appointed specifically to oversee the process. The 'integration managers' that selects to oversee its acquisitions can come from a

wide variety of backgrounds, but all must have the interpersonal skills and cultural sensitivity necessary to foster good relationships between the management and staff of the parent company and its new subsidiary.

3. If uncomfortable changes (such as layoffs and restructuring) have to be made at the acquired company, it is important that these are announced and implemented as soon as possible - ideally within days of the acquisition. This helps to avoid the uncertainties and anxieties that can demoralize the workforce of a newly-acquired company, allowing employees to move on and to focus on the future.
4. Perhaps the most important lesson is that it is important to integrate not just the practical aspects of the business, but also the firms' workforces and their cultures. A good way to achieve this is to create groups comprising people from both companies, and get them to work together at solving problems. Other authors, however, question whether aiming for total integration of two contrasting company cultures is necessarily the best approach. There are, in fact, four different options for reconciling cultural differences: complete integration of the two cultures, assimilation of one culture by another, separation of the two cultures (so that they are maintained side by side), or deculturation (eventual loss of both cultures). The optimal strategy may depend upon the degree of cultural difference that exists between the organizations, and the extent to which each values its own culture and identity suggests an alternative set of "seven key practices" to assist with a successful merger or acquisition:
5. Close involvement of Human Resources managers in the acquisition process; they should have a say in whether or not the deal goes ahead.