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Domestic merger and acquisition in Pakistan

University of Lahore | DECLARATION i


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


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


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:-


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.


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.


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.


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



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



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



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


University of Lahore | List of tables 5

List of tables


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.


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.



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.



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.


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.


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?


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.


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.



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



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



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.



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.


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.



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.



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.



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.



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


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.



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.



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.



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.



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.



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.



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



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



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



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 -



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


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.


University of Lahore | Recommendations: 35

Recommendations:


University of Lahore | References 36

References


University of Lahore | References 37

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