MERGER AND ACQUISITION

Table of contents
Introduction of Merger and acquisition Purpose and categories of merger & acquisition. Merger and Acquisition in Banking Sector. Analysis Profitability Capital adequacy indicators Liquidity risk indicator Growth indicators Conclusion Recommendation

Introduction
The wave of merger and acquisitions started after the announcement by the state bank of Pakistan. Mergers and Acquisitions are: Common place in developing countries of the world but became prominent in Pakistan after 2000.

Cont,.
More efficient, better-capitalized, more skilled industry. Primary driven by Business motives or market forces and Regulatory interventions. Singing a useful role in restructuring the banking industry with no risk and lack of opposition.

Merger
Merger means combining two companies in one corporation which is completely absorbed by another company. The less significant company loses its name and operates with more important company, which exists with its identity.

Acquisition
Acquisition is use to acquired property in ownership. In corporation combinations, an acquisition is to buy one company by getting controlling interest in all resources of other company.

Categories of Merger and Acquisition

Vertical Combination Horizontal Combination Circular Combination Conglomerate Combination Market-extension Product-extension

Merger and Acquisition in Banking Sector

In Pakistan, banks chose to acquire / merge with other banks in order to comply with the statutory requirement of raising their paid up capital to at-least Rs.10 billion by the end of 2009. The privatization policy of the government resulted in acquisitions of ABL, UBL and PTCL

Cont,
Some mergers took place at the time of nationalization of Pakistani banks on January 1, 1974 reducing the number of bank from 16 to 5. Merger and acquisition took place at large scale during 1980's, 1990's and 21st century. Foreign banks have usually small numbers of branches. If they acquire Pakistani bank they can get lager branch network.

Cont,
Some small foreign banks were not running profitability so they merge themselves to Pakistani banks. For example, the Pakistani operations of bank of America and Emirates banks were sold to Union bank. Later on Union Bank itself bought by Standard Chartered Bank.

Standard Chartered Bank

The history of Standard Chartered in Pakistan dates back to 1863, when the Chartered Bank of India, Australia and China first established its operations in Karachi.

Union Bank
Union Bank was established in 1991, with its headquarters in Karachi, Sindh, Pakistan. Prior to the merger with Standard Chartered Bank in 2006 it was Pakistan's eighth largest bank and had 65 branches in some 22 cities, about US$2 billion in assets, and about 400,000 customers.

Merger Of Standard Chartered Bank And Union

Union Bank and Standard Chartered Bank have merged to become one bank. After merger, the bank had 115 branches and a network of 119 ATMs in 22 Major cities in Pakistan.

Analysis
Profitability Final

Table 1: Standard Chartered Bank (SCBPL)

2002 2003 2004 2005 2006 2007 2008 2009 Average

pre

pre

pre

pre

post

post

post

post

pre

post

Return on assets

3.4

3.2

3.23

3.25

1.23

1.29

0.27

0.25

3.27

0.76

Return on Equity
53 36 36.67 16.5 17.19 13.75 14.65 16.65 35.54 15.56

Return on deposits 5.39 4.64 4.56 4.57 3.29 3.73 1.57 0.36 4.79 2.23

capital employed 58.0 54.01 64.03 69.05 49.08 45.08 47.16 47 61.23 47.08

Interpretation
The three ratios i.e. return on assets, return on equity and return on deposits showed declining behavior. Return on capital employed ratio declined in first year after merger but after that it improved and showed a way towards better performance. All these ratios show that the profitability indicators are slowly declining after merger and acquisition.

Capital Adequacy Indicators

Data finding (SCBPL)

Table 2. Capital Adequacy SCBPL

2002 2003 2004 2005 2006 2007 2008 2009 Average pre pre pre pre post post post post pre post

Total capital to assets

Loans to total capital Deposits to total capital

7.82

7.89

8.27

7.31

7.99

6.93

7.25

7.72

7.31

7.72

0.95

0.99

1.72

1.22

0.98

1.29

0.99

1.96

1.22

1.96

7.01

5.17

5.34

6.03

6.78

6.08

7.89

7.91

6.03

7.91

Capital/ risk assets

18.11

17.99

17.61

17.93

16.87

17.19

16.98

17.49

17.93

17.49

Interpretation
Total capital to assets ratio presented escalating tendency year to year which showed positive response for capital adequacy improvement. Loans to total capital ratio grew very low in post-merger and acquisition period as compared to pre-merger period.

Cont,
Capital/risk assets ratio or capital adequacy ratio shows how banks can cope up with the risks. It is a measurement which shows how much capital is used to maintain the banks' risk assets. This ratio determines the capacity of a bank in terms of meeting with the legal responsibility and extra risks such as credit risk and operational risk. So capital provides cushion for potential losses.

Cont,
There was no specific fluctuation in capital adequacy ratio as represented same trend in pre-merger and acquisition period.

Liquidity Risk Indicator

Data Finding (SCBPL)

Table 3: Liquidity Risk Of SCBPL

2002 2003 2004 2005 2006 2007 2008 2009 Average

pre

pre

pre

pre

post

post

post

post

pre

post

Loans to total assets

deposits to total assets loans to deposits

10.15

9.73

9.97

10.12

9.67

9.91

10.69

11.24

10.08

10.38

5.25

5.48

6.89

5.93

4.47

4.56

5.18

5.89

5.88

5.02

75

69

71

73

67

62

70

74

72

67

Fixed assets to total assets

15

13

17

18.3

16

19

17.5

17

15.82

17

Interpretation
In SCBPL the loans to assets ratio increased year to year which was risky for bank. Deposits to total assets ratio in post merger era declined which was not in favor of bank performance. Loan to deposit ratio decreased in first 3 years of merger but after 2009 it increased. It means that in first 3 years banks was not earning as much as they could but from 2009 the bank generated more earnings.

Cont,..
Fixed assets to total assets ratio increased in post merger era which showed that the liquidity condition of banks fetched weaker.

Growth indicators
Data Finding (SCBPL)

Table 4: Growth Indicator Of SCBPL

2002 2003 2004 2005 2006 2007 2008 2009 Average pre pre pre pre post post post post pre post

EPS

5.36

4.87

5.12

5.19

5.89

4.91

5.09

5.37

5.13

5.43

Price ratio

Earnings

4.89

4.38

5.10

4.79

4.12

4.92

5.67

5.84

4.79

5.13

Dividend ratio

Yield

35

29

37

33

32

38

41

45

33.5

39

Dividend Payout 24 ratio

22

28

31

26

31

37

39

26.5

33.25

Interpretation
EPS increased in post merger period which showed better performance in stock. The price earning ratio increased which shows that in post merger era the market growth of bank has gone well. The growth indicator showed that the market value of bank turns into betterquality after merger.

CONCLUSION
The study showed that mergers and acquisitions in banking commerce are among the policy trusts of SBP to correct the variance in the industry. The merger sharpened the competitive edge in the industry that they need to play in the emerging global financial markets. It further showed that one of the fall outs of the mergers was the shrinkage in the industry. Pakistan has banks with huge capital to invest now, but it is instructive to note that size and huge capital do not necessarily make a good and sound bank.

Recommendation
There are some recommendations after conclusion of this study; Government should provide enabling environment that will encourage more merger in Pakistan, whereby our nation can have a strong bank with good capital bases. SBP should make such policies which can control monopoly creation in banking industry. SBP should fix minimum capital base for all banks to run their operation successfully and in risk free environment.

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