Corporate Finance

COURSE CODE-5542

ASSIGNMENT NO. 2

Impact of mergers and acquisitions upon the financial environment of Pakistan

Submitted By:

Muhammad Yousaf

Page 1

Corporate Finance

Acknowledgement

I am very grateful to Allah, the Almighty that HE gifted me the ability to learn and write and to know what is happening all over the World. He provided me the success to capture the knowledge and avail the opportunities in the World.

No words of gratitude are sufficient to express my deep appreciation for the kind attitude of my teacher, who gave me relevant information and guidance. I send my special gratitude to those whose names have not been mentioned but they have supported and beckoned me on every step.

Page 2

Corporate Finance

AN ABSTRACT

Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

The terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Page 3

Corporate Finance

TABLE OF CONTENTS

S#

Contents

Page No.

Introduction (Merger & Acquisition)

Distinction between Merger & Acquisition

M & A effects on Management

14

4.

Practical Study of the organization (UBL)

15

5.

SWOT analysis

18

6.

Conclusions

20

7.

Recommendations

20

8.

References

20

Page 4

Corporate Finance

CORPORATE FINANCE
ASSIGNMENT NO.2

Impact of mergers and acquisitions upon the financial environment of Pakistan

(a) Introduction

MERGERS:
The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Acquisition:
An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquireee or merging company (also termed a target) is
Page 5

Corporate Finance or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called 'confidentiality bubble' wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiror secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets. Increase in acquisitions in our global business environment has pushed us to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Retention is only possible when resources are exchanged and managed without affecting their independence.

Page 6

Corporate Finance

Mergers & Acquisitions:

It refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. Mergers & Acquisitions or M&A is a combination of two areas. A merger is when two firms decide to come together to become a single new company and new company stock is issued. An acquisition or takeover is when one company buys another and then the target (bought) company ceases to exist. There is no exchange of stock or consolidation as a new company. If either the merger or acquisition is large enough the FTC can investigate if the transaction is compliant with antitrust laws. Usually the two terms are talked about in conjunction with each other as Mergers & Acquisitions or M&A A Merger or Acquisition (M&A) can add considerable value to a business, but making sure that each stage of the transaction processfrom valuation to negotiation and completionis successful demands considerable experience and knowledge. We can assist you by assessing the strategic fit of a business by analyzing all aspects of a transaction, assessing the projected synergies, project managing the process, assisting in negotiations, financial modeling and assisting in assessing transaction implications. We work with you throughout the transaction lifecycle, helping you to achieve your strategic objectives across acquisitions, Divestitures, spin-offs, slump sale, management buy-outs, buy-ins, fundraisings, Initial Public Offerings, takeovers, and mergers.

The key steps involved in our M&A advisory role are:

Identification of the business to be acquired Strategic planning of acquisition Identifying key targets locally and internationally
Page 7

Corporate Finance

Valuation Transaction structuring, and negotiation Advice on financing, be it debt, equity or other more complex instruments Supervising due diligence, legal and other issues to work towards a successful completion

Distinction between mergers and acquisitions:

The terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an
Page 8

Corporate Finance acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.

For Example:
In the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition.

Financing M&A:
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist: Cash Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.
Page 9

Corporate Finance Stock Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyers capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from the companys current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked. If the buyer pays cash, there are three main financing options:

Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs.

It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.

If the buyer pays with stock, the financing possibilities are:

Issue of stock (same effects and transaction costs as described above).

Page 10

Corporate Finance

Shares in treasury: it increases financial slack (if they dont have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.

In general, stock will create financial flexibility. Transaction costs must also be considered but tend to have a greater impact on the payment decision for larger transactions. Finally, paying cash or with shares is a way to signal value to the other party, e.g.: buyers tend to offer stock when they believe their shares are overvalued and cash when undervalued.

Motives behind M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:

Economy of scale:
This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

Economy of scope:
This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

Cross-selling:
For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Page 11

Corporate Finance

Synergy:
For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts.

Taxation:
A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

Geographical or other diversification

This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders

Resource transfer:
Resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Vertical integration:
Vertical integration occurs when upstream and downstream firms merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the
Page 12

Corporate Finance vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.

Hiring:
Some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and little legal issues are involved

Effects on Management:
Merger & Acquisitions (M&A) term explains the corporate strategy which determines the financial and long term effects of combination of two companies to create synergies or divide the existing company to gain competitive ground for independent units. A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition more than double the turnover experienced in non-merged firms. If the businesses of the acquired and acquiring companies overlap, then such turnover is to be expected; in other words, there can only be one CEO, CFO, et cetera at a time.

Different Types of M&A: Types of M&A by functional roles in market

The M&A process itself is a multifaceted which depends upon the type of merging companies. A horizontal merger is usually between two companies in the same business sector. The example of horizontal merger would be if a health cares system buys another health care system. This means that synergy can obtained through many forms including such as; increased market share, cost savings and
Page 13

Corporate Finance exploring new market opportunities. - A vertical merger represents the buying of supplier of a business. In the same example as above if a health care system buys the ambulance services from their service suppliers is an example of vertical buying. The vertical buying is aimed at reducing overhead cost of operations and economy of scale. - Conglomerate M&A is the third form of M&A process which deals the merger between two irrelevant companies. The example of conglomerate M&A with relevance to above scenario would be if health care system buys a restaurant chain. The objective may be diversification of capital investment.

Arm's length mergers

An arm's length merger is a merger: 1. approved by disinterested directors and 2. approved by disinterested stockholders: The two elements are complementary and not substitutes. The first element is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. But, because bargaining agents are not always effective or faithful, the second element is critical, because it gives the minority stockholders the opportunity to reject their agents' work. Therefore, when a merger with a controlling stockholder was: 1) negotiated and approved by a special committee of independent directors; and 2) conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply, and any plaintiff ought to have to plead particularized facts that, if true, support an inference that, despite the facially fair process, the merger was tainted because of fiduciary wrongdoing.

Strategic Mergers
A Strategic merger usually refers to long term strategic holding of target (Acquired) firm. This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process. Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the
Page 14

Corporate Finance ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons

PRACTICAL STUDY SELECTED ORGANIZATION: Standard Charted Bank

INTRODUCTION:
Standard charted is a merged bank with union bank. Union Bank
Union Bank was established in 1991 and had its headquarters in Karachi, Sindh, Pakistan. Prior to the merger with Standard Chartered Bank (see below), 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. In 2006, Standard Chartered Bank acquired 81% of Union Bank's shares for US$413 million. Under Pakistani law, it had to delist Union Bank and make an offer for the outstanding shares; the offer raised the total purchase price to about US$511. On 30 December 2006, Standard Chartered merged Union Bank with its own subsidiary in Pakistan, which has 46 branches in 10 cities. The merged bank is named Standard Chartered Bank (Pakistan) and is now Pakistan's sixth largest bank In 2000, Union Bank acquired Bank of America's operations in Pakistan. Then in July 2001, Union Bank signed an Independent Operator agreement for American Express Cards in Pakistan. In

Page 15

Corporate Finance 2002, Union Bank acquired the operations in Pakistan of Emirates Bank International. This purchase helped Union Bank become one of the larger private banks in the country

Standard Chartered
Standard Chartered is named after two banks, which merged in 1969. They were originally known as the Standard Bank of British South Africa and the Chartered Bank of India, Australia and China. Of the two banks, the Chartered Bank is the older having been founded in 1853 following the grant of a Royal Charter from Queen Victoria. The moving force behind the Chartered Bank was a Scot, James Wilson, who made his fortune in London making hats. James Wilson went on to start The Economist, still one of the world's pre-eminent publications. Nine years later, in 1862, the Standard Bank was founded by a group of businessmen led by another Scot, John Paterson, who had immigrated to the Cape Province in South Africa and had become a successful merchant. Both banks were keen to capitalize on the huge expansion of trade between Europe, Asia and Africa and to reap the handsome profits to be made from financing that trade. The Chartered Bank opened its first branches in 1858 in Chennai and Mumbai. A branch opened in Shanghai that summer beginning Standard Chartered's unbroken presence in China. The following year the Chartered Bank opened a branch in Hong Kong and an agency was opened in Singapore. In 1861 the Singapore agency was upgraded to a branch, which helped provide finance for the rapidly developing rubber and tin industries in Malaysia. In 1862 the Chartered Bank was authorized to issue bank notes in Hong Kong. Subsequently it was also authorized to issue bank notes in Singapore, a privilege it continued to exercise up until the end of the 19th Century. Over the following decades both the Standard Bank and the Chartered Bank printed bank notes in a variety of countries including China, South Africa, Zimbabwe, Malaysia and even during the siege of Makeking in South Africa. Today Standard Chartered is still one of the three banks which prints Hong Kong's bank notes. Standard Chartered PLC British multinational banking and financial services company headquartered in London, United Kingdom. It operates a network of over 1,700 branches and outlets (including subsidiaries, associates and joint ventures) across more than 70 countries and employs around 87,000 people. It is a universal bank and has operations in consumer, corporate and institutional banking and treasury services. Despite its UK base around 90% of its profits come from Africa, Asia and the Middle East.

Page 16

Corporate Finance Standard Chartered has a primary listing on the London Stock Exchange and is a constituent of the FTSE 100 Index. It had a market capitalization of approximately 33 billion as of 23 December 2011, the 13th-largest of any company with a primary listing on the London Stock Exchange.[3] It has secondary listings on the Hong Kong Stock Exchange and the National Stock Exchange of India. Its largest shareholder is the Government of Singapore-owned Temasek Holdings

Impact of merger and accusation:

Mergers and acquisitions bring a number of changes within the organization. The size of the organizations change, its stocks, shares and assets also change, even the ownership may also change due to the mergers and acquisitions. The mergers and acquisitions play a major role on the activities of the organizations. However, the impact of mergers and acquisitions varies from entity to entity; it depends upon the group of people who are being discussed here. The impact of mergers and acquisitions also depend on the structure of the deal.

Impact on Employees:
Mergers and acquisitions may have great economic impact on the employees of the organization. In fact, mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. If the merged company is pretty sufficient in terms of business capabilities, it doesn't need the same amount of employees that it previously had to do the same amount of business. As a result, layoffs are quite inevitable. Besides, those who are working, would also see some changes in the corporate culture. Due to the changes in the operating environment and business procedures, employees may also suffer from emotional and physical problems.

Impact on Management The percentage of job loss may be higher in the management level than the general employees. The reason behind this is the corporate culture clash. Due to change in corporate culture of the organization, many managerial level professionals, on behalf of their superiors, need to implement the corporate policies that they might not agree with. It involves high level of stress.

Page 17

Corporate Finance

Impact on Shareholders Impact of mergers and acquisitions also include some economic impact on the shareholders. If it is a purchase, the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. On the other hand, the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load.

Impact on Competition Mergers and acquisitions have different impact as far as market competitions are concerned. Different industry has different level of competitions after the mergers and acquisitions. For example, the competition in the financial services industry is relatively constant. On the other hand, change of powers can also be observed among the market players.

SWOT ANALYSIS: STRENGTHS:

The largest private sector bank in Pakistan with a network of 941 domestic and 5 foreign branches. It has long-term vision, which plays a very important role in organizations success. First bank to privatize, which has, now become the leader in market with largest on line ATM network in the country. Banks emphasis on consumer banking by providing them with innovative saving schemes, products and services suiting best to their life style. Extension and improvement in services to domestic as well as foreign customer.

Page 18

Corporate Finance Best and optional policies and attractive compensation packages, for employees, which has really improved their commitment, dedication and hard work, towards the accomplishment of banks objectives. They instant financing products for customer wanting instant loan facility at thesebbranches. Attention and sensitivity to competition prevailing in the country. Easy access to the customers at their residential localities through a large number of branches. Recognition of critical condition and need for Drastic immediate change. It is well aware of the Market and adopts strategy according to the competitors strategy.

Weaknesses:
Less job satisfaction of employees. Customer facing problem of NADRA verification while opening their accounts because its process is time consuming To give everyone equal protocol is lacking among employees Customers having account with small amount are not given same services like dealing to others who have high account. Lack of decentralization. Banks is planning to restructure its departments and is going to be centralized very soon. Lack of organizational loyalty among employees. Promotions generally on seniority basis. Attitude of senior managers at head office has to change towards junior staff Competent staff unwilling to serve in the audit due to an absence of firm rotation policy. As most of the employees are young they have more tendencies to switch the organization and to seek more opportunities.

Page 19

Corporate Finance

Opportunities:
To go global fully. Low exposure to consumer banking providing opportunity to explore the segment. Emergence of Islamic banking in the country it is increasing its Islamic Banking operations. SBP policy to allow Islamic banking business separately. Bank has earned a good name by introducing innovative products like car financing home financing credit cards these products can easily enhance the market share. Bank introduces Islamic banking in country that attracts large number of people. Free staff training facilities offered. Greater profitability can be achieved through strong internal control Profit and deposit of banking industry have shown an increasing trend because of better marketing environment. Elimination of risk of fraud through professional training Opportunity to open branch in ruler area to increase its branch network and gain more profit. The bank can earn more profit by advancing to farmers and industrialists at low rates. New schemes for deposits and finances should be introduced regularly

Threats:
Current economic crunch. Political instability. Strong competition. Rising deposit rates. Foreign banks in market having more marketing budgets.

Page 20

Corporate Finance People losing trust in banks. Decline in private and public sector credit due to tight monetary policy Participation of foreign banks local market that can hurt the market share Mergers and acquisition activities, consolidating the banking sector Changes in government policies

Recommendations: The bank should finance its loans in those projects that are meeting the required standard and should avoid the political pressure. The bank should bring forward the new talent as fresh knowledge and education is considered very important to increase the efficiency and production. There is needed to make the outlook situations of branches in those manners that can complete the other modern banks in the banking market. Keeping in view the hard work by the staff members at all levels of management, staff should be given bonus and increment every year. Nepotism should be avoided in this connection There are some employees untrained which decreases the efficiency of the bank branch. All the employees should well train. Most of the bank employees are sticking to one seat only, with the result that they become master of one particular job and loose their grip on other banking operation. In my opinion each employee should have regular job change. People have to wait for re-cashing their cheques and for paying their School Fees, which is not good for reputation of bank, it should be improved.

Page 21

Corporate Finance Mergers and acquisitions Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. Acquisition An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquired or merging company (also termed a target) is or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome. Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called 'confidentiality bubble' wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquirer secures endorsement of the transaction from the board of the acquire company. This usually requires an improvement in the terms of the offer and/or through negotiation.

Page 22

Corporate Finance "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets. There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications: This unreferenced section requires citations to ensure verifiability. The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment. The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders. Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition. For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence.
Page 23

Corporate Finance Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing. Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise. Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition. Preservation of tacit knowledge, employees and literature are always delicate during and after acquisition. Strategic management of all these resources is a very important factor for a successful acquisition. Increase in acquisitions in our global business environment has pushed us to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Retention is only possible when resources are exchanged and managed without affecting their independence.

Distinction between mergers and acquisitions

The terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Welcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company,
Page 24

Corporate Finance GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition. Specialist M&A advisory firms Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice (and not financing). These companies are sometimes referred to as Transition companies, assisting businesses often referred to as "companies in transition." To perform these services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation. More information on M&A advisory firms is provided at corporate advisory. Motives behind M&A The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Page 25

Corporate Finance Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders. Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalize an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable. Hiring: some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and little legal issues are involved.[citation needed]

Effects on management
Merger & Acquisitions (M&A) term explains the corporate strategy which determines the financial and long term effects of combination of two companies to create synergies or divide the existing company to gain competitive ground for independent units. A study published in the July/August 2008 issue of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies top management teams for at least a decade following a deal. The study found that target companies lose 21 percent of their executives each year for at least 10 years following an acquisition more than double the turnover experienced in non-merged firms.[10] If the businesses of

Page 26

Corporate Finance the acquired and acquiring companies overlap, then such turnover is to be expected; in other words, there can only be one CEO, CFO, et cetera at a time. Different Types of M&A Types of M&A by functional roles in market The M&A process itself is a multifaceted which depends upon the type of merging companies. - A horizontal merger is usually between two companies in the same business sector. The example of horizontal merger would be if a health cares system buys another health care system. This means that synergy can obtained through many forms including such as; increased market share, cost savings and exploring new market opportunities. - A vertical merger represents the buying of supplier of a business. In the same example as above if a health care system buys the ambulance services from their service suppliers is an example of vertical buying. The vertical buying is aimed at reducing overhead cost of operations and economy of scale. - Conglomerate M&A is the third form of M&A process which deals the merger between two irrelevant companies. The example of conglomerate M&A with relevance to above scenario would be if health care system buys a restaurant chain. The objective may be diversification of capital investment. Strategic Mergers A Strategic merger usually refers to long term strategic holding of target (Acquired) firm. This type of M&A process aims at creating synergies in the long run by increased market share, broad customer base, and corporate strength of business. A strategic acquirer may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after M&A process.

Page 27

Corporate Finance

Practical study: SELECTED ORGANIZATION:

UNITED BANK LIMITED

INTRODUCTION:
UBL opened up for business on November 7, 1959 with authorized capital of Rs.20 million and Paid-up capital of Rs.10 million. In its very first year, it mobilized deposits of Rs.70 million and earned a profit of Rs.O.7 million. It continued to grow rapidly and soon became one of the largest banks in the country. The main reasons for its exemplary growth were the introduction, in many instances for the first time in Pakistan, of professional management, computers, economic and business research, latest managerial practices and customer orientation. UBL remained in the private sector for 15 years until it was nationalized on January 1, 1974 with other Pakistani banks. The bank continued to grow rapidly even after nationalization. Its resource base expanded, the number of branches increased, and overseas operations grew. As an organization, UBL has grown rapidly except in the last couple of years when it ran into some problems. A professional team was appointed in mid 1997 to restructure the bank and to commence rightsizing. The management is also in the process of rationalizing the branch network and identifying and recovering its doubtful and classified portfolio. It has planned to institute major improvements in customer services and internal systems to improve efficiency. It also intends to launch innovative products. The bank is increasing

Page 28

Corporate Finance resource mobilization through regular deposit campaigns and accelerating the process of recovery of outstanding advances and non-performing assets. The second largest private sector bank in Pakistan with the most active corporate and investment bank. Privatized in October, 2002.sponsor includes The Bestway Group (25.5%), Abu Dhabi Group (25.5%), while the balance is held by the Government of Pakistan and general public. Consist double digit growth in advances and deposits during the last four years. Represented in 10 countries Worldwide through 22 offices, including USA, UK, and Switzerland. A strong domestic footprint comprising of 1096 branches all over Pakistan. Mission is to become a world class bank, where you come first.

Page 29

Corporate Finance

Procedure of Fixed Assets in auditing

Auditor has a duty to verify all the assets appearing on the balance sheet and also a duty to verify that there are no other assets which ought to appear on the balance sheet. Following aspects of assets must be verified There is the procedure of the Fixed asset verification:
1. In UBL check the manual and computer record of fixed assed 2. Each class of asset will be have a separate page in FAR 3. UBL contain Detail of Asset make model, specification, quantity rate, value supplier, receipt

issue balance etc will be maintain and check.

4. UBL main the date of issue and receipt of asset in the book of account

5. All the auditors check the register which is help in locating asset a all the time of physical inventory.

Procedure for Verification of fixed Asset

Plant and other assets In auditing of fixed asset there is check and balance of all the voucher of
plant purchase by the necessary and check all the entry in the book of account.

Goodwill

In verification of asset Goodwill is the necessary think in UBL that good will in UBL can determined the important think all the money or profit which received from goodwill is proper channel the entry in software and all the paper procedure that auditors can check all the software entry of goodwill and manual check is also.

Machinery

for the purchase, disposal, and maintenance of assets are very relevant all the entry is done by it and check audit reposition and other aspect which is related for it

Page 30

Corporate Finance In most organization there is insurance of vehicle of asset are maintain all the audit procedure there will be check all the book of account which is

Insurance

necessary for it help all procedure of the account. All the verification of asset such as building the auditor check and balance of all the deprecation about building that are they are took which method

Building

for it is see the what type of method of deprecation are charged and check the software where fixed asset deprecation has been charged

SWOT ANALYSIS:
STRENGTHS:
3rd largest Bank of Pakistan in term of deposit so the bank has core strength that it will not be affected by the changing Government regulation. UBL have 1056 branches all over the country and able to deliver his services all over the country even in the Rural, Semi Rural and Urban area of the Pakistan. UBL have a large number of ATM and online banking facilities for his customers and able to deliver efficient services to his customer. UBL continuously improved its product and introduce new product for his customer according to their requirement and need. UBL have corporate finance in Pakistan and have a secured investment in large scale industries of Pakistan like Airline Industry, Cement Industry. UBL provide wealth management services and offer short term, medium term and long term deposit for his customer with the help of UBL Assets management and UBL fund Management Company.

Page 31

Corporate Finance UBL is the schedule Bank of Pakistan and have marvelous image and confidence in the eyes of the customer.

UBL have the best talent and most experienced employees of the market who are able to handle
any type of situation

Weaknesses:
Lack of organizational loyalty among employees. Promotions generally on seniority basis. Attitude of senior managers at head office has to change towards junior staff UBL is a step behind in using the new technology as compared to its competitors. Most of the employees are overload with the work and promotion is also n o t timely. Most of the employees of the UBL are not following the dress code explained by the Bank in his procedure

Opportunities:
Bank can extend its network in other cities of Pakistan like other 4 remote cities, it would increase their sales. Proper orientation of employees in all branches can help them to cope up with foreign banks. By bringing new technology and modern business processes will bring the c h a n g e a n d increase their profitability Call centre services should be improved to enhance their network

Threats:
Growing global technological advancement and adaptation of modern style of management in banking sector.

Unemployment, lower level of income and prices like problem in the motherland coupled with
low rate of industrialization, geo political adverse conditions religious factor, lack of consistency in policies due to political instability are some of other major threats.
Page 32

Corporate Finance

Recommendations: Ability to develop and suggest sound strategies when needed Keeping in view the hard work by the staff members at all levels of management, staff should be
given bonus and increment every year. Nepotism should be avoided in this connection. The bank should bring forward the new talent as fresh knowledge and education is considered very important to increase the efficiency and production. There are some employees untrained which decreases the efficiency of the bank branch. All the employees should well train Most of the bank employees are sticking to one seat only, with the result that they become master of one particular job and lose their grip on other banking operation. In my opinion each employee should have regular job change.

Conclusion
I conclude that in this organization all the verification procedure is good but there is no proper record have been maintain which give a audit Para objection for it the procedure is good but there is some circumstance the back record of the audit is not identify. They need a warehouse for auditing record for it and all the procedure have been done for it.

REFERENCES:http://www.google.com.pk/#hl=en&site=&source=hp&q=fixed+assets&oq=fixed+assets&aq=f&aqi=g1 0&aql=&gs_nf=1&gs_l=hp.3..0l10.37.3645.0.3804.23.12.0.0.0.0.775.775.61.1.0.bbomO7oPW7M&bav=on.2,or.r_gc.r_pw.,cf.osb&fp=f5061e61cdb2e617 http://moci.gov.af/Content/Media/Documents/AuditReport2312201016263877.pdf http://www.amcy5.com/Reports/internship/amcy22.html www.ubl.com.pk https://banking.zionsbank.com/NASApp/webloanapp/jsp/zions_loan_help.jsp?domain_id=1 www.google.com.pk/#hl=en&site=&source=hp&q=fixed+assets&oq=fixed+assets&aq

Page 33