Corporate Finance

Merger and Acquisition in Malaysian Banking Sector: The Impact on Performance

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Contents

1 2 3 4 5

Introduction and Background Problem Statement Literature Review Discussion Conclusion

Merger
Merger: Two companies made an agreement to operate as a single new company rather than to be independently owned and operated.
Company A + Company B Agreement Company X

Another term is the merger of equals Companies involved are same size, both companies surrender their own stocks and issue new company stocks. In a real world , the actual mergers as described (mergers of equals) does not happen quite often. Companies that are more stable and have higher financial capabilities and resources would normally buy the other company and proclaim that it is an equal merger due to agreement made by the owners. Technically, it is actually an acquisition.

Acquisition
Acquisition: Firms action which buys majority or all of another targeted companys ownership stakes.
Company A Buys Company B Company A

When a firm buys the majority of the companys ownership stakes, it has the ability to control the targeted company. There are two ways to do this, either an agreement between the companies or a force acquisition in which a company actively buys the shares of the targeted company until it achieves the majority stakes to assume control. Part of strategy of a company to expand or demotes competition. If the company perceives that it is more beneficial to acquire an existing firm in a new location rather than expanding on its own, a company would proceed with acquisition. If a company sees that acquiring a company would reduce their competition and increase their market share and profits, they would proceed in doing so.

Background
Globalization intensified competition. Company look for strategy to survive, compete and to grow. Merger and Acquisition M&A enables firms to increase capacities, resources and widens firms capital. M&A enables firms to capture bigger market share, reduce competition and penetrate into new market Asian Economic Crisis 1997, Malaysian Government tries to encourage M&A through Bank Negara Malaysia. Provides incentives under National Budget 2006, exemption on stamp duty and real property gains tax for firms undertaking M&A. Malaysian banking system was composed of large numbers of small banking institutions.

Background
Came Asian Financial Crisis, crucial to merge banks to save them. Banks needed high level of capital

Most required financing were intermediated through banking system.

To reduce or eliminate these risks on banking sectors, Malaysian government encourages the merge of banking institutions Ten Banking Groups were formed. Each bank have minimum shareholders funds of RM2 Billion Each bank have minimum asset base of at least RM25 Billion

Table
Anchor Banks Banks Acquired The Pacific Bank Phileo Allied Bank N.A N.A Hock Hua Bank N.A Wah Tat Bank International Bank Malaysia Sabah Bank BSN Ban Hin Lee Bank Oriental Bank Anchors 30 June 00 Total Assets RMb 127 Post-Merger Assets RMb % of System Assets MayBank Bumiputra-Commerce Bank RHB Bank Public Bank Arab-Malaysian Bank Hong Leong Bank 150 24.0

63 51 43 11 29

67 56 50 39 35

10.7 9.0 8.0 6.2 5.6

Multi-Purpose Bank

14

2.2

Affin Bank

15

30

4.8

Southern Bank
EON Bank

24
14

25
25

4.0
4.0

Table
Anchor Banks Banks Acquired The Pacific Bank Phileo Allied Bank N.A N.A Hock Hua Bank N.A Wah Tat Bank International Bank Malaysia Sabah Bank BSN Ban Hin Lee Bank Oriental Bank Anchors 30 June 00 Total Assets RMb 127 Post-Merger Assets RMb % of System Assets MayBank Bumiputra-Commerce Bank RHB Bank Public Bank Arab-Malaysian Bank Hong Leong Bank 150 24.0

63 51 43 11 29

67 56 50 39 35

10.7 9.0 8.0 6.2 5.6

Multi-Purpose Bank

14

2.2

Affin Bank

15

30

4.8

Southern Bank
EON Bank

24
14

25
25

4.0
4.0

Problem Statement
The purpose of this concept paper is to look into the impact of mergers and acquisition known also as M&A to the banking sector in Malaysia in terms of its performance. It tries to look into what are the impacts of the M&A and do the M&A process weaken or strengthen the banking institutions that undergo the M&A process.

one of the objectives of this paper is to try to understand what will happen to banking institutions involved before and after the M&A

Problem Statement
There is a clear understanding that Malaysia is over banked due to the wasted resources on duplication of branches in the same locality. The banking crisis in the mid-1980s propelled a number of weak commercial banks and finance companies into insolvency and financial distress. Bank Negara Malaysia had implement a rescue scheme which involved Bank Negara Malaysia acquiring shares in some of the ailing commercial banks and the absorption of the assets and liabilities of the insolvent finance companies by stronger finance companies.

Problem Statement
Asian financial crisis on 1997 is one of the factors for the rapid M&A process in Malaysia and as a result, from a total of 54 financial institutions ten anchor banks has been formed as at end of 2001. IMF had forced countries under their programmes (Indonesia, Thailand and South Korea) to reduce the number of banking institutions by effectively closing them down. Malaysia does not believe that the IMFs prescription of closing down the problem bank is the way to go, as the social costs involved in terms of dislocation of resources are high.

Problem Statement
Reasonable approach adopted by Malaysia is guided merger, with the central bank playing a proactive role in solving the issues involved and the principle of fairness will be strictly applied to all parties in the merger. Bank Negara Governor emphasized the merger programme for domestic banking institutions weaken the financial strength of the merged entities.

The creation of the eight domestic financial groups would ensure that the domestic banking institutions would be able to withstand pressures and challenges arising from globalization and from an increasingly competitive global environment.

Problem Statement
This move towards consolidation was in line with the Government's policy of not to bail out weak companies but to rationalize businesses towards higher productivity. In this time and age of globalization, banks must merge to survive the onslaught of greater competition. Bank Negara had justified the consolidation program on grounds that Malaysia needed to build strong banks to compete globally.

Problem Statement
The aggressive encouragements for M&A in banking sector in Malaysia had led to the question of what drives performance of M&A and how successful are these M&A in obtaining the preset objectives.

Thus, it is the interest of this study to analyse the success rate of the M&A in terms of performance exercise as well as the probable factors contributing to the failure or the success of M&A in banking sector in Malaysia.

Literature Review
1) Mergers and acquisitions are a global business terms used in achieving business growth and survival. 2) Merger entails the coming together of two or more firms to become one big firm while acquisition is the takeover or purchase of a small firm by a big firm. 3) According to Soludo (2004) stated that M&A are aimed at achieving cost efficiency through economies of scale, to diversity and expand on the range of business activities for improved performance.

Literature Review
4) The studies provided the foundation for a research on the linkage between banks mergers and acquisitions and profitability. Evidence as provided by Calomiris and Karenski (1996), De-Nicolo (2003), and Caprion (1999) suggested that mergers and acquisitions in the financial system could impact positively on the efficiency of most banks. 5) Some of the previous literature has examined the impact of mergers and acquisitions operation on cost efficiency as measured simple accounting cost ratios (Rhoades, 1990, 1993;Pilloff, 1996; DeLong and DeYoung, 2007). 6) Evidence supporting mergers and acquisitions to achieve cost saving and efficiency gain is sparse (Kwanand Elsenbeis, 1999). Akhavein et al. (1997) analysed changes in profitability experienced in the same set of large mergers as examined by Berger and Humphrey(1992).

Literature Review
7) Banking organizations significantly improved their profit efficiency ranking after mergers. De Young (1993) does find that when both the acquirer and target were poor performers, mergers resulted in improved cost efficiency. 7) Healy et al. (1992)examined all commercial banks and bank holding company mergers and acquisitions occurring between1982 and 1986. They found that mergers and acquisitions did not reduce non-interest expenses that could have led to improved efficiency. But for Straub(2007), mergers and acquisitions have often failed to add significantly to the performance of the banking sector. 7) Their findings undermine a major rationale for mergers and consequently raised doubt about other benefits mergers and acquisitions may provide to banking sector in Malaysia.

Discussion
In August 1999, according to the source of the local news paper The Star, Bank Negaras governor Tan Sri Ali Abul Hassan Sulaiman state that mergers exercise will not in any way weaken the financial strength of the merged bank. The act towards consolidation is in line with the Governments policy not to bail out the weaker companies but to rationalize towards higher productivity.

Discussion
According to Tan Sri Ali Abdul, it is important for the country to remain and ensure banking institutions will remain in the hands of Malaysia. The merged banks can provide banking service to the whole country at lower costs due to savings on man power; improve information system and reduction in branch network. During this bank restructuring exercise Malaysian government has spend about RM60billion and government has spend RM2billion to rescue Deposit Taking Cooperatives (DTCs) in the 1980s.

Discussion
Merger and acquisition will improve the efficiency of the merged banks because of the new business opportunities that has been created by the changes in the regulatory, technology and expertise (Berger, 1999). Evidence suggested that United States banks that involved in M & As has increased costs of the operation but still improved on their profit and productivity by increasing revenues(Berger, 1999) have improve their outputs in 1990s.

Discussion
Although Malaysian banks exhibit lower stat on pure technical efficiency compared to the mean scale efficiency during the pre merger period, only two banks were operating at 100% scale efficient, whereas six banks were pure technically efficient during the premerger period. (Bank Negara, 2009).

Discussion
Malaysian banks have exhibit a commendable overall efficiency level of 95.9% suggesting minimal input waste of 4.1%. The study found that by Bank Negara statistic that found that during the merger year, Malaysian banks overall efficiency level deteriorates significantly compared to the premerger period, which was mainly due to scale inefficiency.

Discussion
Despite that, post merger Malaysian banks overall efficiency has not only recovered but is higher compared to the pre-merger period. We also found that scale inefficiencies dominates pure technical efficiency in Malaysian banking post merger.

Discussion
Financial performance changes using financial ratios based on Bank Negaras consolidation program show that on average, the six anchor banks have larger asset based, shareholders fund and book value per share than stand alone basis and even larger than the ten anchor banks. However, the ten anchor banks tend to show higher performance for overhead efficiency and cost to income than stand alone basis and the six anchor banks.

Discussion
In terms of nonperforming loan or credit risk, profitability and liquidity, there is no significant difference between the eight anchor banks and stand alone basis.

Discussion
Consolidation program appears to increase efficiency (overhead efficiency and post acquisition positive reactions) and may have improved the real economies where these consolidations occurred. The market believes that M&A event itself may have awakened or makes the management realize to the need for improvement. The evidence is consistent that shows merger and acquisition on banking sector in Malaysia have show a high performance increases despite some finding in literature review found vice versa.

Conclusion
At the end of discussion, we have come to a conclusion that there are evidences which support the M&A on the banks in Malaysia has produced an improved result in the productivity of the merged and acquired banks. However, in the event of the merging of weaker bank to a healthier bank, the result could lead to the failure of the banks involves in the M&A. On the other hand, the opposite will happen if the merged banks are both in a good condition.

Conclusion
There are mixed evidences from previous study on the relationship between mergers and acquisitions, financial efficiency, profitability and performance in banking sector. The paper has discussed that merger and acquisition in Malaysia have found to improved performance after the merging process. This merging and acquisition can be considered successful and able to make financial system in Malaysia are more strength and able to compete with non domestic banking operate in Malaysia. All in all, it can be said that M&A in banking sector in Malaysia produced more positive impact rather than the negative impact.

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