Académique Documents
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SUBMITTED BY
Mohammad Idrees
Reg No:
SUPERVISED BY
Ghufran Majeed Hashmi
Project Report on
A Study on Mergers & Acquisition-Strategic
Alliance
SUBMITTED BY
Mohammad Idrees
Reg No:
SUPERVISED BY
Ghufran Majeed Hashmi
This internship report is submitted in partial fulfillment of the requirements for degree of
Bachelors of Business Administration awarded (BBA HONS) by Hazara University Mansehra
Approval Committee
External Examiner
Supervisor
Head of Department
DEDICATION
This
_______________________________________
ABSTRACT
This Project report is a study of Mergers and acquisitions. Mergers & Acquisitions aspire
towards Business Restructuring and increasing competitiveness and shareholder value
Via increased efficiency. In the market place it is the survival of the fittest.
Pakistan has witnessed a squall of mergers in topical years.The Finance Act,1999
clarified many issues relating to Business Reorganizations there by facilitating and
making business-restructuring tax neutral. As per Finance Minister this has been done to
accelerate internal liberalization and to release productive energies and inventiveness of
Pakistani businesses.
Table of Contents
Chapter 1..........................................................................................................................................
Introduction......................................................................................................................................
1.1 Introduction............................................................................................................................
1.2 Merger....................................................................................................................................
1.2.1 Takeover..........................................................................................................................
1.2.2Horizontal merger.............................................................................................................
1.2.3 Vertical mergers...............................................................................................................
1.2.4 Conglomerate mergers.....................................................................................................
1.3 Operating economies..............................................................................................................
1.3.1 Limit competition and exploiting factor markets............................................................
1.3.2 Financing.........................................................................................................................
1.3.3 Taxation...........................................................................................................................
1.3.4 Personal reasons..............................................................................................................
1.4 Mergers and acquisitions in Pakistan.....................................................................................
1.4.1 Consolidation of banking industry-an overview.............................................................
1.5 Mergers: Making sense of it all..............................................................................................
1.5.1 Time for strategic alliance...................................................................................................
Chapter 2........................................................................................................................................
Literature review............................................................................................................................
Chapter 3........................................................................................................................................
Research Methodology..................................................................................................................
3.1Subjects/Participants.............................................................................................................
3.1.1Sampling Technique.......................................................................................................
3.1.1.1Fieldwork/Data Collection:.........................................................................................
3.2 Data Collection Methods..................................................................................................
3.2.1Primary data...................................................................................................................
3.2.2 Secondary data..............................................................................................................
6
Chapter 4........................................................................................................................................
Data Analysis and Design..............................................................................................................
4.1Financial Analysis of MCB...................................................................................................
4.1.1 ADVANTAGES OF RATIO ANALYSIS:.....................................................................
4.2 EXPLANATION OF FINANCIAL RATIOS..........................................................................
4.2. 1 ROFITABILITY RATIOS............................................................................................
4.2.2 ACTIVITY RATIOS.....................................................................................................
4.2.3 MARKET RATIOS.......................................................................................................
4.2.4 LEVERAGE RATIOS...................................................................................................
4.3 BALANCE SHEET.............................................................................................................
4.4 Income Statement.................................................................................................................
4.5 VERTICAL ANALYSIS......................................................................................................
4.6 HORIZONTAL ANALYSIS................................................................................................
4.7 RESULT ON THE BASIS OF VERTICAL & HORIZONTAL ANALYSIS:.....................
Chapter 5........................................................................................................................................
Conclusion.....................................................................................................................................
5.1 Conclusion...........................................................................................................................
5.2 Recommendations................................................................................................................
References......................................................................................................................................
ACKNOWLEDGEMENTS
No one can say that I am perfect, everyone should admit that without the help of ALLAH
and His people a man cant get anything so I bow my head before almighty Allah with
gratitude. I am also very much thankful and presents salute to many individuals who have
helped me in shaping this research paper .I am also very much thankful to lot of former
fellows and contemporary colleagues who took the time and trouble during the last few
days to speak to me about the way this text could be further improved. I have no words to
express my gratitude to my supervisor Sir Ghufran Majeed Hashmi of The Muslim
College of Commerce & Management Sciences Abbottabad, for his intellectual
guidance, constructive suggestions, patience and wise comments without which it could
have been rather difficult for me to complete this Project Report.
Muhammad Idrees
EXECUTIVE SUMMARY
Merger is a combination of two or more companies into one company. The acquiring
company, (also referred to as the amalgamated company or the merged company)
acquires the assets and the liabilities of the target company (or amalgamating company).
Typically, shareholders of the amalgating company get shares of the amalgamated
company in exchange for their shares in the Target Company.
There are two ways which company can grow; one is internal growth and the othe one is
external growth. The intenal growth suffers from drawbacks like the problem of raising
adequate finances, longer implementation time of the projects, uncertain etc. in order to
overcome these problems a company can grow externally by acquiring the already
existing business firms. This is the route of mergers and acquisition.
OBJECTIVE
To evaluate whether the mergers and acquisitions in banking sector create any
shareholder value or not.
RESEARCH TOOLS
Financial ratios, Economic Value added and market Value Added.
SAMPLE DESIGN
A sample of three mergers has been taken and the financial statements of five years had
been analyzed. The five-year period comprises of Pre-merger period and post merger
period.
FINDINGS
1. Shareholders of the target company has benefited more than the acquired
company.
2. The post merger analysis is showing the increasing trend in MVA&EVA.
3. The market price has increased during merger period of target companies.
4. All the parameters are showing increasing trend after merger period.
5. EPS of the acquired companies has increased more than 100% in post merger
period.
Chapter 1
Introduction
1.1 Introduction
Mergers and acquisitions aim towards Business Restructuring and increasing competitiveness
and shareholder value Via increased efficiency. In the market place it is the survival of the fittest.
Pakistan has witnessed a storm of mergers in recent years.The Finance Act,1999 clarified many
issues relating to Business Reorganizations there by facilitating and making businessrestructuring tax neutral. As per Finance Minister this has been done to accelerate internal
liberalization and to release productive energies and creativity of Pakistani businesses.
The year recent years has notched-up deals over Rs.21000 crore which is over 1% of Pakistans
GDP. This level of activity was never seen in Pakistani corporate sector. InfoTech, Banking ,
media , pharma, cement , power are the sectors, which are more active in mergers and
acquisitions.
1.2 Merger
Merger is a combination of two or more companies into one company. In Pakistan, we call
mergers as amalgamations, in legal parlance. The acquiring company, (also referred to as the
amalgamated company or the merged company) acquires the assets and the liabilities of the
target company (or amalgamating company). Typically, shareholders of the amalgamating
company get shares of the amalgamated company in exchange for their existing shares in the
target company. Merger may involve absorption or consolidation.
1.2.1 Takeover
Takeover can be defined as the acquisition of controlling interest in a company by another
company. It does not lead to the dissolution of the company whose shares are being acquired. It
simply means a change in the controlling interest in a company through the acquisition of its
share by another group.
1.2.2Horizontal merger
A horizontal merger involves merger of two firms operating and competing in the same kind of
business activity. Forming a larger firm may have the benefit of economies of scale. But the
argument that horizontal mergers occur to realize economies of scale are not true horizontal
mergers is regulated for their potential negative effect on expectation. Many as potentially
creating monopoly power on the part of the combined firm enabling it to engage in
anticompetitive practices also believe horizontal mergers.
Product-extension merger broaden the product lines of the firms. These are the mergers
between the firms in related businesses and may also be called as concentric mergers.
ii.
A geographic market extension merger involves two firms whose operations have been
conducted in non-overlapping geographic areas.
iii.
Finally, the other conglomerate mergers, which are often referred to as pure conglomerate
mergers involve, unrelated business activities. These would not qualify as either as
product-extension or market-extension.
First, a conglomerate firm controls a range of activities in various industries that require
different skills in specific managerial functions of research, applied engineering,
production, marketing and so on.
2
ii.
Second, mainly external acquisitions and mergers achieve the diversification, not by
internal development.
iii.
iv.
v.
A desire to diversify.
vi.
Economics of scale; a firm can increase its income with less than proportionate
investment
vii.
viii.
A desire to utilize fully the particular resources or personnel that are controlled by the
firm, particularly in context of managerial skills.
ix.
x.
xi.
An individual owing or controlling a firm may be motivated for merger with a desire to
create an image of aggressiveness and strategic opportunism, empire building and to
amass vast economic power of the company.
Economic motives
Personal motives
Strategic motives
Increase profitability
power
Risk spreading
Managerial challenge
Acquisition of a competitor
Increase profitability
Acquisition of inefficient
management
Cost reduction
Acquisition of raw material
Enchancemanageriall prestige
Defence mechanism
Create shareholder value
Functions such as purchasing, production, marketing, R&D etc. the logic of operating economies
lies in the concept of synergy.
Diversification
Diversification generally means expansion of operation through the merger of firms in unrelated
lines of business. Such mergers are called conglomerate mergers.
Growth
Growth implies expansion of a firms operation in terms of sales , profit and assets . When a
company is unable to grow internally because of resource and management constraints, it can
grow extremely by taking over operations of another company . Acquisition may yield the desire
of growth faster , easier and cheaper than the internal growth.
1.3.2 Financing
Sometimes internal growth may not be possible due to financial constraint. Financial an external
growth becomes easy if operations of other company can be acquired through the exchange of
shares.
1.3.3 Taxation
The urge to minimize tax liability, particularly when the managerial tax rate is high, may also
cause merger of two companies. The carry forward of a tax loss is yet another reason for some of
the merger.
sector banks, but also the shares of old generation private banks and even public sector banks
experienced an buying interest. Are these merger moves a culmination of the consolidation in the
industry? Will any bank be untouched and which will be left out?
To answer this question let us first glance through the industry and see where the different
players are placed. The Pakistani banking industry is consists of four categories-public sector
banks, new private sector banks and foreign banks. The public sector banks control a major share
of the banking operations. These include some of the biggest names in the industry like Stare
Bank of Pakistan and its associate banks, Bank of Baroda, Corporation bank etc. their strength
lies in their reach and distribution network. Their problems rage from high NPAs to over
employment. The government controls these banks. Most of these banks are trying to change the
perception. The government controls these banks. Most of these banks are trying to change the
perception. The recent thrust on reduction of government stake, VRS and NPA settlement are
steps in this direction. However, real consolidation can happen if government reduces its stake
and changes its perception on the need of merger. The governments stand has always been that
consolidation should happen to save a bank from collapsing. The old private sector banks are the
banks, which were established prior the Banking Nationalization Act, but could not be
nationalized because of their small size. This segment includes the Bank Of Punjab, United
Western Bank, Jammu and Kashmir bank; etc. who banks are facing competition from private
banks and foreign banks. They are trying to improve their margins. Though some of the banks in
this category are doing extremely well, the investors and the markets seem not to reward them
adequately. These banks are unable to detach themselves effectively from the older tag. The new
private banks came into existence with the amendment of Banking Regulation Act in 1993,
Which permitted the entry of new private sector banks. Of the above the spotlight is on the old
generation private banks .the OGPBs can become easy takeover targets .the sizable portfolios of
advances and deposits act as an incentive. Added to this these banks have a diversified
shareholder base, which inhibits them from launching an effective battle against the potential
acquirers. But the problems go beyond the shareholding pattern and are far rooted .The
prudential norms like the increasing CAR and the minimum net worth requirements are making
the very existence of these banks difficult. They are finding it difficult. They are finding difficult
to raise capital and keep up with the ever-tightening norms .one of the survival routes fore these
banks is to merge with another bank.
bank with
another specialized investment bank to provide value-added services. Tie-ups Could also be
between a bank and technology firm to provide advanced services. It is these Strategic tie-ups
7
that are set to increase in future. These along with providing vale-added benefits, also help in
building positive perceptions in the market.
In a macro perspective mergers and acquisition can prove effective on strengthening the
Pakistani financial sector . Today, while Pakistani banks have made tremendous strides in
extending the reach domestically , internationally the Pakistani system is conspicuous by its
absence . The are very few catering mostly to Pakistan related business . As a result Pakistan
does not have a presence in international financial markets. If Pakistan has to emerge as an
international banking center the presence of large banks with foreign presence is essential. With
globalization and strategic alliances Pakistani banks would grow originally. The would be large
banks with international presence. Globally the banking industry is consolidating through crossborder mergers. Pakistan seems to be far behind. The law does not allow the foreign banks with
branch network to acquire Pakistani banks.But who knows with pressures of hlobalization the
law of the land culd be amended paving way for a cross border deal.
While the private sector banks are on the thershlod of improvement, the public sector banks
(PSBs) are slowly contemplating automation to accelerate and cover the lost ground. To contend
with new challenges posed by the private sector banks, PSBs are pumping huge amounts to
update their It.but still, it looks like, public sector banks need to shift the gears, accelerate their
moivements, in the right direction by automation their branches and providing, Internet banking
services.
Private sector banks, in order to compete with large and well-established public sector banks, are
not only foraying into IT, but also shaking hands with peer banks to establish themselves in the
market. While one of the first initiatives was taken in November 1999, when Chairman of HBL
of Bank Al-Habib shook hands, created history. It is the first merger in the Pakistani banking,
signaling that Pakistani banking sector joined the mergers and acquisitions bandwagon. Prior to
this private bank merger, there have been quite a few attempts made by the government to rescue
weak banks and synergize the operations to achieve scale economies but unfortunately they were
all futile. Presently size of the bank is recognized as one of the major strengths in the industry.
And, mergers amongst strong banks can both a means to strengthen the base, and of course, to
face the cutthroat competition.
8
The appetite for mergers is making a come back among the public sector banking industry. The
instincts are aired openly at various forums and conferences. The bank economist conference
perhaps set the ball rolling after the special secretary for banking Mian Khalid stressed the
importance of the size as a factor. He pointed out the consolidation through merger and
acquisition was becoming a trend in the global banking scenario wanted the Pakistani
counterparts to think on the same lines. There is also a feeling threat there are far too many
banks. PS Shenoy, chairman and managing director of Bank of Baroda, said, There are too
many banks to handle the size of business. The pace of mergers will hasten. As the time runs
out and the choice of target banks with complimentary businesses gets reduced there would be a
last minute rush to acquire the remaining banks, which will hasten the process of consolidation.
Chapter 2
Literature review
Both M&A and innovation are instruments for growth and competitive advantage. Therefore
they are fundamental to each firms competitive strategy. Usually, both instruments have been
studied separately, but much less in conjunction. This is unfortunate as both processes - the
process of innovation and the process of mergers and acquisitions - are intimately connected. The
impact of mergers on innovation can only be rigorously assessed, if the converse direction of
influence - mergers caused by innovation - is accounted for. Therefore this review tries to take a
balanced view on both processes and to point out links between them. Nevertheless, the focus is
on the impact of mergers on innovation.
Although innovation is a highly complex matter, the question as to the impact of mergers on
innovation boils down to the simple basic question: How do mergers change the incentives to
innovate for the merging parties and for the remaining firms in the industry? It is therefore
important to analyze determinants of these incentives.
One of these determinants is the appropriability of the benefits of an innovation. The
appropriability in turn depends on a host of circumstances. Among them the available
institutional framework of intellectual property rights, the probable degree of knowledge
spillovers, and the intensity of product market competition figure prominently.
Another determinant is the ability to successfully engage in an innovation project. The ability
again is in turn dependent on many aspects: the ability to finance the innovation project, the
access to the use of intellectual property rights necessary for implementing the innovation, the
absorptive capacity necessary to enter the innovation project successfully, which may be
dependent on the distance to the current technological frontier, the availability of relevant human
capital either internally or on the job market, the relationship to public research facilities etc.
Potentially, mergers can change almost every determinant of innovation incentives which may
be relevant either for the merged entity or the remaining firms or both. This multidimensionality
of the paths of impact via the many determinants poses a formidable problem to any analysis of
10
the merger-innovation connection. The complexity of the task is even larger because the
determinants enumerated so far do only represent broad categories of which each exhibits a
number of dimensions by itself and because the impact of mergers on innovation incentives can
go in opposite directions for different determinants. For example, a merger may increase the
ability of a merged entity in terms of increased knowledge, but may deter rivals from continuing
an otherwise promising innovation project leading to a similar new product. It is obviously not
clear whether the incentive to realize the merging firms project is increased by a merger or not.
Therefore, it is not surprising that the literature has not reached a unified and sound background
for judging the effects of mergers on innovation. Indeed, there are only very few contributions
dealing directly with the merger-innovation connection. But there are substantially more
contributions on the correlates of innovation like the size of a firm, the intensity of competition
in the product market etc. As these have some bearing on the subject of our inquiry they are also
surveyed in the following.
The review will be structured as follows. First, in section 1, we will review the few studies
which analyze the impact of mergers on innovation directly. Then, in section 2 we will collect the
relevant contributions on the relation of product market intensity and innovation. A merger will
typically (but not necessarily) reduce the intensity of competition. Therefore this relation is
obviously important to assess the probable impact of a merger on innovation. Moreover, merger
control is currently driven by a judgment as to whether a merger would lessen competition or
not. Therefore the relation between competition and innovation is also important from this
perspective.
Next, in section 3, we will review the literature on mergers and acquisitions. This literature is
concerned with the impact of a merger in the first place but also - especially in its empirical part with the causes of mergers. As innovative processes may be one of such a cause this information
should be helpful to understand the merger-innovation link.
Section 4 gathers some supplementary aspects. Some mergers are motivated by its potential to
obtain access to patents or licenses and some mergers are cleared on the condition to provide
licenses to rival firms. Therefore we also review the literature on the incentives to offer licenses.
The numerous contributions to the effect of spillovers of R&D have also a bearing on the
11
merger-innovation link. Although most of this literature is on the effect of research joint
ventures, it discusses the internalization of external effects. The literature on corporate finance
stresses the impact of leverage on innovative activity. As mergers are often accompanied with
increased financial leverage - especially in leveraged buy outs - this literature is included as well.
Most of these strands of literature ignore the fact that a merger may affect the ability of the
related firms to innovate. This is the main issue of the technology management literature which
concentrates on the conditions for realizing technological synergies. Hence it will also be
included. Finally, we offer some thoughts on the notions of technological opportunity and
appropriability as a means to explain industry specific shocks. Generally for each of these
strands of literature, we will first review theoretical studies (if existent) and then empirical
contributions (if existent).
The review ends with some summarizing remarks in section 5.
1. Studies focusing on the link of mergers and innovation
At the beginning of 2006 an extensive search of the exiting literature has not revealed a single
theoretical contribution that deals directly with the subject of this section. This finding is in
accordance with Cassiman et al. (2005) who claim this fact as well. In the meantime two
theoretical studies appeared which will be reviewed next. But there are also some empirical
contributions. First we present some of these studies which do not consider a specialized industry
but rather use data covering many industries. At the end of this section we review some studies
which are concerned with one industry. Studies are only included if they focus on merger
specific changes in innovation behaviour.
Kleer (2006) and Jost and van der Velden (2006) analyze the impact of mergers on innovative
activity. The former study focuses on incremental process innovation while the latter deals with a
patent race context stressing drastic innovation. As the results are more or less in line with each
other and Kleers analysis is more elaborate I focus on his study. In a context which abstracts
from the organizational problems of a merger he finds that a merger increases the incentives for
innovative activity of the merging parties. But depending on the strength of these merged entity
rivals increase (low strength) or decrease (substantial strength) their innovative activity. Once,
organizational problems of a merger are accounted for, even the clear picture of increased
12
incentives for the merging parties disappears. Interestingly he finds that for most cases social
surplus increases due to merger. This last result may be dependent on the specification of
demand and cost structures. It should also be noted that his modelling strategy is essentially
static.
Ravenscraft and Scherer (1987) suggests a negative impact of mergers on R&D. They analyze
2955 US lines of business and acquisitions for the period of 1950-1977 and compare R&D of
acquirers to R&D of the industry average for the period 1974-1977. Their indicator for R&D was
R&D intensity (R&D spending/sales).
Similarly Hall (1990) studies a sample of 2500 US manufacturing firms (1967-1987) and finds
evidence of a very weak negative impact of R&D intensity. M&A which led to increased
financial leverage decrease R&D intensity substantially and significantly. In Hall (1999) she
revisits the issue on a new sample of about 6000 firms for the period 1976-1995. Identifying
acquisitions which perform R&D before and after the acquisition leaves her with 479 M&A
cases. In contrast to the 1990 paper she estimates a propensity score for firms to be an acquirer
and uses this score to stratify the sample. The propensity to be an acquirer is estimated as
function of size (employment), R&D, cash flow, capital intensity and Tobins Q. Comparing
firms with a similar propensity score which did acquire to those who didnt reveals that for high
propensity scores mergers have a positive impact on R&D intensity and growth. In contrast for
those with a low propensity score the impact is reversed. Thus the earlier finding of almost no
impact obscures the heterogeneity among firms.
Hitt et al. (1991) use a sample of 191 US M&A for the period 1970-1986 and analyze R&D
intensity and innovation output as measured by the number of patents divided by sales.
Compared to the industry average, firms show lower innovation activity on both counts after
going through a M&A process. Hitt et al. (1996) use another sample of 250 US firms for the
period 1985-1991 to study among other influences the impact of M&A on innovation. The
innovation measure is R&D intensity and the intensity of new products introduced (number of
product introductions divided by sales). Both measures are combined via a factor analysis. They
suggest a number of hypotheses. We report only on those which are relevant to innovation. One
hypothesis holds that acquisition intensity (number of acquisitions) reduces internal innovation.
A second holds that acquisitions lead to a shift from strategic controls to financial controls. This
13
shift has an indirect negative impact on internal innovation. All of these hypotheses are
supported by the econometric results.
Capron (1999) studies the long-term performance of horizontal acquisitions. As in Hitt et al.
(1996) the scope of the paper is much broader than on the innovation impact. His sample consists
of 253 US and European acquirers in manufacturing industries and is based on a survey of
managers of the acquiring firms. These were asked to reply on a 5 point scale on the change of
capability for product innovation and on the change of the development design cycle (time to
market). They report mixed effects of M&A on innovation capabilities. Firms redeployed assets
from acquirer to target and vice versa to a large extent. This effect had a positive effect on
innovation capabilities. On the other hand acquisitions also led to a substantial divesture of the
targets assets which had a negative effect on innovation capabilities. 50% of the M&A are
reported to have improved these abilities.
14
Chapter 3
Research Methodology
For this research I used primary data and secondary data. Primary data will be collect from the
Companies employees through conducting personal interview. Thus the primary source of this
research is different companys employees.
3.1Subjects/Participants
The respondents of this study will be different companies employees who are Management
expert, mangers, line mangers, and supervisor
3.1.1Sampling Technique
A non-probability sampling technique (convenience sampling) will be used
3.1.1.1Fieldwork/Data Collection:
I have written above that data would be collect from the employees by conducting personal
interviews through using questionnaires tools. Time will be taken from the company
management. Only relevant data will be used, irrelevant and wrong data will be removed for
quality purpose.
3.2.1Primary data
Primary data represents the main data collection of this Project Report
Main sources of primary data collection in my study have been the different Banks in Abbottabad
such as United Bank limited, Allied Bank Limited, Soneri Bank limited etc. I have also
conducted in-depth follow-up interviews with selected officials of these franchises that I met
during my visits. Interviews are conversing interchange of views on a mutual interest area
between two people (Kvale, 1996).
15
I conducted several interviews and survey with Professionals working in the different companies
of Pakistan.
16
Chapter 4
Data Analysis and Design
Merger of Companies
Companies Ordinance 1984 regulates the procedure for merger of two companies into one.
Section 284 of the Companies Ordinance 1984 describes that a company could be merged /
amalgamated into another company if:
i.
ii.
No Court sanctioned the merger unless the Court is satisfied that all material facts
relating to the Company such as the latest financial position of the Company, the
latest auditors report on the accounts of the company, the pendency of any
investigation proceedings in relation to the Company and the like.
iii.
A certified copy of the order of the Court shall be filed with the registrar within
thirty days otherwise the order would have no effect of merger / amalgamation.
iv.
A copy of such order along with the memorandum of the company issued after
the order has been made shall be filed within thirty days with the registrar. A
copy of every such order shall be annexed to every copy of the memorandum of
the company issued after the order has been made and filed aforesaid.
v.
17
Object of Merger
Object of merger is to achieve economy of scales and to carry on business more
economically and efficiently, to streamline and maintain smooth and efficient management
and corporate control, to cut unnecessary administrative, secretarial and other expenses, to
attain the main objectives of both the petitioner-companies more feasibly, to avoid
duplication of managerial and corporate process and to otherwise carry on business more
conveniently and advantageously.
A scheme containing the terms of the merger / amalgamation has been placed in
draft before the share holders of each of the NBFC concerned separately;
ii.
iii.
iv.
Any shareholder, who has voted against the scheme, of amalgamation at the
meeting or has given notice in writing at or prior to the meeting to the NBFC
concerned or the presiding officer of the meeting that he dissents from the
18
scheme of the amalgamation, shall be entitled, in the event of the scheme being
sanctioned by the Commission to claim from the NBFC concerned, in respect of
the shares held by him in that NBFC, their value as determined by the
Commission when sanctioning the scheme and such determination by the
Commission as to the value of the shares to be paid to dissenting shareholder
shall be final for all purposes.
v.
vi.
vii.
Methods of Merger
i.
ii.
By purchase of assets;
19
iii.
By purchase of shares;
iv.
v.
By acquisitions of shares;
vi.
vii.
By exchange of shares.
ACQUISITION
The act of becoming the owner of certain property; the act by which one acquires or
procures the property in anything. Term refers especially to a material possession obtained
by any means.
Acquisition is not a term of art and has, therefore, to be construed in its ordinary meaning,
which covers in its ordinary meaning, in the context in which it is used, the acquiring of all
kinds of rights or interests in land. It does not necessarily imply the acquiring of property
rights though, when contrasting such acquisition with that of a lesser kind of rights such as
requisition, acquisition is generally used to convey the obtaining of proprietary rights while
requisition is confined to the mere taking of possession for a limited or unlimited period.
But from this distinction it does not follow that they are entirely different concepts and
cannot, therefore, be reasonably covered by the same expression. In decisions as well as
statutes, the term acquisition has been used to include the temporary occupation.
Acquisition may be defined as a transaction or series of transactions whereby a person
(individual, group of individuals or company) acquires control over the assets of a company,
either directly by becoming the owner of those assets or indirectly by obtaining control of
the management of the company. Where shares are closely held (held by a small number of
persons), an acquisition will generally be effected by agreement with the holders of the
whole of the share capital of the company being acquired. Where the shares are held by the
public generally, the acquisition may be effected (a) by agreement between the acquirer and
20
the controllers of the acquired company; (b) by purchases of shares on the stock exchange;
(c) or by means of an acquisition bid.
FORMS OF ACQUISITION
Derivative Acquisitions
Derivative acquisitions are those which are procured from others. Goods and chattels may
change owners by act of law in the cases of forfeiture, succession, marriage, judgment,
insolvency and intestacy; or by act of the parties, as by gift or sale.
Original Acquisitions
Original acquisition is that by which a man secures a property in a shape which is not at the
time he acquires it, and in its then existing condition, the property of any other individual. It
may result from occupancy; accession; intellectual labor__ namely, for inventions, which
are secured by patent rights; and for the authorship of books, maps, and charts, which is
protected by copyrights.
An acquisition may result from the act of the party himself, or those who are in his power
acting for him, as his children while minors.
21
i.
ii.
iii.
The mortgage charge would be registered as if the company itself created the
mortgage charge etc. The acquiring company becomes mortgager and substitute
existing mortgager and existing mortgagee becomes mortgagee of the acquiring
company.
iv.
Period of 21 days meant for registration of mortgage charge shall be counted from
the date of acquisition of the property.
v.
b.
c.
d.
e.
22
Ratio analysis is an important and old technique of financial analysis. Ratios are important and
helpful in the reference that:
These simplify the comprehension of financial statement and tell the whole story of changes in
the financial conditions of the business.
These provide data for inter-firm comparison. The ratios highlight the factors associated with
successful and unsuccessful firms, also reveal strong and weak firms.
These help in planning and forecasting these can assist management in its basic functions of
forecasting, planning, coordination and control.
These help in investment decision in case of investor and lending decision in case of Bankers etc.
However, the ratios are only indicators, they cannot be taken as final regarding good or bad
financial position of the business other things have also to be seen.
Great care is needed while calculating meaningful ratios and in interpreting them. Although there
are several ratios, which an analyst can employ yet the type of ratios he would, use entirely
depends on the purpose for which the analysis is done i.e., a creditor would keep him abreast
about the ability of a concern to cover up its current obligations and so would care about current
and liquid ratios, Turnover of receivables, coverage of interest by the level of earnings etc.
23
Profitability ratios
Market ratios
LIQUIDITY RATIOS
The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come
due. Liquidity refers to the solvency of the firms overall financial position i.e. the ease with
which it pays its bills. Due to low or declining liquidity firm moves towards financial distress
and bankruptcy.
Liquidity Measures are
Current ratio
Quick (acid-test) ratio
CURRENT RATIO:
The current ratio, one of the most commonly cited financial ratios, measure the firms ability to
meet its short-term obligations. It is expressed as follows:
CURRENT ASSETS
CURRENT RATIO =
CURRENT LIABILITY
Years
2013
2012
2011
Current ratio
1.42
1.02
1.31
RESULT:
From the above ratios it is clear that the firms investment in current assets has increased. In
2008 it is in better position to pay its obligations as they come due. But in three years we can see
that the firm has the ability to pay its current liabilities efficiently. The standard for this ratio is
2:1 it is calculated by the current assets by total of the current liabilities.
24
This ratio is below the standard. The management should take steps to improve the short- term
financial position of the firm.
DEBT RATIO
The debt position of a firm indicates the amount of other peoples money being used to generate
profits. In general, the financial analyst is most concerned with long term debts, because these
commit the firm to a stream of payment s over the long run.
The debt ratio measures the proportion of total assets financed by the firms creditors. The higher
this ratio the greater the amount of other people money being used to generate profit. The ratio is
calculated by following formula
DEBT RATIO = TOTAL LIABILITIES
TOTAL ASSETS
Years
2013
2012
2011
Debt ratios
0.864958
0.860627
0.877075
RESULT:
The ratio indicates the more than half of the assets financed by the debt. This ratio is almost
showing the same trend throughout the previous three years. Debt ratio indicates the greater the
risk and more financial leverage it has. It also shows that firm has paid some portion of the debt
during the year 2013.
MARKET RATIOS
Return on total assets
Return on equity
25
2013
2012
2011
ROA
5.030%
5.505%
5.219%
RESULT:
The return on investment of the firm is 5.03 % in 2013. It is less than the previous year. It shows
that firm generates Rs.5.03 for each Rs.100 of the investment which is very poor for the
company progress.
RETURN ON EQUITY:
EARNING AVAILABLE FOR COMMON STOCKHOLDERS
RETURN ON TOTAL ASSETS =
TOTAL EQUITY
Year
2013
2012
2011
26
ROE (%)
28.313
34.73238
34.448881
RESULT:
The return on equity of the firm is 28.313% in 2013. It is less than the previous year. It shows
that firm generates Rs.28.313 for each Rs.100 of the investment made by the partners or
shareholders of the company (which are privately owned by four brothers).
2013
2012
2011
EPS
24.38929
26.16947
22.95
RESULT:
This ratio indicates the amount of income earned by the common stockholders. Above figures
clearly show the progress of the company and it maintains this ratio more than Rs.20 which is
good for the investors.
VERTICAL ANALYSIS:
In vertical analysis each item of a financial statement is presented as a % age of the total of items
or some other suitable items.
HORIZONTAL ANALYSIS:
In vertical analysis each item in financial statement of the last year is considered as a base of the
same items.
27
The gross spread ratio relationship between Net Markup income & Gross markup income.
Gross spread ratio is continuously increasing from 2008 to 2013.
Income expense ratio as shows the percentage of expenses it should be lower. In bank income
expense ratio has decreasing trend from 2011 to 2013.
Return on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. A company with high return on
equity is more successful to generate cash internally. But in this bank return on equity is
throughout decreasing trend (2008 to 2013) due to increase in borrowing /debt its means the
bank generate low profit with the money shareholder have invested So if the firm takes on too
much debt, the cost of debt rises as creditors demand a higher risk premium, and ROE decreases.
It is generally accepted that a company with a higher ROE is a better
investment than one with a lower ROE since it has a stronger ability to generate cash flows
Internally; however, this is not completely accurate.
28
Return on assets (ROA) return on assets of commercial banks reflects the effectiveness and
efficiency of the use of resources is the embodiment of its operating efficiency and management
level of the important comprehensive index. In year 2011 ROA is higher in all five years due to
increase in earnings after tax so the bank is better at converting its investment into profit. But in
the year 2013 return on asset is decrease because net income in this year is also decrease.
29
calculate earnings. The rise in prices of MCB shares and higher EPS calculates a stronger Price
to Earnings (P/E) ratio Rs. 9.80, from 5.66 in 2008
Book value per share shows value of share as per books. It should be maximum. Book value per
share of the bank has increased due to increase in shareholders equity
30
2012
2011
(Rs. In '000')
(Rs. In '000')
(Rs. In '000')
39,631,219
39,683,883
32465976.00
4,106,526
3,867,591
6649659.00
4,100,079
1,051,372
21081800.00
Investments
97,790,391
115,358,590
64450761.00
Advances
262,508,830
218,959,786
198236682.00
17,320,485
16,082,781
9073274.00
174886.00
19,828,228
17,896,838
11044909.00
445,285,758
412,900,841
343177949.00
10,551,468
10,479,058
7089678
22,663,840
39,406,831
23943476
Sub-ordinate loans
330,245,080
292,088,347
257185110
479,232
1597440
440,295
1,183,586
21,252,942
11,716,465
11177125
385,153,625
355,353,519
300992830
ASSETS
LIABILITIES
Bills payable
NET ASSETS
31
60,132,133
57,547,322
42185119
Reserves
6,282,768
6,282,768
5463276
Unappropriated profits
36,772,321
34,000,927
24662446
11,065,723
7,054,472
6278593
54,120,812
47,338,167
36404315
69
63
52
54,120,881
47,338,230
36404367
6,011,252
10,209,092
5780752
60,132,133
57,547,322
42185119
REPRESENTED BY:
Share capital
Minority interest
32
2012
2011
Rs. In '000'
Rs. In '000'
Rs. In '000'
40,049,505
31791754
25784853
11,592,922
7858819
4509146
28,456,583
23932935
21275707
2,683,994
105269
121197
1,335,127
2959583
1014540
199
47000
4,019,121
3065051
1182737
24,437,462
20867884
20092970
2,878,663
2,772,615
2325171
21,867
5,859
483
Dividend income
451,312
535,813
746276
727,564
693,408
692011
748,139
1,507,610
605865
(99,531)
(3,329)
1,201,834
1,002,160
577703
5,929,848
6,514,136
4947508
30,367,310
27,382,020
25040478
33
7580302
5,440,305
6505576
10120
(3,743)
11411
Other charges
920991
642,780
66708
8511413
6,079,342
6583695
30843
1,223,633
474030
21886740
22,526,311
18930813
Current year
7387345
6,463,560
5709140
Prior years
-865344
-1294586
593906
Deferred
16348
899,898
61213
25164
15,769
25675
6563513
6,084,641
6389934
15323227
16,441,670
12540879
24.39
26.17
19.96
2012
2011
8.90
9.61
9.46
0.92
0.94
1.94
0.92
0.25
6.14
ASSETS
34
Investments
21.96
27.94
18.78
Advances
58.95
53.03
57.76
3.89
3.90
2.64
0.05
4.45
4.33
3.22
100.00
100.00
100.00
Bills payable
2.37
2.54
2.07
5.09
9.54
6.98
74.16
70.74
74.94
0.12
0.47
total assets
LIABILITIES
Sub-ordianted loans
Deferred tax liabilities
0.10
0.29
0.00
Other liabilities
4.77
2.84
3.26
total liabilities
86.50
86.06
87.71
Share capital
1.41
1.52
1.59
Reserves
8.26
8.23
7.19
Unappropriated profits
2.49
1.71
1.83
12.15
11.46
10.61
1.35
2.47
1.68
100.00
100.00
100.00
REPRESENTED BY:
35
Income Statement
For the Years 2013.2012.2011
2013
2012
2011
100
100
100
28.95
24.72
17.49
71.05
75.28
82.51
6.70
0.33
0.47
3.33
9.31
3.93
0.00
0.18
10.04
9.64
4.59
61.02
65.64
77.93
0.00
0.00
0.00
0.00
0.00
0.00
7.19
8.72
9.02
0.05
0.02
0.00
Dividend income
1.13
1.69
2.89
1.82
2.18
2.68
1.87
4.74
2.35
0.00
0.00
0.00
-0.25
-0.01
0.00
3.00
3.15
2.24
14.81
20.49
19.19
75.82
86.13
97.11
0.00
0.00
0.00
Administrative expenses
18.93
17.11
25.23
0.03
-0.01
0.04
36
Other charges
2.30
2.02
0.26
21.25
19.12
25.53
0.08
3.85
1.84
54.65
70.86
73.42
Taxation
0.00
0.00
0.00
Current year
18.45
20.33
22.14
Prior years
-2.16
-4.07
2.30
Deferred
0.04
2.83
0.24
0.06
0.05
0.10
16.39
19.14
24.78
38.26
51.72
48.64
24.39
26.17
19.96
2012
2011
ASSETS
122
122
100
62
58
100
19
100
Investments
152
179
100
Advances
132
110
100
191
177
100
37
100
Other Assets
180
162
100
130
120
100
Bills payable
149
148
100
95
165
100
128
114
100
30
100
LIABILITIES
Sub-ordianted loans
Liabilities against assets subjectto finance lease
100
100
Other liabilities
190
105
100
128
118
100
143
136
100
Share capital
115
115
100
Reserves
149
138
100
Unappropriated profits
176
112
100
149
130
100
133
121
100
149
130
100
104
177
100
143
136
100
NET ASSETS
REPRESENTED BY:
Minority interest
Income Statement
38
2013
2012
155.32
123.30
2011
%
100
257.10
174.29
100
133.75
112.49
100
2214.57
86.86
100
131.60
291.72
100
0.42
100
339.82
259.15
100
121.62
103.86
100
123.80
119.24
100
4527.33
1213.04
100
Dividend income
60.48
71.80
100
105.14
100.20
100
123.48
248.84
100
208.04
173.47
100
119.86
131.66
100
121.27
109.35
100
Administrative expenses
116.52
83.63
100
88.69
-32.80
100
39
Other charges
1380.63
963.57
100
129.28
92.34
100
6.51
258.13
100
115.61
118.99
100
Current year
129.40
113.21
100
Prior years
-145.70
-217.98
100
Deferred
26.71
1470.11
100
98.01
61.42
100
102.72
95.22
100
122.19
131.10
100
122.19
131.11
100
40
41
Chapter 5
Conclusion
5.1Conclusion
1.Shareholders of the target company has benefited more than the acquired company.
2.The post merger analysis is showing the increasing trend in MVA&EVA.
3.The market price has increased during merger period of target companies.
4,All the parameters are showing increasing trend after merger period.
5.EPS of the acquired companies has increased more than 100% in post merger period.
5.2 Recommendations
1. Globally, the banking and financial systems have adopted information and
communications technology. This phenomenon has largely bypassed the Pakistani
banking system, and the committee feels that requisite success needs to be achieved
in the following areas:
2. Bank automation
3. Planning, standardization of electronic payment systems
4. Telecom infrastructure
5. Data warehousing network
6. Mergers between banks and DFIs and NBFCs need to be based on synergies and
should make a sound commercial sense. Committee also opines that mergers between
strong banks/FIs would make for grater economic and commercial sense and would
be a case where the whole is greater than the sum of its parts and have a force
multiplier effect. It is also opined that mergers should not be seen as a means of
bailing out weak banks.
7. A weak bank could be nurtured into healthy units. Merger could also be a solution to
a weak bank, but the committee suggests it only after cleaning up their balance sheets.
It also says, if there is no voluntary response to a takeover of there banks a
restructuring, merger amalgamation, or if not closure.
8. The committee also opines that, licensing new private sector banks, the initial capital
requirements need to be reviewed. It also emphasized on a transparent mechanism for
42
deciding the ability of promoters to professionally manage the banks. The committee
also feels that a minimum threshold capital for old private banks also deserves
attention and mergers could be one of the options available for reaching the required
threshold capitals. The committee also opined that a promoter group couldnt hold
more than 40% of the equity of a bank.
43
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