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Purpose of Mergers and Acquisitions in Banking


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Vertical mergers: Vertical mergers and acquisitions are M&A transactions between a bank and a bank that is a customer of that bank (forward M&A) or between a bank and a bank that is a customer of that bank (forward M&A).

suppliers for them (backward M&A). Vertical M&A brings the buyer bank benefits such as: controlling risks when granting credit to customers, reducing intermediary costs.

Purpose of Mergers and Acquisitions in Banking

Conglomeration mergers: Conglomeration mergers are M&A transactions that take place between banks and other banks operating in unrelated business areas or industries. Another name for this transaction is “conglomeration mergers”. This type of merger was very popular in the 1960s when antitrust laws prevented banks from merging horizontally or vertically. Because conglomeration mergers do not immediately affect the level of market concentration. The benefits of this M&A activity are risk reduction through diversification, cost savings in market entry, and increased profits through a variety of products and services.

Classification based on territorial scope

Domestic Mergers and Acquisitions: M&A activities take place between banks within the same national territory.

Cross-border mergers and acquisitions: M&A activities take place between banks in different countries (one of the most popular forms of direct investment today). However, these M&A deals are more complicated than domestic M&A. The reason is that there are differences in political, economic, cultural, traditional customs, tax and accounting principles... between countries.

Classification based on acquisition strategy

Friendly takeover: is an M&A transaction that both parties want to do because they both feel they will benefit from the deal. A merger with such a fair nature is called a “merger of equals”, so there is always a balance between the parties in the decision-making process of operating the new organization.

Hostile takeover: is an M&A transaction in which one party must buy the other party by all means regardless of whether the seller agrees or not. In this case, the buyer will use its financial resources to buy the competitor to eliminate the competition of that competitor.


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1.1.4. Purpose of mergers and acquisitions in banking

When conducting a merger and acquisition transaction, banks often expect certain benefits. Synergy is an important motive and the ultimate goal of mergers and acquisitions. The goals behind each M&A transaction include:

Penetrating new markets, reducing market entry costs: For banks that intend to expand their markets and penetrate new consumer markets, M&A activities are given top priority. Through this activity, the acquiring bank can save a lot of costs in the process of entering the market: costs of hiring employees, renting offices, building factories, building brands, and finding customers... On the other hand, taking advantage of the available resources and strengths of the target bank in the new location not only significantly reduces costs, but the market entry process of the acquiring bank is carried out faster and more effectively.

Achieving efficiency based on scale: If M&A is successful, the bank will achieve many expected results. Thanks to the synergy value, the efficiency and value of the new bank (after the merger) will be significantly enhanced. The most important thing to mention is the reduction of small, useless costs such as reducing employee hiring costs, firing incompetent employees, cutting offices and transaction offices in the same area... Thanks to that, the profit margin will be significantly increased, along with improved business performance. Moreover, thanks to the efficiency due to scale, the bank's capacity will be significantly increased with the addition of capital structure as well as taking advantage of good human resources, taking advantage of each other's advantages and strengths.

Increase market share and reputation in the industry: One of the goals of M&A is to expand into new markets, increase revenue and income. Mergers allow for the expansion of marketing channels and distribution systems. In addition, the position of the newly merged bank will increase in the eyes of the investment community: the bank is larger, has more advantages and can raise capital more easily than a small bank.

Equipping with new technology: To remain competitive, banks need great support from engineering and technology. Through mergers and acquisitions, new units can leverage each other's technology to create competitive advantages.

Risk Elimination: Banks are always considered as a source of capital for economic, political and social activities. Therefore, when weak banks merge into stronger banks, it will eliminate risks, increase competitiveness for the entire banking system, in which each member bank benefits, and the effective purpose belongs to the national economy. Therefore, mergers should not be considered as takeovers, occupations or eliminations.


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one

1.1.5

A bank is an organization, arrangement and reorientation of capital flows, a unified focal point for more effective management and operation.

. Ways to conduct mergers and acquisitions in banking

The way to carry out bank mergers and acquisitions is very diverse depending on the law, the management views of the parties, the objectives, the ownership structure and the advantages of each party in each specific case. However, according to the mergers and acquisitions in the world, there are the following common methods of carrying out bank mergers and acquisitions according to the views of Andrew J. Sherman and Milledge A. Hart in the book “Mergers & Acquisitions from A to Z” , 02nd edition, Prentice Hall [17]:

1. Tender Offer

A bank, or an individual or a group of investors intending to buy out the entire target bank, proposes that the bank's existing shareholders sell their shares at a price much higher than the market price (premium price). The bid price must be attractive enough for the majority of shareholders to agree to give up their ownership and management of the bank. This form of bidding is often applied in hostile takeovers of competitors. The target bank is usually a weaker bank. However, there are still some cases where a small bank acquires a stronger competitor when they can mobilize huge financial resources from outside to carry out this takeover. The notable point in the "bidding" activity is that the target bank's board of directors will lose the right to decide, because this is a direct exchange between the acquiring bank and the shareholders of the target bank. Typically, the target bank's board of directors and key positions will be replaced, although its brand and organizational structure may be retained without necessarily being fully merged into the acquiring bank.

2. Proxy fights

This form of M&A is also used for the purpose of acquiring competitors. When the target bank is in a weak and loss-making business situation, there is always a large number of dissatisfied shareholders who want to change the management and operation of their bank. The buyer can take advantage of this situation to attract that group of shareholders. First, they will buy a relatively large number of shares on the market (but not enough to control) to become shareholders of the bank. After receiving support, they and the dissatisfied shareholders will convene a General Meeting of Shareholders, gather enough controlling shares to remove the old management board and elect their representatives to the new Board of Directors.


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3. Friendly mergers

This is a fairly common practice in bank mergers and acquisitions. When both banks see the potential mutual benefits of the merger or they predict the outstanding growth potential of the merged bank, the management board will sit together to negotiate the merger contract. There are small and weak banks that, during the economic crisis, automatically seek out larger banks to propose mergers. At the same time, medium-sized banks also seek opportunities to merge with each other to form larger, stronger banks that are strong enough to overcome the difficulties of the crisis and improve their competitiveness with larger banks.

4. Collecting stocks on the stock market

The buyer will secretly collect shares of the target bank through trading on the stock market or buying back from existing strategic shareholders. This method takes time, and if the intention to take over is revealed, the price of the shares may skyrocket on the market. However, this method of acquisition is carried out gradually and smoothly, at which time the buyer will achieve its ultimate goal smoothly and at a much cheaper price than the bidding method.

5. Asset acquisition

The buyer can unilaterally or jointly with the target bank value the seller's assets (they often hire an independent asset valuation firm). The parties will then negotiate to come up with a suitable price (which can be higher or lower). The payment method can be in cash and debt. The limitation of this method is that intangible assets such as brand, market share, customers, personnel, organizational culture, etc. are difficult to value and agree upon by the parties. Therefore, this method is often only applied to take over small banks, which in fact target the distribution channel and agency systems currently owned by the target bank.

1.1.6. Contents of the merger and acquisition process in banking

1. Plan the strategy and determine the motive for the deal

The most successful acquisitions are those that are planned in advance. When a bank seriously considers M&A, no matter how good the purpose or strategy, the acquisition cannot be successful without a specific plan for each stage or if there is a plan, it is not effectively implemented. Therefore, the bank intending to acquire first establishes a specialized team to carry out M&A-related work. The team members include experienced financial managers, specialized and competent managers.

related members such as Law, Accounting...

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determine

pay

First of all, the M&A department and other related departments of the bank will clarify the strategic objectives in M&A activities. This stage focuses on two questions: what will the bank gain if it merges and acquires, increasing its value?

through M&A, determine current resources, factors affecting M&A activities, which methods to use to raise capital. Decisions must be made regarding the overall scale of the deal to match the bank's available resources. Based on a clearly defined strategy, banking standards will be developed as a basis for selection. The criteria are often determined relatively specifically. It includes a set of issues: from clearly defined issues such as capital scale, total income, number of employees to issues including professional skills, business culture, potential customer groups or relationships...

2. Identify target bank

Identifying a target bank that is suitable for the proposed business motives is of great significance to the success of the M&A deal. The target bank must meet the requirement of helping to supplement the resources that the buyer/seller is lacking. Therefore, the target bank here can be understood as the buyer or/and the seller, not just the seller. Furthermore, when there are many target banks, the parties will have many options and favorable conditions for negotiating the M&A transaction. Identifying a target bank is not easy in all cases, especially in the case of identifying many target banks. Because identifying a target bank is essentially obtaining accurate information about them. There are many ways to approach and obtain information. Among them, currently, cooperating with financial institutions (such as securities companies, investment funds, etc.) is one of the effective ways to achieve the goal.

3. Preliminary negotiations

Once the target bank is identified, the acquiring bank will enter into contact negotiations. This is a lengthy process and during this process the parties will reach preliminary agreements with each other. Most of these agreements relate to the manner in which the parties will conduct themselves during the negotiations. Most of these agreements are non-binding in nature, there are two common types of agreements that are commonly used:

Confidentiality Agreement: During the preliminary negotiations, there is no certainty that the deal will be completed or not? Therefore, if information related to the bank's operations is disclosed or leaked, it may make its business operations more difficult. At the same time, the law also strictly regulates this area.



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information field. Therefore, at this stage, the parties often sign a commitment to keep information confidential about the content of the negotiation work.

Agreement in Principle: Typically, an agreement in principle is a written document exchanged between the parties when negotiations have reached a fairly advanced stage. At this point, the buyer and seller usually formalize their intentions and expectations before moving forward. The function of this stage is to summarize the general terms that both parties agree on and agree to proceed with the next steps.

4. Develop a detailed merger and acquisition plan

After preliminary negotiations and accurately identifying the target bank, the M&A Bank should consider developing a detailed merger plan and reviewing its strategy to match the actual situation. This plan is not only important in the pre-M&A process, but it is also essential to ensure the success of the M&A deal later. The merger plan is a comprehensive roadmap of the necessary work to be done after the completion of the M&A. It includes tasks such as financial control, organizational restructuring, and a plan to coordinate the business activities of the two banks. The plan also specifies and assigns work to the entire system, not just the specialized M&A department as in step one. This is to ensure that the bank's operations after the M&A can be operated immediately when the M&A procedures are completed, which is an important content and basis for a successful M&A deal.

5. Comprehensive survey and assessment of target banks

After the preliminary negotiation phase is completed and the agreement in principle has been signed by both parties. The M&A bank and the target bank move to the Comprehensive Survey phase. The assessment survey is usually conducted after the agreement in principle has been signed, because it is a sign that both parties are serious about maintaining the work. At the same time, the survey should be conducted before the final agreement is signed.

The three main areas that need to be investigated are: Commercial, Financial and Legal, and a number of other secondary issues. At the end of this phase, the acquiring bank will have a comprehensive and unified set of information about the target bank to serve the following requirements:

Correctly assess the current situation in all aspects of the target bank's operations to see the advantages that need to be promoted and the weaknesses that need to be reformed.

Check whether the target bank reports correctly according to their stated status?


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Review the target bank's compliance with the merger strategy and plan. See the target's inherent resources and potential resources for synergy that will emerge after the merger.

See the issues that need to be implemented after mergers and acquisitions so that the new bank can operate more successfully.

A comprehensive survey will provide input data for valuation activities in bank M&A deals.

6. Pricing

After collecting all the information from outside as well as from the recent comprehensive survey, the bidder bank enters an important stage, which is valuation. The purpose of valuation is to determine the price to be paid to each shareholder to acquire the target bank. Valuation plays a very important role. It determines whether the bank spends too much money to acquire a competitor while the benefits from this deal are not much or not? Valuation is too high, which will result in the benefits from the acquisition being transferred to the shareholders of the selling bank, while if the valuation is too low, the deal will not be successful. Therefore, when valuing a bank to conduct a merger or acquisition, it is necessary to satisfy the following equation:

(Real value + synergy value) ≥ M&A transaction price Some methods to determine real value

Price/Earnings Ratio (P/E) Method : The buyer can compare the average P/E of stocks in the industry to determine a reasonable bid. The P/E ratio measures the relationship between the market price (Market Price - P) and the earnings per share (Earnings Per Share - EPS) and is calculated as follows:

In which, the market price P of the stock is the price at which the stock is being bought and sold at the present time; the earnings per share EPS is the portion of net profit after tax that the bank distributes to common shareholders in the most recent fiscal year.

P/E shows how many times the current stock price is higher than the earnings from that stock, or how much investors have to pay for one dollar of earnings. P/E is calculated for each stock and averaged over all stocks and this ratio is often published in the press. The higher this ratio, the more efficient the bank is operating, and the higher the market price is. If the market operates stably and effectively, the P/E ratio will reflect more realistically the market price and earnings of the bank's stocks.


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Valuation by this method is not really suitable for countries with underdeveloped stock markets because the stock market price fluctuates a lot, so determining the market price for valuation by this method will not be accurate. Therefore, depending on the valuation market, this method should also be used in combination with other methods to give more accurate results.

Discounted Cash Flow Method : The discounted cash flow (DCF) method is a method of determining the value of a bank based on the bank's future earning capacity. This method allows an analyst to calculate the expected future income streams and cash flows, by calculating the income and fixed assets at an assumed cost of capital. However, the accuracy of this method depends on the accuracy of the forecast of future cash flows and the discount rate. There are two methods of determining the value of a bank based on discounted cash flows: the FCFF (Free Cash Flow to Firm) method and the FCFE (Free Cash Flow to Equity) method.

The FCFF method calculates cash flows generated from both debt and equity sources. The formula is:

FCFF = EBT*(1- t) - Net Capex - Change Working Capital

In there:

EBT: earnings before tax

t: corporate income tax rate

Net Capex = Capital cost - New fixed asset investment cost (difference in fixed asset value in year N and N-1)

Change Working Capital: Change in net working capital between year N and year N – 1

The FCFE method calculates cash flows related only to equity and does not include cash flows associated with debt – interest payments, principal, and new debt.

FCFE = NI – (Net Capex + Change Working Capital) * (1 – D/A)

In there:

NI (Net Income): Profit after tax

Net Capex: New fixed asset investment expenses (difference in fixed asset value in year N and year N-1)


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