Methodology

Due diligence is a generally accepted method in undertaking an assessment of potential M&A targets.

Referrals through investment and commercial bankers

Proactive screening process was utilised to identify candidates

It is essential to test the business case by examining operational and management strengths and weaknesses
which includes full financial information, sincerity about the company’s operating performance and problems,
its corporate culture plus an honest assessment of management talent.

Firms are more successful when they acquire companies that are in a moderately similar business.

Why a merger takes place

- The conduct of banking and insurance business from one legal entity eliminates the
possibility for an acquisition to become a merger, or a merger to take place initially.

- the range of products on the foreign market has been extended to take advantage of cross-selling
possibilities

In most of the studies the underlying assumption is that improved stock performance (ex-ante studies)
or improved profitability (ex-post studies) are best indicators of true performance increases, i.e.
increases in productive (or internal) efficiency (say, productivity) and/or increases in dynamic efficiency
(i.e. process and product innovation), in short, increases in the creation of economic wealth. Although
this latter criterion is the only one that makes sense when assessing mergers from a social point of
view, it is evident that mergers and acquisitions (M&As) may well be beneficial to certain stakeholders
(shareholders, managers, employees) and thus welcomed by them even if no economic wealth has
been (or will be) created.
Theoretical Approach
tax savings

In a substantial number of cases, one uses some variant

of the capital asset pricing model (CAPM) or the market model (MM) to calculate the expected returns
for the firms in question.

Manne(1965) suggests that, through the market for corporate control, acquisitions are a
solution to the agency problem. Firms whose efficiency is poor due to agency problems will be
taken over by predators and their performance improved. Jensen and Ruback(1983) note the
improvement in efficiency that can arise through economies of scale, while Williamson(1989)
argues that acquisitions can improve efficiency through a reduction in transaction costs.

Jensen(1986) proposes that acquisitions are not a solution to the agency problem, but, a
manifestation of it. Acquisitions are one of the ways in which managers keep firms’ free cash
flow away from shareholders. Such acquisitions will have an indeterminate effect on the wealth
of target firms, but will certainly have a negative effect on the wealth of bidding firms’
shareholders.

Roll (1986) suggests that acquisitions are motivated by managerial ‘hubris’. Bidders may have an
underlying motive of reaping efficiency gains, but, hubris leads to overbidding. This means that
the price paid transfers all / or a large proportion of any efficiency gains from an acquisition to
target shareholders. The implication is that, on average, there will be a positive gain for target
shareholders, but a negative gain for bidders.

Studies (for example, Bradley;1980 and Asquith;1983) find that the shareholders of target firms
do well from acquisitions, enjoying significantly abnormal gains in share prices. However, the
findings for bidders are more equivocal. For instance, Dodd(1980)) finds significantly negative
abnormal returns for bidders, while, more recently, Schwert(1996) argues that the abnormal
returns to bidding firms are not significant.

Berkovitch and Narayanan (1993) propose a different approach to try and distinguish between
the different motives for acquisition activity. The methodology focuses on the relationship
between the observed gain to target firms’ shareholders and the total gain from acquisitions
and the observed gain to target firms’ shareholders and the gain to bidding firms’ shareholders.
Aim
Lynch and Lind (2002) describe mergers and acquisitions as being one of the central techniques for
organisational growth,

whilst

increasing the diversity of the business

Hurtt, Kreuze and Langsam (2000) go further and suggest growth is the primary reason for M&As.

Perry and Herd (2004) emphasise the critical role of strategic planning when using M&As to grow an
organisation. They suggest that in the 1990s companies shifted the focus for undertaking M&As from a cost
saving perspective to using M&As as a strategic vehicle for corporate growth, which the authors regarded as an
inherently more difficult challenge.

Harari (1997) lists several reasons given by CEOs to justify a merger or acquisition. These include: to obtain
synergies, economies of scale, cost savings, increased products and rationalisation of distribution channels.

Selden and Colvin (2003) highlight the way companies focus on the potential return on capital. They also
suggest that the most common reason companies buy one another is to acquire customers.

Selden and Colvin (2003) note the pressure on CEOs to use their excess cash and increase earnings by mergers
or acquisitions even if that may not be an appropriate strategy for the company.

Albizzatti and Sias (2004) identify that the reasoning for an acquisition needs to be more strategic than simply
the use of excess cash. The strategic reasons they identify for acquisitions are: (i) acquire new products,
capabilities and skills; (ii) extend their geographical reach; (iii) consolidate within a more mature industry; and
(iv) transform the existing industry or create a new industry.

Merger Success
1. Growing scale
Mergers most often aim to grow scale, which does not mean simply getting larger. Rather, success requires
gaining scale in specific elements of a business and using these elements to become more competitive overall.

2. Building adjacencies
The next most common impetus for mergers and acquisitions is to expand into highly related or adjacent
businesses. This can mean expanding business to new locations, new products, higher growth markets, or new
customers. But most importantly, the additions should be closely related
to a company’s existing business.

3. Broadening scope
In mergers geared to broaden the scope of products or technologies, a serial acquirer systematically buys
specific expertise to either accelerate or substitute for a traditional new business development, or technology
R&D function.

4. Redefining the business

Deployed strategically, mergers and acquisitions can at times redefine a business. This is an appropriate
strategic rationale, when an organisation’s capabilities and resources grow stale very suddenly due to, for
example, a major technological change.

5. Redefining the industry

Sometimes a bold, strategic acquisition can redefine an entire industry, changing the boundaries of competition
and forcing rivals to re-evaluate their business models.

6. Platform for success

A clear, strategic rationale for an acquisition is critical, but not enough to guarantee a successful deal and
merger integration. Remember: over half of acquisitions destroy shareholder value. The rationale
helps identify the right target and set boundaries for negotiations, but the hard work remains bringing two
companies together effectively.

3.1 Merger motives

Motives behind manager‟s decisions are in many experiments given as self evident. To list
some motives found earlier are e.g.:
1) to create a number of new business opportunities (Healy et al. 1990, 23) and entry new
markets (Black, Carnes and Jandik 2001,5); institutional owners support specially this
managerial goal of growth (Bethel and Liebeskind 1993, 29); Acquirers of healthy
companies hold to growth motives more often than those who acquired unhealthy
companies (Kitching 1973 via Hunt 1990)
2) to reduce earnings volatility (Healy et al. 1990, 23; Black, Carnes and Jandik 2001,5)
3) technical Efficiency (Chaaban, Réquillart and Trévisiol 2005) and economies of scale
4) parallel i.e. contagious M&As (Öberg and Holtsröm 2006), there is a kind of
economical “force major” to stay competitive for customers while they are merging.
In the „60s and early „70s there was a surge of the conglomerate (Kitching 1973 via
Hunt 1990) but during „80s there was a shift away from conglomerate diversification
(Hunt 1990); Divestment is an option which management is likely to hold in reserve
(Montgomery and Thomas 1988, 95)
5) decreased undiversifiable “employment risk” i.e., risk of losing job, professional
reputation, etc. Managers‟ personal wealth is linked more to firm size and risk of
bankruptcy than to firm performance (Amihud and Lev 1981). The merger offers an
opportunity to improve one‟s social identity as well (Terry, Callan and Sartori 1996)
6) value maximization (Halpern 1983, 314) is specially a shareholder‟s goal (Bethel and
Liebeskind 1993, 29)
7) use of control position (Halpern 1983, 314)
8) synergy (Halpern 1983, 314; Chatterjee 1992)
9) monopoly (Halpern 1983, 314)
10) corporate restructuring is needed industry wide (Hatfield, Porter Liebeskind, Opler
1996; Markides 2006; Chatterjee 1992)
11) cost reduction (Dranove and Shanley 1994)
12) managerial vs. shareholder interests (Taffler, Holl 2006; Holl and Kyriazis 1997;
Mahoney and Mahoney 1991; Mahoney and Mahoney 2006; Firth 1991). Motives for
takeovers tend to reflect managerial rather than shareholder interests in abandoned
mergers (Taffler and Holl 1991). Amit, Livnat and Zarowin (1989) have investigated
owner-manager conflict of interest.
13) reputation enhancement (Dranove and Shanley 1994): local systems do not appear to
have lower cost but do appear to enjoy reputation benefits
14) innovation performance (Ahuja and Katila 2001)
15) resource redeployment (Capron, Dussauge and Mitchell 1998)
16) power, achievement, sensation seeking and prestige (Lausberg and Stahl 2006)
17) horizontal, vertical, product extension, market extension, unrelated Acquisition classes
by U.S. Federal Trade Commission (Montgomery and Wilson 1986)