Impact_and_Effectiveness_of_Bank_Mergers_and_Acquisition

Impact and Effectiveness of Bank Mergers and Acquisition Nurul Hidayah Ab Rahman, Student, Degree in Finance, Faculty of Business Management, Universiti Teknologi MARA, Malaysia Abstract The effect of a worst financial crisis in 1997, there has been an increase in the number of corporate takeovers and mergers. The beginning of merger and acquisition process increases the chances for an individual bank to become an acquisition target. Most bank employees consider merger and acquisition as a risk to their jobs, since shareholders often demand limitations in the number of employed staff. Besides that, in terms performance of efficiency before and after the commercial bank merged. After merged, automatic that all the management and skills change, so it has many positive effect to the bank such as banks are becoming more focused on their intermediation activities to generate high net interest income. Introduction Merger and acquisition are a big part of corporate finance world. Merger is the combination of the assets and liabilities of two firms to form a single business entity. In everyday language, the term acquisition tends to be used when a larger firm absorbs a smaller firm, and merger tends to be used when the combination is portrayed to be between equals. One plus one makes three, this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies. This rational is particularly appealing to companies when times are tough. Strong companies will act to buy other companies to create a more competitive and cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. Deals can be worth hundreds of millions, or even billions, of dollars. They can state the chances of the companies involved for years to come. For a CEO, leading an merger or an acquisition can be the best part of a whole career. From the perspective of business structures, there are some of different mergers. A few types, distinguished by the relationship between the two companies that are merging which are horizontal merger, vertical merger market extension merger, and conglomeration merger. Background of the issue In Asia, most of the merger and acquisition activities have taken place only after the financial crisis in 1997. The process of getting banks to merge in Malaysia started in the mid 1980s because of the recession. Market forces the entire commercial bank merge. That’s make a government announced a major consolidation in 1999 that would reduce the number of domestic banking institutions to ten banking groups by 2000. The ten anchor banks are Malayan Banking Bhd, Bumiputra-Commerce Bank Bhd, RHB Bank Bhd, Public Bank Bhd, Arab-Malaysian Bank Bhd, Hong Leong Bank Bhd, Perwira Affin Bank Berhad, Multi-Purpose bank Berhad, Southern Bank Bhd and EON Bank Bhd. This merger was expected to get about greater impact to domestic banking operations. It was also hoped that the merger process would help the banking sector achieve economies of scale and therefore cover the way for a strong and competitive banking sector that will be able to handle the offensive of globalization and the liberalization of the financial system. This paper seeks to analyze the efficiencies of these locally incorporated banks, before and after the merger. It also tries to evaluate the impact of these reforms on the performance of these consolidated banking institutions. Besides that, this paper also looks at the impact of this phenomenon on employment and on the efficiency of human resources. Objective of the paper The focus of this paper is the bank or financial institution in terms of merger and acquisition, and also impact and efficiency effect of commercial bank before and after the merged. Such objectives of this paper are: • To compare the efficiency of the commercial banks before and after the merger • To identify the sources of productivity growth of the commercial banks. • To evaluate the important quantitative and qualitative consequences of merger and acquisition in employment. • To evaluate the benefits that gain by the commercial bank after the merged The issue According to Pilloff (1996), the primary reason for the synergy is performance improvement after the merger, which may be obtained in several ways. First, there is a transfer of management skills from the superior firm to the reduced amount of better firm if the better firm has approving skills to the target firm. The two firms once merged will become a large single entity, thus, a better management team will magnify the financial performance. Secondly, the merger can boost financial performance through the removal of unneeded facilities and human resources. Thirdly, there is a consolidation of technology, skills and resources when bank merge. And finally, the fragmented market shares that each entity independently in keeping earlier to the merge are combined. In terms of human resources management within a merger and acquisition environment is problem due to changes in the common actions and in the practices followed by the acquired companies to carry out the tasks, and also due to the growing competition between the employees of the merged parties. Most employees look upon merger and acquisition as a threat to their jobs, because of shareholders often demand limitations in the number of employed staff. This estimation shows that on average that the commercial banks had improved in terms of their technical efficiency. The productivity of all banks increases in both periods which are before and after the merger. This is contributed by improvement in technology rather than efficiency change. An interesting finding is that the local banks have improved their productivity greater than the foreign bank. The overall evaluation found some justifications for the merger policy introduced by the Government in the late 1990s and also some support for the accomplishment of the Financial Master Plan (2001-2010). It can be confirmed that the merger had created more spaces for the banks to better utilize the resources and enhance their capacity, in particular the local banks. It had been claimed that before the merger. Malaysia had many small banks relative to her economy, as a result of the merger, the local banks have been restructured. Bank branches were relocated so that any potential markets were well-captured. Merger and acquisition sign may make use of new technologies in a more efficient way and, most of all, it may also start to a great amount the cost for the application of these technologies (De Boyer et. al., 2000). The international experience and research detects the important quantitative and qualitative consequences of merger in employment, such as decrease in the employment of less specialized categories, important changes in the role of enterprise senior staff towards more complex and more flexible duties, a relative increase in the employment of specialized and younger staff, companies are relieved of less specialized or older excess staff through early or voluntary retirement programs. In 1999, Bank Bumiputra Malaysia Berhad (BBMB) emerged from the Asian financial crisis to merge with the Bank of Commerce (BOCM), resulting in the biggest merger in Malaysia’s banking history. Bank Commerce Berhad (BCB) became the bank of choice of many multinational and local corporations, government organizations and individual Malaysians. In the mean time, the banking crisis in the mid-1980s propels a number of weak in terms of insolvency and financial distress. These financial institutions were badly hit by the 1985-1986 recession as they were saddled with huge levels of NPLs. Besides that, BBMB merge with the Bank of Commerce because of the government want to increase the reserve to create a higher amount of borrowing to the consumer. If the number of bank was deducted, each bank can have a higher amount of reserve and can improve the damage of financial crisis. The merged also because of BBMB and BOC have a financial problems in terms of saving, if both of that bank just go through with its own bank, they have chances to insolvency and become bankrupts. In terms of employment, Bank Commerce Berhad (BCB) or CIMB will cut their employees but not by fire them. CIMB will ask for volunteer to quit from their job but if they refuse to do that CIMB will give an option whether to transfer them to another branch or cut their salary. This is because the CIMB bank want to restructuring their management by use the experienced, good and effective staff. After the merged, BCB or CIMB will become one largest entity financial institution, so all the management will change become more efficient, not just in terms of management but also in skill. The level of skill will increase and the new skills will appear, as a result now CIMB bank had recognized by all. Improvement in cost and profit efficiency, mergers could also lead banks to earn higher profits through the banks market in leveraging loans and deposit interest rates. Prager and Hannan (1998) found that banks mergers and acquisitions have resulted in higher banks concentration, which in turn leads to significantly lower rates on deposits. So, the CIMB bank earn higher profit after the merged because of lower rates in terms on deposit. Conclusion Merger and acquisition is the best way to banks and company increases their performance, earn higher profit, improving their staff operations and achieving capital reforming and raising it. Banks can also easier utilize new information collection, management and dissemination technologies, which favor and make restructuring, integration and networking necessary within a new environment. For the recommendation, in bank in Malaysia, government should promote and force bank to merge each another. Because of this merged, the largest entity will born that give the country a big impact besides of that bank and consumer in terms of fix the damage the financial problems in the future. References Mahadzir Ismail. (2009) Impact of merger on efficiency and productivity in Malaysia commercial bank Anson Wong; Kui Yin Cheung (2009) The effect of merger and acquisition announcements on the security prices of bidding firms and target firms in Asia, University of Macau, Macau; Lingnan University Rasidah Mohd Said; Fauzias Mat Nor; Soo-Wah Low; Aisyah Abdul Rahman (2008) The efficiency effects of mergers and acquisition in Malaysian banking institution, Asian Journal of Business and Accounting Sufian; Fadzlan (2004) The efficiency effects of bank mergers and acquisition in a developing economy John Mylonakis (2006) The impact of banks mergers and acquisition on their staff employment and effectiveness, International Research Journal of Finance and Economics Mahadzir Ismail; Hasni Abdul Rahim (2009), Impact of merger on efficiency and productivity in Malaysian commercial banks, Faculty of Business Management, Universiti Teknologi MARA Kedah