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Ijcrb.Webs.Com 164 POST MERGER PERFORMANCE ANALYSIS OF ijcrb.webs.com OCTOBER 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 4, NO 6 POST MERGER PERFORMANCE ANALYSIS OF STANDARD CHARTERED BANK PAKISTAN ASMA ARSHAD Management Studies The University of Faisalabad, 4Km from Sargodha Road, Faisalabad, Punjab. Pakistan. MS Finance ABSTRACT The main intention behind this study is to analyze the post merger performance of the Standard Chartered bank. The Union bank was acquired by Standard chartered bank in December 2006. Before merger Union Bank was the eighth largest bank in Pakistan. After merger Standard chartered bank achieved awards. The main objective was to study and review the existing system of merger and by accessing the gap was to suggest some measures to meet the gap. For this quantitative and cross sectional study ratio analysis was conducted to analyze the performance of Standard Chartered Bank. The total 11 ratios under efficiency ratios, liquidity ratios and capital ratios applied on key financial figures to analyze the performance. Key figures were taken from standard chartered bank’s website. Data was taken from 2004-06 before merger and 2007-09 after the merger. MS EXCEL 2007 was used to calculate and analyze the ratios. After applying ratios, averages of all the ratio categories were taken. On account of that it came to know that 64% answer was in favor of Union bank before merger and 36% was in favor of after merger standard chartered bank. The research resulted with unavailability of before merger and after merger financial statements, just focused on merger effect with limited applicability of ratios. No study conducted on this bank ever before. Key words: Merger, Performance, acquired, ratio analysis, financial figures, efficiency ratios, liquidity ratios and capital ratios. 1. INTRODUCTION 1.1 THE HISTORY OF STANDARD CHARTERED BANK (PAKISTAN) The first branch of Standard Chartered had been opened in Karachi in 1863. Today there are 176 branches across 41 cities. 2006 was the beginning year for the transformations of Standard Charterer’s operations in Pakistan. During this year the Bank announced its acquisition of Union Bank that was the eighth largest banks in Pakistan with US$2 billion in assets, and about 400,000 customers. The acquisition was for US$ 487 million in December 2006. Bank settled effectively cemented position as the largest and fasted growing international bank in Pakistan. In 2007 the merged bank had 115 branches across 22 cities in Pakistan. A year later in mid of 2008, the bank had 176 branches across 41 cities. After the acquisition of the Union Bank by Standard Chartered bank, many foreign banks reached to Pakistan and acquired other small and medium sized banks or financial institutions to expand their network and business in Pakistani market. 1.2 THE MERGER In today’s large-scale economy, merger and acquisition are more and more used for improving the competitiveness through large market share, lengthening the portfolio and to reduce the risk. It is so done to run the business on new geographical areas at economies of scale. It is actually combining of two or more companies where one company’s stockholders offer securities to the acquiring company. Thus merger is the fusion of two or more partners thus creating a totally new business entity or continuing the operation of the partners “under the roof” of any one of them (Wolff, 2008). In merger companies usually combine to share resources. In merger a new business works. A merger occurs when two (or more) companies agree into merge in a new single company rather than remain separated for creating business synergies (OECD Benchmark Definition of Foreign Direct investment, 2008). COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 164 ijcrb.webs.com OCTOBER 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 4, NO 6 Merger is different form acquisition. In merger a new business creates where there is not any concept of acquirer. There is the combine management system in new business. Moreover, both companies are of parallel size. In merger both participants decide to establish and arrange the management. A merger exists when Neither company is portrayed as the acquirer or the acquired. Both parties participate in establishing the management structure of the combined business. Both companies are sufficiently similar in size that one does not dominate other when combined. All or most of the consideration involves a share swap rather than a cash payment, etc. (Glenlake & Fitzroy, 2000) 1.3 IMPORTANCE OF STUDY Merger enhances the value of business. On account of which owners’ good will increases with the increment in profit through economies of scale and cost reduction etc. Motives behind merger are to increase revenue by enhancing market share, cost reduction, economies of scale and economies of scope. As the size of bank increases, efficiency also improves. In addition to economies of scale and diversification benefits, there are two other economic motives of M&A; Horizontal integration and vertical integration (Gaughan, 2011). To employees, merger provides a different and new culture to work. There employees can work in an advanced culture with some desired change. The success of mergers and acquisition depends on a change in state of mind of the people (Sathe and Davidson, 2000; Champy, 1995). Calomiris and Karceski (2000) and point out that efficiency gains can flow to bank customers (Nikolaos & Ioanna, 2005). 1.4 OBJECTIVE OF THE STUDY Main causes of merger in Pakistan according to banking system review are; Increase in Minimum Capital Requirements, Restructuring of public sector and private entities, Appetite for Commercial Banking License, Expansion & Growth (Malik, 2006). Main intention in doing this research is to; Study the existing system of Merger. Review idea system of Merger. Access the gap between existing system and idea system of Merger in Standard Chartered Bank. To suggest measures to reduce the gap in banks. Evaluate the affect of the merger on post-profitability of standard chartered bank. 1.5 HYPOTHESIS = Merger improves the performance of Standard Chartered Bank Pakistan. = Merger does not improve performance of Standard Chartered Bank Pakistan. 2. REVIEW OF LITERATURE Merger is the global business term used achieving the business growth and survival. Merger is different from acquisition. Merger is the combination of two businesses that leads toward a new business, but acquisition is the takeover or purchase of one business by other business. Merger is also helpful for businesses in terms of solvency. Because when a business’ liabilities exceed to assets then mostly businesses adopt this process to abstain from insolvency. There were limitations of resources. So following are the reviews according to access to different articles. The process of mergers & consolidation in the banking system also extended hand to strengthen the solvency of the banking system (Malik, 2006). From banking system review it was also seen that merger of banks is adapted to increases the return on capital, that further lead towards increment in equity. The recent trend of mergers and acquisitions of local banks by the foreign banks is also intended to extend their outreach to maximize return on their capital (Malik, 2006). Mergers and consolidation of the banking system further supported this increasing equity base (Malik, 2006). The chances of uncertainty in operations increase due to new technologies, e- banking and more over mainly from merger. No doubt that new technology and e- banking are the basic factors of operational risks, but banking mergers are causing operational risk in a situation when there was no more idea about new banking workings and operations while diversification is there. The contributory factors to enhanced operational risk exposure generally originate COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 165 ijcrb.webs.com OCTOBER 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 4, NO 6 from new automated technologies, more complex products, e-banking and acquisitions/ mergers in the banking system (Malik, 2006). Little banks have to face problem of less capital. For running business they see for a partner so that that person will be able in running business activities properly. So, to solve capital problem banks decide to go for merger. So that business will not only be able to produce required capital but also will be in a position to introduce new innovative facilities. Some of the banks that have less capital than the required level and/or are facing difficulties in raising capital through equity injection or reinvestment of profits are opting for mergers to bring their capital to the requisite level. (M. & MUSLEH-UD, 2006). Cost efficiency is obtained from merger. It may be raised due to the fact that merged banks get entrance into cost reduction technologies or increase their fixed cost over a bigger base, thus dropping average cost. The cost efficiency effects of merger and acquisition may depend on the type of merger and acquisition, the motivation behind it and the manner in which the management implemented its plans (Pardeep & Gian, 2010). When in-market mergers take place then competition is reduced. In this case market power for survival of the business is increased. On this basis business can earn more profit and offers high loan rates and lowering deposit rates. That helps business in enhancing its good will. A related effect of in-market mergers is at the market share of the surviving organization in these markets is raised (Pilloff & Santomero, 1996). Mostly banks do mergers to get more return on assets, equity and for increment in profit. But different bodies of research examined the performance effects of bank mergers and found no evidence of merger-related performance improvements as measured by ROA, ROE or operating income profitability (Jens & Kevin, 2009). When mergers take place some changes occur in the working and response of employees.
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