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Value Creation Through a Bank Merger

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Value Creation Through a Bank Merger Copenhagen, spring 2017 Value creation through a bank merger A case study of DnB and Gjensidige NOR Master thesis Supervisor: Bent Jesper Christensen Number of standard pages: 111 Number of characters: 228 903 Submission date: 15.05.2017 MSc Applied Economics and Finance (AEF) MSc Accounting, Strategy and Control (ASC) Authors: Gard Hesland Noren Semi Pettersen Dahmane Abstract In 2003, DnB NOR was established as a result of the merger between Den norske Bank (DnB) and Gjensidige NOR (GNO). The general objective of a strategic move like a merger or an acquisition (M&A) is to expand a company’s business, increase market share or to improve earnings. The purpose of this thesis is to examine the merger of DnB and GNO and track the performance of the merged entity after the consolidation. The strategic analysis shows that increasing regulations, declining share prices all over the world and the integration of the financial markets raised the competitiveness in the banking industry. To be able to compete with larger, international financial conglomerates that were penetrating the market, it was essential to obtain a significant size. This analysis estimates a total value of the combined firms equal to BNOK 43,5, which is slightly below the market values at the time. The valuation estimates indicate that the merger was priced marginally higher than the standalone value of each company combined. However, by incorporating the expected merger synergies, the deal appears to become profitable. Further, we find that the merger generated synergies that were realized earlier than projected and that the merger enabled DnB NOR to efficiently compete with the other Nordic financial giants. In short- term perspective, DnB NOR increased its income and profitability more than its defined competitor group. On a long-term, DNB’s market value outperforms its competitors over the same period, building grounds towards becoming one of the biggest firms in Norway. Table of Content Abstract ............................................................................................................................................. 0 1.0 Introduction ........................................................................................................................... 3 1.1 Company introduction: DNB Group ................................................................................. 4 1.2 Company introduction: Gjensidige NOR .......................................................................... 4 1.3 Clarification of brand development ................................................................................... 4 1.4 Difference between commercial and savings banks .......................................................... 5 1.5 Economic history ............................................................................................................... 6 1.6 The merger process ........................................................................................................... 8 2.0 M&A theory ....................................................................................................................... 10 2.1 Difference of a merger and an acquisition ...................................................................... 10 2.2 Motives for M&A ........................................................................................................... 11 2.3 Mergers of financial institutions ..................................................................................... 12 3.0 Valuation theory ................................................................................................................. 13 3.1 Complications related to valuation of banks .................................................................. 13 3.2 Fundamental valuation ................................................................................................... 16 3.3 Choosing a valuation method ......................................................................................... 18 3.3.1 Present value approach ........................................................................................... 18 3.3.2 Relative valuation ................................................................................................... 20 3.3.3 Application of valuation methods ........................................................................... 20 4.0 Strategic analysis ................................................................................................................ 21 4.1 External analysis ............................................................................................................ 21 4.1.1 PESTEL analysis .................................................................................................... 22 4.1.2 Porter analysis ........................................................................................................ 32 4.2 Internal analysis .............................................................................................................. 42 4.2.1 Resource analysis ................................................................................................... 42 4.3 Operational synergies ..................................................................................................... 49 4.4 SWOT analysis ............................................................................................................... 57 5.0 Financial analysis ............................................................................................................... 59 5.1 Framework ..................................................................................................................... 59 5.1.1 Comparable companies .......................................................................................... 59 5.1.2 Pre-merger period of analysis ................................................................................. 60 5.1.3 Input data ................................................................................................................ 60 5.2 Adjustments .................................................................................................................... 61 5.3 Key figures analysis ....................................................................................................... 63 5.3.1 Liquidity ................................................................................................................. 63 1 | Page 5.3.2 Solvency ................................................................................................................. 67 5.3.3 Credit quality of loan portfolio ............................................................................... 67 5.3.4 Profitability analysis ............................................................................................... 70 5.4 Summary of the financial analysis .................................................................................. 73 6.0 Forecasting ......................................................................................................................... 73 6.1 Cash flow analysis .......................................................................................................... 78 6.2 Free cash flow to equity ................................................................................................. 80 7.0 Valuation ............................................................................................................................ 81 7.1 Cost of capital ................................................................................................................. 82 7.2 Discounted cash flow to equity model ........................................................................... 86 7.3 Relative valuation ........................................................................................................... 87 7.4 Summary of valuation .................................................................................................... 89 8.0 The parties’ own valuation of DnB NOR ........................................................................... 89 8.1 Valuation based on agreed merger remuneration ........................................................... 90 9.0 Realization of synergies ..................................................................................................... 94 9.1 Organization of the integration work .............................................................................. 94 9.2 Timeframe for synergy realization ................................................................................. 95 9.3 Reported synergies ......................................................................................................... 96 9.4 Profit development in the years after the merger ............................................................ 99 9.5 Profitability development in comparable companies .................................................... 102 9.6 Summary of synergy realization ................................................................................... 106 10.0 Conclusion ........................................................................................................................ 108 11.0 The merger from a 2017 perspective ................................................................................ 110 Bibliography 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