PublicInvest Research reported:
"CIMB Group (CIMB), RHB Capital (RHB) and Malaysia Building Society (MBSB) released a joint statement merely indicating that they had received Bank Negara approval to commence discussions with the aim of merging the businesses of both RHB and CIMB as well as creating an enlarged Islamic Banking franchise with MBSB. It further went on to say that the three parties have entered into a 90-day exclusivity agreement to negotiate and finalize pricing, structure and other relevant terms and conditions for a proposed merger of the three entities"
"...which would see the creation of the largest banking group in the country with a combined asset base of RM613.7bn and nudging it ahead of current incumbent, Maybank. "
It would be interesting to see how does this M&A stack up against the conventional wisdom of M&A.
1. Post announcement, the aquiree's share price increases while the acquirer's share price is either stagnant or drops a little.
"Despite the large numbers of bank mergers over the past 25 years, academic studies have failed to produce consistent evidence of value enhancement, cost savings and economies of scale for acquirers" - Effect of Bank Acquisitions on Shareholder Returns By Alan P. Mayer-Sommer, Sharon Sweeney and David A. Walker.
Many textbooks on M&A would state that results of past M&A showed that, more often than not, the share price of the acquiring company would either be stagnant (indifferent) or suffer a negative movement. The acquired companies, more often than not, will see positive price movement, indicating immediate value creation for the investors.
In the case of this mega bank merger, the term merger assumes that there is no acquirer per se as everyone in a merger is equal. However, the investors might see it differently, stapling the label acquirer to the largest member of the merger party (or who they perceive as the dominant entity in the pack).
In this case, it is my opinion that the investors had picked CIMB, the largest and deemed more influential of the three to be 'designated' as the acquirer. And this seems to be supported by the price movements of CIMB around the period of announcement, as can be seen below where it dropped the day after the announcement.
Source: Bloomberg
With regards to the acquiree companies, I recall a chat I had with one of the owners of an investment bank in Malaysia who said that the strategy for him was to make the bank very attractive for another bank to acquire. Well, Looking at the price movements of the 2 other companies in the mega bank merger, his strategy seemed to have a lot of truth in it.
Why does this happen? Well, this 'rule' on the share price of the acquirer and acquiree is a well known text book rule which are taught at almost every M&A program. The holder of the bulk of the shares in these companies would be professional fund managers who would have more probably than not, received such teaching of the rule. And as with the share price, it is driven by expectations and subject to by the self-fulling prophecy principle; when enough investors believed and acted on the rule (prophecy) of price movement in M&A above, the prophecy is fulfilled and made into a fact.
Well, that is one of the ways we can use to the try to understand (and in some cases, predict) the price movement of the shares involved in an M&A.
Another logic behind the price movement states that the acquirer is expected to pay a premium for the shares of the acquiree companies in order to entice the shareholders of the acquiree companies to part with their shares. In that sense, the expectation of a higher price for the consideration is very strong to some investors. Therefore, people would buy to cash in on the premium later.
Hypothetically speaking, if I have some shares in the acquirer company and the acquisition will be made through a share swap, where the shares of acquirer company will be offered in exchange for the shares of the acquiree company (which most likely be priced at a premium to the current price), it would probably make sense for me to sell my acquirer company shares and buy the shares of the target company, hoping that at the end of the day, I would still end up with the shares of the acquirer company after the share swap, but now at a 'discount'.
On top of that, in the analysts have been doing fundamental valuations on the acquiree companies RHB and MBSB for a while now. Whether or not the prices of the acquiree companies had followed the fundamental valuation were inconclusive at best, and judging by the reports that RHB is the most undervalued of the three (based on price to book ratio valuation) suggested that the price did not. However, this piece of major news has raised investor's expectations that more people will pay attention to the information on 'undervaluation' and cause the price to move towards a favourable valuation. One group of people who definitely have to pay attention to this 'undervaluation' would the negotiation party from CIMB who would have to factor this in when arriving at the consideration prices.
Well this is a knee jerk reaction immediately after the announcement. As the investors are able to gather themselves and digest more of the information, the price should adjust accordingly.
Okay, I have to leave it there for the moment and continue with the rest of the story on a later date, where I hope to discuss the following wisdom of M&A:
- "There is no clear success directly attributable to the merger, many post merger successes were due to the rapid growth and prosperity in the industry that it is in." Where we will look at
- What do I mean by successful?
- What made me think that the SapuraKencana merger successful.
- What were the factors that contributed to the success of SK merger? Industry, culture, speed, objective of merger, leadership
- Would the the current mega bank merger have that?
- Synergy is elusive to calculate, even more elusive to realise. Bigger simply means just that, bigger. Bigger headache.
- What to expect in the coming months, negotiations, announcements and motivations
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