Mergers and acquisitions (M&A) can be defined as the consolidation of companies that can aid and help a company to grow rapidly. Mergers refer to the combination of two entities to form a new company. Meanwhile, acquisitions refer to the purchase of one company by another company and there is no new company to be formed.
Over the years, there has been an increasing trend of consolidation in banking sector worldwide and the number of the banks had decreased dramatically. Nowadays, M&A become one of the highly popular phenomenon and common corporate strategies in banking industry. Mostly, this phenomenon is due to the economic developments in the national level such as financial liberalization, technological advancement and the restructuring of the banking industry. The M&A in banking industry can help the banks withstand against the new competition especially the foreign banks.
From the traditional views, M&A has always been associated with the enhancement of the company's financial strength and increasing in value. Entity that is involved in M&A will be beneficial in aspect of financial and efficiency. M&A activity will lead the shareholders of the company to overall gain when the post merged company gain more positive value effect or become more valuable than the normal aggregate of the two separate companies which are not undergo the M&A activity. This positive value effect is derived from the performance improvement from the merged company after the M&A activity. There are several gains that can be derived from the activities of M&A such as expense reduction, economies of scale and scope, increased market power, synergy, bankruptcy avoidance and etc.
In the past, most academic studies employed the traditional approach which used the accounting data to evaluate the value effects derived from the M&A activity. They compared the performance before merger and the performance after merger of the company by using the accounting data and determine whether the M&A activity resulting on improvement in financial performance.
1.1 Overview of the Malaysian Banking Industry
Prior to the Asian Financial Crisis, the Malaysian banking industry comprised of large number of the small financial institutions, i.e. 58 financial institutions which operated with the total of 2,712 branches in Malaysia in order to serve the high demand of population of 22.5 million (Hewitt Associates, 2010). Regarding about this, the central bank of Malaysia, Bank Negara Malaysia (BNM) encouraged the small financial institutions to merge in order to achieve gains such as economies of scale, efficiency gains and etc. But the advice of the BNM did not bring any significant result as there were only a few numbers of mergers taken place in banking industry (Sufian, 2004).
The wave of banking consolidation still was not apparent until the occurrence of the incident of Asian financial crisis which took place in 1997-1998. According to Zubair Hasan (2009), during the Asian Financial Crisis in 1997-1998, in which the financial crisis resulted from the Contagion Effect of the collapse in Thai Baht, Malaysia had suffered from the financial crisis and faced the economy problems such as balance of payment deficit, inflation, government spending deficit and etc. As the consequences of financial crisis, it had revealed the weaknesses of the small financial institutions as the financial crisis left the financial institutions with high levels of non-performing loan (NPL) and the financial institutions need to maintain a high level of capital. As response to this, BNM implemented the capital injection to the banks and solved those problematic loans from the banks in order to prevent the incident of the bank collapse (Allen & Boobal-Batchelor, n.d.). BNM realized that the banks play a highly crucial role in Malaysia's capital market because much of the required financing in Malaysia was intermediated through the banking system. Therefore, BNM announced the consolidation of the banks as BNM knew that it is the most effective and long-term solution for preventing the bank failures. Meesook (2001) and Malaysia (Asian Development Outlook, 2000) stated that in July 1998, in order to solve the effect of the financial crisis, Malaysia's government decided to restructure the financial system by announcing a restructuring program to consolidate the financial institutions in Malaysia into major bank groups. Under the restructuring program, banks were given the autonomy to establish their own merger groups. By 2001, there was consolidation of 58 financial institutions which consist of commercial banks, merchant banks and finance companies into 10 domestic anchor bank groups that occurred in Malaysia (Tahir, et al., 2009). The ten anchor bank groups are Malayan Banking Bhd, Bumiputera-Commerce Bank Bhd, RHB Bank Bhd, Public Bank Bhd, Arab-Malaysian Bank Bhd, Hong Leong Bank Bhd, Perwira Affin Bank Bhd, Multi-Purpose Bank Bhd, Southern Bank Bhd and EON Bank Bhd (see Table 1) (Asia Times Online, 2000). According to Sufian (2004), each bank had minimum shareholders' equity of RM2 billion and an asset base of RM25 billion.
Table 1: Malaysian Banks Mergers and Acquisitions
Anchor Banks
Banks Acquired
Anchor's 30 June 2000 Total Assets RMb
Post-Merger Assets Rmb
% of Systems Assets
Maybank
The Pacific Bank
Phileo Allied Bank
127
150
24.0
Bumiputra-Commerce Bank
N.A.
63
67
10.7
RHB Bank
N.A.
51
56
9.0
Public Bank
Hock Hua Bank
43
50
8.0
Arab-Malaysian Bank
N.A.
11
39
6.2
Hong Leong Bank
Wah Tat Bank
29
35
5.6
Multi-Purpose Bank
International Bank
Malaysia Sabah Bank
9
14
2.2
Affin Bank
BSN Commercial Bank
15
30
4.8
Southern Bank
Ban Hin Lee Bank
24
25
4.0
EON Bank
Oriental Bank
14
25
4.0
Source: Bank Negara Malaysia (cited in Sufian, 2004)
During that period, the banking M&A activities in Malaysia experienced at an unprecedented level. Even after the year 2000 in which the ten anchor banks were established, the wave of consolidation in banking industry was still continual and unstoppable. For instance, the merger between Bumiputra-Commerce Bank Berhad and Southern Bank Berhad established CIMB Bank Berhad during 2006 (CIMB Group, 2006). Moreover, Ang (2009) and Zuraimi (2010) stated that currently Hong Leong Bank Berhad sought the approval from BNM and attempted to acquire EON Bank Berhad in December 2009 but Hong Leong Bank Berhad's attempt was ended in failure. However, at last EON Bank Berhad accepted the acquisition proposal from Hong Leong Bank Berhad as Hong Leong Bank Berhad increased the purchase consideration to RM5.06 billion cash (Yong, 2010).
These consolidations made by the anchor bank groups are based on the belief that the M&A activities can lead to healthier financial performance such as cost reduction, economies of scale and scope, synergies, risk reduction, improve competitiveness, reduce the number of bankruptcies in the financial system and etc. However, the critical question and issue is that whether the M&A activities in banking industry can actually achieve the expected gains in practice. If the consolidation does lead to the gains in value, then the shareholders wealth can be increased. On the contrary, if the consolidation does not lead to the expected gains, then the M&A activities may lead to adverse circumstances, i.e. less profitable and valuable banking industry.
Therefore, this research is carried out to determine the value effect and driving motivator behind the M&A activities for the banking industry in Malaysia.
1.2 Research Objectives
This study investigates the impact of M&A activity in Malaysian banking industry by analyzing the financial performance of the banks involved in term of cost, profitability and share performance. Theoretically, M&A has always been associated with the improvement of the bank's financial performance. Thus, investigation is carried out to determine whether the expected gains from the bank consolidation in Malaysia can actually enjoyed in practice by the those banks which involved in M&A activity.
Therefore, this research consists of three objectives which are:
(a) To investigate whether there is degree of impact of M&A in Malaysian banking industry towards bank cost.
(b) To investigate whether there is degree of impact of M&A in Malaysian banking industry towards bank profitability.
(c) To investigate whether there is an impact of M&A in Malaysian banking industry towards bank share performance.
