THE ORIENT Insurance Company Limited— a B.R.R group company in Karachi agreed early this month to merge business with Islamabad based—Business and Industrial Insurance Company Limited — the majority stake in which is vested in Mumtaz Abdullah, a former chairman of the Corporate Law Authority and his group.

The tie up marks not only the first merger among country’s insurance company, but also identifies a trend of intra-group mergers. In contrast to the past when Mergers & Acquisition (M&A) activity was concentrated mainly in group companies, investors are witnessing growing number of corporate marriages outside the clan.

Altowfeek Investment Bank Limited, which is 60 per cent controlled by AlBaraka Investment & Development Co, Jeddah, is all set to merge with Cres Group’s, First Crescent Modaraba, which would go to create First Standard Investment Bank Limited. In the new investment bank, Cres Group would hold 35 per cent shareholding with three nominees on a seven member board of directors. AlBaraka Investment would have 14 per cent stake and a claim to two seats on the board. The Cres Group has further acquired strategic equity interests in First Leasing Company and Paramount Leasing—both with more than 80 per cent capital held by various financial institutions. The two leasing companies are already in the process of merging into “First Paramount Leasing Company”.

Seven Modarabas have so far merged. Some were consolidation of the same group units such as in case of B.R.R Second into B.R.R International Modaraba; Equity International into B.R.R International Modaraba and Crescent Modaraba into Al-Ata Leasing. But others such as mergers of Security Stock Fund with BSJS Balanced Fund; Ghandhara Leasing with Al-Zamin Leasing Modaraba and Guardian Leasing Modaraba with Providence Modaraba portrayed intra-group mergers. Security Leasing Corporation recently tied the knot with Lease Pak. Two of the top six firms of chartered accountants—Fordes, Rhodes, Robson, Morrow (FRRM) and Sidat Hyder Qamar & Co., are in advanced talks for merger, which if it goes through, would be the first such institutional merger in Pakistan. FRRM is an affiliate of one of the global ‘big’ four accountancy firms: Ernst & Young. Sidat Hyder was the member firm of Arthur Andersen, which fell apart in the wake of Enron bankruptcy and WorldCom scandal. By combining business with FRRM, Sidat Hyder hopes to restore the ‘global branding’, which is so essential for securing multinational clients.

For the first time, it appears that the local entrepreneur or “Seth” is opting to risk sharing the control of a merged company with someone outside the family fold. But market analysts suggest that such an urge to merge has been piqued as much by choice as from force of circumstances.

In contrast to the earlier policy of allowing expansion in the financial sector, the regulators have turned to consolidation. In a bid to reduce the number of banks and non-banking financial institutions (NBFIs) to fewer but stronger entities, the minimum capital requirements have been greatly enhanced. The Insurance Ordinance 2000, which replaced the Insurance Act, 1938, stipulates that general insurance companies increase their paid-up capital to a minimum of Rs 80 million by the year 2004. But as many as 20 of the 36 listed insurance companies are still short of the Rs 80 million mark. Most of those smaller companies run the risk of being pushed out of business unless they conform to the new regulations. But what options do they have? Given the stock market’s unhealthy appetite for additional new offerings and the huge discounts in the market prices of their stock, an attempt to raise paid-up capital by asking shareholders for cash in right issues is bound to be frustrated. Mergers and Acquisitions (M&A) then, appears to be the only way for such companies to be able to survive. Leasing companies are required to raise paid-up capital to Rs 200 million, while SBP has directed banks to have minimum of Rs 500 million in shareholders’ equity. Smaller banks, leasing companies, insurance companies and modarabas, who can not raise additional capital through right issues because of discounts in their stock prices, have all but the Hobson’s choice: Amalgamate with others of their ilk or risk being pushed out of business. While most experts view the intra-group mergers as a positive development for the country’s corporate sector, some look down upon them as “forced” marriages, which have a high probability of hitting the rocks.

The other kind of company integrations—those between local companies belonging to the same group—have been dismissed by some analysts as merely “paper mergers”. The earliest of those was the 1995 merger of Raza Textiles with sister concern, Umer Fabrics. 1997 saw a bevy of tie-ups among group companies: Nishat Fabrics and Nishat Tek amalgamated with Nishat Mills; United Woollen with United Carpets; Premier Tobacco with Lakson Tobacco. Later to follow were the mergers between Ellahi Spinning and Taj Textile; Sitara Spinning into Sitara Chemical; D.G.Khan Cement into D.G.Khan Electric; Maple Leaf Cement and Kohinoor Textile into Maple Leaf Electric; R.R.P with Nimir Resins and Atlas Lease with Atlas Investment Bank. In March 2002, Al-Faysal Investment Bank merged with Faysal Bank, which went to create one of the largest banks in the private sector. Earlier in February, the units of the Ibrahim group: A.A.Textile; Zainab Textile; Ibrahim Energy and Ibrahim Textile merged into the flagship company— Ibrahim Fibres. Market talk suggests that Ibrahim Fibres’ main competitor—Dewan Salman Fibre— is about to follow suit: consolidate the group’s three textile mills: namely, Dewan Textile, Dewan Khalid and Dewan Mushtaq into the fibre unit. That would enable it to cut costs and improve debt-to-equity ratio.

Prior to mid-nineties, there was no former role of M&A. But when it began, it was concentrated mainly among the multinationals and that too in pharmaceuticals, the market has since seen Wyeth Laboratories merge with Cyanamid; Ciba-Geigy with Sandoz; Beecham with Smith Kline; Glaxo with Wellcome and Knoll Pharmaceuticals with Abbot. All of that, inevitably in response to the global merger of their powerful parents. SmithKline Beecham has gone on to merge with GlaxoWellcome to create the country’s largest pharmaceutical firm—GlaxoSmithKline (GSK).

Takeover is another phenomenon. Except for isolated cases such as the Lever Brother’s acquisition of Brooke Bond in 1997 and Dewan Salman Fibre’s takeover of Dhan Fibre, almost all of the acquisition activity is concentrated in the financial sector. Saudi Pak Industrial and Agricultural Investment Company had acquired Prudential Commercial Bank in September 2001 and it has since adopted the name of Saudi Pak Commercial Bank Limited. PICIC bought over the Gulf Commercial Bank and Union Bank acquired Pakistan branches of the Bank of America (BOA). Union is now in the midst of takeover of Emirates Bank branches in Pakistan. New Jubilee Insurance has bought over Commercial Union; Pak-Libya Holding company has acquired Platinum Commercial Bank, while another investment bank is understood to be in negotiations to buy out the Mashreq Bank.

Acquisition of local corporate units have not been plentiful. Experts have been advocating takeover of sick units, whose carryover losses could be adjusted by profitable companies against their earnings. The KSE too has identified Mergers and Acquisitions (M&A) as one simple solution for the revival of financially sick units. The Budget 2002-03 has given incentives for carryforward of losses in case of M&A. But the event to watch is the promulgation of the “Takeover Law”. If the Federal finance minister does keep his promise of promulgation of the law shortly, it could well serve as a catalyst for large-scale M&A activity in the country.