UNIT holders have been summoned to a meeting this week to approve merger of MCB Asset Management Company into Arif Habib Investments.
A similar notice calls for members’ consent to KASB Funds Limited for acquisition of Crosby Asset Management (Pakistan) Limited. But those are not the lone deals. Merger and Acquisition (M&A) activity in the financial sector is gathering momentum.
Many money managers believe that the Rs202 billion mutual fund industry has fallen upon hard times, which is why AMCs -- the managers of mutual funds are seeking to combine businesses. One analyst contended that only those AMCs which hold money market funds in their portfolio were able to do well. While the income of funds is running dry, there are indications suggesting considerable run on redemptions.
The odd source of investment for Mutual Funds was the ‘badla’ market of stock exchanges, which is now no more. “Investors loath to hand over funds to AMCs, when they can secure higher returns from investment through banks on government papers: T-Bills and PIBs,” said a financial analyst.
He said several Mutual Funds were already up for sale. Prior to mid-nineties, there was no former role of M&A in thecountry. But when it began, it was concentrated mainly among multinationals and that too in pharmaceuticals, such as Wyeth Laboratories merger 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 global merger of their powerful parents.
The regulators, several years ago, switched over their earlier policy of allowing expansion in the financial sector, 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 requirement (MCR) was greatly enhanced. With the SBP bar of MCR for banks to be raised to Rs9 billion for 2012 and Rs10 billion for 2013, smaller banks run the risk of being pushed out of business.
In such circumstances, many financial institutions have been presented with limited options, either to merge or fade away in the face of higher capital requirements. In case of banks, sponsors who could neither inject cash nor raise it from shareholders in right issues, have opted for merger with larger banks. In earlier M&A activity, numerous smaller banks dissolved into bigger banks and several combined assets to form new banks.
Only recently the Mansha-group controlled Arif Habib Bank merged with Atlas Bank to create the Summit Bank. “Merger stories abound in most sectors including energy, power, fertiliser, leasing, modarabas, insurance and cement”, says Hamad Aslam, Group Head of Equities at BMA Equities. In cement sector, as competition and over capacity continue to bite on market share, it all boils down to the survival of the fittest.
Smaller cement companies are looking at the giants for survival in the sea of financial crisis. Ali Tabba, chairman of Lucky Cement, one of the largest cement companies in the country, however said there were no firm merger deals in the pipeline.
Yet, he agreed that going forward, highly leveraged smaller companies running short on cash flows, could have to use the M&A option.
In case of insurance just like banking, the concentration appears to be on developing fewer and stronger entities rather than retaining large number of weak and sick units. The MCR for non-life insurance companies has been pushed higher to Rs300 million, from Rs250 million last year. Dozens of smaller insurance companies finding it difficult to swim in a sea of competition mainly due to their smaller equity base and unable to wipe out the red from their balance sheet, have already bled to death.
Some years ago, The Orient Insurance Company merged business with Islamabad-based Business and Industrial Insurance Company. The tie-up marked not only the first merger among country’s insurance companies, but also identified a trend of intra-group mergers.
In contrast to the past when M&A activity was concentrated mainly in group companies, investors were witnessing growing number of corporate marriages outside the clan. 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.
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. But the other kind of company integrations—those between local companies belonging to the same group—have also been dismissed by many analysts as merely ‘paper mergers’.
The earliest of those was the 1995 merger of Raza Textiles with sister concern, Umer Fabrics. The year 1997 saw a bevy of tie-ups among group companies. The M&A activity currently abounds in almost all sectors. The KSE website posts two deals this year: Merger of Royal Bank of Scotland into Faysal Bank on Jan 3 and Atlas Bank amalgamation into the newly formed Summit Bank on Jan 11.
The year 2008 also saw the much celebrated marriage of PICIC with NIB Bank. And analysts say that Agritech, with 80 per cent stake held by Azgard Nine, is now up for sale, with huge conglomerates such as Fauji Foundations expressing interest in the deal. Except for Mansha group’s take-over of Adamjee Insurance, there have been no big hostile deals. And cross border M&A is yet a distant dream. The vice and virtues of M&A activity have triggered a debate among entrepreneurs. Detractors say that it results in enhanced political and economic power of the conglomerates.
The concept behind M&A is to enhance shareholders value, create liquidity and raise demand. Khalid Mirza, the man widely believed to have brought two institutions — SECP and CCP to global standards -- is now a visiting faculty at Lahore University of Management Sciences (LUMS). He told Dawn that the CCP does not discourage normal commercial activity of M&A so long the merged entity does not go on to hold dominant position (commanding 40 per cent of market) and also misuses such position of dominance.