Article

Making bank mergers work in Taiwan

Challenging even in the best of times, Taiwan's crowded banking market harbors hidden perils with the economy in tumult.

Par Nick Palmer and Keng Koay

First published on juin 23, 2009
min


Like financial institutions the world over, Taiwan's banks are feeling the strains of the global recession. But this downturn is shaping up as a watershed event for Taiwan's NT$30 trillion banking sector. Even before the sharp slowdown hit Taiwan's export-driven economy, merger pressures were building. With 70 banks serving a population of just 22 million, the industry is highly fragmented, balance sheets are weak, and profit margins are among Asia's lowest. Potential acquirers have plenty of reasons to take a close look. Regulators have made clear that they will direct local banks to merge. Multinational banks and some private equity firms are pondering their options to enter Taiwan, build on an existing position or. in some cases, withdraw. And just last month, the finance ministry eased rules that will allow Mainland financial institutions to acquire stakes in Taiwan's state-owned banks. But as corporate activity picks up during a period of economic turbulence, Taiwan bank acquirers need to be mindful of four time-tested rules: 1) Start with a sound investment thesis. Taiwan looks to be a target-rich environment for acquisitions. Depressed equity prices have reduced price-to-book ratios, making Taiwan banks look like relative bargains. Smart acquirers, however, focus not just on the deal's price but on its rationale. They begin with a well-formulated understanding of the distinctive capabilities and assets that set them apart from the competition in a specific transaction and would enable them to generate superior returns or justify paying a higher price. For example, some would-be acquirers will be eyeing potential acquisition candidates as a way to quickly expand their subscale networks. Others may focus on opportunities to increase the cross-sale of products and services, take advantage of cost synergies, or further build strengths in particular products or customer segments. Whatever their motivations, acquirers may cast a wide net, but should pursue only acquisition targets they can get to know intimately. They also focus on identifying the right-size deals, ideally beginning with smaller transactions and building up to larger ones as they develop their expertise. A study by Bain & Company found that large, one-off transactions are harder for inexperienced acquirers to digest, greatly increasing the likelihood of failure. 2) Know when to walk away. Successful dealmakers carefully build a bottom-up view of their target company to determine its stand-alone value. But they also actively look for potential problems that would cause them to walk away before the deal is consummated. Potential acquirers of Taiwan banks should heed several watch-outs that could be deal-killers, including asset quality, key management defections or weakening customer loyalty and retention. Acquirers should also stay closely attuned to governance issues; many private banks are family owned with strong corporate identities that could clash with acquirers' organizations. Government policies, too, are still a complex work in progress. For example, the government is proposing measures that would reduce and cap certain lending interest rates, potentially undermining an already fragile source of profits. 3) Integrate where it matters. Even before the deal is done, acquirers pivot quickly and begin acting like owners. Every integration project-like every merger-is different, revolving around such critical issues as identifying operations that most urgently need to be combined, shoring up relationships with most important customers, and retaining key employees. A survey by Bain & Company of 250 global business executives found that failure to pay sufficient attention to the right integration issues are a major source of problems in fully two-thirds of all consummated deals. That's why seasoned acquirers set up a dedicated merger-integration team to plan and work on the highest-priority integration tasks, enabling the rest of the organization to get on with running the business, freed from post-merger distractions. 4) Expect the unexpected. Successful acquirers establish a merger integration steering committee, put strong early-warning systems in place to track key financial and operating measures, and respond rapidly to even the faintest distress signals. In today's tumultuous environment, bank balance sheets can take sudden and dramatic hits. With their capital adequacy bumping up against legal limits, several Taiwan banks are highly vulnerable. According to one recent analysis, a one percentage point rise in non-performing loans this year would wipe out 84% of Taiwan banking industry profits. Inattentive acquirers could find themselves on the line to make big equity infusions. And competitors will use any distractions to lure away key customers and staff. Acquirers need to be prepared for these contingencies from the very start and formulate plans to quickly mitigate the risk. Challenging even in the best of times, Taiwan's crowded banking market harbors hidden perils with the economy in tumult. Only acquirers who are alert to the many pitfalls as well as its potential opportunities will emerge as winners. Nick Palmer is a partner with Bain & Company, based in Hong Kong. Keng Koay is a manager in Bain's Hong Kong office. Article was published on FEER.com and is reprinted with permission. HOW WE CAN HELP Mergers & Acquisitions Acquisition Screening Bain Merger Integration Strategic Due DiligenceAcquisition Strategy

Like financial institutions the world over, Taiwan's banks are feeling the strains of the global recession. But this downturn is shaping up as a watershed event for Taiwan's NT$30 trillion banking sector.

Even before the sharp slowdown hit Taiwan's export-driven economy, merger pressures were building. With 70 banks serving a population of just 22 million, the industry is highly fragmented, balance sheets are weak, and profit margins are among Asia's lowest.

Potential acquirers have plenty of reasons to take a close look. Regulators have made clear that they will direct local banks to merge. Multinational banks and some private equity firms are pondering their options to enter Taiwan, build on an existing position or. in some cases, withdraw. And just last month, the finance ministry eased rules that will allow Mainland financial institutions to acquire stakes in Taiwan's state-owned banks.

But as corporate activity picks up during a period of economic turbulence, Taiwan bank acquirers need to be mindful of four time-tested rules:

1) Start with a sound investment thesis. Taiwan looks to be a target-rich environment for acquisitions. Depressed equity prices have reduced price-to-book ratios, making Taiwan banks look like relative bargains. Smart acquirers, however, focus not just on the deal's price but on its rationale.

They begin with a well-formulated understanding of the distinctive capabilities and assets that set them apart from the competition in a specific transaction and would enable them to generate superior returns or justify paying a higher price. For example, some would-be acquirers will be eyeing potential acquisition candidates as a way to quickly expand their subscale networks. Others may focus on opportunities to increase the cross-sale of products and services, take advantage of cost synergies, or further build strengths in particular products or customer segments. Whatever their motivations, acquirers may cast a wide net, but should pursue only acquisition targets they can get to know intimately. They also focus on identifying the right-size deals, ideally beginning with smaller transactions and building up to larger ones as they develop their expertise. A study by Bain & Company found that large, one-off transactions are harder for inexperienced acquirers to digest, greatly increasing the likelihood of failure.

2) Know when to walk away. Successful dealmakers carefully build a bottom-up view of their target company to determine its stand-alone value. But they also actively look for potential problems that would cause them to walk away before the deal is consummated.

Potential acquirers of Taiwan banks should heed several watch-outs that could be deal-killers, including asset quality, key management defections or weakening customer loyalty and retention. Acquirers should also stay closely attuned to governance issues; many private banks are family owned with strong corporate identities that could clash with acquirers' organizations. Government policies, too, are still a complex work in progress. For example, the government is proposing measures that would reduce and cap certain lending interest rates, potentially undermining an already fragile source of profits.

3) Integrate where it matters. Even before the deal is done, acquirers pivot quickly and begin acting like owners. Every integration project-like every merger-is different, revolving around such critical issues as identifying operations that most urgently need to be combined, shoring up relationships with most important customers, and retaining key employees.

A survey by Bain & Company of 250 global business executives found that failure to pay sufficient attention to the right integration issues are a major source of problems in fully two-thirds of all consummated deals. That's why seasoned acquirers set up a dedicated merger-integration team to plan and work on the highest-priority integration tasks, enabling the rest of the organization to get on with running the business, freed from post-merger distractions.

4) Expect the unexpected. Successful acquirers establish a merger integration steering committee, put strong early-warning systems in place to track key financial and operating measures, and respond rapidly to even the faintest distress signals.

In today's tumultuous environment, bank balance sheets can take sudden and dramatic hits. With their capital adequacy bumping up against legal limits, several Taiwan banks are highly vulnerable. According to one recent analysis, a one percentage point rise in non-performing loans this year would wipe out 84% of Taiwan banking industry profits. Inattentive acquirers could find themselves on the line to make big equity infusions. And competitors will use any distractions to lure away key customers and staff. Acquirers need to be prepared for these contingencies from the very start and formulate plans to quickly mitigate the risk.

Challenging even in the best of times, Taiwan's crowded banking market harbors hidden perils with the economy in tumult. Only acquirers who are alert to the many pitfalls as well as its potential opportunities will emerge as winners.

Nick Palmer is a partner with Bain & Company, based in Hong Kong. Keng Koay is a manager in Bain's Hong Kong office.