[Investment] CIMB-RHB-MBSB Three-way Merger

This is a continuing blog from my previous post on Why mergers fail to unlock the expected synergy?. The three-way merger somehow garnered my interest since it has been on the news headlines for almost half a year and it is by far the biggest corporate deal in Malaysia (up to RM94 billion) - although the deal didn't come through.

For ease of understanding and to cut a long story short, so here's the compiled news headlines for the proposed three-way merger ranked by chronological order. 

Date	News Headline
09-Jul-14	Stocks trading suspended
10-Jul-14	BNM approval to commence negotiation and exclusivity agreement between CIMB, RHB and MBSB
08-Sep-14	EPF: Right to vote on merger critical to protect members’ interests
09-Sep-14	RHB Cap unlikely to be priced at significant premium if EPF allowed to vote
30-Sep-14	Abu Dhabi reaches out to M’sia
08-Oct-14	RHB and MBSB boards agree to proposed merger
09-Oct-14	Mega bank merger terms concluded to see share swap between CIMB-RHBCap, formation of mega Islamic bank
10-Oct-14	CIMB’s shareholders to hold 70% stake in enlarged banking group
13-Oct-14	Malaysia's three-way bank deal is far from done
13-Oct-14	Moody's: Mega bank merger credit negative for CIMB Islamic Bank, benefits RHB
14-Oct-14	Mega bank merger credit negative for CIMB Islamic Bank
15-Oct-14	MBSB will cause asset quality weakness in merged mega bank: Fitch
21-Oct-14	Bank merger plan can still proceed even if EPF is not allowed to vote
21-Oct-14	CIMB, RHBCap, MBSB share trade suspended pending annoucement
23-Oct-14	RHBCap shares fall 0.2%, CIMB down 0.6%, MBSB drops 1.5% after EPF disallowed from merger vote
24-Oct-14	Abu Dhabi state fund asks for more in $22 bln Malaysia banking deal
30-Oct-14	EPF will not trim stake in CIMB
30-Oct-14	Bursa to decide on EPF vote
31-Oct-14	CIMB-RHBCap-MBSB post merger integration to cost RM1.4b
03-Nov-14	Merger valuations seem fair, but will Aabar accept?
20-Nov-14	Aabar now in favour of mega merger
01-Dec-14	Merger will go through “with or without EPF”, says Nazir
10-Dec-14	Bursa says no to EPF’s appeal to vote in banks merger
17-Dec-14	Potential revision in Malaysia Building Society’s offer price
14-Jan-15	Merger deal is off, confirm CIMB, RHBCap and MBSB
15-Jan-15	Aborted mega bank merger highlights tougher environment, says Fitch
16-Jan-15	Market relief on aborted merger

(Sources: Financial Daily The Edge)

The implications on stocks performance

It's late and I'm starting to counting star, so here's a chart that explain all:-

Shares performance (return in %) of MBSB, RHB and CIMB from 01 Jul 2014 - 20 Jan 2015

(Click image to enlarge)

• Three key events (based on the date of Bursa announcement) are highlighted as it had triggered the stocks to move more than +-10% (i.e the start of negotiation, the proposal of the merger, the appeal for EPF's voting rights was rejected and the cease of proposed merger).
• MBSB: As a target company of the three-way merger, the shares performance had been fueled with positive momentum since the negotiation started and proposed merger announced. The surge of shares price was due to the fact that investors are chasing after the arbitrage over the proposed cash offer price of RM2.82 vs. market price. However, the stocks started to head south after the EPF (major shareholder) voting rights was rejected and the deal was ceased.
• CIMB: The shares performance is worst off since the start of the merger's negotiation as there were negative views on the asset quality and credit rating post-merger. Market relief with sign of stocks rebounding prior the announcement of the withdrawal of the proposed merger.
• We can see that the market actually reacted significantly for all three stocks days (or a week) before the official Bursa announcement on the withdrawal of three-way merger. Was there some noise in the market or was there any party who had the advantage of superior information?
• So who is the biggest loser? From the chart above, CIMB is the biggest loser with its market value depreciated -19.5% since the 1 Jul 2014 (vs. RHB: -8.5%; MBSB:-2.4%). 
• However, investors who are emotional and acted on news flows could also be the biggest loser as well, i.e. investors who bought MBSB shares after the announcement of the proposed merger and hoping the deal to seal (to receive the offer cash consideration) may lose of up to -24%.
• Of course with high trading volume and liquidity during the period, it did provide a good opportunity for traders as well.

Thoughts of the day:

Propose transactions are just proposal, anything could happen.
There's no done deal, until Bursa Announcement say so.

Information asymmetric do exist, you may be too slow to react.
Life is not fair, same goes to the market.

[Investment] Why mergers fail to unlock the expected synergy?

The domestic financial industry has been changing rapidly. Given the more competitive financial landscape arising from greater globalisation and liberalisation, it is vital for banking institutions to respond promptly to enhance capacity and capabilities. With the recent the proposed three-way merger acquisition of RHB-CIMB-MBSB (mega bank wannabe), it just inspired me to blog on a general topic on merger acquisition. The three-way merger had been relatively complicated with lots of drama i.e (1.) starting of with everyone wondering who is the actual acquirer along with plot twist behind the deal (RHB or CIMB?); then (2.) the voting issue of EPF coupled with the demanding Abu Dhabi state fund (Aabar Investment) going against the transaction; (3.) and the concern on valuation as the stocks market heading south; (4.) lastly the merger was finally aborted (what a relief?).

Of course the shares price for three of the companies had been roller coaster but I’m not going to blog about the merger implication on the shares performance at the moment. The rationales behind the mega merger were justified by (1.) valuation creation through synergy 1+1+1=??? (a common argument for all mergers) (2.) earnings accretive (3.) being largest Islamic bank to drive growth (4.) being top 5 largest bank in the region of ASEAN. However, channel check on the ground, most of the employees were not even happy or looking forward for the merger.

Aside from its products innovation and large network distribution, the success of the banking industry also heavily rely on the professional services which people play a key role in the company.  So here's some people issue arose or rather the resistance to change during the transition period that lead to the failure of delivering the expected full value of mergers.

We-they attitudes

  So we used to be fierce competitor and we used to fight but now you expect us to be a happy loving family? After the acquisition has been formally announced, the differences in the two organizational cultures usually lead to competition between employee groups and hostile ‘we-they’ attitudes. Particularly in target company, the employees may have perceived the acquisition as a loss. The merger usually emphasize or even exaggerate the differences in status between employees, the resultant structure is often a constant reminder of who the `winners” and who the `losers’ are. Employees may not know where the new organization is headed and how they fit into the new scheme of things.

Cultural clash

  While the two organizations are still in the transition period, it is common to notice that the number of employees who have been coming to work with workplace concerns and issues has risen dramatically. Most of the complaints surround the culture clash between the two merging companies. It became quite clear that this merger was going to be challenging, given the drastically different cultures of the two organizations. An employee-centric approach to business vs a power culture will make a big difference to way people used to do things i.e. clearly defined position, status, rules and procedures.

Confusion and confusion 

  Despite the fact that mergers and acquisitions look attractive to management and investors, the reality of their execution is that organizations are composed of employees who generally view such organizational changes as a threat. Accordingly, many merger and acquisition deals have inherent retention issues resulting from negative attitudes often felt by employees, including, but not limited to uncertainty about the future organizational direction, feelings of loss of previous organizational culture, uncertainty about personal job security, perceptions of lack of leadership credibility, feelings of confusion due to a lack of communication, survivor guilt due to downsizing of other employees, perceptions of increased job stress and workload.

Lost and found

  In essence, employees from the target company lose trust in their organizations and feel betrayed by leadership. Employees begin to grieve the loss of corporate identity and reminisce about the good old days before the merger. Consequently, in an attempt to regain control over individual job situations, many employees begin to contemplate "jumping ship" as the merger and acquisition is implemented. During the transition period, many of the senior, experienced and qualified professionals may leave due to uncertainty of the post-merger organisational structure of the company and the resistance to change. Following the departure of the head of team and senior management, most of the team members will follow suit leaving to the closest competitors which led to loss of human capital. Not to mention, good staff tend to leave while "bad apples" tend to stay.

As a general rule of thumb, M&A is accepted if the deal is earning accretive. However, people are key assets of a company which go unrecorded. When people leave, they bring along the relationship, network, knowledge, skills and expertise which are irreplacable. When we talk about synergy 1+1=3, have we ever factored in the cost to retain human capital as well as the value loss from human capital (especially in the service related sector)?

Thoughts for 2014 and Happy New Year 2015

It’s the last day of the year 2014 and I open up the newspaper of  The Edge Financial Daily like every other days. Cover page of the FD really seems saddening as the year ending 2014 for Malaysia has been surrounded with many bad news.

(Source: The Edge Financial Daily - 31st December 2014)

There’s some thoughts that came through my mind from a popular Chinese characters “wei-ji” 危 (crisis) 機 (opportunity), i.e. there is a famous saying: in every crisis, although dangers abound, there is also opportunity.

Since there's every opportunity in every time of danger, so here's a summary of my views after relooking (at the points highlighted by FD) for the year of 2014:- 

危 (time of danger)	機 (time of opportunity)
3 Air Disasters (MAS MH3070, MAS MH17, Air Asia QZ8501)	The travel insurance market in Malaysia is under-penetrated compared to other countries. These incidents will lead to higher awareness and the increase of demand for air travel insurance. (Winner: Travel insurance sector)
Worst Floods  Since 1972	Even though insurance company may need to pay out huge claims for the floods, the incident will drive higher pricing for insurance premium. Massive floods in Kelantan also led to loss of infrastructure, homes and cars, there will be need for development and assets replacement. (Winner: Automotive, Insurance and Construction sector)
Crude Oil Plunges 40%	Lower oil price is positive for the household spending leading to higher disposal income and lower inflationary pressure. Also, business with high transportation and energy cost will benefit from lower crude oil price. (Winner: Airlines, Power, and Construction sector)
Ringgit Depreciate 7% against USD	Strengthening USD boost the export industry (with income quoted in USD). (Winner: Glove producer and Shipping sector)
Bank Negara Foreign Reserves dip 11%	There is a need for Government to work on controlling budget deficit. Fundamentals of the economy need to be proven over time and monetary policy stance will remain accommodative.
FBM KLCI fall 5%	FBMKLCI has always been  viewed as trading  at a premium of PER compared to regional market. With the recent correction, market weakness essentially offer opportunities to position for the medium term. Also, foreign fund outflow will reduce the volatility of the stocks market.

Wishing all of you a happy and prosperous new year for 2015, 
let’s count our blessings and embrace for better tomorrow.

May you be blessed with health, wealth and happiness.