In new phase banking mergers and acquisitions will be at a higher price

THAT the banking sector is entering a new wave of mergers and acquisitions (M&As) would be stating the obvious. But what the new M&A phase would likely result in is new pricing benchmarks.

Financial institutions will possibly be bought and sold at higher prices than before. This is my guess, at least, from what the trend is indicating.

While this may seem difficult to comprehend, especially for minority shareholders of the acquirers, there is a realisation that financial institutions are getting more expensive, for a myriad of reasons.

Take the case of Hwang-DBS (M) Bhd, the biggest stand-alone investment banking group in Malaysia, that is the acquisition target of both Affin Holdings Bhd and AMMB Holdings Bhd.

CIMB Research, in a recent report, reckoned that Hwang-DBS would likely fetch a higher price-to-book value than the average 1.31 times for past investment bank M&As, given its size and strong exposure to retail broking.

But, CIMB still thinks that Hwang-DBS' M&A valuation would be lower than the 1.77 times RHB Capital Bhd (RHB Cap) had paid for OSK Investment Bank and the 1.9 times Malayan Banking Bhd had paid for Kim Eng Securities.

However, don't be surprised if a deal is struck at a price that works out to more than two times the book value of Hwang-DBS.

You have two large banks with lots of money and rich major shareholders to boot fighting for Hwang-DBS, one of the largest players in stockbroking, ranking number four with a market share of 6.8% in 2012. Additionally, it has strong exposure to retail broking with 650 remisiers. Such an asset would clearly provide scale to its acquirer.

Reports have indicated that AMMB would jump to the number one position in terms of brokerage value and volume from its current fifth ranking if it succeeds in buying Hwang-DBS.

Affin Holdings, meanwhile, would jump to the third position from its current 14th.

Surely, these two banks are not going to stinge on the price they are willing to pay to achieve these goals, which is a faster growth plan as opposed to the organic method. This is especially so in a market where getting new talent seems to be a perennial challenge.

Then, take the case of Hong Leong Capital Bhd (HLCap). Its owner Tan Sri Quek Leng Chan has tried unsuccessfully to privatise the company at a price of RM1.71 per share.

Notwithstanding the failure, what is significant is that since then, HLCap has inexplicably traded at very high prices of more than RM4 per share. Its current price values the company at a massive 2.5 times its book.

So, it is inconceivable that any M&A or privatisation of this company (at least in the near future) can be done within the historical range of 1.1 to 1.9 times book value.

Subsequently, there is Public Bank Bhd, a name that inevitably crops up when a banking M&A is discussed. It has often been speculated that this well-run bank could, at some point, become the subject of an M&A exercise. But at its current price of RM16.34 per share, Public Bank is trading at a massive 3.2 times price to book.

The highest valued banking M&A in recent times was the acquisition ofEON Capital Bhd by Hong Leong Bank Bhd, which began in 2009 and concluded in July 2011, at a value of 2.2 times price to book.

And lastly, let's look at RHB Cap, the owner of RHB Bank Bhd. In October 2011, an Abu Dhabi fund, Aabar Investments PJSC, paid a whopping RM10.80 per share to buy a 25% stake in RHB Cap. That price worked out to a price-to-book ratio of some 2.3 times.

What this means is that in the event that RHB Cap is the subject of a takeover, it is likely that Aabar would support the deal only if it gets a price higher than the 2.3 times it had paid. This, in turn, is another sign that banking M&As, going forward, would breach new pricing highs.

? Deputy News Editor Gurmeet Kaur hopes the new government that will be formed will keep the promises and pledges it has made.

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Banking Mergers , Higher Price


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