The purpose of this article
is to know about the mergers and acquisitions in Banking sector and legal
procedures of acquisition under company ordinance 1962. The process of mergers
and acquisitions has gained significant importance in today’s corporate world.
This process is widely used for restructuring the business organizations. In
Pakistan, the concept of mergers and acquisitions was initiated by the
government bodies. Some well known banks also took the necessary initiatives to
restructure the banking sector of Pakistan by adopting the mergers and acquisitions
According to Banking
Companies Ordinance, 1962
means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdraw able by
cheque, draft, order or otherwise”
“Banking Company” means any company
which transacts the business of banking in Pakistan and includes their branches
and subsidiaries functioning outside Pakistan of banking companies incorporated
The wave of
merger and acquisitions that currently swept through the banking sector started
after the announcement by the state bank of Pakistan. Mergers and Acquisitions
are common place in developing countries of the world but are just becoming
prominent in Pakistan. Merger means combining
two companies in one corporation which is completely absorbed by another
company. The less significant company loses its name and operates with more
important company, which exists with its identity. Acquisition is use to acquired property in ownership. In
corporation combinations, an acquisition is to buy one company by getting
controlling interest in all resources of other company.
of banking Sector in Pakistan:
Pakistan first formally started in Pakistan during
the period of British colonialism in the South Asia.
After independence from British Raj in 1947, and the emergence of Pakistan as a
country in the globe, the scope of banking in Pakistan has been increasing and
expanding continuously. Pakistan’s oldest bank is the State Bank of Pakistan, which is also
the central bank of the nation. Before independence on August 14, 1947,
the Reserve Bank of India was the
central bank of what is now Pakistan. After independence, Muhammad Ali Jinnah took actions to
establish a central bank in Pakistan which resulted in the new founding of
the State Bank of Pakistan, with its
headquarters to be based in Karachi.
Only 7% of the population uses the banks, has great potential, but this needs
to be pushed a little further. Commercial banking grew favorably in Pakistan
until 1974. Under the nationalization policy implemented by Zulfikar Ali
Bhutto’s government, thirteen banks were brought under full government control,
and consolidated into six nationalized banks. Banks were essentially not in
control of their destinies during this period. By 1991, the Bank
Nationalization Act was amended, and 23 banks were established in which ten
were domestically licensed. Muslim Commercial Bank was privatized in 1991 and
the majority ownership of Allied Bank was transferred to its management by
1993. By 1997, there were still four major state-owned banks, but they now
faced competition from 21 domestic banks and 27 foreign banks. By 2010, there
were five public commercial banks,25 domestic private banks, six foreign banks
and four specialized banks. There are now 9,348 bank branches spread throughout
the country, catering to the needs of some 28 million deposit account-holders.
In today’s large-scale
economy, merger and acquisition are more and more used for improving the
competitiveness through large market share, increase the portfolio and to
reduce the risk. It is actually combining of two or more companies where one
company’s stockholders offer securities to the acquiring company. Thus merger
is the mixture of two or more partners thus creating a totally new business entity
or continuing the operation of the partners “under the roof” of any one of them
(Wolff, 2008). In merger companies usually combine to share resources. In
merger a new business works. A merger occurs when two (or more) companies agree
into merge in a new single company rather than remain separated for creating
business synergies (OECD Benchmark Definition of Foreign Direct investment,
2008). Merger is different form acquisition. In merger a new business creates
where there is not any concept of acquirer. There is the combine management
system in new business. Moreover, both companies are of parallel size. In
merger both participants decide to establish and arrange the management.
A merger exists when
company is portrayed as the acquirer or the acquired.
parties participate in establishing the management structure of the combined
companies are sufficiently similar in size that one does not dominate other
or most of the consideration involves a share swap rather than a cash payment,
etc. (Glenlake & Fitzroy, 2000)
Between a Merger and an Acquisition
The terms merger and acquisition mean slightly
A merger occurs when two separate entities (usually
of comparable size) combine forces to create a new, joint organization in which
– theoretically – both are equal partners.
An acquisition refers to the purchase of one entity
by another (usually, a smaller firm by a larger one). A new company does not
emerge from an acquisition; rather than, the acquired company, or target firm,
is often consumed and ceases to exist, and its assets become part of the
acquiring company. Acquisitions – sometimes called takeovers –
generally carry a more negative connotation than mergers, especially if the
target firm shows resistance to being bought. For this reason, many acquiring
companies refer to an acquisition as a merger even when technically it is not.
Here are a few types, distinguished by the
relationship between the two companies that are merging:
Horizontal merger –
Two companies that are in direct competition and share the same product lines
Vertical merger –
A customer and company or a supplier and company. Think of a cone supplier
merging with an ice cream maker.
Congeneric mergers –
Two businesses that serve the same consumer base in different ways, such as a
TV manufacturer and a cable company.
Market-extension merger – Two
companies that sell the same products in different markets.
Product-extension merger – Two
companies selling different but related products in the same market
Two companies that have no common business areas.
Purchase Mergers – As the name suggests,
this kind of merger occurs when one company purchases another. The purchase is
made with cash or through the issue of some kind of debt instrument; the sale
is taxable. Acquiring companies often prefer this type of merger because it can
provide them with a tax benefit. Acquired assets can be written-up to
the actual purchase price, and the difference between the book value and
the purchase price of the assets can depreciate annually,
reducing taxes payable by the acquiring company.
Consolidation Mergers – With this
merger, a brand new company is formed and both companies are bought and
combined under the new entity. The tax terms are the same as those of a
and disadvantages of Mergers and Acquisition
most common reason for firms to enter into merger and acquisition is to merge
their power and control over the markets.
advantage is Synergy that is the magic power that allow for increased value
efficiencies of the new entity and it takes the shape of returns enrichment and
of risk using innovative techniques of managing financial risk.
become competitive, firms have to be compelled to be peak of technological
developments and their dealing applications. By M of a small business
with unique technologies, a large company will retain or grow a competitive
biggest advantage is tax benefits. Financial advantages might instigate mergers
and corporations will fully build use of tax- shields, increase monetary leverage
and utilize alternative tax benefits (Hayn, 1989).
of experienced workers aside from workers in leadership positions. This kind of
loss inevitably involves loss of business understand and on the other hand that
will be worrying to exchange or will exclusively get replaced at nice value.
a result of M, employees of the small merging firm may require exhaustive
will face major difficulties thanks to frictions and internal competition that
may occur among the staff of the united companies. There is conjointly risk of
getting surplus employees in some departments.
two firms that are doing similar activities may mean duplication and over
capability within the company that may need retrenchments.
in costs might result if the right management of modification and also the
implementation of the merger and acquisition dealing are delayed.
uncertainty with respect to the approval of the merger by proper assurances.
many events, the return of the share of the company that caused buyouts of
other company was less than the return of the sector as a whole.
& Acquisition In Pakistan:
banking sector in Pakistan (as of 31st December, 2005) comprised 39 banks which
include one co-operative bank (Punjab Provincial Co-operative Bank Ltd.), two
specialized banks (Industrial Development Bank of Pakistan and Zarai Taraqqiati
Bank), a dozen of foreign banks – big and small one bank jointly owned by the
Pakistani government and the Saudi investors (Saudi-Pak Commercial Bank Ltd.).
During the first tenure of Prime Minister Muhammad Nawaz Sharif in early 1990s,
permission was given to about a dozen of small commercial banks with the
minimum capital requirement of Rs 500 million. During the tenure of the former
State Bank of Pakistan (SBP) Governor, Dr Ishrat Husain, emphasis was on the
merger of small Pakistani banks established during early 1990s and to reduce
the number of banks to 20. To force the small Pakistani banks to merge, the
minimum capital requirement has been raised by the SBP and these banks are now
required to bring the paid up capital to Rs 6 billion by 2009. The four major
banks- National Bank of Pakistan, Habib Bank Ltd, United Bank Ltd. and M.C.B.
Bank Ltd – currently hold about 55 per cent of the deposits of the banking
sector. Their share in the 2005 pre-tax profit is over 59 per cent of that of
the banking sector- virtually a monopolistic situation.
have, however, been quite a few cases of the mergers and acquisitions-for
reasons other than the SBP policy directives- during the last few years. The
details are as under:
closure of business of the Bank of Credit and Commerce International (BCCI) by
the British authorities, Pakistan was under pressure to close down the branches
of the bank operating in Pakistan. The pressure was effectively resisted by the
then SBP authorities. The branches were initially acquired by Habib Bank Ltd.
by incorporating a subsidiary in the name of Habib Credit and Exchange Bank
Ltd. HCEB and later sold to an Arab investor/ renamed Al-Falah Bank Ltd.
2 A branch
of a Bangladeshi bank- IFIC Bank-operating in Karachi was acquired by and
merged in National Development Leasing Corporation Ltd. (NDLC) which was the
subsidiary of National Development Finance Corporation (NDFC). A branch of a
French Bank in Karachi- Credit Agricole Indo-suez was also acquired by and
merged in the NDLC. After these mergers, the NDLC has been renamed as N.I.B
Bank Ltd. The NIB Bank has also been purchased by a foreign bank now N.I.B Bank
has been merged in M.C.B bank in 2017
branches of Bank of America operating in Karachi/Lahore and Islamabad and a
branch of a French bank operating in Karachi-Societe Generale the French and
International Bank and the branches of the Emirates International Bank
operating in Pakistan were acquired by and merged in Union Bank Ltd.
branches of ANZ Grindlays Bank Plc operating in Pakistan were acquired by and
merged in the Standard Chartered Bank.
5 The Schon
Bank Ltd. established in early 1990s was initially sold to a Middle Eastern investor
but was finally acquired by the Pakistan Industrial Credit and Investment
Corporation (PICIC) and renamed as PICIC Commercial Bank Ltd. While the process
of merger of PICIC and PICIC Commercial Bank Ltd. was under process, it is
reported that NIB Bank has also been purchased by a foreign bank.
6 Union Bank
Ltd. has since been purchased by the Standard Chartered Bank
7 A branch
of Bank of Ceylon operating in Karachi has been acquired by Dawood Bank Ltd.
Bank Ltd. has recently acquired the branches of Habib Bank A.G. Zurich
operating in Pakistan and the two banks have since been merged.
9 A branch
of a Bangladeshi Bank “Rupali Bank Ltd.” has since been acquired by
Arif Habib group and the bank has been renamed as “Arif Habib Rupali Bank
7. Legal Aspects Merger
& Acquisition of banking companies.
to Section 48 of the Banking Companies Ordinance, 1962,
Sub section (1)
anything contained in any law for the time being in force, no banking company shall be amalgamated with
another banking company, unless a scheme containing the terms of such
amalgamation has been placed in draft before the shareholders of each of the
banking companies concerned separately, and approved by a resolution passed by
a majority in number representing two thirds in value of the shareholders of
each of the said companies, present either in person or by proxy at a meeting
called for the purpose.
of every such meeting as is referred to in sub-section (1) shall be given to
every shareholder of each of the banking companies concerned in accordance with
the relevant articles of association, indicating the time, place and object of
the meeting, and shall also be published at least once a week for three consecutive
weeks in not less than two newspapers which circulate in the locality or
localities where the registered offices of the banking companies concerned are
situated, one of such newspapers being in a language commonly understood in the
locality or localities.
shareholder, who has voted against the scheme, of amalgamation at the meeting
or has given notice in writing at or prior to the meeting to the company
concerned or the presiding officer of the meeting that he dissents from the scheme
of amalgamation, shall be entitled, in the
of the scheme being sanctioned by the State Bank to claim from the banking
company concerned, in respect of the shares held by him in that company, their
value as determined by the State Bank when sanctioning the scheme and such
determination by the State Bank as to the value of the shares to be paid to
dissenting share holder shall be final for all purposes.
Sub section (4)
If the scheme of
amalgamation is approved by the requisite majority of shareholders in
accordance with the provisions of this section, it shall be submitted to the
State Bank for sanction and shall, if sanctioned by the State Bank by an order
in writing passed in this behalf be binding on the banking companies concerned
and also on all the shareholders thereof; Provided that in case of foreign
banking companies, notwithstanding the fact that the scheme of the amalgamation
is not approved by the requisite majority of shareholders, such sanction may be
granted by the State Bank, upon a certificate issued by their respective head
offices, approving the scheme.
a scheme of amalgamation is sanctioned by the State Bank under the provisions
of this section, the State Bank shall transmit a copy of the order sanctioning
the scheme to the registrar before whom the banking companies concerned have
been registered and the registrar shall, on receipt of any such order, strike
off the name of the company (hereinafter in this section referred to as the
amalgamated banking company) which by reason of the amalgamation will cease to
the sanctioning of scheme of amalgamation by the State Bank, the property of
the amalgamated banking company shall, by virtue of the order of sanction, be
transferred to and vest in, and the liabilities of the said company shall, by
virtue of the said order be transferred to and become the liabilities of the
banking company which under the scheme of amalgamation is to acquire the
business of the amalgamated banking company, subject in all cases to the terms
of the order sanctioning the scheme.
this section, “banking company” means any banking company and includes the
National Bank of Pakistan, the Agricultural Development Bank of Pakistan, the
Industrial Development Bank of Pakistan, the House Building Finance
Corporation, investment finance companies, venture capital companies, housing
finance companies, leasing companies, branch of a foreign banking company doing
business in Pakistan and any other financial institution covered under section
acquisition play a vital role in the business world if firms effectively
and efficiently utilize it. Merger and acquisition is like a family relation
when two families merged but in companies case two firm merged and each firm
has different organizational structure, different way of working, different
thinking style like a family and it is really very difficult for firms after
merger and acquisition to behave accordingly other firm (acquirer firm) but we
cannot say that it has no use, it is very useful but only and only if we study
the past trend of target firm, its organizational structure, perform complete
SWOT analysis of that firm and also study yours own organizational culture, and
perform complete SWOT analysis , after that a firm would be able for the
decision of merger and acquisition. Sometimes it seems that profitability would
be increased but when organizational culture not match then employees’ productivity
decreased and profitability decreases