Muktadir-Al-Mukit
Why does the culture of corporate restructuring exist in the western world? The answer was well given by Saul Steinberg, founder of Reliance Group Holdings: "there were tremendous values in a lot of companies that shareholders were not getting. So smart guys went out and said, 'If they won't realize these values, if these guys won't do the job, I'll do it and make the money for myself."
But the question here remains: how many such smart shareholders are there in our country? Our shareholders have a very short-term relationship with companies as many of them are, "T+3 days" stockholders. I use the term "T+3" days here as most of our investors are more interested in reaping capital gains through frequent buying and selling of shares, instead of enjoying yearly dividend, that is, they are inspired by short-term investment rather than a long-term one.
Their concern is more about appreciation of market value of share rather than company performance. It is true that company performance can be measured by share price. But in our country we see that even a Z category company provides higher market return than a A category one and the share price is increased more by rumours /manipulation rather than by financial and operative performance of a firm. In a true sense, it can be found that a number of companies' performance is not satisfactory at all and many companies are running even at a loss. But if the culture of merger and acquisition (M&A) existed in our country, then firms could have benefited with extended growth and economic gains achieved through restructuring. Many companies in different industries in our country fail to reap profit and to provide professional services through shaping up the cost and financial structures efficiently to ensure the best possible operational results. So, firms may think of strategic acquisition which is a cost-effective solution to gain rapid market share in our country.
Merger and acquisitions (M&As) refer to a corporate strategy, dealing with the buying, selling and combining of different companies that can facilitate a combined/acquired company in a given industry to grow rapidly. How can a firm be benefited from such a strategy? First, the combined company can often reduce its fixed costs through increased production referred to "economies of scale". M&As often lead to an increased value generation (synergy) for a company. It is expected that the shareholder value of a firm, after mergers or acquisitions, would be greater than the sum of the shareholder values of the parent company. When a firm is facing a tough financial situation which may make it bankrupt, then merger can play the role of a saviour where the target company benefits as it gets out of the difficult situation and, after being acquired by a large firm, the joint company accumulates larger market share. Moreover, M&A also leads to tax gains as the combined company can show the target firm's loss to reduce tax liability. To obtain tax advantage, a firm may use greater amount of debt, instead of equity for financing M&A transactions as interest payments on debt are a tax-deductible expense. Mergers help to increase market power through purchasing competitors. This ultimately increases market share. Inefficient management of the target company can be replaced with new management after acquisition which leads to a better performance of the firm.
In case with merger, when one firm acquires another firm, then it must be approved by stockholders of both firms. Another way to acquire a firm is to buy the voting stock. This can be done by agreement of the management or by tender offer. In a tender offer, the acquiring firm makes the offer to buy stock directly to the shareholders, thereby bypassing the management.
In our country, we see that the financial performance of many companies has come under question after the recent stock market crash. It can be assumed that now the stockholders of such companies are not satisfied with their financial performance. Thus, it will be easier to get consent from them toward a merger process. But our investors are not aware of such a strategy and as was mentioned earlier, the relationship between a firm and its stockholders in the Bangladesh context is very short term. So, it is one of the reasons for not witnessing any wide practice of mergers in the country.
If we see the history of M&A in Bangladesh, it can be found that there are only few examples of such a strategy. After liberation, in 1972 Rupali Bank Ltd., was reconstituted with the merger of three erstwhile commercial banks i.e. Muslim Commercial Bank Ltd., Australasia Bank Ltd. and Standard Bank Ltd. Sonali Bank was reconstituted with the merger of three former commercial banks and Agrani and Janata banks were reconstituted likewise with the merger of three erstwhile commercial banks in 1972. Bangladesh Chemical Industries Corporation (BCIC) came into being in July, 1976 by merger of the erstwhile three corporations: Bangladesh Fertilizer, Chemical & Pharmaceutical Corporation, Bangladesh Paper and Board Corporation and Bangladesh Tanneries Corporation.
On October 03, 2006, Beximco Group has completed the merger of its four textile units -- Beximco Textiles, Beximco Denims, Beximco Knitting and Padma Textile Mills Limited into one entity known as "BexTex". On December 11, 2007, Sanofi-Aventis Bangladesh Limited has been formed due to the amalgamation of three legal entities: Aventis Limited, Fisons (Bangladesh) Limited and Hoechst Marion Roussel Limited.
In 2008, Beximco merged with Shinepukur Holdings Limited and Beximco Fisheries Limited. Again, Beximco merged with BD Online in 2009.
In 2008, Switzerland-incorporated ICB Financial Group Holdings purchased the problem- ridden Oriental Bank and named it "ICB Islamic Bank".
Standard Chartered Bank Bangladesh bought out the Bangladesh operations of various foreign banks such as Grindlays Bank and American Express Bank.
In 2010, the Bangladesh Development Bank Ltd (BDBL) resulted from a merger of two failing state-owned entities -- the Bangladesh Shilpa Bank (BSB) and the Bangladesh Shilpa Rin Sangstha (BSRS), which were in a crisis over unrealized loans.
In very recent times, we saw that Bharti Airtel, India's renowned telecom company, bought Warid Telecom.
But M&A does not always bring positive values. There are many cases of merger and acquisition casualties. Peter Vermilye, a leading figure in the US financial community said: "Restructuring is good in so far as it enhances the productivity of capital and labour. Restructuring is bad in so far as it lays a lot of debt on a company that it then has, to pay interest on and pay off as opposed to developing products and plants and a more efficient operation over time."
While the use of financial leverage produces tax benefits, debt also increases the likelihood of financial distress in the event of the acquiring firm not being able to meet its interest payments on the acquired debt. It is said that merger or acquisition during bullish condition prevailing in the stock market may be risky.
Furthermore, regardless of the organisational goals, to satisfy only "executive ego", managers may have incentives to increase a firm's size which is the detrimental to shareholders' wealth. Failures may also result if the two combined companies hold different corporate cultures.
In Bangladesh, there are no specific rules or regulations for merger and acquisition. To build up M&A culture in the country, specific guidelines must be introduced. Though in 2007, Bangladesh Bank declared concise guidelines for corporate restructuring through merger but this guideline is applicable only for commercial banks and non-banking financial institutions.
So, it is high time to introduce regulations or enact a new piece of legislation on merger so that no one can take the unusual advantage of grey areas, arising out of non-existence of regulation during the merger process. The specific regulation will ensure that such restructuring is not detrimental to the financial discipline or to the interest of the country. Besides, there is no proper research work on actual benefit or outcome obtained from mergers practised in our country so far. Such works are needed to evaluate the prospects of mergers in Bangladesh.
Though there are many cases of failures of M&As, but there are a number of examples of mergers that have helped boost the performance of a company and maximize the wealth of its shareholders. So, the companies of our country can seek the opportunity of merger and acquisition to help boost their growth and to enhance the value of a firm through creating a culture of corporate restructuring.
The writer is with the Department of Finance, University of Dhaka. He can be reached at email: shovon_8512@yahoo.com
Corporate culture of mergers and acquisitions in Bangladesh
Muktadir-Al-Mukit | Published: April 04, 2011 00:00:00 | Updated: February 01, 2018 00:00:00
Share if you like