Determinants of premiums paid in cross-border bank acquisitions – an overview of case studies from Taiwan, and China
Date Issued
2007
Date
2007
Author(s)
Chen, Hsien-Wei
DOI
en-US
Abstract
The valuation of financial institutions, in particular banks, is different from other industries such as manufacturing or high-tech industries. Concerning cross-border transactions, due to differences in cultures and generally accepted accounting principles (GAAP) in the target’s country and the buyer’s country and the limited information available to the buyer; how to perform an appropriate evaluation of a bank and pay a reasonable premium is one of the critical areas that foreign investors, target banks, analysts and government officials are concerned about. With the rise of cross-border bank acquisitions in Taiwan and China, which is largely driven by government reforms and China’s entrance into the WTO, these transaction details become more and more important. However, as China and Taiwan are relatively new markets for foreign investors, the amount of information available about such transactions and the premiums paid in cross-border bank deals is limited.
This study attempts to examine the financial and non-financial determinants identified in previous studies and analyze the correlations between the determinants and premiums paid for the selected samples. The financial determinants examined include the target’s financials, the target’s delivery system, and the non-financial determinants primarily include the controlling and management. In addition, this study attempts to analyze the transaction rationales between different types of buyers, namely private equity versus prestigious multinational banks and the transition rationales behind the target banks.
The traditional valuation methodologies to valuate a Bank include the P/B multiple and P/E multiple. In particular in developing countries, as contract to the developed countries which consider quality of earning as the key areas for pricing, net book value is normally regarded as the primary basis for valuation in a merger and acquisition transaction. Nevertheless, how do foreign investors evaluate a target without positive earning or even with negative net book value. Accordingly, this study attempts to discuss the valuation methodologies adopted by the foreign investors in valuating a bank in China or Taiwan with negative earnings or even negative book value and discuss the impacts on their valuation models arising from the GAAP differences.
This study attempts to find out the motives for the wave of cross-border bank acquisitions in China and Taiwan by analyzing the prices of these acquisitions or mergers. The scope of this study is limited to short-term performance indicators and determinants of the merger premiums offered for a target and this study does not attempt to examine efficiency effects of changes in the long-run performance. In order to be more prudent on the sample selections, only the cases/samples captured by both SDC and Bloomberg were selected for this study. In addition, only the deals with public financial data available were selected as samples. Due to the aforementioned restrictions on the sample selections, the number of sample deals qualified for selection was limited. As the number of cross border transactions in China and Taiwan during the period this study examines did not meet the minimum requirements for statistic analysis, this study does not employ the statistics method. Alternatively, this study employs the case study method, in both qualitative ways and quantitative ways.
Based on the qualitative and quantitative case studies, this study finds out that the financial determinants, such as the targets’ financials, primarily, absolute size, ROA, ROE, asset’s quality and core deposits have a strong correlation between the premiums paid in Taiwan, whilst such correlation was not significant in the deals in China.
This study further finds out that the correlation between the premiums paid and the targets’ delivery systems was not conclusive in either in Taiwan or China. As for the non-financial determinants, based on the current available information, it seems that higher premiums reflect the pay-off for obtaining the controlling rights or management.
As little research has been performed on the cross-border bank acquisitions in Taiwan and China, this study recommends further research be performed in order to examine those non-financial determinants and some financial determinants that were not examined in this study due to data limitations, as identified by the previous empirical studies to analyze whether the premiums paid have any correlation between the aforementioned determinants.
Subjects
企業收購與合併
企業評價
銀行收購
財務因素
溢價
mergers and acquisitions
cross-border transactions
valuation
bank acquisitions
financial determinants
premiums
Type
other
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