Impact Of Merger And Acquisition On Debt Management Ratio: A Case Study In Malaysian Banking Sectors

Abstract

This study based on efficiency theory of shareholders wealth maximization of acquisition principle attempted to investigate the debt management ratio of ten Malaysian anchor banks after undergoing mega merger and acquisition program which was completed in the year of 2000. As efficiency theory consists of three elements that are financial synergy, operation synergy and managerial synergy, the study will primarily focus its analysis on financial synergy (debt management). Using accounting technique (financial statement analysis) to draw the implication, the study results highlighted the performance of those anchor banks from the year 2000 to 2004. The ratio analysis tools employed covered total liabilities to total assets, total liabilities to total equity, times interest earned, and cash debt coverage ratio. The findings shows that in general, the anchor banks recorded improvement in term of debt management; yet more comprehensive strategies have to be executed to further enhance the financial synergy. The generalization however shall be done in more cautious as the study inherits several limitations including the application of financial statement which based on historic cost rather than reflecting the current market situation. The study perhaps can be extended to include the analysis of earnings performance ratios and market/investor perception toward the resilience of those anchor banks after completing the merger and acquisition mega program.

The Performance of Two Anchor Domestic Malaysian Banks before and after Acquisition

“…According to Talha and Sallehhuddin (2005), by using total liability to total asset (TLOTA), total liabilities to equity (TLOE), times interest earned (TIE), and cash debt coverage ratio (CDCR) to analysis the impact or merger and acquisition on debt management ratio, the results shows that mergers and acquisition of Malaysia banks sector generally improve the debt management ratio. According to Said et al (2008), findings using the method of financial ratios on 4 out of 9 mergers in America show that there was improveme nt in cost efficiency, however, the rest 5 mergers in America show no improvement.…”

“…Malaysia Central Bank which is also known as Bank Negara Malaysia (BNM) initially planned for the 58 financial institutions (21 commercial banks, 25 finance companies, and 12 merchant banks) to merge into 10 anchor banks. According to Talha and Sallehhuddin (2005), there are two purposes of undergoing mergers, first is to ensure domestic banks are able to handle financial sector liberalization by the year 2003 and also to increase international competitive advantage. Second purpose of undergoing mergers is to create a stronghold of domestic banks to survive when financial crisis occur.…”

“…Second purpose of undergoing mergers is to create a stronghold of domestic banks to survive when financial crisis occur. Establishment of the 10 anchor banks increases the depositors' confidence and also established stronger and flexible banks (Talha & Sallehhuddin, 2005).…”

“…(Source: Bank Negara Malaysia as cited in Sufian & Abdul Majid, 2005) According to Talha and Sallehhuddin (2005), several theories on value maximization of acquisition theory can be found such as diversification of risk theory, coinsurance effect theory, efficiency theory, merger and debt capacity, tax benefit theory, agency theory, asymmetric information theory, the monopolistic theory of acquisition, and perfectly competitive acquisition market theory. However, two theories stated in Talha and Sallehhuddin (2005) are chosen for this study which are diversification of risk theory and efficiency theory.…”

“…However, two theories stated in Talha and Sallehhuddin (2005) are chosen for this study which are diversification of risk theory and efficiency theory. The independent variables are financial ratios and event study, whereas the dependent variable is the performance on Domestic Malaysian banks.…”