Merger of Malaysian banks: selecting appropriate partners

Abstract

Access to this document was granted through an Emerald subscription provided by emerald-srm: 463575 [] For AuthorsIf you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractThe Malaysian government is rushing banks to merge. The Central Bank has decided that there must be only 10 banks instead of a current total of 20. As a result, the local banks were being forced to merge with other banks. The problem lies in the non-existence of a systematic means of identifying potential merger partner(s). This study thus, proposes to use the concept of the Transportation Algorithm to select potential merger partners for Malaysian banks, which would maximize the net worth of the merged entity. The methodology employed in this paper may not yield the best merger partner(s) but it should at least narrow down the choices to a select few where together with other rigorous financial, technical, strategic and even qualitative analysis may be used to determine the ultimate merger partner(s).

Application of the Transportation Algorithm for Selecting Bank Merger Partners

“…Given this lack of academic literature on merger partner selection techniques, this paper intends to extend the work done by Guru et al [9] in order to identify the potential merger partners in the second wave of commercial banking sector consolidation in Malaysia. The rationale for this is simply based on the high compliance rate of their merger partner selection with the actual outcomes of the first consolidation wave which came to its completion in 2001.…”

“…Guru et al [9] had actually employed both these methods in their paper. The actually employed the transportation algorithm first, to select three potential merger partners for each performance parameter.…”

“…The key success factors for banking institutions in this framework are earnings ability, asset quality, growth, liquidity and strategic Management. In line with Guru et al [9], this study also selects the potential merger partners based on the key performance parameters implied in the EAGLES framework. However, contrary to the earlier study reported in Guru et al [9], this study employs more than one indicator for some of the key performance measures with the intention of further enhancing the robustness of the merger partner selection process.…”

“…Once again it should be reiterated that that the main aim of this paper is for developing a quantitative method for identifying an initial set of potential merger partners for the second round of commercial bank consolidation in Malaysia. This is achieved by adopting and extending the work of Guru et al [9]. They had employed an operations research (OR) optimization technique namely the transportation algorithm for this purpose.…”

“…Under this heading the key performance parameters and the associated indicators are discussed. This is then followed by a description of the bank partner selection methodology which employs the transportation algorithm in line with Guru et al [9]. Since any mergers and acquisitions are bound to have an impact on market structure and antitrust implications, the paper then examines the impact of the proposed mergers on the bank market concentration based on the Herfindahl index.…”