Emirates NBD”, the leading banking group in the Middle East, was established on October 16, 2007 when the shares of Emirates NBD were officially listed on the Dubai Financial Market (DFM). Currently, more than 9,000 people, representing 70 nationalities, are employed by Emirates NBD, making it one of the largest and most culturally diversified employers in the UAE. October 18, 2007 Emirates NBD announced the integration of its ATM network, making it the largest in the UAE.
The significance of the merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD) was reflected in Emirates NBD's strong pro forma results. Emirates NBD's wholesale banking net income (excluding IPO business) grew by 38 per cent and its assets by 42 per cent in 2007. The Structured Finance and Syndicate Division (SFS) remained the market leader of the loan union in the United Arab Emirates2007. The division gained a significant share of the local debt consolidation market in terms of value and number of deals acting as mandated lead arrangers and brokers in a number of high profile transactions. The division also led numerous managed benchmark transactions for the UAE's largest and highest profile issuers in 2007.
As a result of the merger, the Group's distribution network became the largest in the United Arab Emirates. The Group's new credit structuring and trading areas became fully operational in 2007. Foreign exchange and interest rate trading volumes increased positioning the newly merged group as a leading market maker in GCC currencies. The implied share price for EBI was AED 9.30. The total implied value was AED 13.75 billion.1 The offer price represented a 14 percent premium to prices the day before the announcement.
In the retail banking sector, the focus will be on incremental revenue generated through market share/price advantages and leveraging the largest distribution network in the UAE.
Literature Review
Stock Market Studies
Cost synergies are expected to accrue from retail banking as a result of: consolidation of branch and ATM networks; Integration of card acquisition activities; and price advantages on advertising/marketing spend. Cost synergies would also result from the reallocation of IT staff from NBD to EBI's dedicated IT center. Cost synergies are also expected from the brokerage business as a result of the improved efficiency of the integrated operations and IT platform.
Cost synergies are also expected by leveraging Emirates Islamic Bank as a platform for unified Islamic offerings. Bidders gain significantly during the twenty-one days leading up to the announcement of each of their first four merger bids. The results do not support the capitalization hypothesis that bidder gains are captured at the beginning of merger programs.
The results of this study show that weighted abnormal announcement returns are 1.1 percent, but shareholders of the acquiring firm lose an average of $25.2 million after the announcement. Moeller et al (2004) find that takeover announcements in the 1990s are profitable for acquiring firm shareholders up to 1997, but the losses of acquiring firm shareholders from 1998 to 2001 wipe out all gains made earlier, thus making the newest purchases last. costly wave for acquiring firm shareholders.
Operating Performance Studies
The study by Langetieg (1978) uses four alternative two-factor market industry models in combination with a matched non-merger control group to measure shareholder gains from mergers. The study finds that merged firms show significant improvements in asset productivity relative to their industries, leading to higher operating cash flow returns. The study further suggests that post-merger cash flow improvements do not come at the expense of long-run performance as the sample firms maintain their capital expenditure and R&D rates relative to their post-merger industries.
The study also found a strong positive correlation between increases in post-merger operating cash flows and abnormal stock returns upon merger announcements, indicating that expectations of financial improvements explain a significant portion of the stock appreciation of the merging firms. Cornett and Tehranian (1992) examine the results after the acquisition of large bank mergers between 1982 and 1987. The results of their study indicate better results for merged banks due to the improvements in the ability to attract loans and deposits, in employee productivity and profitability asset growth. Further, the study finds a significant relationship between the announcement period abnormal returns and the various performance measures, indicating that market participants are able to identify in advance the improved performance associated with bank acquisitions.
Switzer (1996) used a sample of 324 combinations that occurred between 1967 and 1987 to study the change in the business performance of the combined companies. The results showed that the performance of those grouped according to their combinations and also the results are not sensitive to factors such as e.g. the size of the offer, the industrial connection between the offeror and the target company or the offeror's financial leverage. The study also found a positive relationship between abnormal revaluation of merging firms and observed changes in business performance.
The results of this investigation also showed that the acquiring companies did not generate additional cash flows beyond the cash flows required to recover the premium paid. Ghosh (2001) compares the post- and pre-acquisition performance of merging firms with that of matched firms to determine whether operating cash flow performance improves post-acquisition.
Methodology
- Stock Price Analysis
- Operating Performance Analysis
- Share Price Analysis and Interpretation
- Abnormal Return (Excess return) and Cumulative Abnormal Return Analysis 2
- Operating Performance Analysis and Interpretation
The share price return for NBD was 4.73 percent for the day immediately following the announcement. An analysis of different time window periods shows that the maximum cumulative return of 7.62 percent was observed during the 21 day period (-10 to + 10). During the three day window period (-1 to +1) the cumulative return was 7.15 per cent. During the 11-day period (-5 to + 5) surrounding the merger announcement, the cumulative stock price return was 3.755 percent.
During the time window period of -5 to +5 days, only day +1 and +5 of the announcement period documented positive stock price returns. From the table it can be seen that only during the shortest period of the time window from -2 to +2 and 3 days from -1 to +1, the returns from the share price are positive. The CAR analysis for NBD documents positive abnormal returns during the shortest time period surrounding the merger announcement.
Figure 4 shows that the cumulative abnormal returns for NBD showed a positive upward movement during the days immediately following the announcement day. The excess return analysis for EBI shows an excess return of 6.6 percent compared to the market index DFM during the day immediately following the merger announcement. The CAR analysis indicates that Emirates Bank International has positive cumulative abnormal returns during the shorter period compared to the negative returns in the longer period of analysis.
The research documents a CAR of 5.9 percent over a two-day period following the announcement of the merger. This shows that share prices showed significant gains during the year around the post-merger period. Total operating income and net profit show a fluctuating trend during the post-merger period.
Net profit decreased during 2007 followed by an increase in 2008, again a marginal decrease in 2009, but since then a progressive upward trend has been observed. It is noted that the growth rate in total assets and liabilities was greater in the pre-merger period compared to the post-merger period. Growth in lending and customer deposits was higher in the pre-merger period.
The analysis of the operating cash flow return of the asset model shows that the cash flow return has decreased by 17 percent during the merger period compared to a 54 percent increase in the post-merger analysis period compared to the post-merger year. The increase in returns had been respectively 54 percent, 97 percent, 74 percent, 79 percent, 70 percent and 78 percent in the analysis period after the merger.
Conclusion
Comparing the year of the merger to 2007, the analysis of the return on assets model revealed that cash flow returns increased by 78 percent. The study documents a share price return of 0.47 percent and 4.73 percent for NBD on the announcement day and the day after, respectively. The cumulative stock price return was positive in all time window periods, except for the period from -20 to +20 days.
Excess return or abnormal analysis for NBD reveals that the day after the merger announcement NBD had an abnormal return of 3.89 percent. CAR analysis for NBD reveals positive double-digit returns over the +1 to +10 and +1 to +5 announcement day timeframes. Analysis of operating performance suggests that the growth rate of total operating income and net profit were higher in the post-merger period compared to the pre-merger period.
The operating cash flow yield on assets model analysis shows that the cash flow yield decreased by 17 percent during the pre-merger period compared to an increase of 54 percent during the one-year post-merger analysis period. Compared to the merger year of 2007, the return on assets model analysis revealed that the cash flow returns increased by 78 percent. Mergers and acquisitions (M&As) continue to play an important role in shaping business activity worldwide.
The Ethiopian economy is also growing and the search for growth is a major driving force behind mergers and acquisitions. 1992. "The Post-Merger Performance of Acquiring Firms: A Reexamination of an Anomaly": Journal of Finance Vol. 1978. "An application of a three-factor performance index to measure shareholder gains from mergers", Journal of Financial Economics , Vol.
A study of Acquiring Firm Returns in the recent merger wave”, The Journal of Finance, Vol.
