Mergers, Acquisitions and Takeovers Case Study

CCB’s Acquisition of BOA (Asia): Merger of Two Complementary Banks

OR

Abstract:
On October 20, 2006, China Construction Bank’s shareholders approved the Bank’s proposal to acquire 100% of Bank of America (Asia) Ltd for $1.24 billion. CCB's purchase price (1.32 prices to book) was lower than the market average of two times price-to-book ratio. The low price showed Bank of America's eagerness to enter the mainland market by partnering with CCB. The Asia unit of the US banking giant held 8.5% stake in CCB, and the foreign ownership rules would allow it to increase its interest up to a ceiling of 19.9%. The deal had enormous merits for BOA (Asia), considering the fact that the best bank of China had been enhancing its operating efficiencies in recent years, with healthy development in its international presence and rapid growth in its foreign exchange businesses. On the other hand, Hong Kong was an important platform to CCB for its overseas developmental strategies, with an aim to drive its overseas operations. The acquisition would enable CCB to double its Hong Kong market share to 1.4%, boosting its ranking among the city's 24 licensed banks from 18th to ninth, with total assets of HK$96 billion. Going forward, CCB would be looking to acquire other overseas investment banking units, with targets including Hong Kong-based Gold bond Capital and Taiwan's Core Pacific International. However, CCB was not away from controversies and corruption charges. Zhang Enzhao, the Ex-Chairman of the bank, resigned on March 16, 2005, citing "personal reasons". However, a lawsuit in the US alleged that he received a bribe of $1 million from Alltel Information Services, for securing a contract. The NPL ratio still stood high at 4%, compared to the international average range of 0.5 to 2.5%. Moreover, the reduction of NPL was made possible due to huge capital injection by the PRC government in the form of Hujin Investments, which may not happen in future. In such a scenario, the valuation of BOA (Asia) seemed to be at a lower than expected level.

Pedagogical Objectives:

• To understand the role of mergers and acquisitions in the growth strategy of banking companies
• To have a brief understanding of the Chinese banking Industry
• To study the impact of banking reform
• To understand the potential synergies of a merger of two complementary banks.

Keywords : Mergers,Acquisitions,Alliances Case Study;Bank; China; Reform; Acquisition; Non performing loan (NPL); Loan; Deposit; Basel; Capital adequacy; Gross domestic product (GDP); Hong Kong; Book value; Huijin; Net interest; Valuation

Contents : 
China Construction bank
Brief History of China Construction Bank
Segment Information of China Construction Bank
China Construction Bank’s Loan Portfolio
Bank of America (Asia)
Banking Industry in China
Banking Industry in Hong Kong