The Acquisition Bid for UFJ Holdings
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Case Code: BSTR133 Case Length: 17 Pages Period: 2000 - 2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization: Sumitomo Mitsui Financial Group, UFJ Holdings Industry: Banking Countries: Japan Themes: Mergers Acquisition and Takeovers |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
UFJ's Need for a Partner
UFJ was the weakest of Japan's major banks with the largest quantum of non-performing loans. The bank had incurred a loss of ¥2.24 tn in the past three fiscal years with bad loans amounting to ¥306 bn. UFJ had generated revenues of ¥2,520.659 bn in the fiscal year 2003, a 20.3 per cent decline from the previous year. The bad loans of UFJ for the fiscal year 2001 amounted to ¥6482.1 bn and ¥4163.5 bn in the fiscal year 2002. In the first quarter ending June 30 2004, UFJ recorded a loss of ¥91.6 bn as bad loans grew by more than 10 per cent of total loans disbursed, compared to 8.5 per cent in March 2004. The capital adequacy ratio fell to 9.01 per cent from 9.24 per cent for the same period. Moreover, in May 2004, when the FSA asked it to reclassify a significant amount of UFJ's loans as non-performing, the bank reported a loss of ¥400 bn. As many banks in Japan were facing financial problems, FSA, which had been injecting funds into the troubled banks, gave an ultimatum that these banks should reduce their non-performing loans as on September 2002, by 50 per cent by April 2005...
The Offer of SMFG
As soon as news of the merger plans was made public, STB reacted. STB filed a petition in the District Court of Tokyo against UFJ and requested the court to stop the proposed merger on the grounds that UFJ had earlier promised to sell its trust banking business to STB. SMFG claimed that UFJ and STB had reached an agreement, according to which both parties had exclusive negotiation rights; and that the agreement also contained a provision, which required the party violating the agreement to pay a penalty. It further said that both parties were scheduled to sign a formal contract regarding integration of the trust businesses on July 22, 2004. The District Court of Tokyo ruled that UFJ should honour its agreement with STB and should not proceed with the merger talks with MTFG. Immediately, UFJ appealed against the court ruling, which too was dismissed. UFJ then filed an appeal in the Tokyo High Court against the District Court's ruling. Following this, SMFG sent a new merger proposal with UFJ in August 2004...
The Synergies
Analysts commented that the UFJ-MTFG merger would create an entity with combined assets worth ¥188 tn, ¥4 tn more as compared to the proposed UFJ-SMFG merger. The synergies and cost reduction resulting from the merger were expected to boost the earnings of the combined entity by 20 per cent. After the merger, MTFG would have access to UFJ's extensive branch network, individual customer base and its top corporate clients like Toyota. UFJ's core area of operations comprised retail business and small and enterprises, which MTFG lacked. Though MTFG had a stronger presence in corporate lending, the revenues from this business were stagnating and net interest margins were less. Moreover, after the merger, MTFG would emerge as the leader in the mortgage business, in which it lagged behind Mizuho and SMFG. Analysts also pointed out that both the entities would benefit from the complementary nature of their branch network and operations. Most of MTFG's branches were in and around Tokyo, Eastern Japan, whereas UFJ had a strong presence in Western Japan in the regions of Osaka and Nagoya....
The Pitfalls
Notwithstanding the benefits, analysts were quick to point out possible disadvantages. They commented that both UFJ and MTFG were formed after a series of complicated and long drawn out mergers, which meant that each group already had conflicting corporate cultures. The formation of UFJ faced a lot of personnel problems and cultural conflicts. Industry observers felt UFJ's union with MTFG would involve a lot of risk due to the diversity in core areas of operations. The merger could backfire if both of them failed to settle restructuring problems like pay roll cuts, branch closures, personnel and organizational shuffling and linking computer systems. In spite of UFJ's strong retail clientele and economies of scale after the merger, analysts expressed doubts about the profitability of the merged entity. UFJ's significant non-performing loans was expected to affect MTFG's balance sheet. Most banks in Japan were burdened by huge quantum of bad loans, and the Japanese government had to bail them out by injecting public funds...
Exhibits
Exhibit I: The Japanese Banking Industry
Exhibit II: Top Ten Banks in the World (July 2004)
Exhibit III: Consolidated Balance Sheets of UFJ
Exhibit IV: Consolidated Balance Sheets of SMFG (2003)
Exhibit V: Consolidated Balance Sheets of MTFG (2003)
Exhibit VI: SMFG Proposal for Integration
Exhibit VII: Takeover Regulations of Listed Companies in Japan
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