Monday, 5 May 2014 00:00
The misinterpretation of the HNB MD’s comment at the MTI Banking Forum demonstrates the widespread confusion regards mergers and acquisitions, which are two distinct approaches of inorganic growth for a business.
Acquisition, as the name implies, is when a business is bought over by another business – such as a bank acquiring a finance company. Having acquired it, the acquirer has the option of treating it as a subsidiary (and letting it operate as it is) or actively integrating the two organisational structures – which is referred to as a merger.
Purely as an example, if Malaysian Airlines (a legacy airline) decide to acquire Air Asia (a budget airline), it may not be commercially prudent to ‘merge’ the two organisational structures – because they have very different cost structures, operating business models, staff competencies and organisational cultures. Of course, there could be synergies in areas like aircraft buying and technology, where the synergies could apply.
Similarly, a bank and a finance company would have two very different operating models. Finance companies would have a low cost distribution model, an aggressive outdoor sales channel, ability to reach and serve the ‘un-bankable’ customers, developing small ticket products and swift loan approval mechanism.
Therefore, merging all these functions with a much higher fixed cost bank structures may not be commercially prudent. However, there could areas like technology and risk management, where the finance companies could benefit from the bank’s strengths.
So, the next time we hear “Don’t merge”, let’s dig a little deeper and not jump the gun!