Halifax started as a building society and is now more widely known as a big mortgage lender. In the wider community, the Halifax Bank has a very active community-banking sector catering for charity and non-profit organizations including housing associations, credit unions and community development operations. In comparison, the Bank of Scotland’s strength lies in the corporate market.
It would seem very likely that both firms would like to achieve higher profitability and growth opportunity through cross-selling products to each other’s customers. For example, the products developed by Halifax could be marketed effectively to Bank of Scotland’s customers and vice versa. Because both banks operate complementary activities, it is possible the combining of both firms will result in synergies, which may also result in increased efficiency.
There may also be opportunities to achieve savings through cutting some unnecessary costs. For example, the amount of staff needed for the combined firm is likely to be reduced.
By merging together, the size of the combined firm will certainly increase, thus leveraging the combined spend to negotiate better deals. The market position of the combined firm will be strengthened. Its market share within the industry will increase, maybe even enough to compete with the big-four banks, thus increasing the competition within the banking industry.
- Performance analysis before and after merger
In reality, there are wide ranges of techniques that can help analyse a firm’s performance – some firms may base their performance on sales, whereas others through the quality of products. Economists usually analyse a firm’s performance based on the amount of profit it is making. For a thorough analysis, this paper will be looking at the firm’s: market value, profitability, stability, value for shareholders, efficiency, and capital adequacy.
It must be noted that firms within the banking sector are subject to many economic uncertainties, which can influence how well a firm is doing from year to year. In this case, these uncertainties include: interest rates, employment rates, as well as the condition of the equity markets. For example, the base rate in January 2000 was 5.75%, however, at January 2002, the base rate was at 4.00%.
To analyse the performance of the banks before and after the merger, the firms’ financial accounts will be examined and ratios will also be calculated. The main performance indicators that will be analysed include: Profit before tax; Total assets; Dividends and Earnings per share. In addition, the return on equity, cost:income ratio and the firm’s capital strength will be examined. These ratios will give a clear assessment of the firm’s performance compared with that of other firms.
Before the merger, in 2000, Halifax and Bank of Scotland had market values of $22,105million and $11,762million respectively. Post-merger, in 2002, HBOS then had a market value in excess of $31billion. This immediately signifies the success of the merger, as the combined company is worth now worth a lot more in the market.
Figure 1 - Profit before tax
From an economic point of view, it is important that a firm makes a profit otherwise there would be no point of the existence of the firm. The Profit & Loss account of a firm shows the results of trading over the previous 12 months. It shows the net effect of income less expenses. The reason that profit before tax is analysed rather than profit after tax is due to the fact that interest rates and inflation changes could affect the amount of tax that is paid each year.
In 2000, Halifax made £1,715million profit (before tax), compared with Bank of Scotland, which made £911million. It would be expected that when both companies have merged together, the pre-tax profit should increase. Figure 1 shows that in 2002, HBOS made a pre-tax profit of £2,909million, which is more than the separate firms’ pre-tax profit added together. This shows that HBOS are actually performing better than the previously separate firms.
Figure 2 - Total Assets
The balance sheet shows the financial position of the firm on a particular day – from everything they own to everything that they owe. Total assets are an indicator of a firm’s level of investment and how stable it is. In 2000, Halifax’s total assets amounted to £182,520million whereas Bank of Scotland’s total assets were only £71,813. It would be expected that after a merger, the combined assets of firms would increase the total assets of the merged firm. Again, it is confirmed in Figure 2 that the merger of both firms has increased total assets to £355,080million in 2002. This figure is more than double the combined value of Halifax and Bank of Scotland’s total assets, indicating that clear synergies have been delivered as a result of the merger.
Figure 3 – Earnings per share
This is the net profit for the firm that is attributable to shareholders, divided by the average number of shares held by the shareholders. In other words, this is an important ratio for showing how much profit is actually being earned per share and whether a firm is really making money for it’s shareholders. Figure 3 shows the earnings per share for Halifax and Bank of Scotland in 2000 and foe HBOS in 2002. It seems that the earnings per share for HBOS has decreased to 50.6p in 2002 compared with Halifax, which made 52.5p in 2000. However, Bank of Scotland only had 44.3p earnings per share, thus this would be anticipated.
Figure 4 – Dividends per share
The dividend is the amount of profit that is distributed to shareholders. This is the amount the firm has agreed to pay from its profits to shareholders divided by the number of shares in issue. Bank of Scotland had dividends per share of 13.5p in 2000 whereas Halifax had almost double this, 26.5p, indicating that perhaps Halifax were doing better. Post-merger, dividends per share increased to 29.4p, which was desirable to shareholders.
Figure 5 – Post-tax return on average equity
A firm’s equity is the residual value of all assets after all liabilities have been taken into account. The return made on equity is an indicator of a firm’s performance through efficiency. In 2000, Bank of Scotland made a higher return on equity compared with Halifax (21.4% & 18.7% respectively). In 2002, HBOS only made 18.2% return on equity, suggesting that efficiency had decreased after the merger, due to an increase in liabilities.
Figure 6 – Cost: income ratio
The cost to income ratio is a key measure of a firm’s efficiency. It expresses a firm’s cost effectiveness, which sets operating expenses in relation to operating income. A higher ratio would indicate that income is growing faster than expenses and therefore demonstrates that a firm is efficient. Figure 6 shows Bank of Scotland was slightly more efficient than Halifax in 2000. In 2002, the cost to income ratio of HBOS was 44.7%, which signifies that HBOS remained fairly efficient after the merger.
Figure 7 – Tier 1 capital
The tier 1 capital ratio is an indicator of how well a firm’s capital strength is. Banks are usually required, by law, to have a tier 1 capital ratio of at least 4%. Sometimes, if a firm decides to adopt a growth strategy, its capital ratio may deteriorate die to the amount they have to invest. In 2000, Bank of Scotland and Halifax had Tier 1 capital ratios of 6.4% and 9.3% respectively. Post-merger, HBOS achieved a capital ratio of 7.9%, thus their capital strength is strong.
Overall, it seems that the combined firm, HBOS is performing better than it was as two separate firms. The firm have increased their presence in the market; synergies have been accomplished, and it would be likely to grow even stronger in the future.
- Factors that were influential to the success of the merger
The merger of Halifax and Bank of Scotland was a £28bn deal between two equal entities without any domination from one side. Despite the pessimism about banking mergers and acquisitions, this merger proved that a well-aligned merger in the banking sector is not impossible. In fact, the merger has since proved to be a major success. I will go on to discuss what I think were the main influential factors that led to such success.
Halifax was strong in mortgages and saving schemes, whereas Bank of Scotland has made its mark in corporate lending. Having merged, the shareholders of both banks exchanged their shares on a one-for-one basis for the shares in the new firm, HBOS.
Halifax has brought its financial strength and scale, along with its products and channels to the Bank of Scotland shareholders. Similarly, Bank of Scotland has brought its lending ability along with corporate growth opportunities to Halifax shareholders. The combination of these complementary activities has in no doubt led to the achievement of synergies, thus has been a main factor contributing to the success of this merger.
The merger enabled the resources of both firms to combine and reach a scale big enough to compete with the ‘big players’ within the market. Apart from financial resources, the knowledge and experience of both firms are shared, thus creating a more diverse background for HBOS. Furthermore, post-merger, the firm could then rationalise and reorganise the constituent parts, making the firm more efficient.
A recent article showed that the addition of HBOS means that there are now five main payers within the industry. In 2005, HOS has made more profit than Lloyds TSB Bank:
Source: ‘Big Five Banks’ Metro, Tuesday March 7, 2006
In my view, cultural cohesion is another crucial asset in the eventual success of the overall deal. The merger has brought together two highly successful management teams with proven track records of innovation and a shared strategic commitment to achieve growth through aggressive competition. Because both banks’ strategy and culture were very similar, combining together did not create any problems as the employees of both banks had similar aims and goals, thus, enabling the workers of HBOS to work smoothly together.
To conclude, the main factors contributing to the success of the merger between Halifax and Bank of Scotland is mainly down to the fact that the combination of the complementary activities has led to value and growth for its existing customers. Additionally, with its diverse products and deep experience, it has become an attractive bank for potential customers. Having combined the assets and resources of both firms, HBOS then had the resources to undertake larger projects and to strengthen its market position in order to better compete within the industry. Finally, die to the similarities in both firms’ strategy and culture, the employees within the new firm had common beliefs and goals, which enabled them to work together efficiently, thus contributing to the overall success.
Appendix A: Halifax: Summary Profit & Loss Account
(For the year ended 31 December 2000)
Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp
Appendix B: Halifax: Summary Balance Sheet (For the year ended 31 December 2000)
Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp
Appendix C: Bank of Scotland: Summary Profit & Loss Account (For the year ended 28 February 2000)
Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp
Appendix D: Bank of Scotland: Summary Balance Sheet (For the year ended 28 February 2000)
Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp
Appendix E: HBOS: Summary Profit & Loss Account (For the year ended 31 December 2002)
Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp
Appendix F: HBOS: Summary Balance Sheet (For the year ended 31 December 2002)
Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp
Bibliography
-
Anderton, A. ‘Economics’ 3rd edition, CPL, 2000
- ‘Big Five Banks’ Metro, Tuesday 7 March 2006
- Citiwire, 2005 ‘Snapping at heels of big four’ 2 March 2005
- Clegg, Kornberger & Pitsis. ‘Managing and Organizations’ Sage, 2005
-
Moschandreas, M. ‘Business Economics’ 2nd edition, Thomson, 2000
- Hamilton, K. ‘HBOS players sprint to finish’ The Sunday Times, 6 May 2005
- Phillips, B. ‘Merger, International Tax Review’ Vol. 13, Issue 2 p.14
- Watson, D. Head, A. ‘Corporate finance: principles and practice’ Trowbridge, FT Pitman Publishing, 1998
- [Online] ‘Cultural conflict and merger failure’
www.hss.cmu.edu/departments/ sds/BDRauthors/Weber/MERGETXT.pdf
- [Online] ‘The value creation effects of mergers and acquisitions’
www.wits.ac.za/accountancy/ staff/negashm/research/doc19.doc
-
[Online] Banking capital requirements,
-
[Online] BBC News ‘HBOS takes on big four’ http://www.news.bbc.co.uk/1/hi/scotland/1312704.stm
[Online] ‘Cultural conflict and merger failure’
www.hss.cmu.edu/departments/ sds/BDRauthors/Weber/MERGETXT.pdf, accessed March 1st.
Anderton, A. ‘Economics’ 3rd edition, CPL, 2000.
[Online] ‘The value creation effects of mergers and acquisitions’
www.wits.ac.za/accountancy/ staff/negashm/research/doc19.doc, accessed March 1st.
BBC News ‘HBOS takes on big four’, http://www.news.bbc.co.uk/1/hi/scotland/1312704.stm
‘Economic Data’ , accessed March 15th 2006.
Copies of the firms’ balance sheet and profit & loss accounts have been appended for reference.
‘Forbes.com’ ?,accessed March 15th 2006.
Banking capital requirements, , accessed March 17th