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Advanced Business Economics 4ECQ650

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Introduction

Advanced Business Economics 4ECQ650 Semester 2, 2005-2006 Coursework: Question 1, Mergers and Acquisitions Word Count (excluding titles & appendices): 2481words Name: Josephine Tang Student No: 03071847 Tutor: Nic Zafiris Date: 5th April 2006 TABLE OF CONTENTS Section Page 1.0 Possible reasons to justify or explain a merger or acquisition 3-4 2.0 Likely motivations underlying the merger between Halifax & Bank of Scotland 5 2.1 Performance analysis before and after merger 6-9 2.2 Influential factors that were influential to the success of the merger 10-11 Appendices A Halifax - Profit & Loss Account 2000 12 B Halifax - Balance Sheet 2000 13 C Bank of Scotland - Profit & Loss Account 2000 14 D Bank of Scotland - Balance Sheet 2000 15 E HBOS - Profit & Loss Account 2002 16 F HBOS - Balance Sheet 2002 17 Bibliography 18 1.0 Possible reasons to justify or explain a merger or acquisition It is often suggested that profit-maximising firms are motivated to grow in size; this can be done either through internal growth or through a merger/acquisition. Mergers permit a quick and more certain expansion. However, sometimes a firm is reluctant to lose its independence and is faced not with a merger option but with a takeover bid from a rival. Very often, the main motive behind merger activity is to increase the firm's market power and reduce competition in the market place in order to be better able to exploit the market. The merger therefore acts as a risk-reduction mechanism as the firm will have more control to withstand any small changes in the industry (e.g. the threat of new firms entering the market). It is also suggested that through merger activity, a firm will also be able to increase long-term profitability. However, there is little evidence that an increase in market power is effective in raising profitability. A study by Ravenscraft and Scherer (1987), found that out of 6000 acquisitions in the US between 1950 and 1967, two-thirds of the merged companies had ...read more.

Middle

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. ...read more.

Conclusion

2002 �million Interest receivable 16,691 Interest payable (11,921) Net interest income 4,770 Non interest income 2,776 Net operating income (all from continuing operations) 7,546 Operating expenses (3,762) General insurance claims (79) Provisions for bad and doubtful debts (832) Amounts written off fixed asset investments (24) Operating profit (all from continuing operations) 2,849 Before exceptional items 3,002 Exceptional items (153) Share of operating profits of joint ventures and associated undertakings 35 Profit and disposal of business 25 Profit on ordinary activities before taxation 2,909 Before exceptional items 3,062 Exceptional items (153) Tax on profit on ordinary activities (835) Profit on ordinary activities after taxation 2,074 Before exceptional items 2,186 Exceptional items (112) Minority interests (equity) (35) (non equity) (123) Profit attributable to shareholders 1,916 Dividends Preference 37 Ordinary 1,140 Retained profit of the year 739 Earnings per Ordinary Stock unit - basic before exceptional items 56.1p - basic 50.6p - diluted 50.2p Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport.asp Appendix F: HBOS: Summary Balance Sheet (For the year ended 31 December 2002) 2002 �million Assets Cash and balances at central banks 1,373 Items in course of collection 1,093 Treasury bills and other eligible bills 5,964 Loans and advances to banks 11,838 Loans and advances to customers 240,879 Less: non-returnable finance (6,564) 234,315 Debt securities 44,324 Equity shares 223 Interest in joint ventures and associated undertakings 453 Intangible fixed assets 1,434 Tangible fixed assets 1,671 Operating lease assets 2,625 Other assets 8,892 Long-term assurance business attributable to shareholders 3,544 317,749 Long-term assurance assets attributable to policyholders 37,331 Total Assets 355,080 Liabilities Deposits by banks 45,637 Customer accounts 150,221 Debt securities in issue 80,771 Other liabilities 16,085 Subordinated liabilities 9,127 301,841 Capital and reserves Called up share capital Preference stocks (non-equity) 400 Ordinary stock 946 1,346 Share premium account 1,292 Other reserves 496 Profit and loss account 10,635 Shareholders' funds (including non-equity interests) 13,769 Minority interests (equity) 436 (non-equity) 1,703 15,908 Long-term assurance liabilities attributable to policyholders 317,749 37,331 Total liabilities 355,080 Memorandum items Contingent liabilities 2,829 Commitments 49,024 Source: [Online] HBOS plc, www.hbosplc.com/investors/annualreport. ...read more.

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