HSBCs Acquisition

1
HSBCs Acquisition

• M A in Hong Kong

2
Company Background

• 1992 acquisition of Midland Bank by HSBC created
  a financial institutions with assets of 170
  billion
• Desire to create a truly global banking
  organization
• Ensure HSBCs growth worldwide as
  re-strengthening its relationship with
  multinationals

3
HSBC Holdings

• Main member is HK Shanghai Banking Corporation
  Ltd. formed in HK in early 1860s
• Opened its office (HQ) in HK at 1 Queens Road on
  March 1865 and in Shanghai on 3 April 1865

4
HSBC Holdings

• After WWII, expansion thru acquisition
• 1959 UK registered Mercantile Bank
• 1960 British Bank of the Middle East
• 1965 Hang Seng Bank
• In 1972, it created an investment Banking
  arm-wardley
• In 1970s, it acquired Marine Midland Bank of
  Buffalo, NY

5
HSBC Holdings

• On 2 April 1991, Hong Kong Bank became
  wholly-owned subsidiaries of HSBC Holdings PLC
• HSBC enjoyed the unique benefit of being an UK
  company paying taxes in HK
• Trading on SEHK and LSE

6
HSBC Holdings

• Major Business
• Retail and corporate banking
• Trade services
• Investment banking
• Private banking
• Trustee services
• Pension and investment-fund management

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HSBC Holdings

• Major Business
• Treasury capital market services
• Consumer business finance
• Securities custody services
• Insurance
• From 1980-1991, profit increased

8
Midland Bank PLC

• Midland started in Birmingham in 1836
• In 1905, the first to introduce Foreign Exchange
  Department
• By 1934, largest deposit bank in the world, with
  457 million in effects
• By 1939, Midland had 2,100 branches

9
Midland Bank PLC

• The 1980s were a disastrous decade
• It paid US820 million for a 57 in Crocker
  National Bank the 4th largest bank in Cal. And
  12th largest in the US
• Crocker lost US62 million in 4th quarter of 1983
• Suffered from bad real estate loans massive
  debts in South America
• Lost US324 million in 1984

10
Midland Bank PLC

• Shares of Crocker worth US90 (1983) down to
  US16.25 in 1985
• Midland bought the other 43 of Crocker
• Midland sold Crocker the year later
• This acquisition took a severe toll on Midlands
  capital base
• In late 1987, HSBC offered to make a friendly
  acquisition of 14.9 of Midlands stock

11
Midland Bank PLC

• Late 1980s, Midland introduces 2 innovative
  banking products. The Switch debt card, a
  paperless check of electronic payments at the
  point of sale, and First Direct, a 24-hour
  person-to-person tele-banking service
• Both projects were pended because the bank was
  short of cash

12
Midland Bank PLC

• Overhead were growing at a rate of 10 a year
  while revenues were increasing by 1. In 1989,
  the bank lost 261 million.

13
Reasons for the Acquisition

• Globalization
• Increasing competition for local and
  international banks
• In 1991, pre-tax profits of HSBC was US6.7
  billion
• HK operations 81.3
• UK operations 1

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Attractiveness of the European Markets

• HSBCs subsidiary HS Bank played a dominated role
  in HK
• Diversification to reduce risk
• Unification of European markets will lead to more
  business transaction among European nations and
  with Asia

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Attractiveness of the European Markets

• HSBC specialized in the fast-growing Asia-Pacific
  region. Midland Bank has a strong retail banking
  business in Britain and deep roots in trade and
  wholesale lending in Europe
• Both banks could be complementary functionally
  geographically

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Attractiveness of the European Markets

• Global network with a unique combination of
  international capabilities local strengths
• A merger with Midland Bank doubled HSBCs total
  assets
• 86 billion to 170 billion in 1992
• 3,200 branches in 70 countries

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To serve global customers

• HSBCs customers in Asia-Pacific had begun
  looking for trade investment opportunities
  elsewhere in the world
• European companies looked for business partners
  in Asia
• The merger could build up a global network to
  serve the major multinationals

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Uncertainty

• Problem of 1997
• If anything goes wrong, HSBC has a chance to go
  Europe

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Financial Package
20
Major Events

• The 1987 HSBC acquisition of 14.9 of Midland
  Bank and promised not to increase its stack in
  Midland until December 1990
• Speculation that a merger would happen in 1990,
  but actually not
• HSBC became a wholly owned company by HSBC PLC in
  1991

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Major Events

• Midland announced better-than-expected results
  with pre-tax profits up from 11 million to 36
  million against a widely expected lost in 1992
• On 10 March, HSBC announced 82.9 rise in
  disclosed profit attributed to shareholders, from
  HKD3,096 million to HKD5,664 million

22
Major Events

• On 17 March 1992, HSBC Midland announced plan
  to merge
• Share price of Midland was trading at 253 pence
• On 17 April 1992, HSBC valued Midland at about
  3.1 billion at 378 pence per share

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Major Events

• For each share of Midland, one new HSBC shares
  and 100 pence of new HSBC Holdings bonds were
  offered
• On 4 April 1992, Lloyds Bank announced an offer
  for Midland for one Lloyds share plus 30 pence in
  cash
• Referred to Monopolies and Mergers Commission

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Major Events

• Lloyds would cut staff by 20,000 over 4 years and
  close 1,000 branches to produce annual savings of
  over 700 million
• Midland preferred HSBCs bid
• On 8 May 1992, HSBC Holdings valued Midlands
  share at 401 pence (because HSBCs price went up
  from 2.93 to 3.13)

25
Major Events

• On 19 May 1992, approved by BOE and two days
  later from EC
• HSBC did not have any substantial overlapping
  business with Midland but Lloyds did

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Major Events

• On 2 June 1992, HSBC announced a second bid of
  120 new shares of HSBC 65 in either new HSBC
  bonds or cash for 100 Midland shares, than valued
  at 471 pence on shares
• Lloyds withdrew its offer

27
Analysis of effects of corporate announcement

• HSBC wanted to move back to UK
• Analysis were negative on the merge

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Geographical Contribution of the Pre-tax Profit
of the HSBC Group, 1992-1995
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Financial Data of HSBC, 1992-1995
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Financial Data for Midland Bank, 1992-1995
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Aftermath
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Aftermath

• 1992 represented an increase of 59.2 over 1991,
  mainly from the HK UK operations
• HSBCs 3.7 billion bid for Midland in 1992 was
  the largest cross-border takeover in Europe that
  year
• HSBC became the 2nd largest (non-Japanese) bank
  in the world (12th in terms of assets)

33
Aftermath

• In 1994, HSBC group handled 25 of all trade form
  China into the UK. It handled 30 of trade from
  HK and 20 from India
• First Direct, the telephone-banking service was
  successfully launched and became the most popular
  one in the UK

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Cumulative Abnormal Return of HSBC Holdings,
December 1991- September 1996
35
Abnormal Return and Cumulative Abnormal Return of
HSBC, March 1992- July 1992
36
Abnormal Return and Cumulative Abnormal Return of
Midland Bank, March 1992 July 1992
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Lessons

• Diversification to hedge against risk
• Timing is important

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END