S11 Bendigo Bank Adelaide Bank PDF

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Accounting for Business Combinations Group report cover sheet Tutor name: Class 6:00 pm – 7:30 pm Friday Rebec c a time: Bac hmann Date submitted:

08/11/2018

Assigned companies:

Bendigo Bank Ltd & Adelaide Bank Limited

SUBMISSION CHECKLIST (please read, tick and sign) Final report structure and content  Table of contents  Executive summary  Short introduction paragraph  Headings used throughout the report  Main conclusions  Reference list and appendices  Large blocks of text have been broken up into paragraphs, with one key idea per paragraph  All statements of fact have been referenced  Minimal use of direct quotes – ideas should be paraphrased in your own words. Format  Times new roman font 12 point  Line spacing double  Margins: at least 2.54 cm for top, bottom, left and right margins. Referencing  Number of academic journal articles in reference list_5__  Number of other sources in reference list__12__  All direct quotes have page numbers in their in text reference  All references in text have been included in the final reference list  Final reference list is in alphabetical order by author Turnitin  Report has been checked by all team members before submission - Only one submission allowed  Name of student who submitted the report to Turnitin Hakheng Chiv Peer review  Each team member has completed, signed and submitted their individual peer review sheet – N/A, unanimous agreement on 100% contribution by all members. Original authorship statement We hereby certify that this assignment is our own work, based on our personal study and research and that we have acknowledged all material and sources used in the preparation of this assignment. We also certify that the assignment has not previously been submitted for assessment and that we have not copied in part or whole or otherwise plagiarised the work of other students or authors:

Student ID Number

Student Name

Signature

Date

12489631

Hakheng Chiv

Hakheng.C

08/11/2018

12520742

Xiaojun Yang

11049347

Arash Farahani

08/11/2018

Arash. F

08/11/2018

Content 1. Executive summary 2. Introduction 3. What are the rationales behind the acquisition 4. What are the personal incentives of the board of directors of the target firms to accept the takeover offer? 5. The acquisition method: The method of the acquisition used (e.g., scheme of arrangement, on-market bid, off-market bid) and the reasons why this method was used: 6. Detailed Evaluation of Acquisition Analysis 7. Is the amount of Goodwill justified ? 8. Explain how & why the market reacted to takeover around the announcement date? 9. Analysis of post-Acquisition accounting performance up to 3 years post acquisition. 10. Using the analysis above evaluate whether the takeover was value enhancing to shareholders 11. Conclusion 12. References

Executive Summary We came to this conclusion through an analysis of these main point. 

It is shown that the main rationales behind the acquisition of Adelaide bank by bendigo bank are to increase market share, increase product range and to capitalize on operational synergy with ultimate goal of increasing profit



The offer price was $2094.3 million included the FVINA allocation of $725 million and the goodwill came from the acquisition of $1368.3 million

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In this case, the good will is justified because the acquisition is beneficial to shareholders of Bendigo and Adelaide Bank

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Finally, The report presents the analysis of the financial performance of Bendigo Bank after the acquisition. Bendigo Bank acquired Adelaide to improve its performance and the analysis indicates that since the banks merged the performance has increased. It presents the accounting performance of the bank for the three years after the merger and acquisition. The report presents the analysis of the value of acquisition to the shareholders

Introduction Bendigo Bank Ltd was announced in 2007 that they were going to merge with another big financial institute which is Adelaide Bank Limited in the end of year. Bendigo bank offer around 2 billions dollars to acquire all share in Adelaide bank through a scheme arrangement. This two big banks had successfully merged and announced a new business name as Bendigo and Adelaide Banks Limited. In this report we will discuss about the acquisition and evaluate after the acquisition.

What are the rationales behind the acquisition? The acquisition of Adelaide Bank Limited by Bendigo Bank Ltd in 2007 came at a time when shareholders wanted a change in business model, also their firm to increase in value and expand in areas they haven’t before, and finally to compete with larger banks in the industry. This was proven when it came time to vote for the merger, 98 percent of the Adelaide Bank shareholders that voted supported the acquisition. That percentage was much higher than the minimum requirement to approve the acquisition. The two banks have business models which are different but complimenting. Adelaide bank focusing on wholesale banking operations and Bendigo Bank is more customer focused retail banking. This acquisition is an example of a ‘horizontal merger’, which occurs between businesses that operate in the same industry. The benefits of this is a gain in market share and greater synergies. These types of mergers can offer existing customers additional range of products and the opportunity to cross sell products to a larger customer base. According to the Adelaide Bank Limited Scheme book, the group expected to offer wealth management products, wholesale products and retail banking products across both banks now. Also, the group planned

to increase their product range, which is planning to be available across the whole nation through their combined businesses (Adelaide Bank Limited Scheme Book 2007). The merge will also result in operational synergy due to the sharing of ATM machines, infrastructure, software and systems and distribution facilities. Therefore, this results in much lower costs in the functions of their business (Smith 1971). It was predicted that this synergy will add value to the business which is the ultimate goal, with 80% of the total synergy costs being realised in the second year of operation (Adelaide Bank Limited Scheme Book 2007). What are the personal incentives of the board of directors of the target firms to accept the takeover offer? Mergers and acquisitions often result in benefits for members of the board of directors, especially if the acquisition meets all the goals and objectives that was created pre-acquisition. Some of these benefits may include an increase in individual pay, incentives and higher positions in the company (Harford 2003). Using the information obtained from end of year reports of the respective companies, we will compare the salaries, positions and shares that are shown on senior bank members before and after the merge. Senior member Fennell is shown to have had a $93,734 pay increase after the merger, this could possible be an incentive given due to the merge. In contrast McPhee, who was crucial in the push for the merge, is shown to have a drastic increase in ownership, he was given 370 00 more ordinary shares then he previously owned and a $350,000 bonus after the merge. Another form of incentive that is enticing is the opportunity of holding a position in a company that is far more successful and larger than what it was before with the potential of being very successful and thus offer further benefits well into the future. While often personal incentives are

not openly shared to the public, there is evidence that members were influenced by incentives to accept the takeover.

The acquisition method: The method of the acquisition used (e.g., scheme of arrangement, on-market bid, off-market bid) and the reasons why this method was used: On 30th November 2007, Bendigo Bank acquired Adelaide bank by using scheme of arrangement method, which stated that Bendigo Bank would acquire all the shares through the scheme and Adelaide Bank shareholders will receive 1.075 Bendigo Bank shares per Adelaide Bank share (BAB 2008). Regarding to scheme of arrangement, it requires Adelaide shareholders to approve for the scheme and the approval from the court to proceed on the agreement. 98 percent Adelaide ordinary shareholders votes were agreed to merge with Bendigo banks and it was above the minimum required to approve the scheme of arrangement. A scheme of arrangement allows the company to reconstruct its capital, asset or liabilities with approval of its shareholders and the court (under Pt 5.1 Corporations Act 2001). One of the reason that Bendigo chose a scheme of arrangement because it can be effected a wide range of corporate restructure. A scheme of arrangement seems a bit complicated compare to takeover bid but it allows greater flexibility to add such as necessary features such as asset transfer and capital reduction. Another reason is the certainty of obtaining 100 percent ownership for the bidder.

Detailed Evaluation of Acquisition Analysis Offer Price: $2,094.3 million Method of Payment: Allocation of ordinary shares and step-up preference shares, and cash payments for transaction costs FVINA Allocation: $725 million Goodwill: $1,369.3 million The effects of the acquisition of Bendigo Bank Ltd and Adelaide Bank Ltd are shown in the following figure.

Figure 1 - Acquisition analysis from Bendigo and Adelaide Bank Limited 2008 Annual Report Bendigo Bank Ltd acquired Adelaide Bank Ltd through allocating 117,687,891 ordinary shares for $16.80 per share and 1,000,000 step-up preference shares for $100.00 per share, and there were transaction costs of $17.2 million which were paid in cash (BAB 2008). After the acquisition, Bendigo Bank Ltd changed its name to Bendigo and Adelaide Bank Ltd, which is referred to asBAB in the following parts. Evaluation of the Offer Price

The total offer price for the subsidiary ended up being $2,094.3 million with $1,369.3 million of goodwill (BAB 2008). With the completion of the acquisition, each share of Adelaide held by the original Adelaide Bank shareholders will receive 1.075 shares of the combined group. As can be seen in BAB’s annual report in 2008, total assets of the parent entity increased from $16,535.2 million to $21,281.7 million after the acquisition, and total liabilities increased from $15,551.7 million to $18,049.1million, leading to an increase of $2,249.1 million in the net assets (BAB 2008). This is comparable to the offer price, even a little higher. Moreover, Adelaide Bank contributes $170.5 million of after-tax profit after the merger, indicating the merger brings more profit growth points (BAB 2008). By and large, the offer price is justified, and it is a cost-effective deal for Bendigo Bank. Evaluation of the Payment Method The acquisition was completed through stock payment. BAB allocated 117,687,891 ordinary shares for $16.80 per share and 1,000,000 step-up preference shares for $100.00 per share. In friendly mergers and acquisitions, the method of stock payment can benefit both the merging party and the merged party (Lu, 2016). In this case, for Bendigo Bank, this transaction avoids the occupation of large amounts of liquidity, greatly reducing its financial pressure. For Adelaide Bank, its shareholders still hold their owner’s equity, and have rights to participate in the new company’s income distribution. In fact, most enterprises choose cash payment methods in the mergers and acquisitions (Su et al, 2009). Cash payment is the clearest form of payment. Both sides of the merger and acquisition are given a clear cash flow, facilitating the completion of the transaction as soon as possible, and cash payment will not affect the capital structure of the merged company, which is conducive to the stability of the stock price (Jin, 2016). However, due to the large amount of payment in this

case and the strict liquidity management requirements of the banking industry, it is wiser for Bendigo Bank to choose stock payments in the acquisition. Evaluation of the FVINA Allocation The fair value of identifiable net assets was about in line with what the company offers. As the largest portion of the assets are loans and other receivables, as well as financial assets, the fair value can be clearly reflected through the book value of assets. Therefore, there will not be much dispute over the issue of FVINA allocation arising from the acquisition. Evaluation of the Goodwill Goodwill on acquisition

“values in $ million”

Total consideration Less: Fair value of identifiable assets and liabilities Goodwill on acquisition

2,094.3 (725.0) 1,369.3

From the acquisition of Adelaide Bank Ltd, Bendigo Bank Ltd realized goodwill of $1,369.3 million. In evaluating whether the goodwill amount was justified, we broaden our analysis to include what the position and reputation of Adelaide Bank was on the date of acquisition. Adelaide Bank, abbreviated as ABL, was already a world-class commercial bank with a long history before the acquisition. It is famous for its excellent service and good public image, and was the fourth largest bank in Australia. Thus, in acquiring ABL Bendigo Bank was in turn able to improve its reputation in the market, and this can be translated to an increase in customers. Moreover, the merge of Bendigo Bank and Adelaide Bank was at a time when Australia's economy is in a weak state. The merger of the two powerful banks will help them better survive the economic downturn and thus gain a higher competitive position. We can thus conclude that the goodwill amount on acquisition was justified.

Explain How & Why the Market Reacted to the Takeover Around the Announcement Date? The merger was first announced on 9 August 2007, and implemented on 30 November (BAB 2008). After the announcement of the merger, Adelaide's shares rose by 14.86%, while Bendigo's shares fell slightly. This is consistent with the general merger and acquisition cases, because in theory the merger and acquisition behavior will make people have a positive expectation of the acquired party, which will make the stock prices of these companies rise. Because the buyer needs to pay consideration, and the use of stock payment will produce stock price dilution effect, so the buyer's immediate stock price is more likely to fall (Peng & Zhao, 2009). Graph showing movement of the Bendigo & Adelaide Bank stock after the announcement of the acquisition

From the above picture, we can see that after the merger of the two major banks, the initial reaction of the market to the combined company is negative. We believe that this is because in the short term, investors are more alert to the dilution effect than to the economic benefits of the merger. After all, the merger is in the weak period of Australian economy, and the synergy effect

after the merger needs a longer period (Jiang, 2016). This is clearly not what short-term investors expect.

Analysis of Post-acquisition accounting performance up to 3 years post acquisition Due to market challenges, the bank has been focusing on reducing expenses and shrinking its operation. It is estimated that 35% of finances of the bank is online on mortgage financing and therefore, it plays an essential in housing mortgage (Frost, 2018). The report, therefore, presents an analysis of post-acquisition accounting performance up to three years after the acquisition and evaluation of the impact of the takeover. The merger and acquisition bring efficiently and improve performance can improve the performance of a company. Bendigo merges Adelaide to increase its market share and profit margin in the market. The analysis indicates the acquisition has no effect on the bank. However, the post-merger analysis indicates a positive trend in the financial statement of the bank. After the merger, Bendigo bank profit margin increased significantly to A$34 million within the first one year. The profit margin increases steadily to A$105 million, within the first three years (Bao, 2017). The increase in profit is due to cost cutting due to acquisition and merger, which brought efficiency to the company. The analysis of the financial performance also indicates the Return on Equity (RoE) decreased by 7% from the lowest point of 5% before the merger took place. The Total Asset Turnover increased by 4.34% from the lowest [oint of 2.11% between 2014-1015. It indicates a clear improvement Bendigo Bank performance after the merger had occurred and therefore, acquisition and merger helped the bank to improve its market performance (Huian, 2012). Then the return of investment of the bank also increased by almost 7% to 13% after three of operation after the acquisition of Adelaide bank to allow the bank to keep constant cash flow

in the bank. The profit margin ration of the Bank increased to a high or 35% and therefore, evident that the acquisition of Adelaide by Bendigo improve the performance of the bank.

Value Enhancing to Shareholders Based on the analysis of the financial performance of the bank the takeover, it is evident that the takeover added value to the shareholders of Bendigo Bank. It is indicated that after a period of twelve months the bank could be able to issue divided to the shareholders after a period of time. The Return on Equity (RoE) also increased to 7% from 5% before the merger occurred. The increased of RoE means that the bank could write a lot of divided to the shareholders. The Bendigo banks earning per share also increased significantly by 10.8% (Ntuli, 2017). It means the shareholders of the bank were able to receive more dividends compared to the previous years. The shareholders of the bank earned more dividend and the prices of shares in the stock exchange also increased, giving shareholders an opportunity to trade Bedndgio bank and earn more money from the sales. The acquisition also leads to the increase in the value of the company in the market. This directly benefits the company since the market share of the bank increased resulting in higher profits.

Conclusion To conclude, the acquisition of changed the fortune of the bank and made it a profitmaking bank from making loses for two consecutive years. The post-acquisition analysis indicates that Bendigo financial status changed. The total asset turnover increased and the return on equity increased as well, which is a significant sign of good performance.

Reference List

Bao, H. 2017, Evaluation of Pre and Post Demerger-Merger Performance Using ABN AMRO Bank as an Example. International Journal of Economics and Finance, vol. 9, no. 2, pp 2-35. Bendigo Bank 2007, Resounding ‘yes’ vote for Adelaide Bank and Bendigo Bank merger, viewed on 03 october 2018, Financial Review 2018, Bendigo Bank investors are sitting on their hands, viewed 3 october 2018, Huian, M. C. (2012). Post M&A Accounting Performance of Romanian Banks. Journal of Eastern Europe Research in Business & Economics, pp. 2-25. Harford, J. 2003, Takeover bids and target directors' incentives: the impact of a bid on directors' wealth and board seats. Journal of Financial Economics, vol. 69, no. 1, pp. 51-83 Jiang, LY 2016, Financial synergy and path analysis of merger and acquisition integration. Commercial Accounting, vol. 2016, no. 19, pp. 64-65. Jin, X 2016, Analysis of factors influencing the choice of payment methods in mergers and acquisitions. Co-Operative Economy and Science, vol. 2016, no. 10, pp. 110-111. Lu, 2016, The Choice of Payment Methods in Mergers and Acquisitions. Times Finance, vol. 2016, no. 7, pp.132–137. Ntuli, M. G. (2017). An evaluation of bank acquisition using an accounting based measure: a case of Amalgamated Bank of South Africa and Barclays Bank Plc. viewed on 03 october 2018,

Peng, S and Zhao, G 2009, Announcement effect of private placeme...