Analysis of UOB acquisition of Bank of Asia

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United Overseas Bank (UOB) which was founded in 1935 is a leading bank in Singapore and has subsidiaries in Malaysia, Indonesia, Philippines etc. In 2001, UOB adopted the merger and acquisition as its expanding and growing strategies by successfully acquired Overseas Union Bank Ltd. UOB then undertook acquisitions in Thailand, Malaysia and Indonesia. UOB expanded steadily during the 1990s in the growing Asian economy and even during the economic crisis refrained from consolidating the bank. They continued their expansion by acquiring banks in the region in an attempt to become the region's leading bank.

Bank of Asia, established in 1939 positioned itself as a leader in the range of banking services it offers and is headquartered in Bangkok. ABN AMRO became a major stakeholder in the bank in 1998 and in 2003, the bank reported assets of 171 Million THB.

UOB, which had 79 percent stake in UOB Radanasin Bank (Thailand) bought 80 percent stake in the Bank of Asia from ABN AMRO and later went on to merge both these entities into United Overseas Bank (Thai) (UOBT). Although there were only few changes in the organization of Bank of Asia and UOBT, the former's board of directors was replaced by a new management team from Singapore's United Overseas Bank.

The objective of this project is to analyze the rationale for the acquisition of Bank of Asia by the United Overseas Bank. Also, the group would like to analyze and comment on how successful the acquisition was in terms of performance of the bank post acquisition, the culture fit between the two organizations by studying several performance indicators including interviewing employees of the bank.

M&A trends in the banking industry

The last two decades have witnessed some major changes in the business climate brought about by various events such as 9/11, the economic crises etc. These events have reshaped the corporate landscape and priorities for M&A's especially in the banking sector. Financial institutions now face an extremely challenging environment.

The motive for globalization is no longer limited to improving profit margins. The investment industry has become a global business and investors are looking for internationally diversified portfolios. This necessitates global expansion for several banking and financial firms. Due to the financial turmoil witnessed in the past few years, it has become imperative for companies to restructure their organizations and improve transparency and efficiency to attract more investments. In order to do so many banks are acquiring others to leverage their insights into their corresponding home markets and access to their large customer base.

Analysts expect to see a lot of domestic consolidation in this sector in the Asian region along with increasing number of offshore acquisitions and strategic investments. [1] The year 2004 saw 23% more M&A's compared to the year 2003 which saw only a 7% increase as compared to the year before. [2] The peak in such activities was in the year 2000 but latest data shows that there were only one third that number of acquisitions in 2007. [3] With banks currently trying to consolidate their positions after the economic crisis had occurred recently, they are mostly in the capital-preservation mode and would be more cautious about undertaking mergers and acquisitions ie. this sort of activity would be assigned lower priority. As the Asian economies recover and stabilize in the future, greater M&A activities can be expected with banks venturing into greener pastures and more favorable investment opportunities.

Rationale for deal

Today's business environment is quite turbulent due to change in economic events frequently. Over the last decade several economic events occurs in different continents which force to the organization to rethink and restructure their corporate strategies so that they can gain the sustainable competitive advantage. The current economic forces such as Global financial crisis, high-profile corporate misconduct cases in the US and emerging economic dominance of China and India all these event leads organization reshape their corporate strategies. Besides, the organization needs to identify some other trends e.g. government deregulation which creates opportunities with new competitive pressures, consolidation poses challenges to corporate management, emergence of regional players, globalization, corporate governance and so forth. UOB is not out of this vulnerable business environment, and it has to find the current and future trends, intensity and sensitivity of these forces, and control over the forces which it will make it stable in business. Keeping the reality in mind, The UOB developed mission "To be a Premier Bank in the Asia-Pacific region, committed to providing Quality Products and Excellent Customer Service" [4] . Further, UOB's objective is to take the market leadership in Asia-Pacific regions in consumer and commercial banking services by creating more shareholder value. These economic forces and dynamic long term objectives initiates UBO to series of acquiring.

During the acquisitions time, UOB use selective approach to acquire banks in the region where a strategic fit is. In addition, UOB also looks local partners and professional to benefit from their knowledge of the indigenous environment. In case of Thailand, UOB was looking for partner and professional in banking sectors such as Bank of Asia who can meet the strategic fit. Bank of Asia had intensive market and customer knowledge in banking sector with extensive presence in Thailand. UOB found similar corporate culture, highly motivated and productive employees, homogenous product and services, all most same organizational structure, easily modifiable technology, lower opportunistic behavior of Bank of Asia which helps UOB to acquiring Bank of Asia. Furthermore, some other factors like flexible government regulation, low development and transaction cost, lower communication and coordination cost, closer geographical location leads UOB for acquiring.

Empirical research study

To help deepen the group's understanding of the UOB/BOA merger and to have a chance to uncover cultural issues and more detailed information on processes, systems and communication, a well-planned empirical study can give critical input.

To help get input for these areas, the group arranged for two qualitative, open and explorative interview sessions with manager-level employees at OUB. The respondents were chosen based on several criteria; these included position, job responsibilities etc., but also how long they have been with the company and which company they were originally attached to (pre-merger).

Mrs. Garnsita Nanphiravit VC HR Business Management Division. Originally BOA employee.

Mr. Nathapong Cheunban Customer Service Manager, Commercial Banking Division, Originally UOB employee

For each interview, a range of open questions were asked to start the discussion. The questions asked can be seen in appendix X.

Culture analysis

In merging two different companies as it is the case with UOB and BOA, one of the most important factors to the success of the merged company is found in the compatibility of the merging corporate cultures. When mergers cross borders, the impact of culture on the ability for the companies to work together towards common goals is even stronger, as national culture has impact on corporate culture as well.

Geert Hofstede is the main figure of a global research study in collaboration with IBM, where data from more than 50 countries were analysed by the following four categories [5] :

Power Distance Index (PDI)

The extent to which members of the culture accept and expect inequality in society.

Individualism (IDV)

The degree to which individuals are integrated into groups.

Masculinity (MAS)

Refers to the distribution of roles between the genders. The women in feminine countries have the same modest, caring values as the men.

Uncertainty Avoidance Index (UAI)

Deals with a society's tolerance for uncertainty and ambiguity; it ultimately refers to man's search for Truth.

Long-Term Orientation (LTO)

Long-Term Orientation (LTO) versus short-term orientation

Based in Singapore and Thailand accordingly, the corporate culture of the pre-merger UOB and BOA banks are influenced by the national culture from these two countries. To understand the differences between the two, the scores are compared to the right:

Uncertainty Avoidance

Thailand and Singapore have similar scores in several categories, but vary substantially within 'Uncertainty Avoidance'. As stated before, this score relates to the tolerance of uncertainty and the lengths to which one will go to alleviate uncertainty. An example of how uncertainty can be reduced is with the creation of control/hierarchy structures to force re-checks at several stages. From the interview with both respondents, this was also proven to be apparent also with BOA when questions about communication structures and hierarchy were introduced:

"Before, [BOA] was a very traditional Thai bank when talking communication. Many steps to the top." [6] 

The merger brought changes to this structure, almost cutting the "steps to the top" in half. These changes have been part of a management initiative to improve internal communication, increase efficiency in work processes and procedures in BOA to better align the two banks. However, while this has reduced the official hierarchy levels, the feeling of distance is still felt by UOB employees today.

"We still do not just go visit the boss when we want, should have a good reason."

Individualism

Following the merger, a new staffing program 'Fast-Track' has been launched to strengthen the bank's position as a strong contestant in the international bank environment. A new and direct requirement to applicants for this career track is strong English proficiency, which has resulted in a high percentage of new employees having English as first language - even "some who don't speak Thai" [7] .

Communication structures have been put in place by management to ensure that information is conveyed in both Thai and English, officially supporting the increasingly diversified employee constellation. There is however evidence that this has created cultural problems, leading to potential sub-cultures arising in the organization. While formal communication is done in English in addition to Thai, informal and social communication is still largely only in English.

"At lunch breaks nobody speaks English to me, we (referring to respondent and colleagues) only speak Thai to each other."

This creates a problem in the integration of new employees into the social environment of OUB, potentially leading to the establishment of sub-cultures that can ultimately impair organizational performance.

It is crucial that the UOB management is aware and actively deal with these issues to ensure that the merged organization will be able to successfully reach its goals. Cultural integrity is crucial to the success of any M&A, and in the case of banks like UOB that rely on highly stabile and efficient communication to deliver value to its customers, a top-performing organization is essential to the ability to stay competitive.

Systems and processes

After acquiring to the Bank of Asia, UOB needs to manage the integration process in the area of human resources, capital resources, task and activities. Usually, main difficulties such as both company's different culture, different management system, different values, different financial and control system arise during the acquisition period. Firstly, UOB tried to find the behavior of employee which means uncertainty and anxiety, crisis of identity, Inter-group conflict and unfair treatment etc. By keeping in mind these issues, UOB offers the employees to decide whether they will stay with UOB or not. Without putting any pressure on employee, UOB also offers the employee special package who are willing to leave the company. In this way, the UOB is capable to reduce the uncertainty and anxiety of employee. Besides, by introducing some social program e.g. sports event, the UOB trying to tie up and make good relationship among the employee with a fairly manner. The UOB bank has found some difficulties in management system of Bank of Asia. Though the bank of Asia has the good market presence in Thailand, but the employee and staff has the difficulties to operate business in different level. That's why; UOB introduces some dynamic staff and employee development program like management trainee, management associate etc. Main objectives of UOB at Thailand to penetrate market and expand its global market share; leads UOB to produce and maintain productive employee who can satisfy the end customer need at Thailand. UOB try to build the customer relationship management who will be responsible for credit and lone section. Beside, UOB also found some weak points in its branch Management of Bank of Asia and focus to develop efficient branch manager. To meet the challenges and attain the objectives in Thai-market, UOB restructure its selection and recruitment process so that it can choose potential candidate and who can lead the organization in future. In addition, UOB also changes in its top management level like the Bank of Asia's board of directors has replaced by a new management team from Singapore's United Overseas Bank. Mr. Chavalit Thanachanan was replaced as chairman by Wee Cho Yaw, and Mr. Chulakorn Singhakowin was replaced as president and CEO by Wong Kim Choong, Chua Teng Hui was a deputy president and deputy CEO of the bank and Wee Cho Yaw, the new chairman, served as chairman of UOB in Singapore while Dr Wee's son, Wee Ee Cheong, was deputy chairman.

Since UOB had the problems in managing and coordinating among the department, UOB restructured and established its department in terms of front, middle and back desk. Front desk responsible for sales, customer care, profit, credit, corporate and trade marketing, contact etc. Middle desk build with 150 branches which use to deal expansion of business banking, and do some other strategic operations. Back desk consist with Human department, Management Information Department to support the operations. UOB is trying to create the flow of information among the entire department to ensure faster customer service.

Discrimination regarding the core values was found between Bank of Asia and UOB after the acquisition. It is necessary to establish common core value for successful business, and UOB defined its core values with integrity, excellence, team work, and responsibility. UOB interprets and encourages its employees to uphold and practices core values during behaving and interacting with each other.

Another problem faced by UOB after the acquisition is customer perceptions regarding the UOB product and services. When UOB introduced in Thai market, it should concern and trace about how customer perceive UOB. For keeping the same or above positioning, it initiates to develop and appoint efficient customer relation manager who is responsible to communicate and convince customer. They also work for keeping customer trust and confidence.

UOB also faces the problem switching of the employee in other banks. Since UOB's top and some part of management use English inside the office which helps and encourages to other employee to learn English. At the same time, UOB undertook several language program which helps employee to develop English and communication skills. In contrast, At Thailand communication skills in English is demanding due to investment and growth of many multinational companies which creating opportunities for efficient works. The employees of UOB are taking the opportunities by switching other organization which creates problem and management the human resource for UOB. For this reason, UOB would like to create a greater pipeline of employee with specific areas with future career path for the employee and to meet the demand of its own.

Financial Analysis of the Deal

There may be several objectives for banks to merge and/or acquire other banks. Most common out of these are usually to create shareholder value, competitive advantage and leveraging synergies. In case of the BOA acquisition by UOB, the group wanted to analyze the effect on the financial performance of the combined entity post acquisition.

Prior to the acquisition, the turnover for Bank of Asia was about 6 Billion THB and rose to about 10 Billion THB in the year 2008 (known as UOBT after the acquisition). This increase can primarily be attributed to a result of the consolidated earnings of the two entities in question. In terms of the profit margins however, it is very difficult to see any significant trends. There have been improvements in the profit margins for the newly formed entity compared to the period prior to the acquisition but they have also witnessed poorly performing periods where the profit margins have eroded significantly. This however could be owed to the current crisis in the financial world.

After having analyzed other financial ratios such as Return on Capital Employed, Return on Shareholder Funds etc from the accounting statements of UOBT, the group concluded that financial synergies though witnessed, the primary driver for this acquisition weren't financial. They were primarily focusing on strengthening UOB's position in the region as well as in Thailand in terms of increased customer base, number of branches, ATMs and the array of services offered.

Areas where the acquisition did not succeed

Although, with comparing with other banks at Thailand the UOB is satisfied with its goals and objectives, still UOB has some areas problem where it could not successful. Corporate culture is enduring and cannot be changed within a certain period of time. For minimizing the corporate cultural distance between UOB and Bank of Asia, UOB took several social activities such as sports event between the departments which is not sufficient. UOB should undertake and introduce more social events frequently like debate, cultural show, talent hunt, religious and cultural events etc. so that the employee could come closer with each other, share their ideas and feeling. These initiatives will help to establish common corporate culture and reduce uncertainty and anxiety, crisis of identity, and Inter-group conflict.

Secondly, for every organization it is very useful to sets and develops short, medium and long-term plans. When UOB merged with Bank of Asia, it had a long term plan to penetrate and expand the market, but it failed to establish short and medium term goals in the areas of marketing, human resources, and sales. Human resources department undertook some employee development program e.g. management trainee, management associate but failed to indentify and define what short of competency level and core specification the employee needed to fulfill the organization requirement. Beside, Human resource department could not have clear idea about the short, medium and long term trends of human resources for the UOB. Marketing department failed to communicate effectively with existing customer and failed to attract potential customer at Thailand, which indicates lack of efficiency of marketing talent. In addition, sales department could not establish shot, medium and long term sales plan. Sales department is concentrating mostly on current customer rather than future customer.

Thirdly, during the restructuring of the hierarchy among top, middle and first line level, UOB failed to define eliminating and adding position, position roles, responsibility, and duties. UOM changed its top management e.g. by replacing new management team from Singapore United Oversea Bank who has lake of idea regarding the Thailand banking sector and business environment. Such kind of decision leads UOB to deal business with uncertainty, because top management is responsible for generating corporate strategies and execute among the middle and lower level management.

Fourthly, Changing and restructuring is a matter of huge budget. The Organization has to pay attention in different areas such as employee, infrastructure, integration and so forth. during and after the acquisition. UOB don't have concrete policy to allocate budget among the departments integration, redesigning and restructuring. Besides, UOB failed to estimated budget during golden hand shake with the Bank of Asia's employee. Because, at that time they were give flexibility to the employee to stay and leave the organization.

Finally, UOB failed to access the competitive environment in Thailand banking and business sectors, because most of the time UOB's management concentrate on less important factor such as deal with existing customer instead of searching future customer, inviting young graduate on its management trainee program without looking experience banker from outsource, concentrating on push selling techniques ignoring pull strategies etc. Number of well established bank are available at Thailand with strong market share, but UOB has no well structured strategies to compete with them and still didn't forecast what percentage of market share UOB will gain and grab by implementing its policy.

Future prospects for the merged UOB

For future successful business in Thailand banking sector, UOB has to redefine its strategies in some areas such as long-term competitive advantage in Thai markets, faster and more effective integration, define unique capabilities and core competencies, full cooperation of the acquired firm top management, key personnel stay in the new combined company. For gaining competitive advantage in Thai market, UOB should differentiate and define its core competencies and capabilities in the areas of efficient employees, faster services delivery process, keep commitment at the time of dealing with customer etc. Delivering superior service needs well integration among the department and continuous flows of information. During the service delivery, UOB should also identify and eliminate some bureaucratic complexity which will ensure quick and faster delivery. In addition, it is necessary to establish cooperation between UOB and Bank of Asia to management. They should have friendly mentality, and everybody should respect each other ideas, thinking and expertise knowledge. Another important thing, key personnel in every level of management should stay in the new combined company. It is necessary because UOB brings new ideas and experiences from abroad and the same time Bank of Asia has the knowledge of Thai market. In combination of both parties, I would be effective to develop and generate future strategies.

Exhibit 1 - Interview guide

Please give a short introduction of yourself (4-5 years)

How long you've been with the company?

How long have you been in this department?

From your viewpoint, how have you experienced the changes from UOB acquiring BOA?

Changes in organization/responsibilities/staff?

How many % of employees pre-acquisition would you say are still with the company today (after)?

Could you give three examples where the acquisition has been a success and three where the acquisition has not been as successfully as planned?

In your opinion, what could be the reasons for this?

First for a positive, then for negatives…

What has been the biggest impact on your work following the acquisition?

Additional questions

Would you be able to provide us with some data on company structure (diagrams), press releases, financial information etc. that might help us in the analysis of the company?

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