FM 422: Special Topics in Financial Management

The Merging and Acquisition of Banco De Oro and Equitable PCI Bank

• KUA, Harmaein

• PULMONES, Khay Delyn

• GERAWA, Charmaine Crace

• TABUGA, Lorena

Banco De Oro

 BDO, known as Acme Savings Bank(a thrift bank-1968), was acquired by the SM
Group in November 1976 and was named: Banco de Oro Savings and Mortgage
Bank.

 In December of 1994, BDO became a commercial bank. To reflect the bank's

new status, BDO was renamed Banco de Oro Commercial Bank

 Until 5 August 1996, when it was granted full universal bank status, the Bank’s
main business was providing traditional loan and deposit banking services to the
middle-market segment, including corporate suppliers of SM.

 BDO eventually became involved in insurance services in 1997 (it is

a bancassurance firm) by establishing a subsidiary called BDO Insurance
Brokers.

 In 1999, BDO expanded its insurance services through partnerships with

Assicurazoni Generali s.p.a., one of the world's largest insurance firms, and
Jerneh Asia Berhad, a member of Malaysia's Kuok Group.

 March of 2000, BDO partnered up with its insurance affiliates, which are Generali
Pilipinas Life Assurance Company and Generali Pilipinas Insurance Company.

 BDO listed its shares in the Philippine Stock Exchange (PSE) on 21 May 2002.
 On June 15, 2001, BDO merged with Dao Heng Bank's Philippine subsidiary,
with BDO as the surviving entity, growing its branch network by 12.
 In April 2005, the bank further expanded by acquiring branches of United
Overseas Bank .
 As of 29 December 2005, Banco de Oro ranked 5th in terms of resources and
loans, 6th interms of deposits, and 8th in terms of capital among the 41
commercial banks in the industry.
 698 branches
 1,171 Automated Teller Machines (ATMs) nationwide
 third largest in the country in terms of branch network.

EQUITABLE BANK

 On June 17, 1950, Equitable Banking Corporation Was founded by Go Kim Pah
as the first commercial bank in the Philippines licensed by the newly formed
Central Bank of the Philippines

 In 1958, Equitable established the only direct telex service between the
Philippines and Japan at the time, with initial messages exchanged between
Equitable and Chase Manhattan Bank of Tokyo.
  On August 15, 1963, Equitable established its first branch outside the Philippines
in Hong Kong and only International Branch, the first time a Philippine bank
opened a branch in the city. Two years later, on March 26, 1965, Equitable
opened its first provincial branch in Cebu City. By 1972, Equitable emerged as
the country's premier bank.

 In 1989, Equitable turned its credit card department into a wholly owned
subsidiary, Equitable Card Network. With three other banks, namely Far East
Bank and Trust Company (since merged with BPI), Philippine National
Bank and United Coconut Planters Bank, it formed Megalink, then the
Philippines' largest ATM network.

 On July 27, 1996, Equitable Savings Bank was established as Equitable's

savings bank arm. Equitable listed on the Philippine Stock Exchange on April 3,
1997, and in 1999.

 In 1977, the bank received its foreign currency license from the BSP and in 1980,
issued its first credit cards under the VISA (credit card) and Visa brand. In 1987,
Equitable became a universal bank and was appointed the clearing house of the
Makati Stock Exchange, now the Philippine Stock Exchange.

PCI BANK

 PCIBank was established on July 8, 1938 as the Philippine Bank of Commerce

by sugar farmers from the Visayas region then it was the first Filipino-owned
private commercial bank in the country.

 Then in the 1960s Benpres Holding Corp (now Lopez Holdings Corporation)
bought out the majority stake in the PBC and they renamed it to the Philippine
Commercial and Industry Bank (PCIBank).

 PCIBank formed BancNet along with Security Bank, Chinabank, RCBC, Allied
Bank (merged with PNB), Metrobank, International Corporate Bank (now part
of UnionBank) and Citytrust Savings Bank

 And due to pressures from President Erap Estrada the Lopez and Gokongwei
Families sold their shares to the SSS and GSIS and they were auctioned and the
victors Equitable Banking Corp a well known crony of the Pres. Estrada had them
merged with Equitable as survivor of the merger.

EQUITABLE PCI BANK

 Equitable PCI Bank is a commercial bank with an expanded banking license.

 It is the third largest private domestic bank in the country in terms of resources,
capital, deposits, and loans.

 Offering traditional and innovative deposit products and services, cash

management, international banking, commercial and corporate banking, money
market, trust and treasury services, the Bank caters to the needs of corporate,
middle market, and retail clients.

 Combining the individual strengths of Equitable Bank and PCI Bank, the merger
in 1999 created a strong presence insignificant market segments particularly the
corporate and Filipino-Chinese middle market.
  Moreover, Equitable PCI Bank’s extensive distribution network provides the
critical mass to further fortify the Bank’s position in the consumer/retail sector as
it presents increased opportunities for cross-selling other retail products.

MARKET POSITION

 Equitable PCI Bank enjoys many advantages as the third largest private
domestic bank in the Philippines.

 The Bank has had a long history of financial strength and stability and holds
leading positions in key business segments.

 It has a strong position in the middle market and in the corporate market. It
enjoys a large presence, wide customer base, and extensive distribution network.
The Bank has a base of diversified well-established financial services
businesses, which further bolster its position

 In credit cards, Equitable Card Network dominates the local credit card industry
as merchant acquirer, and third party processor.

 This provides good scope for the Bank to increase its retail lending.

 PCI Leasing and Finance is one of the most profitable finance companies with a
high capital base and wide reach.

 PCI Capital Corporation is well recognized for being a dominant player in

investment banking

 Capitalizing on its size and large customer base, the Bank also continues to
invest in technology and is able to take advantage of economies of scale.

Merger VS consolidation

 Merger-the absorption of one or more corporations by another existing

corporation

 Consolidation-is the union of two or more corporations into a single new

corporation

THE BANCO DE ORO EQUITABLE PCI BANK MERGER

 Merger Of Equals

 The combination of two firms of about the same size to form a single company. In
a merger of equals, shareholders from both firms surrender their shares and
receive securities issued by the new company.

 Horizontal Acquisition

 The acquisition of one company by another in the same industry. The new
combined entity may be in a better competitive position than the standalone
companies that were combined to form it. Horizontal acquisitions expand the
capacity of the acquirer, but the basic business operations remain the same.

THE BANCO DE ORO EQUITABLE PCI BANK MERGER

 A plan by the SM Group of Companies and Banco de Oro Universal Bank to

merge with Equitable PCI Bank
  Last November 2006 their respective Board of Directors passed resolutions
approving a plan to merge the two companies

Why “BANCO DE ORO” be the surviving entity?

 Standard and Poors

 Equitable PCI’s debt rating is currently a B, five notches below investment grade.
Banco de Oro has a B+ rating.

 UBS: with BDO as the surviving entity, the merger will also benefit Equitable PCI
since it would increase its capital adequacy ratio (CAR) without having it raise
more capital, making the deal timely under IAS.

The combination of the branch networks and other businesses of BDO and EPCI
will enable them to:

 To serve its customers better and more efficiently than either institution alone

 To invest in the most up-to-date technology and develop more innovative

products which will benefit both retail and corporate customers

 Will be better able to upgrade its risk management and IT systems in order to
address Basel II requirements.

Banco de Oro's gambit.

 On January 6, 2006, Banco de Oro offered to buy the rest of Equitable PCI for
41.3 billion pesos through a share swap option, with Banco de Oro as the
surviving entity Under the deal, every one Equitable PCI share would be
swapped for 1.6 Banco de Oro shares or, in a second option, an independent
accounting company would determine the swap ratio on the book values of both
banks under International Accounting Standards

"They're the drunken buyer!“

 In a turn of events, the GSIS has offered to buy the 34% SM stake from it at
P79.50 per share (as of March 23) in cash, earning Banco de Oro and the SM
group some eight billion pesos. It is unknown whether Banco de Oro, the SM
group, or the SM board members of Equitable PCI Bank have agreed, although it
is believed that GSIS chairman Garcia is trying to turn the tables on Teresita Sy.
If the deal succeeds, this could thwart any chance of a merger. However, this
deal is dogged with allegations that Garcia is merely hyping the market, causing
a rise in the value of Equitable PCI shares, which were then valued at above 80
pesos as of March 24.

 The term drunken was used because it was believed at the time that Garcia's
claim is merely market hype and that no one would be crazy enough to buy an
Equitable PCI share for the price Garcia was asking for, which is 95 pesos,
payable in cash.

Grounds for Merger and Acquisition

• A merger with EPCI would transform BDO into a dominant industry player,
possessing market leadership and operational scale while enhancing
shareholder value through a potential re-rating in the share price and reduced
funding cost.

“Second wave”
 • This merger is only one part of the "second wave" of mergers and acquisitions in
the Philippine banking industry, the first one being in the 1990s.

• The merger is part of a campaign on the part of the Bangko Sentral ng Pilipinas,
in a complete reverse of stance from the 1990s. During the term of Bangko
Sentral governor Gabriel Singson, the Bangko Sentral urged the creation of more
banks, encouraging competition. However, the Asian financial crisis eventually
forced the Bangko Sentral under Rafael Buenaventura to urge for the creation of
more financially stable banks, starting the first wave of mergers and acquisitions.
The current governor, Amando Tetangco, has kept the stance of Buenaventura.

The merger

 On January 6, 2006, Banco de Oro offered to buy the rest of Equitable PCI for
41.3 billion pesos through a share swap option, with Banco de Oro as the
surviving entity. Under the deal, every one Equitable PCI share would be
swapped for 1.6 Banco de Oro shares or, in a second option, an independent
accounting company would determine the swap ratio on the book values of both
banks under International Accounting Standards.

 On November 6, the respective boards of Banco de Oro and Equitable PCI Bank
agreed to the merger of both banks through a modified stock swap deal. Instead
of the original 1.6 shares Banco de Oro would swap for, it would swap 1.8 shares
for every Equitable PCI share

 On December 27, 2006, Banco de Oro shareholders approved the merger with
Equitable PCI Bank. Equitable PCI Bank shareholders also approved the merger
the same day. In order for the merger to take effect, approval from both the
Bangko Sentral and the Securities and Exchange Commission is required, which
was obtained in early 2007.

 Regulatory approval from the Bangko Sentral was granted on April 25, 2007.

 On May 31, 2007, trading of Banco de Oro and Equitable PCI Bank shares were
suspended, with Equitable PCI Bank shares being delisted from the PSE

 Equitable PCI Bank branches are in the process of becoming Banco de Oro
branches. The legal name of the bank remained Banco de Oro-EPCI, Inc. until
February 2008, when it was finally named Banco de Oro Unibank, Inc.

THE EFFECTS OF THE MERGER

 PROS

- Banco de Oro would move up into large capitalized company status, defined as
a company whose capital stands at a minimum of $700 million. The merger of
both banks would result in the merged company having a market capitalization of
two billion dollars.

- The new Banco de Oro would have a total of 685 branches and a wide-reaching
ATM network. Thus, a wider convenience to both BDO and Equitable customers.

 CONS

- Transition could mostly result with the conversion of ATMs: Equitable PCI
Fastellers are linked to MegaLink while Banco de Oro Smartellers are linked to
Expressnet. Also, Equitable PCI ATM cards are linked to Visa Electron and/or
PLUS while Banco de Oro ATM cards are either local or, in the case of the new
 BDO International ATM Card, linked to MasterCard (branded as MasterCard
Electronic), Maestro and Cirrus.

- It would trigger a wave of mergers and acquisitions that could result in an

oligopoly, with only few competitors

BANGKO SENTRAL NG PILIPINAS on BDO-EPCI

• “The proposed merger of BDO and EPCI will create a bigger and stronger
institution which will be among the leaders in the industry. It also continues the
process of consolidation, which we believe is positive for the Philippine banking
system.”

-Governor Amando Tetangco, Bangko Sentral ng Pilipinas

• “The merger of BDO and EPCI raises the bar of competition for the Philippine
banking industry. It is good for financial stability and good for customer service.”

-Deputy Governor Nestor Espinilla , Bangko Sentral ng Pilipinas

SECURITIES AND EXCHANGE COMMISION

• has approved the merger of Banco de Oro Universal Bank and Equitable PCI
Bank with BDO

• renamed as Banco de Oro-EPCI, Inc

RANKING

Bank (as of 2005) Gross Revenues (P

million)
1. Metropolitan Bank & Trust Co. 39,731

2. Bank of the Philippine 37684

3. Equitable PCI Bank, Inc. 26,042

4. Land Bank of the 24,565

5. Banco De Oro 22,225

6. Philippine National Bank 18,380

7. Development Bank of the 18,271

8. China Banking Corp. 14,435

9. Rizal Commercial Banking Corp. 14,086

10. Union Bank of the 11,717

As of 2009 (Assets)

1. Banco de Oro (BDO) Php634.3 billion

2. Metrobank Php585.8 billion

3. Bank of the Philippine (BPI) Php541.2 billion

4. Landbank of the Php333.6 billion

5. Philippine National Bank (PNB) Php201.2 billion

6. Rizal Commercial Banking Corp. (RCBC) Php196.4 billion

7. Chinabank Php173.9 billion

8. Union Bank of the Php162.0 billion

9. Allied Bank Php139.8 billion

10. Citibank- Php187.8 billion

Deposits

1. Banco de Oro (BDO) Php808.0 billion

2. Metrobank Php758.5 billion

3. Bank of the Philippine (BPI) Php658.4 billion

4. Landbank of the Php434.0 billion

5. Development Bank of the (DBP) Php290.9 billion

6. Philippine National Bank (PNB) Php276.8 billion

7. Rizal Commercial Banking Corp. (RCBC) PhP270.2 billion

8. Unionbank of the Php208.2 billion

 9. Chinabank Php207.3 billion

10. Citibank- Php187.8 billion

Sources:

• https://en.wikipedia.org/wiki/Banco_de_Oro
%E2%80%93Equitable_PCI_Bank_merger

• https://chimpmunkalvin.wordpress.com/2010/08/07/banco-de-oro-equitable-
pci-bank-merger-and-perishing/

• http://en.wikipilipinas.org/index.php/Banco_de_Oro_Universal_Bank

• https://en.wikipedia.org/wiki/Equitable_PCI_Bank

• http://www.investopedia.com/terms/m/merger_of_equals.asp?layout=infini

• http://www.investopedia.com/terms/b/bargain-purchase.asp?layout=infini

• http://www.liquisearch.com/banco_de_oro-
equitable_pci_bank_merger/background