Capital Market Insurance Industry Banking Industry 2 Capital
金融市場現況 Ø Capital Market Ø Insurance Industry Ø Banking Industry 2
Capital Markets ØTrading volume: 2 nd in Asia (2004); 15 th in Asia (2005) ØMarket cap: No. 1 in emerging market; 2 nd in Asia (2004); No. 21 in Asia (11/2006)
Insurance Industry Ø Size: 4 th largest non-life market in Asia based on premiums Ø P&C penetration at 1. 0% lower than other mature Asian markets (Japan: 1. 5% ; South Korea: 3. 0%) Ø Growth: CAGR of 4. 4% from 2006 -2016 (Swiss Re) Ø Market share: Top 5 insurers accounted for 55% of the market as of 2006
ØRelatively unsophisticated market, as a result of historical regulatory restrictions ØTaiwanese market is a mix of a mature market in life but still under-penetrated in non-life.
§ Penetration rate of 14. 6% } P&C: 1. 0% } Life: 13. 6% § Total market (2006 GWP): NT$1 677 bn } P&C: NT$114 bn } Life: NT$1 563 bn § CAGR (compound annual growth rate) 2002 – 2006 } P&C: 3. 0% } Life: 15. 3% § Estimated CAGR 2006 – 2016 (Swiss Re) } P&C: 4. 4% } Life: 6. 6%
FSC Reform: Ø Risk-Based Capital System Ø Relax overseas investment Ø Adopt negative listing
Banking Industry As of June 30, 2007: Ø 47 domestic banks (including 74 foreign banks); 31 savings banks and 278 farmers’ and fishermen’s associations. Ø 14 Faces with 14 banks, 14 securities firms, 7 insurance companies Ø Market share: Top 5 accounted for 38%; top 10 accounted for 63%; 26 banks less than 2%; The Bank of Taiwan (9. 85%); proposed Taiwan FHC (18% in lending and deposit)
§ Capital strength
• BIS: 10. 11 (Dec. 2006) • BIS: 10. 62 (June 2007)
§Assets and net worth * 2007: The total assets reached US$850 billion.
§Asset Quality • NPL: 11. 76� in 4/2002; 2. 87% in 7/2005; 2. 13% in 2006; 2. 32% in 6/ 2007; coverage ratio: 58. 53% in 2006; 55. 14% in 6/2007
Profitability ROA, ROE in recent 5 years ROE ROA 12 1. 2 10 10. 30 8 6 4 2 1. 0 0. 8 0. 61 6. 04 0. 47 3. 61 0. 26 3. 50 0. 21 0. 6 0. 4 0. 2 0 0. 0 -2 -0. 2 -4 -0. 47 -6 -8 -0. 4 -0. 6 -7. 35 ROA : from -0. 47% in 2002; 0. 61% in 2004; 0. 17% in 7/2007 ROE : from -7. 35% in 2002; 10. 3% in 2004; 2. 76% in 7/2007 -0. 8
Profitability Ø 7/2007 ROA: 0. 17% (international average > 1%) Ø 7/2007 ROE: 2. 76% (international average: 15~20%) Ø 2004 Revenue: 78% from loan (international average: 40%)
Comparison with Other Banks ROA LT Target Near Term Target Dec 31, 2004
As of June 2007 • Cathay Bank: 0. 35% • Taishin Bank: 0. 36% • Chinatrust: 0. 83% • Mega Bank: 0. 35% • Taipei Fubon: 0. 35%
ROE Dec 31, 2004
As of June 2007: • Cathay Bank: 5. 6% • Taishin Bank: 7% • Chinatrust: 17. 16% • Mega Bank: 4. 18% • Taipei Fubon: 5. 1%
Asset Dec 31, 2004
Taiwan FHC ØAsset: US$159 billion (No. 89 worldwide; 18 in Asia; exceeding top 3 banks in Singapore) ØBranch: 308 ØOverseas operation: 16 Ø Market share: 18% in both lending and deposit market
Banking Consolidation 21
Financial Reforms in 2002 ØJuly 2002: two-year Financial Reform Plan Øfocused on NPLs Øincrease the competitiveness of financial institutions Øestablish an integrated financial supervisory body to supervise financial institutions
Single Financial Regulator ØFSC was established on July 1, 2004 ØSingle financial regulator to supervise the securities, banking and insurance industries
Regulators Prior to the Reform Ø Ministry of Finance (MOF): banking, securities & futures, insurance, taxation, fiscal policy, budget, management of government owned shares Ø Central Bank of China in Taiwan (CBC): monetary policy, FX policy, inspection of banks
After the Reform Ø MOF taxation, fiscal policy, budget, management of government owned shares Ø CBC monetary and FX policy and implementation Ø FSC (financial regulator) supervision of the banking, securities & futures and insurance industries and related capital markets activities; inspection of all financial institutions
FSC Major Tasks • Encourage consolidation of the Banking Sector • Strengthen corporate governance • Relax restrictions on financial business activities • Internationalize capital market practices • Strengthen enforcement against securities violations
Banking Consolidation in 2004
Reform in M&A Laws and Regulations From 2001 to 2002: • Financial Institution Merger Law (FSC) • Financial Holding Company Law (FSC) • 14 Faces established • Enterprise M&A Law (MOEA)
In October 2004, President Chen announced the four objectives regarding consolidation of the banking sector Ø • • By the end of 2005: At least three banks’ total assets will exceed 10% market share government owned banks reduced from 12 to 6 By the end of 2006: Faces reduced from 14 to 7 at least one bank run by a foreign financial institution
Major Transactions From 2002 to 2005 • Taishin Bank merged Da An Bank • Fubon share merged Taipei Bank • Cathay Bank merged United World Chinese Bank • Chiao Tung Bank merged ICBC • Chinatrust Bank merged Grand Commercial Bank
From 2005 to 2007 ØSCB tender offered Hsin Chu Bank ØLong Reach acquired 51% of Entie Bank ØCarlyle acquired 25% of Ta Chong Bank ØMS' minority stake in Chinatrust and ESun
Acquisition via RTC Ø Tai Tong Business Bank (Chinatrust) Ø Hwa Lian Business Bank (ABN AMRO) Ø CUTIC (Cathay) Ø BOWA (DBS) Ø Chinese Bank (HSBC) Ø Asia Trust (SCB) – 10/2008
FSC’s Principal Regulatory Incentives to Facilitate Consolidation of the Banking Sector
FSC Regulatory Incentives During 2005: Ø Capital allocation Ø Investment by FHC (allow 5% investment by FHC, subject to implementation of the M&A plan approved by the FSC) Ø Amended the tender offer rules Ø 100% Foreign FHC or FHC equivalent entity to make investment in a domestic bank Ø Amendment to the Financial Institution Merger Law and the FHC Law
Capital Allocation Prior to the reform: ØAfter 100% share swap between a financial institution and FHC, cash remains at subsidiary ØDividend can only be distributed once a year ØFor banks, no capital reduction is allowed for BIS below 12%
After the reform: Ø 10% BIS plus 6% tier one capital ØPotential excess cash: NT$144 billion (14 FHC)
Investments by FHC Financial Holdco Law ØFHC may invest in FI and non-FI, subject to the approval of FSC ØMax. of 5% paid-in capital for investment in a non-FI; no participation in the management ØBanks under FHC not allowed to make long-term investments
Investments by FHC ØOld guidelines: prior approval for any investment; investment must exceed 25% of the target company Ø 2005 guidelines: Min. of 5% investment completed within one year, with the plan of consolidation within 3 years Ø 2007 policy change (? )
Major Investment Review Guidelines • Unless otherwise approved, DLR below 125% • “Fit and Proper’’ test for investment of more than 10% in an FHC, or 15% in a bank • No cumulative losses
Tender Offer Rules Ø Mandatory tender offer: 20% within 50 days Ø No squeeze-out rule (SCB integration) Ø 70% acquisition of shares triggers delisting (? ) Ø No prior approval from FSC required Ø Prior approval from FSC required for regulated industries Ø Right to call shareholders’ meeting to re-elect directors for any purchase of 51% or more
Amendments to the Tender Offer Rules Ø Relax acquisition consideration (foreign stocks and bonds allowed) Ø Strengthen disclosure requirements Ø Balance commercial risk between offeror and offeree Ø FSC’s neutral policy toward hostile takeover
Amendments to Financial Institution Merger Law Ø Tax incentives Ø Goodwill amortized in 5 - 15 years
Amendments to Financial Holdco Law Ø Cash can be used as consideration in a share swap (FSC letter) Ø Bank under FHC can make long-term investments (Amendments pending at the Executive Yuan)
Foreign Investment in Banks Ø Banking Law: Max. of 25% investment in a bank by same person or related persons Ø Exception to 100% investment - FHC - trouble banks - government owned banks
Relaxed Foreign Investment in Banks • Relax definition of foreign FHC • Cross sectors • SPV of a FHC
How to kick-off an M&A deal?
Major Milestones Ø Identify target (Target analysis) Ø Cooking the deal Ø Signing of NDA Ø Signing of MOU/ indicative terms (binding or nonbinding) Ø Due diligence Ø Negotiation of SPA and SHA Ø Arrangement of financing Ø Signing Ø Closing
Target Analysis Ø Taiwan Market Ø Business profile of Target Ø Rationale Ø Preliminary Valuation Ø Proposed offer
P&C Insurance Company – A cross border acquisition
Pros – Immediate market presence with critical mass and 100% ownership and control – Stable and profitable business with a long history in the market – Potential for growth in earnings mainly coming from a less conservative reinsurance program – Potential for a non-life bancassurance distribution
Pros – Prepare Acquirer to seize opportunities in the life/asset management market should they arise – Give Acquirer Asia Team P&C region further scale. Acquisition may facilitate opening of a direct platform at a later stage – Attractive market as proven by entry of peers and industry growth projections – Access to experienced mandarin speaking management and employees
Cons – Uncertain how much of the business is sourced – while we have initial indications from management that this is not a material component of the business – PRC views Taiwan as its own – while we understand this has not been a material impediment to others in the past, it may add further complexity to managing Acquirer’s relationship with CIRC – Employee considerations – likely limited restructuring (if needed) will be allowed in the first couple of years. While probably not a major issue for this deal, it may need to be considered for future bolt-on acquisitions
Cons – Relationship with regulator – EGM required – Significant additional volatility of earnings might be a consequence of reinsurance optimization
Execution Team ØPrincipals (high-level task force) ØFA ØLawyer ØCPA/Tax Advisor ØBank consultant/Insurance Consultant
FA Ø Project coordination Ø Financial modeling Ø Structure Ø Bidding document (if via bidding) Ø Term sheet; Info Memo Ø Financing arrangement
Lawyer Ø Structure Ø Contract drafting (mandate, NDA, MOU, SPA, SHA, escrow agreement, financing agreement) Ø Legal due diligence Ø Contract nego. Ø Regulatory approvals Ø Closing documents
CPA ØAccounting dd ØCross-border tax planning and execution
Banking Consultant ØOperational dd
Indicative terms Valuation assumptions: • The level of reserves provided for in the account is appropriate • The parties will enter into a mutually agreed non-life bancassurance agreement • No material reinsurance contract has been entered by Target for more than one year • The quality of the assets in the portfolio • The capacity for Acquirer to extract part of the excess capital
• Satisfactory completion of due diligence on the Company • Negotiation, preparation and execution of definitive, legally binding and mutually satisfactory documentation • The business being carried out in the ordinary and usual course, consistent with past practice, and there having been no material adverse change (MAC) in the business, assets or liabilities of the Company • Obtaining all necessary governmental approvals prior to closing • Obtaining all necessary corporate (including shareholder) approvals from both parties
MOU Ø Indicative price Ø R&W (as of signing & dosing) Ø Covenant Ø Corporate governance (or, anti-corporate govt) Ø Closing conditions (conditions precedent and subsequent) Ø Exclusivity Ø Break up fee
Due Diligence ØSeller preparation ØInformation Memorandum (bidding) ØBusiness/financial/legal due diligence ØManagement dd
Data Room - Organizational documents - Financial information - Business Projection - Loan files (data tape) - IT - Marketing & Sales - Legal &Regulatory matters
Negotiation SPA Ø Closing mechanism and deliverables Ø R&W Ø Covenant (to do and not to do) Ø Earn out Ø Holdback (R&W) Ø Escrow/Trust account Ø Conditions to closing
SHA ØCorporate governance ØShareholder level issues
Taipei Bank led by: Major SHA led by: Financial Advisor: Goldman Sachs Deal Counsel: LCS
Case Study - 2 (Project Spaghetti) 渣打(SCB)公開收購新竹商 - the first 100% TO in Taiwan (2006)
Ø Taiwan Market Ø Identify target Ø Business profile of Target Ø M&A Rationale Ø Valuation Ø Proposed offer
Why Hsin Chu? Why SCB? ØHsin Chu Commercial Bank exclusive deal with SCB (NDA)
Transaction team/Integration team Transaction team SCB led by FA: UBS & MS Deal counsel: LCS (Allen & Overy)
Execution proposal Regulatory aspect and tax aspect Ø 100 % TO ØSCB form a sub in Taiwan/Sub merged with Hsin Chu Bank (Citi/Overseas Chinese bank) ØSCB merged Hsin Chu Bank
From March 2006 to Sep 2006 Ø TO (9/29/2006): 98+% (TO Rules) Ø General assumption of SCB Taiwan branch (Financial Merger Act v. Business Merger Act) Ø SCB Taiwan Sub cash share swap with SCB UK (squeeze out) – Financial Holdco Act
Lead counsel ØSHA lock up by trust arrangement ØRegulatory approvals (FSC, FTC, FIA) ØTO prospectus ØSPA or SHA? (N/A)
Case Study – 3 (Project Tarzen) Carlyle acquired control of Ta Chong Bank (2007)
TCB 決議增資 Ø Rationale: - Basel II BIS raised to 10% - Amendment to the Banking Law Article 64 (loss reached up to 1/3 of the capital - cured within 3 months, otherwise taken over by government or suspension of business)
Original plan ØGDR via public offering (proposed by an investment bank) ØPrivate placement to PE (proposed by LCS) ØMinority or majority? ØBidding or one-on-one? ØPE v. strategic investor
Execution plan Ø Invitation to selective bidders Ø Submission of non-exclusive MOU proposed by investors with indicative price (May 2007) Ø 2 weeks dd Ø Investment by tiers of SPVs for tax reason (v. BASEL II Core Principles) Ø Investment limit (max. of 25% by any single investor/exceptions – Banking Act)
ØSSA and SHA negotiation (July 2007) Øgovernment approvals (major SHA approval/ FIA approval) ØClosing subject to financing (Carlyle v. SCB)
Case Study – 4 (Project Tangram) China Life (Taiwan) acquired Winterthur Taiwan Branch (Switzerland) from AXA (France) - 2007
Deal Structure ØAsset acquisition v. share acquisition (Art. 4/Art. 27 of Business M&A Law) ØSpin-off v. General assumption – pros and cons
Application of laws/government approvals ØFinancial Institution Merger Law/ Business M&A Law/Company Law/ Civil Law/Rulings/Explanations ØWhich law governs?
Ø Considerations Ø Timetable of execution Ø Asset Purchase Agreement
- Slides: 87