Standard Chartered's general offer values Hsinchu at $1.2 billion, which equates to 2.3 times book value. This represented a 31% premium to HsinchuÆs closing price of NT$18.65 on September 29. The offer has been supported by the Wu, Chan and Chen families, which are the controlling shareholders with a combined 15% stake.
The deal will transform Standard CharteredÆs Taiwanese business which currently consists of three branches and a $2.9 billion asset base. Hsinchu is TaiwanÆs seventh largest private sector bank, with assets of $12.7 billion and core income of $372 million. It has 83 branches, 345 ATMs, 2.4 million consumer deposit accounts and over 115,000 corporate and SME deposit accounts.
The bank operates nationwide but the bulk of its business is in Hsinchu, Miaoli and Taoyuan. The Hsinchu area houses TaiwanÆs science park and is home to top companies such as TSMC and Acer. The area has TaiwanÆs second highest annual household income.
StanChart hopes to follow the same successful acquisition strategy that it pursued in Korea. The acquisition of Korea First Bank last year boosted the bankÆs Northeast Asian footprint and was earnings per share accretive ahead of target. In fact, SC First Bank saw a 50% increase in first-half operating profits.
The latest deal in Taiwan is another bold foray into Asia's booming Northern region. Taiwan is AsiaÆs fourth biggest banking market and, according to StanChart forecasts, will have a local banking revenue pool worth $43 billion (versus $61 billion for China and $15 billion for Hong Kong). However, the timing is particularly interesting, given that Taiwan has been going through a credit card crisis; and that StanChart has itself just taken a hit in its recent results for the same. Indeed, in its interim results CEO, Mervyn Davies, commented: ôThe bank is increasingly well balanced...for example, the unsecured loan impairment charge in Taiwan has been offset by strong growth in many other markets.ö
One attraction of Hsinchu is its low credit card exposure. Credit and cash cards only comprise 1% of HsinchuÆs asset profile. Instead the bank is exposed to consumer mortgages (23% of assets) and unsecured personal loans (13%), but it has been able to maintain a low NPL ratio of 2.77%. About 60% of assets are in wholesale banking and SME banking.
Hsinchu has undergone a massive change of direction in the past 10 years under CEO, Wu Chih Wei. A member of the controlling family shareholder group, Wu was educated in the US and had worked for an American bank. WuÆs vision was to convert the 58-year-old bank, which had historically operated as a regional cooperative bank, into a more consumer-focused institution. But instead of focusing on credit cards, he extended term-based consumer loans that have low default rates, and thereby sidestepped the credit card problem.
The bank has moved to a position of strong core profitability, although in its first half results it took a $191 million provision to write off some legacy loans û possibly in an attempt to clean the stables ahead of its sale.
It seems that the family shareholders decided early in the year that the bankÆs next phase of growth would require partnering with another bank. Indeed, while it has a 10% market share in the Hsinchu area, it desires to grow quicker in the Taipei area. Credit Suisse was hired as an adviser and potential candidates were approached about six months ago. StanChart showed interest and Hsinchu's management liked the UK bank, in part because it saw the success of its sensitive integration of KFB in Korea.
StanChart, on the other hand, saw a bank with a good franchise, with a synergistic customer base û with 70% of the bankÆs clients having investments in China (which StanChart will hope to bank using its mainland platform). Indeed, the strength of the management team and the fact that Hsinchu has 3,300 Putonghua speakers, was viewed as a valuable asset for StanChartÆs own China expansion.
It was perhaps for this reason that StanChart was willing to pay up. At a price of 2.3 times book, this is the most expensive bank deal ever in Taiwan (the second most expensive was the 2002 transaction between Cathay Financial and United World Overseas Bank which was done at 2.2 times).
What will the deal mean for StanChartÆs regional earnings profile? Before the deal, the bank earned 3% of its income from Taiwan and had 1% of its risk-weighted assets there. Post-transaction these respective numbers will jump to 8% and 7%. StanChart has told analysts that the deal will be EPS accretive in 2008 and will produce a double-digit return on investment in the same year.
StanChart seems to think the worst is over for the credit card problem in Taiwan, stating its view that this is the ôright time to acquire in an attractive marketö.
No doubt the Taiwanese government will be happy with the investment and the vote of confidence in the banking sector that it represents. Whether the deal will prove a catalyst for a new wave of M&A in TaiwanÆs fragmented banking sector is an open question. But as one banker puts it: ôThe government is pretty happy. It has been hoping for a foreign bank to get control of a domestic bank for quite a while.ö
The deal represents the latest acquisition for StanChartÆs CEO, Mervyn Davies. In 2004, Standard Chartered made a bid for a controlling stake in Bank Permata of Indonesia, in a consortium with PT Astra. It was a wise move and Standard Chartered proved successful, gaining a meaningful presence (via a top 10 bank) in one of the most promising growth markets in the region. The consortium has since upped its stake to 89%, taking advantage of government sell-downs. StanChartÆs direct holding is 44.5%.
An even more transformational acquisition by Davies followed in 2005 when the bank paid $3.5 billion to buy Korea First Bank from Newbridge. StanChart was bidding against HSBC for this asset and, by winning, proved that it was now a serious regional player. With the purchase of Korea First Bank, StanChart gained a 6% domestic market share, 404 branches, 68,000 corporate and public customers, 3.3 million retail customers, 1.1 million credit cards and around 5,100 employees.
The Korean deal was followed by the $413 million purchase of an 81% stake in PakistanÆs Union Bank earlier this year.
StanChart was advised on the Hsinchu deal by UBS û which also advised on the KFB and Permata acquisitions û as well as Morgan Stanley. Some market watchers will be surprised that Morgan Stanley got this role rather than Goldman Sachs, which has historically held a house-bank relationship with StanChart. However, it seems that Morgan StanleyÆs extensive experience in Taiwan bank M&A saw it edge out Goldman.
StanChart's tender offer for Hsinchu closes at the end of October, with the expectation that more than 51% of the bank's shares will be tendered; and with StanChart hoping to buy 100%. StanChart expects the deal to complete by November and has stated that it will delist Hsinchu in 2007 and amalgamate it with its operations.