Business Consolidation Of Adelaide Bank: Rationales, Methods, And Benefits

The rationales behind the acquisition

Discuss about the Business Consolidation of Adelaide Bank.

In general business, consolidation is a common way for the companies to expand in terms of its size rather than able to gain only a temporary benefit pertaining to the internal activities. At the time of the business consolidation, it has been seen that the acquirer reports the consolidated results which combine the financial statements with those of the acquirer. Bendigo Adelaide Bank formed the merger with Adelaide Bank in 2007.  The merger process was implemented by the "Scheme of Arrangement of Adelaide Bank". The various discourse of the study aims to highlight the rationale for the merger activity (Bendigobank.com.au. 2018). In the given assignment, rules and the regulations within business organizations that often seem to be the most essential for the overall development of the given system of the organizations. It is also believed that with the use of the given system, there is a need of the gained advantages while two companies get merged up or came under certain agreement. In this assignment two types of industries is being used, specially two types of banks- Bendigo Adelaide Bank and Adelaide Bank. Both the banks are from Australia based and get merged up in the year 2007 (Avadhani, 2010).

The intention of business consolidation of both the banks is seen with the various activities to create a unique partner focused and customer focused financial entity. The merger rationale was also seen to be based on bringing the specialist skills among the various type the workers and ensure delivery of a more cost-effective solution for the customers and business partners. The consolidation process is further seen to be committed to creating a sustainable value for the shareholders. Some of the main rationales for the bank post-merge process is recognized to be depicted with the various types of the career opportunities with more large and diversified operations. The head office functions will be split among the existing sites and the main form of the consolidation will be depicted with the 4000 staff across every state and territory in Australia. In addition to this, the partners in both the bank are depicted to be getting the continued support of the partnership model. These partners will further see a greater variety in form of the product access. This is further seen to be backed by processing capability post consolidation of both the banks (Bendigobank.com.au. 2018).

Some of the other rationales are considered with the focus on increasing the value of the shareholders in the company with an enhanced financial profile and the market capitalization of $ 4 Billion. Some of the main forms of the financial advantages for the merger process has been seen to be based on creating a diversified business and improving the loan management system which was lacking in both the bank before the consolidation process. It is recognized that the presence of the larger wealth management sector after the consolidation process will be conducive in enlarging the overall business structure of the company and at the same time the bank will be able to gain the increased market capitalization of $ 4 billion in the ASX 100 index. The banks will be further able to witness 80,000 retail shareholders. In addition to this, the national expansion is also considered with covering the branch support in more than 380 branches covering all States and Territories (Bendigobank.com.au. 2018).

Acquisition methods

Some of the various types of the rationale for the merger process was recognized to be evident with customers having greater access across more number of products they will be able to gain access to more number of ATM through more than 380 company with a single bank account. These factors are seen to directly conducive to improve the current account and savings account worth.  Moreover, the community account will be able to grow in terms of the different type the aspects of the capacity for growth in “South Australian” branch network (Bendigobank.com.au. 2018).

Henceforth, it has been seen that the result of the merger was complementary to both the banks thereby creating major opportunities to such communities who were seeking for long-term service with the banks. It is further discerned that the overall merger process was introduced with the reason for foreshadowing of pre-tax profit increase of than 50%.  In term of the Adelaide Bank, pre-merger the bank suffered from limited access to the branches in South Australia. Bendigo is known as the leader for having the access to a large number of branch network in Australia and with the support of Bendigo bank, the banks will be able to expand the business for themselves and the customers (Motley Fool Australia 2016).

The important depiction of the merger process is discerned with creating more value for the customer and able to introduce a new form of the products. The various types of the other significant advantages are considered with to create a sustainable value for the shareholders. The various types of the career opportunities with more large and diversified operations. The head office functions will be split among the existing sites and the main form of the consolidation will be depicted with the allotment of 4000 staff across every state and territory in Australia.

Nowadays many companies intend to have a better future which will combine with other companies. The main way which can combine two companies together is called acquisition. After the acquisition agreement deal, the bigger company will be called a  parent, the smaller company will be called as a subsidiary. There are two main methods in many acquisition methods in nowadays australian accounting market. They are an off-market takeover bid and a scheme of arrangement.

First of all, the meaning of a scheme of arrangement is a procedure that allows a company to reconstruct its capital, assets or liabilities with the approval of its shareholder and the court. (Michael,2018) The target company will transfer all the shares to the bidder as a payback to the target shareholders. The meaning of an off-market takeover bid is under an off-market takeover bid, the bidder makes individual written offers directly to all target security holders to acquire their securities in return for payment of the offer price. (Michael,2018). The target security holders have right to choose to accept the offer or not. If they deal with each other, the bidder will acquire their securities.  

As for the events of Adelaide Bank and Bendigo Bank acquisition, Adelaide Bank arranged the merge by a scheme of arrangement which will demand the agreement from the shareholder of Adelaide Bank.(Bendigo bank,2007 ). The shareholders of Adelaide bank will get 1.075 Bendigo Bank shares per Adelaide bank share. The reason why Adelaide bank choose to use a scheme method in the merger is related to the advantages of the methods compare with the  take over bid method. In recent years, people are more willing to use the schemes of arrangement method than takeover bid on acquire control. Because of the four main benefits which are:

Detailed evaluation

1.When two companies deal with the scheme, the ownership is clearly defined.

2.A more exactly schedule of detailed activities.

3.Shareholders are generally considered lower thresholds than the 90%of all securities which are demanded to  become compulsory acquisition.

4. It will be more flexible to incorporate terms into scheme which will be difficult to permitted using a takeover bid.

The offer price

It shows that from 8 August 2007 the ordinary price of Adelaide bank(14.40) is lower than Bendigo bank’s(16.50$). Also the overall tend of Adelaide banking Bendigo bank ordinary share price is decreasing. The lowest price of Adelaide bank is VWAP in 12 months 13.82, as for Bendigo bank the lowest price is also VWAP in12 months 15.10. The implied offer value after two banks acquisition will be 17.74$. Also, it will be decreed VWAP in 12 months. The total implied premium will be about 20% higher compared with the ordinary shares(scheme book,2007).

In the last three years, Bendigo bank using the policy of paying about 70% of cash it earning in the financial year per share as the fully franked dividend to the ordinary shareholder of Bendigo Bank. (Bendigo bank,2007)After being an acquisition. The merged group is still willing to use a similar policy for the dividend payout. The policy of paying the dividend will depend on a few of factors, such as the profitability of merged group's, the level of availability of franking credits and the demand of capital and the financial position of the merged group.

The fair value of Identifiable Net Assets in Adelaide and Bendigo bank's case will be allocated after all assets liabilities and contingent liabilities got certain recognition criteria will put separately in the consolidated financial statement of the merged group. When this process is done, the rest cost from merger and the cost over Bendigo bank’s interest in the FVINA will be regarded as goodwill. (Bendigo bank,2007)

During 2007-2008, goodwill of $1429.6 million contains $1369.7million goodwill is from Adelaide bank limited(preliminary final report,2008). Because of complexity and timing of this merger group, the fair value of assets will just be used for a while which will double-check in 12 months.

The goodwill that is usually as a result of the acquisition of another company must be recorded as an asset in the balance sheet each year so as to determine any impairment suffered. If the acquired business cannot recover goodwill through its profitable operations, then the goodwill is fully written off or written down partially. The process of impairment for goodwill is however different from impairment of other assets because goodwill cannot actually be feasibly recovered directly. Goodwill is amorphous and thus cannot exist Roberts, C., (2011). This makes it more different from other intangible assets which can be identified individually. Thus, goodwill can't exist according to the financial perspective of reporting. It can be acquired from other identifiable intangible and tangible assets.

The amount of goodwill proposed was justified because the customers of Adelaide Bank Ltd will still transact with the bank even after the acquisition took place. Some customers come to the bank just because of the name or because they have accounts in the bank. Therefore most of the customers will not even be aware of the acquisition taking place. Thus Bendigo Bank starts by accepting the "goodwill" of the customers from the other bank.

For one to evaluate the impairment potentially created by goodwill, IAS 36 requires a combination of goodwill with other assets and this combination creates a cash-generating unit. With the support of warranted circumstances and facts, an evaluation can hence be conducted on basis of aggregate.  This is complete by computing and comparing the amount recoverable of each cash-generating unit with the amount of the goodwill that is allocated to that item. If the amount which is recoverable is less than the carrying amount, a write-down of impairment must be prepared Wee, M., (2012). If there happens to be an impairment loss, goodwill absorbs it first and after the goodwill has entirely been eliminated, the other tangible and intangible assets are accordingly adjusted using their identifiable carrying values.

Roberts, C., (2011) suggested that goodwill that was acquired externally should not be combined with the goodwill that was generated internally form operations that existed before the acquisition process. It is however very important to explain further that the outsiders of the company may find it very difficult to differentiate or clearly distinguish between the goodwill acquired from outside and the goodwill generated internally. Therefore, those who set the standards and govern them are concerned that through the process of practice, companies can use the goodwill that was generated internally as a cushion to be used against the impairment of goodwill that was acquired.

When the acquisition taking place is less than 100%, the parent firm only pays a portion of the goodwill attributable to him. That is, the excess amount of fair value of net assets identifiable is what is recorded as part belonging to the parent company. IFRS 3 states that when the company obtains majority interest or shareholding from another company it must record the cost of acquisition in a process of purchase price allocation to all assets and liabilities identifiable valued at the fair price at the actual date of acquisition Ball, R., (2006). The date of acquisition is specified as an actual date when the control of net assets, liabilities, and operations of the entity that is acquired is effectively shifted to the acquirer. The only area of my study is when the parent company also was known as the acquiring firm fully obtains an agreed percentage of controlling interest in the company being acquired. It was observed that Australia is a common law country and hence the mechanisms of strong accounting standards and policies are enforced. Therefore the amount of goodwill suggested by Adelaide Bank and Bendigo Bank was justified.

The merge between Adelaide and Bendigo banks has more advantages than disadvantages if any. The motive was to create a business that delivered complementary goods and services with a more cost-effective delivery to its customers and members. The following are benefits that would be as a result of the merger.

1. The two banks have over 380 branches across Australia and hence, customers would be able to have access to more services and products in the banking sector.
2.  The partners of the two banks such as the wholesale distributors of various types of mortgages would benefit greatly from the committed partnership model. The merger would increase the market share and thus, partners will be able to access more variety of products and services processed efficiently.
3. The shareholders will laugh all the way to the bank since their returns will be absolutely much more. The financial profile of the merged business will be enhanced and the market capitalization will be around $ 4 billion. The value of the merger will be significant as the EPS of both companies will increase.
4.  The staff of the two banks will enhance their careers because they will now work in a huge and more diversified firm. More job opportunities will also be generated because the group company requires over 4,000 employees from Australia.

During the announcement date, the merger promised to increase their financial strength, funding flexibility and scale efficiency. The merged group will enhance the financial position in the industry through effective and efficient processes of doing business.

The merged group will be able to manage over $43 billion worth of loans and will be able to accommodate the increasing number of investors seeking to grow their wealth. The current amount of funds which are under management is $7 billion. The market capitalization of the merged group will be about $4 billion and hence it will be placed within the S&P/ASX 100 index. The accumulated number of retail shareholders will rise to 80,000 and more than 380 branches across the country and other countries. The company now has more than 25 additional branches opened.

The merged group is now prospecting or targeting more than 1.3 million clients which are more than what the two companies served separately. The main agenda of the merger is to best serve the interest of the shareholders as provided for in the regulatory approvals Casey, R. S., (1989). Mergers are important because they produce more returns than an individual company. When two companies merge together to form one company, they get more profit than even the addition of their individual profits. When the news about the merger was released, the public had mixed reactions. Most mergers that take place rarely become successful and as a result, the public had a negative perspective towards the acquisition. However, the shareholders were optimistic that the merger could happen successfully and as a result, pushed it to realization. The strategies employed towards the implementation of the merger was well thought of and the companies also considered corporate social responsibility for the community. On the other hand, most of the customers of the two banks never took interest in the merger information since they knew that their resources and wealth was intact. When the merger took place, it made a profit within the first year and proved the speculators wrong. Therefore, it was a nice decision for Bendigo Bank and Adelaide Bank to merge.

The accounting performance analysis will entail financial evaluation after acquisition took place. This is simply an indication of how the two banks were affected by the acquisition and take over as far as finance is concerned. This analysis will be done by doing a comparison of the financial reports generated by the company to see what improvements have been made and the challenges that have been encountered by the merged group. Financial reports can be accessed from the official website of Bendigo and Adelaide Bank Limited.

The company became more financially stable and was able to fund more projects which brought more returns to the company. The operations of this organization produced a cash flow that is stronger than before the takeover occurred. In the long run, the strong cash flow will help to enhance the liquidity status of the entire organization (Bao, 2017, p.196). The status of liquidity for the merged group is better than that of the independent bank before the acquisition occurred; up to date, it has been on the rise despite a few challenges that could make it drop sometimes. This organization has managed to increase the gross and net returns since the acquisition occurred attributed to by the increased number of products and services sale. A significant rise in the number of sales can be noticed from the time of acquisition up to date to the variety of products and services offered to the clients. The company has gained new customers as well.

The annual reports on finance released by Bendigo and Adelaide bank show the banks accounting performance has been improving after every year. The organization will be better placed in the market since it will have approximately four billion market capitalization. The number of stakeholders will increase to around eight thousand after the merger of the two banks. the acquisition will expand the business territories of the newly formed company by increasing the number of the branches in the nation and foreign countries as well. At the point of merger of the two organizations the business was expected to be serving more than one million customers however this number was expected to rise shortly after the company announced the merger. More financial resources will be required to run the business due to the increased number of business operations and expansion of the business by the opening of more branches.

The improvements evident by using the most recent financial reports which are the 2017 and 2016 reports. The 2017 financial report shows that the total cash earnings of the bank were a four percent increase from four hundred and one million previous years to four hundred and eighteen million in the year 2017. Both the average ordinary and tangible equity were an increase of eight and eleven percent respectively. This is definitely much higher than the individual bank was making before they merged to form a single organization. The net interest income has increased as well mainly as a result of an increase in the growth of assets average interest returns. The wage bill of the merged group was higher than that of an independent organization due to the increased number of employees. The merger led to the opening of more branches and creation of more job opportunities which required more staff.

The employees of both organizations worked hard to ensure that the merger will work in favor of the business and the goals will be realized. The total profit made by the organization after the acquisition was higher than the one made before the acquisition. This increment is explained by the fact that business gained more financial strength to invest in more business opportunities that would bring the company huge profits. The increase in the number of customers also led to the increased returns for the company. The number of debts for the new company reduced after the merger. The two companies will just need to make a single loan which will have lower interest rate than when two banks applied for loans independently. The company will be ranked higher than most companies in terms of financial strength. This will, therefore, give the company to have access to greater amount of loans.

This section exposes the impact of acquisition and merger of banks on the shareholders; these are simply the owners of the banks. Despite a few negative effects, merger and acquisition have proven to be of great value to the shareholders. The companies have one major goal of being the top organization in the market. When the companies join hands, they place the shareholders in a better position to dominate the market both nationally and internationally. The merger means the organization that will be formed will have more assets and financial resources to invest in other projects that will bring profit to the organization (DeYoung et al., 2009, p.99). The shareholders will not be financially constrained because they are many and therefore, little financial support is needed from them. It will become easy for the shareholders to run the organization through the enhanced task force that has a different kind of talented employees.

Once the two banks have merged, there are high chances that the formed group will dominate the market. This, therefore, gives the shareholders the power to take control of the market both globally and nationally. With the help of other leading companies in the market, the shareholders will be able to influence the policies and law passed by the government that affects the well-being of the organization. The shareholders will enjoy the freedom to pass business rules that are best suited for the success and prosperity of the company. The new entity gives the shareholders the advantage of sharing the losses that have been incurred on the business. The same thing will happen when financial assistance is needed for an investment, each of the shareholders will share the total amount of financial aid that is needed. This simply means that the shareholder can make an investment no matter how huge it may be.

There is a clear indication of improvement in terms of assets since the merger occurred. The numbers of assets could have remained the same at the time of merger but increased shortly after the company started investing more into the business by opening more branches. Profitability of the company increased since the more the investments made by the bank the more the profit the company will make. The merged group will be in a position to offer quality products and services to the customers since great talents and specialist will be brought together. When great minds are together, more efficient ways to solve the client’s problems and challenges will be established. The customers will enjoy improved products and services. The group that will be formed after the merger will have a greater capacity to invest in the Australian market and hence more returns to the organization.

The shareholders will be privileged to be in possession of a unique organization which will have a financial profile that is improved (Deng et al., 2013, p.102). This means that the merged group will have more dominance in the target market for a number of reasons. One, it will be able to attract more customers due to the increased range of products and services. The organization will have the right to open more branches across the nation since it has the required labor force and finance to run the business. Most the banks are in debts, which must be paid with an interest; so that they can able to run its operations efficiently. The banks will definitely pay more interest when they are independent but when they merge will reduce the number of interests to be paid and therefore consolidating the debts. It will create a good image for the company since the two merging banks have a good reputation and have dominated the market.

Merger and acquisition will put more money into the pockets of the shareholders due to the increased amount of profit made. The new entity will be in a position to make greater investments that will give greater returns to the shareholders. The increased number of customers of the new entity will create more profit than when the banks were independent. The merger will also give the shareholders more diversifies ways to serve the clients and also invest more in the business (Peng., 2013). There is that one thing that each of the company was best recognized in before the merger occurred; the new entity will utilize this uniqueness to ensure that the customers are served in the best way possible. The shareholders will have more assets which bring more money to the shareholders. Each of the company had its own assets and infrastructure and by coming together the shareholders will utilize these assets maximumly to make the highest possible profit.

Conclusion

These assignments also provide certain ideas about the financial statement of the company and its detailed study which often tend to ensure the entire development of the company. Along with the financial statement of the company, there is a need of the given net payment of the given system of the given system (Lipczynski, 2008). It also discuss about the importance and the goodwill of the said company and how it often tend to create certain responsibility that are often seems to be the most essential for the given system that are often seems to be the most essential for the gained situation (Griffin et al., 2014). It is believed that this assignment must provide with certain ideas and the interior knowledge about the given system of the given system that are often seems to be beneficial for the readers. The purpose of the assignment are often seems to be the most essential part of the given system that are often seems to be the most essential for the readers.

References

Avadhani, V. (2010). Global business. Mumbai [India]: Himalaya Pub. House.

Griffin, R., Ebert, R., Starke, F., Dracopoulos, G. and Lang, M. (2014). Business. Toronto: Pearson Canada.

Lipczynski, J. (2008). Business. Chicago: Chicago Review Press.

Peng. (2013). Global Business. Cengage Learning.