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Abstract
The recent wave of mergers and acquisitions in the financial institutions all over the developed nations has also taken its toll in Malaysia. Factors such as globalization, liberalization and information technology developments have contributed to the need for a more competitive, resilient and robust financial systems in Malaysia. This is added by the recent 1997 Asian financial crisis, which contributed for speeding the mergers and acquisitions process in the Malaysian banking sector. The end result is the formation of ten anchor banks from a total of 54 financial institutions as at end of 2001. This paper has explored the causes and the process of the mergers and acquisitions as well as the future implications in the Malaysian banking system.
Introduction
Mergers and acquisitions of banks are not exactly recent phenomena for Malaysia. As early as 1932, Malaysia (then known as Malay States) witnessed the merger of Ho Hong Bank, The Chinese Commercial Bank and the Oversea Chinese Bank to form Oversea Chinese Banking Corporation (OCBC). Also in the late 1960's, Hong Kong and Shanghai Bank had procured the whole share capital of the Mercantile Bank while Chartered Bank acquired the Eastern Bank (Drake, 1969).
This has been an ongoing activity as warranted by market forces. The initial recent merger in the financial industry occurred in 1990 with the takeover of United Asian Bank by Bank of Commerce. This entity subsequently merged with Bank Bumiputra to form Bank Bumiputra Commerce on 1 October 1999, The second mergers saw the takeover of Kwong Yik Bank by Rashid Hussain Group in late 1996 to form RHB Bank; Sime Bank subsequently joined the RHB Group in June 1999. The central bank, Bank Negara Malaysia (BNM) has always encouraged such moves. However, the 'severity' of the encouragement peaked following the Asian financial crisis.
The Asian financial crisis of the late 90's revealed the extent of the vulnerability of financial institutions to exogenous factors. The capacity of financial institutions to absorb economic downturns was put to question. Economic theory suggests that a firm's capital is supposed to act as a cushion to withstand losses. Hence the question of capacity to absorb losses was linked to capital size and in turn the overall size of the institution.
The Central...