Acquirers unlikely to overpay for Iraqi banks

May 12 was the last day of trading for Mosul Bank (BMFI) ahead of its proposed merger with Union Bank (BUOI). The stock closed up 7% bringing its year-to-date gain to 29%. BUOI ended the day unchanged and is up only 12% year-to-date.

While the deal is being described as a merger, it would in fact amount to a take-over of BUOI by BMFI. (Either way, it's a first for the Iraq Stock Exchange.) Both have the same share capital but BMFI is much larger in terms of number of branches, depost base, and the size of its loan book. (There’s more on the two banks here.)

BMFI’s strong performance relative to BUOI might thus strike one as odd. Typically, things go the other way round—if anything, the acquiree’s stock is supposed to outperform the acquirer’s. This reflects the fact that acquirers often pay too much.

There are a number of reasons for this. Acquirers may expect to realize greater synergies than are actually achievable or may underestimate the costs of integrating the merged entity. Managers may expect to benefit personally from an acquisition even though it destroys value for shareholders. Or they may simply succumb to their own hubris.

None of these things seem particularly likely in a case like the BMFI-BUOI deal. There aren’t really any synergies to consider when the target has only a few branches, nor is there much doubt about what the costs will be. Controlling shareholders, rather than managers, are calling the shots, which means that the perverse incentives facing the mangers of larger companies aren’t present. Similarly, the risk that people will be mastered by pride is a lot less when their own money is on the line.

The recent price action in the two companies, while not typical of most take-over situations, is thus not surprising. There's really no reason to expect BMFI, or any other Iraqi bank in a comparable situation, to overpay.

7 Responses to Acquirers unlikely to overpay for Iraqi banks

  1. Kickabuck 15th May 2011 at 12:59 #

    Another nice article Mark, thanks! I have a question for you. If Iraqi banks won't overpay merging to achieve the CBI 250B requirement, would a foreign bank overpay to get into the same market? Specifically UK Standard Chartered or Russia Alfa Bank in an auction for Warka? I think you will like this information and the QFI website it came from...originally posted by mannymendez at IIF

    Warka Bank for Investment and Finance, the listed Iraqi commercial and retail bank, has appointed a financial and legal advisor to run a sales process, a Warka source told this news agency. The source said that Warka owner Saad Al-Bunnia has appointed the Amman, Jordan and Baghdad-based investment bank, Qimma Financial Investment (QFI) as the financial advisor and Hasseb Kadhim Jwaeed as legal counsel. The source said that Al-Bunnia appointed the advisor to begin a formal auction process following a due diligence report carried out by Price Waterhouse Coopers. The source said that Al-Bunnia would be interested in entertaining offers from banking groups that would have strategic interest in Iraq such as Russia’s Alfa Bank or UK-based Standard Chartered.


  2. DeWeaver 16th May 2011 at 14:29 #

    Thanks, Kickabuck. That's interesting news about Warka. This is the first time I've heard of a possible bid by Alfa Bank.

    My guess is that Standard Chartered would be unlikely to overpay. I just can't see a Warka acquisition being that much of a game changer for them. It would be a much bigger deal for Alfa Bank, however--I believe their operations have so far been limited almost entierly to Russia and its "near abroad." It might also be a lot easier for a Russian bank to get excited about the Iraq story. Anyone with personal experiences of the mid-1990s Russia boom should have no trouble seeing the potential for a country with large untapped oil reserves in the midst of a transition from a planned economy.

  3. david yoder 25th May 2011 at 14:16 #

    I enjoy reading the news in Iraq. Why do we not hear anything about Iraq re-valuing it's currency.?? The dinar is 1270 and really has no value per dinar. How does Iraq pay it's bills, and how does it expect to be a player in the world bank, world trade org. etc. Thank you for your response. Sincerely, David Yoder

  4. Stew 26th May 2011 at 13:44 #

    David... the reason you don't hear about it is because it's a fantasy made up dinar dealers to get people to buy dinar. It's a scam.
    Your statements make sense at all. Exchange rate has nothing to do with the things you talk about. Italy had a rate of 1500:1 for years and years and had one of the top 5 economies in the world during that time. Japan is and has been about 100:1 for a long time. They certainly don't have trouble paying their bills because of it.

  5. Jeff 29th May 2011 at 15:35 #

    Stew you have NO IDEA WHAT YOU ARE TALKING ABOUT when it comes to the I Iraqi Dinar! I 100% guarantee you that! You will see VERY soon Mr. Pessimist

  6. alan 29th May 2011 at 15:43 #

    Stew your reply to David could not be more wrong, I don't know where you got your information from or what your basing your opinion upon but you owe it to your readers to research before you give an opinion such as you have. I have researched the country of Iraq, it's economy and the currency for many months and have to say i am in total disagreement with you.

  7. Stew 31st May 2011 at 08:14 #

    I'd love to know what "research" you have done that leads you to believe Iraq will RV it's currency 100,000% or so. They have practically no economy outside of oil which is sold for dollars and they have 28 Trillion dinar in circulation.
    Basic supply and demand... they have very very little demand with a MASSIVE supply of currency. That equals 1000:1