A proposed acquisition could be a turning point for Taiwan’s overbanked financial services industry.

Last December, Fubon Financial Holdings, the second-largest financial services organization in Taiwan, announced that it was pursuing a hostile takeover of Jih Sun Financial Holdings through a public tender offer for at least 50% of the company’s shares. The offer is valued at NT$24.53 billion (US$880 million), or NT$13 per share.

The acquisition could be significant for Taiwan’s financial services industry. If successful, it would be the first non-friendly acquisition in Taiwan of one financial holding company (FHC) by another. It would also make Fubon the largest FHC in Taiwan in terms of market share, passing the current titleholder, Cathay Financial Holdings.

Importantly, the deal could set a precedent for further consolidation of an industry that has historically seen a very low level of M&A activity. Taiwan, as most observers can attest, is plagued by too many banks and other financial institutions.

“The market in Taiwan is too fragmented; there are too many players” says CY Huang, president of FCC Partners, a boutique investment bank based in Taipei. Huang, who is also the founding chairman of the Taiwan Mergers & Acquisitions and Private Equity Council, notes that Taiwan is host to nearly 40 domestic and foreign commercial banks, over 100 securities companies, dozens of asset management firms, and 15 FHCs – all competing in a market of only 23 million people.

Such an overcrowded environment creates a very high level of competition and weakens banks, as those operating in the market are constantly locked in a race to the bottom.

Conversely, consolidation helps reduce the competitive pressures. According to a report from multinational accounting firm KPMG, mergers and acquisitions in the banking sector serve Taiwan’s long-term financial interests. The report states that such activity increases stability by ensuring that Taiwan’s financial institutions have sufficient capital to weather financial difficulties, and that consolidated banks are better able to integrate resources, which can improve their performance. Also, the larger scope of business that restructured financial institutions are capable of allows them to provide better, more varied services to consumers.

The government has tried throughout the years to encourage consolidation in the financial services sector, usually to little avail. The most fruitful effort was what is called the first financial reform, which included the introduction of the Financial Institutions Mergers Act in 2000 and the Financial Holding Company Act a year later. These two laws allowed for commercial and investment banking activities to be conducted within the same institution, and promoted the establishment of FHCs, large conglomerates that can incorporate commercial banks, insurance companies, securities firms, and other subsidiaries.

According to an industry professional who agreed to speak on condition of anonymity, the first financial reform resulted in some positive changes to the industry, including a significantly lower non-performing loan (NPL) ratio at many commercial banks and the government’s forced sale of problematic banks to better, stronger ones.

The relative success of the first financial reform motivated the then Chen Shui-bian administration to push for further consolidation by encouraging the “good” banks that survived the first round to merge with one another. This second reform was plagued by scandals and is generally considered a failure.

Since that time, there have been very few M&A transactions, particularly among larger organizations. According to data from the Financial Supervisory Commission (FSC), a mere 57 deals were concluded between September 2004 and the latest one in January 2018. Most of these entailed a large FHC acquiring a smaller bank, insurance firm, or bills finance company. None of them were hostile takeovers.

Greg Buxton, a partner at the Taipei-based law firm Winkler Partners, says that strict regulations present impediments to M&A transactions in Taiwan’s financial services industry. “There is a certain baseline level of regulatory challenges faced in getting these deals done,” says Buxton. “Add to that the need for merger control approval and these transactions become that much more difficult.”

In 2018, the FSC once again began encouraging the consolidation of FHCs by amending relevant regulations. The FSC’s amendments “clarified the procedures and conditions related to conducting hostile mergers and acquisitions of financial holding companies,” says Buxton. “This increased clarity was likely a factor in Fubon’s decision to acquire Jih Sun and may pave the way for subsequent similar transactions.”

The industry professional who spoke to Taiwan Business TOPICS says one of the biggest difficulties faced in further consolidating Taiwan’s financial sector after the first reform was the incestuous nature of relations between the ownership of Taiwan’s financial institutions. “These rich guys all know each other,” he says. “Also, these organizations are family-owned, so the big shareholders will defend their stake very strongly.”

He says that things also get complicated when the target of an acquisition is a state-owned institution, pointing to the case of Taishin Holding Company’s attempts to purchase a majority stake in Chang Hwa Bank, 20% of which is owned by the Ministry of Finance. Taishin was invited as a strategic investor to purchase 22.5% of shares in the troubled commercial lender in 2005, during the Chen Shui-bian presidency.

However, things changed when Ma Ying-jeou of the Chinese Nationalist Party (KMT) was elected president in 2008. Taishin has been locked in a struggle with the government for majority control of Chang Hwa ever since.

The Taishin case is instructive for other organizations looking to consolidate, given that many of Taiwan’s remaining banks and financial institutions are state-owned or invested. In addition, the Legislative Yuan has been reluctant to permit privatization of these institutions, further discouraging their consolidation.

Other experts, such as Jerry Lin, director of the Taiwan Association of Banking and Finance’s (TABF) Financial Research Institute, and his colleague, assistant researcher William Lai, say that synergy between organizations is a big factor in whether they are a good fit for a merger. Another is price. In a public tender, the acquiring company offers to purchase the target companies shares at a premium over the market share price. The shareholders of the company being acquired usually try to negotiate the price per share in order to maximize their gains from the sale.

The third challenge, according to Lai, has to do with the employees of the acquired entity. “During an acquisition, oftentimes these employees form a union and begin issuing demands to the surviving entity, such as guaranteeing employment of the union members for at least two years or providing a preferential calculation method for retirement funds,” he says.

Getting the deal through

In the case of Fubon’s bid to acquire a majority stake in Jih Sun, many of these complicating factors are coming into play, along with others. While the FSC gave Fubon its go-ahead to initiate the tender offer in January, the Fair Trade Commission (FTC) approval process forced the company to extend the public tender period.

On February 25, however, the FTC announced that it had completed its evaluation, finding that the Jih Sun acquisition would not lead to a major increase in Fubon’s market share. Since the impact on market competition would be negligible, the FTC said it would approve the application for public tender.

With most regulatory hurdles cleared, a major issue now appears to be related to Fubon’s bid price, which Jih Sun has said it considers to be too low. Last December Jih Sun hired two accounting firms to calculate the company’s fair value. One concluded that a reasonable price range for purchasing a majority stake in the company would be NT$9.63-16.93 per share, while the other put the range at NT$13.89-15.71. At NT$13 per share, Fubon’s offer falls below the low end of the second appraisal. Jih Sun then made a regulatory filing in early January stating that Fubon underestimated the company’s value.

Lin and Lai of the TABF say that the two largest shareholders in Jih Sun – Japanese Shinsei Bank and Capital Target Ltd. from Hong Kong – are considering in their negotiations with Fubon the price they paid in purchasing their initial stake in the company, which Lai notes was also around NT$13 per share. These two shareholders have thus requested between NT$14 and NT$16 per share.

However, Lai notes that Fubon’s original offer was based on Jih Sun’s price-to-book ratio – its stock price per share compared to its book value per share – which was quite low at the time. This could mean the company was either undervalued or underperforming. He says that this factor could give rise to some serious issues for future shareholders of the surviving entity. Fubon has argued that its bid price constituted a premium of 24.8% over Jih Sun’s average closing price per share over the previous 20 trading days before the offer was made.

Lin says that Jih Sun’s shareholders will need to consider that premium if they ultimately reject this offer, since there is no guarantee that a better one will come along. On the other hand, he says, Fubon must offer some vision of how the merged entity will be run in the future.

“If you look at past M&A activity in Taiwan, issues related to the employees and company culture of the merging organizations have resulted in difficulty for the surviving entity,” he says. “Fubon should provide an explanation or plan for how it will address these issues if the acquisition is successful, and how it can help the government in this area to promote future consolidation of the financial services industry.”

One other issue that has surfaced during the public tender process is related to one of Jih Sun’s main shareholders, Capital Target Ltd., which is reportedly owned by Chinese billionaire Xiao Jianhua. Suspicions arose in late December that the acquisition is intended to help Xiao dispose of his assets for cash.

Xiao was abducted by alleged Chinese security officers from his hotel room in Hong Kong in 2017, purportedly for financial crimes, and has not made a public appearance since, although his main company, Tomorrow Holding, confirmed in July 2020 that he is in China. Politicians from Taiwan’s Democratic Progressive Party have requested that the FSC investigate whether Capital Target is linked to Chinese capital.

The FSC responded by releasing a statement on December 24, noting that whether Chinese entities maintain an ownership stake in Capital Target is a separate matter not directly related to the public tender, for which the Commission determined the conditions had been fulfilled.

“Regardless of whether the tender offer succeeds, the FSC will fulfill its duty and determine whether mainland Chinese entities have an ownership interest in CTL [Capital Target Ltd.],” reads the FSC’s statement. “If the FSC discovers that CTL gets involved in any specific legal violations, the FSC will take further actions in accordance with the law.”

TABF’s Lin says that based on some of the abovementioned factors, particularly Fubon and Jih Sun’s battle over the tender offer price, this particular deal may not succeed after all. He and colleague Lai posit that a merger of Taishin Financial Holdings and Shin Kong Financial Holdings would make more sense given their smaller size and the synergy of their operations. “In addition, these two companies are owned by brothers from the same family,” Lin says.

Huang of FCC partners says that domestic consolidation is gradually becoming less of a priority for very large financial companies like Fubon, which have begun looking to expand their overseas presence through international M&A transactions. He points to Fubon’s recent move to increase its stake in South Korea’s Hyundai Life Insurance (renamed Fubon Hyundai Life Insurance Co.) to 62% and take management control of the company.

“I see a tremendous need for consolidation and M&A,” says Huang. But, he says, “I think domestic M&A is meaningless because most companies here are similar in skills and size.”

Given what he’s seen recently, not just in Taiwan’s financial sector but in other major industries, Huang says that consolidating overseas is the best path forward. “Taiwanese companies will become an emerging force in international M&A. I do expect to see more of that in the future.”