Internationalization Through Acquisition

1. Introduction

Merger and acquisition has been a trend in banking sector. Being a leading international bank, HSBC has been very active in acquisition all over the world. Their recent acquisitions include Bank of Bermuda in 2004; Household International, Kepple Insurance in 2003 and the Mexican bank Financiero Bital in 2002. Among the acquisitions, the Household deal is transformational and has the largest impact on HSBC.

This case study analyzes the benefits of the acquisition, as well as the major risks associated with the deal, in respect to HSBC. The purpose of the study is to understand how banks benefit from consolidation and how cross boundary acquisition can help the banks in internationalization.

The structure of the report is as follow: first, the background information is provided which includes the information of the two parties in the deal and the description of the transaction. The second part of the report explains why HSBC choose Household as their acquisition target and how the acquisition will help HSBC to accomplish their ~{!0~}Managing for Growth~{!1~} strategic plan. Then, the greatest concern by HSBC~{!/~}s share holders over the acquisition, i.e. the credit risk and reputation risk will be analyzed. Finally, in the conclusion, I will summaries the learning points from the case study.

2. Background Information

2.1 HSBC

HSBC is one of the largest banking and financial services organizations in the world. Its international network comprises over 9800 offices in 77 countries and territories in Europe, the Asia-Pacific region, Americas, the Middle East and Africa. HSBC is listed on stock exchanges in London, Hong Kong, New York and Paris. Its shares are held by around 190,000 shareholders in some 100 countries and territories. Through a global network linked by advanced technology, the bank provides full range of financial services to more than 110 million customers: personal financial service; consumer finance; commercial banking; corporate investment banking and markets; and private banking. At 30 June 2002, the HSBC Group had total assets of US$746 billion and total capital resources of US$55 billion.

2.2 Household International

Household International is the second largest consumer finance company in the United States. They provide middle-market consumer with several types of loan products principally in the United States, the United Kingdom and Canada. These products include real estate secured-loans, auto finance loans, MasterCard and Visa credit cards, private label credit cards, tax refund anticipation loans, retail installment sales financing loans and other types of unsecured loans, as well as credit and specialty insurance products. At the time of acquisition, the organization had approximately 32,000 employees, and over 50 million active customer accounts. Household subsidiaries do business in the United States through 1400 offices in 46 states.

2.3 The Transaction

The acquisition was completed in March 2003. At the time, the total consideration for the current outstanding Household common stock was approximately US$14,242 million. The HSBC shares issued in exchange for Household common shares resulted in an increase in the issued share capital of HSBC of approximately 13.38%. The structure of the acquisition is that Household merged with HSBC, a wholly owned subsidiary of HSBC group and then Household is wholly owned by HSBC group.

3. Benefits

3.1 Larger Consumer Base

HSBC is the global leader in consumer banking. It is part of the bank~{!/~}s strategy to grow their consumer assets. By inclusion of Household, HSBC expand her customer base by 50 million and increase total owned assets by US$101billion. In consumer banking, volume of sales is vital in the competition. HSBC would enjoy economy of scale as they can share loan processing and information systems with Household and thus results in significant cost saving. Moreover, HSBC can expand its service range to its current customers, as well as the Households customers. In other words, they can cross sell their consumer banking products to as many as 160 millions customers.

3.2 Geographical Diversification

The Economist (August 28, 1999) has once pointed out that HSBC is a true ~{!0~}global~{!1~} retail bank which however lacks a substantial American presence. The bank was trying to change this situation in recent years. Other than Household, HSBC purchased Financiero Bital, a Mexican bank in 2002 and some other financial institutions in South America. However, none of the deals is as transformational as the acquisition of Households. Be With Household, HSBC doubled its US exposure with 1400 offices in 46 states. In 2004, North America contributes 27% of pretax profits to the Group~{!/~}s total, while Europe contributes 35% and Asia contributes 38% (HSBC annual report 2004). The bank now has a three-legged geographical spread.

3.3 Higher margin

HSBC is one of world~{!/~}s largest deposit takers and Household is one of the biggest lenders. HSBC would be able to fund Household~{!/~}s loans from their own deposited fund which has much lower cost than borrowings. On the other hand, Households loans are mostly unsecured customer loans which give higher margin. This is why Sir John Bond, HSBC Group Chairman said that it is an extremely good match. As mentioned before, cost would also be saved from shared loan and credit card processing. Moreover, Household was the second largest third-party issuer of private label credit cards and eighth largest issuer of MasterCard and Visa credit cards in US (HSBC News Release, 14 Nov 2002). With the merger of two banks~{!/~} credit card businesses, they are now top 10 credit card player globally. Credit card business in a hot spot in banking sector and it is very profitable.

3.4 Emerging markets

HSBC believes that over the next 30 years, 50% of the increase in world demand is coming from emerging markets (The Banker, 2003). There is a huge group of middle class customer rising in these emerging markets and they will properly demand a car, followed by a house and then choose a credit card. With Households~{!/~} experience in consumer financing especially for the middle and lower income groups, HSBC will be able to provide better financing services to these customers. Also, the success model of Household can be replicated in other countries where HSBC exists. The Household brand can also be used