金融機構整併現況及交易

協合國際法律事務所金文悅2008/10

金融市場現況

Capital Market

Insurance Industry

Banking Industry

2

Capital Markets

Trading volume: 2nd in Asia (2004); 15th in Asia (2005)

Market cap: No. 1 in emerging market; 2nd in Asia (2004); No. 21 in Asia (11/2006)

Insurance Industry

Size: 4th largest non-life market in Asia based on premiums

P&C penetration at 1.0% lower than other mature Asian

markets (Japan: 1.5% ; South Korea: 3.0%)

Growth: CAGR of 4.4% from 2006-2016 (Swiss Re)

Market share: Top 5 insurers accounted for 55% of the

market as of 2006

Relatively unsophisticated market, as a

result of historical regulatory restrictions

Taiwanese market is a mix of a mature

market in life but still under-penetrated in

non-life.

Penetration rate of 14.6% P&C: 1.0% Life: 13.6%

Total market (2006 GWP): NT$1 677bn P&C: NT$114bn Life: NT$1 563bn

CAGR (compound annual growth rate) 2002 – 2006 P&C: 3.0% Life: 15.3%

Estimated CAGR 2006 – 2016 (Swiss Re) P&C: 4.4% Life: 6.6%

FSC Reform:

Risk-Based Capital System

Relax overseas investment

Adopt negative listing

Banking Industry

As of June 30, 2007:

47 domestic banks (including 74 foreign banks); 31 savings ban

ks and 278 farmers’ and fishermen’s associations.

14 Faces with 14 banks, 14 securities firms, 7 insurance compan

ies

Market share: Top 5 accounted for 38%; top 10 accounted for 6

3%; 26 banks less than 2%; The Bank of Taiwan (9.85%); prop

osed Taiwan FHC (18% in lending and deposit)

Capital strength

10.75

10.40

10.63

10.07

10.67

10.75

9.60

9.80

10.00

10.20

10.40

10.60

10.80

11.00

BIS ratio% 10.75 10.40 10.63 10.07 10.67 10.75

2000 2001 2002 2003 2004 2005 June

BIS ratio

• BIS: 10.11 (Dec. 2006)

• BIS: 10.62 (June 2007)

630659 670

719

773

48 48

43 44

48

0

100

200

300

400

500

600

700

800

900

2000 2001 2002 2003 2004

Year

Ass

et

30

35

40

45

50

55

60

65

Ne

t wo

rth

asset(US$bil.)

net worth(US$bil.)

* 2007: The total assets reached US$850 billion.

Assets and net worth

• NPL: 11.76 in 4/2002; 2.87﹪ ％ in 7/2005; 2.13% in 2006; 2.32% in 6/ 2007; coverage ratio: 58.53% in 2006; 55.14% in 6/2007

Trend of NPL ratio & Coverage ratio

0%

2%

4%

6%

8%

10%

12%

Q4.2001 Q4. 2002 Q4. 2003 Q4. 2004 Jul. 2005

NP

L r

atio

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Co

ve

rag

e r

atio

NPL ratio

Coverage ratio

Asset Quality

Profitability

ROA : from -0.47% in 2002; 0.61% in 2004; 0.17% in 7/2007

ROE : from -7.35% in 2002; 10.3% in 2004; 2.76% in 7/2007

ROA, ROE in recent 5 years

6.04

3.61

-7.35

3.50

10.30

0.47

0.26

-0.47

0.21

0.61

-8

-6

-4

-2

0

2

4

6

8

10

12

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

ROE ROA

Profitability7/2007 ROA: 0.17% (international averag

e > 1%)7/2007 ROE: 2.76% (international averag

e: 15~20%）2004 Revenue: 78% from loan (internati

onal average: 40%)

Comparison with Other Banks

2.01%

1.47%

1.06%

0.88%

1.38%

0.62%

0.05%

0.49%

1.43%

1.87%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%C

athay

Unit

ed B

ank

Tai

shin

Ban

k

Chin

a T

rust

ICB

C

Tai

pei

Fubon

Ban

k

HS

BC

Miz

uho F

inan

cial

Gro

up

Indu

stri

al a

nd

Com

mer

cial

Ban

k o

f

Chin

a

DB

S B

ank

Kook

min

Ban

k

ROA Dec 31, 2004

Near Term Target

LT Target

As of June 2007

• Cathay Bank: 0.35%

• Taishin Bank: 0.36%

• Chinatrust: 0.83%

• Mega Bank: 0.35%

• Taipei Fubon: 0.35%

ROE

25.05%

16.57%

10.63%

1.70%

11.20%

23.50% 23.20%

28.80%

23.12%

19.71%

0%

5%

10%

15%

20%

25%

30%

35%Ca

thay

Uni

ted

Bank

Chin

a Tr

ust

Taish

inBa

nk ICBC

Taip

eiFu

bon

Bank HSB

C

Indu

stria

l and

com

mer

cial

Ban

kof

Chi

na

DBS

Miz

uho

Fina

ncia

lG

roup

Koo

kmin

Ban

k

Dec 31, 2004

As of June 2007:

• Cathay Bank: 5.6%

• Taishin Bank: 7%

• Chinatrust: 17.16%

• Mega Bank: 4.18%

• Taipei Fubon: 5.1%

Asset

76 54 48 47

685

107

1,296

177

1,277

62

0

200

400

600

800

1,000

1,200

1,400

Bank

ofTa

iwan

Taiwa

nCo

operat

ive Bank

Land

Bank

Hua N

anBa

nk

First

Bank HS

BC

Indust

rial an

dcom

merci

alBa

nk of

China

DBS

Mizuh

oFin

ancial

Group

Kookm

inBa

nk

US$bil.

Dec 31, 2004

Taiwan FHC

Asset: US$159 billion (No.89 worldwide; 18 in Asia; exceeding top 3 banks in Singapore)

Branch: 308Overseas operation:16Market share: 18% in both lending and deposit

market

Banking Consolidation

21

Financial Reforms in 2002

July 2002: two-year Financial Reform Plan focused on NPLsincrease the competitiveness of financial insti

tutions establish an integrated financial supervisory

body to supervise financial institutions

Single Financial Regulator

FSC was established on July 1, 2004Single financial regulator to supervise the

securities, banking and insurance industries

Regulators

Prior to the Reform Ministry of Finance (MOF):

banking, securities & futures, insurance, taxation, fiscal policy, budget, management of government owned shares

Central Bank of China in Taiwan (CBC): monetary policy, FX policy, inspection of banks

After the Reform

MOFtaxation, fiscal policy, budget, management of government owned shares

CBCmonetary and FX policy and implementation

FSC (financial regulator)supervision of the banking, securities & futures and insurance industries and related capital markets activities; inspection of all financial institutions

FSC Major Tasks

• Encourage consolidation of the Banking Sector

• Strengthen corporate governance• Relax restrictions on financial business activities• Internationalize capital market practices• Strengthen enforcement against securities

violations

Banking Consolidation in 2004

Reform in M&A Laws and Regulations

From 2001 to 2002:

• Financial Institution Merger Law (FSC)

• Financial Holding Company Law (FSC)• 14 Faces established

• Enterprise M&A Law (MOEA)

In October 2004, President Chen announced the four objectives regarding consolidation of the banking sector

By the end of 2005:• At least three banks’ total assets will exceed 10% market share• government owned banks reduced from 12 to 6 By the end of 2006:• Faces reduced from 14 to 7• at least one bank run by a foreign financial institution

Major Transactions

From 2002 to 2005• Taishin Bank merged Da An Bank• Fubon share merged Taipei Bank • Cathay Bank merged United World Chinese Ba

nk • Chiao Tung Bank merged ICBC• Chinatrust Bank merged Grand Commercial Ba

nk

From 2005 to 2007 SCB tender offered Hsin Chu BankLong Reach acquired 51% of Entie BankCarlyle acquired 25% of Ta Chong BankMS' minority stake in Chinatrust and E-Su

n

Acquisition via RTC Tai Tong Business Bank (Chinatrust)Hwa Lian Business Bank (ABN AMRO)CUTIC (Cathay) BOWA (DBS)Chinese Bank (HSBC) Asia Trust (SCB) – 10/2008

FSC’s Principal Regulatory Incentives to Facilitate Consolidation of the Banking Sector

FSC Regulatory Incentives

During 2005: Capital allocationInvestment by FHC (allow 5% investment by FHC,

subject to implementation of the M&A plan approved by the FSC)

Amended the tender offer rules100% Foreign FHC or FHC equivalent entity to make

investment in a domestic bank Amendment to the Financial Institution Merger Law and

the FHC Law

Capital Allocation

Prior to the reform: After 100% share swap between a financial

institution and FHC, cash remains at subsidiary

Dividend can only be distributed once a yearFor banks, no capital reduction is allowed

for BIS below 12%

After the reform: 10% BIS plus 6% tier one capitalPotential excess cash: NT$144 billion (14

FHC)

Investments by FHC

Financial Holdco LawFHC may invest in FI and non-FI, subject to

the approval of FSC Max. of 5% paid-in capital for investment in

a non-FI; no participation in the management

Banks under FHC not allowed to make long-term investments

Investments by FHC

Old guidelines: prior approval for any investment; investment must exceed 25% of the target company

2005 guidelines: Min. of 5% investment completed within one year, with the plan of consolidation within 3 years

2007 policy change (?)

Major Investment Review Guidelines

• Unless otherwise approved, DLR below 125%

• “Fit and Proper’’ test for investment of more than 10% in an FHC, or 15% in a bank

• No cumulative losses

Tender Offer Rules

Mandatory tender offer: 20% within 50 daysNo squeeze-out rule (SCB integration)70% acquisition of shares triggers delisting (?)No prior approval from FSC requiredPrior approval from FSC required for regulated

industries Right to call shareholders’ meeting to re-elect

directors for any purchase of 51% or more

Amendments to the Tender Offer Rules

Relax acquisition consideration (foreign stocks and bonds allowed)

Strengthen disclosure requirements Balance commercial risk between offeror and of

fereeFSC’s neutral policy toward hostile takeover

Amendments to Financial Institution Merger Law

Tax incentives Goodwill amortized in 5 - 15 years

Amendments to Financial Holdco Law

Cash can be used as consideration in a share swap (FSC letter)

Bank under FHC can make long-term investments

(Amendments pending at the Executive Yuan)

Foreign Investment in Banks

Banking Law: Max. of 25% investment in a

bank by same person or related persons

Exception to 100% investment - FHC

- trouble banks - government owned banks

Relaxed Foreign Investment in Banks

• Relax definition of foreign FHC

• Cross sectors

• SPV of a FHC

How to kick-off an M&A deal?

Major Milestones

Identify target (Target analysis) Cooking the deal Signing of NDA Signing of MOU/ indicative terms (binding or non-

binding) Due diligence Negotiation of SPA and SHA Arrangement of financing Signing Closing

Target Analysis

Taiwan Market

Business profile of Target

Rationale

Preliminary Valuation

Proposed offer

P&C Insurance Company –

A cross border acquisition

Pros

– Immediate market presence with critical mass and 100% ownership and control

– Stable and profitable business with a long history in the market

– Potential for growth in earnings mainly coming from a less conservative reinsurance program

– Potential for a non-life bancassurance distribution

Pros

– Prepare Acquirer to seize opportunities in the life/asset management market should they arise

– Give Acquirer Asia Team P&C region further scale. Acquisition may facilitate opening of a direct platform at a later stage

– Attractive market as proven by entry of peers and industry growth projections

– Access to experienced mandarin speaking management and employees

Cons

– Uncertain how much of the business is sourced – while we have initial indications from management that this is not a material component of the business

– PRC views Taiwan as its own – while we understand this has not been a material impediment to others in the past, it may add further complexity to managing Acquirer’s relationship with CIRC

– Employee considerations – likely limited restructuring (if needed) will be allowed in the first couple of years. While probably not a major issue for this deal, it may need to be considered for future bolt-on acquisitions

Cons

– Relationship with regulator– EGM required – Significant additional volatility of earnings

might be a consequence of reinsurance optimization

Execution Team

Principals (high-level task force)

FA

Lawyer

CPA/Tax Advisor

Bank consultant/Insurance Consultant

F Ａ

Project coordination

Financial modeling

Structure

Bidding document (if via bidding)

Term sheet; Info Memo

Financing arrangement

Lawyer

Structure

Contract drafting (mandate, NDA, MOU, SPA, SHA, escrow agreement, financing agreement)

Legal due diligence

Contract nego.

Regulatory approvals

Closing documents

CPA

Accounting ddCross-border tax planning and executio

n

Banking Consultant

Operational dd

Indicative terms

Valuation assumptions:• The level of reserves provided for in the account is

appropriate• The parties will enter into a mutually agreed non-life

bancassurance agreement• No material reinsurance contract has been entered by

Target for more than one year• The quality of the assets in the portfolio • The capacity for Acquirer to extract part of the excess

capital

• Satisfactory completion of due diligence on the Company• Negotiation, preparation and execution of definitive,

legally binding and mutually satisfactory documentation• The business being carried out in the ordinary and usual

course, consistent with past practice, and there having been no material adverse change (MAC) in the business, assets or liabilities of the Company

• Obtaining all necessary governmental approvals prior to closing

• Obtaining all necessary corporate (including shareholder) approvals from both parties

MOU

Indicative price

R&W (as of signing & dosing)

Covenant

Corporate governance (or, anti-corporate govt)

Closing conditions (conditions precedent and subsequent)

Exclusivity

Break up fee

Due Diligence

Seller preparation

Information Memorandum (bidding)

Business/financial/legal due diligence

Management dd

Data Room

- Organizational documents

- Financial information

- Business Projection

- Loan files (data tape)

- IT

- Marketing & Sales

- Legal &Regulatory matters

Negotiation

SPA

Closing mechanism and deliverables

R&W

Covenant (to do and not to do)

Earn out

Holdback (R&W)

Escrow/Trust account

Conditions to closing

SHACorporate governance Shareholder level issues

Case Study – 1 (Project Taurus)

台北銀行以標售方式與富邦銀行進行股份轉換 (2003)

台北銀行（上市公司）欲進行併購以增加競爭力

台北市政府公股佔 40%

如果您經委任擔任台北銀行之財務 / 法律顧問 ,

您對本案建議的規劃及執行為何 ?

Taipei Bank led by:

Major SHA led by:

Financial Advisor: Goldman Sachs

Deal Counsel: LCS

Transaction proposals

與金控進行股份轉換 與金控旗下銀行合併 與非金控銀行合併 與證券公司或保險公司共組金控 增資引進財務性或策略性投資人

Execution proposals

與特定對象進行談判採取招標方式

Legal issues

股份轉換時，可否以現金為對價？股東中，可否有人取得 40 ％現金、 60 ％股份 ,有人取得 40 ％股份、 60 ％現金？

金控旗下二家銀行雙品牌員工問題處理主要股東於股份轉換後權利的保障

Case Study - 2 (Project Spaghetti)

渣打 (SCB) 公開收購新竹商- the first 100% TO in Taiwan

(2006)

Taiwan Market

Identify target

Business profile of Target

M&A Rationale

Valuation

Proposed offer

Why Hsin Chu? Why SCB? Hsin Chu Commercial Bank exclusive

deal with SCB (NDA)

Transaction team/Integration team

Transaction team

SCB led by

FA: UBS & MS

Deal counsel: LCS (Allen & Overy)

Execution proposal

Regulatory aspect and tax aspect 100 % TOSCB form a sub in Taiwan/Sub merged

with Hsin Chu Bank (Citi/Overseas Chinese bank)

SCB merged Hsin Chu Bank

From March 2006 to Sep 2006TO (9/29/2006): 98+% (TO Rules) General assumption of SCB Taiwan branch

(Financial Merger Act v. Business Merger Act)SCB Taiwan Sub cash share swap with SCB

UK (squeeze out) – Financial Holdco Act

Lead counselSHA lock up by trust arrangementRegulatory approvals (FSC, FTC, FIA)TO prospectusSPA or SHA? (N/A)

Case Study – 3 (Project Tarzen)

Carlyle acquired control of

Ta Chong Bank

(2007)

TCB 決議增資 Rationale:

- Basel II BIS raised to 10%

- Amendment to the Banking Law Article 64 (loss reached up to 1/3 of the capital - cured within 3 months, otherwise taken over by government or suspension of business)

Original plan

GDR via public offering (proposed by an investment bank)

Private placement to PE (proposed by LCS)

Minority or majority?Bidding or one-on-one? PE v. strategic investor

Execution plan

Invitation to selective biddersSubmission of non-exclusive MOU proposed by

investors with indicative price (May 2007)2 weeks ddInvestment by tiers of SPVs for tax reason (v. B

ASEL II Core Principles)Investment limit (max. of 25% by any single in

vestor/exceptions – Banking Act)

SSA and SHA negotiation (July 2007) government approvals (major SHA approv

al/ FIA approval)Closing subject to financing

(Carlyle v. SCB)

Case Study – 4 (Project Tangram)

China Life (Taiwan) acquired Winterthur Taiwan Branch (Switzerland) from AXA

(France) - 2007

Deal Structure

Asset acquisition v. share acquisition

(Art. 4/Art. 27 of Business M&A Law)Spin-off v. General assumption – pros and

cons

Application of laws/government approvalsFinancial Institution Merger Law/ Busines

s M&A Law/Company Law/

Civil Law/Rulings/ExplanationsWhich law governs?

Considerations Timetable of execution Asset Purchase Agreement