varadarajan rengarajan
Independent consultant
India

Kind regards, Peter

Regards

Zvi

Pricing – valuation are an important stage in M&A (mergers and acquisitions), but valuing an MFI with a complex history and a double/triple bottom line is challenging as much as its results can easily be disputed, isn’t it?

Furthermore, as we saw with Compartamos and I can only confirm from own experience, issues like remaining programme funds, grants, quasi equity, subordinated debt (the latter two often not examined and aproved by MFI regulators/auditors in my experience), retained earnings, valuing employee/member shares and goodwill make it even more difficult.

That can maybe explain that foreign lenders and “investors” dominate the M&A process with MFIs and that is then indeed the additional factor that makes local businessmen, employees, managers, owners and depositors/savers reticient towards MFIs that enjoy foreign attention.

If what I am saying even roughly makes sense, people who promote trends in MF might be more willing to go a bit slow and emphasise the priority of (supporting) local market and capacity building processes and to not go faster than the local process.

Kind regards, Peter

Peter makes some good points, as usual. The lack of clear ownership in many MFIs is an obvious hurdle to MFI mergers. There are also ’social’ issues where an MFI is the ‘adopted child’ of the founder or the Board. Having invested many years of love and attention, they are not always willing to sell, just because the price looks attractive.

It is in these circumstances that an independent view can be of assistance, to advise the parties and encourage them to come to a joint decision. One particular area where external advice can assist is in terms of valuation.

A key element of a successful merger is often pricing. Both the buyer and the seller(s) in an acquisition, or the two parties in a merger, need to feel that the price is fair for them all. In the more commercial world, this can come from so called “precedent transactions”, where parties can see the prices paid in other deals that are similar. Weighted for the distinctions between the past deals and the present one, this can be of great assurance to the parties.

When I left investment banking seven years ago, I was surprised that, despite so many MFIs (10,000 seems to be the much quoted but never proven number), there was a lack of merger activity. An article I wrote a few years ago made the point that one of the obstacles to MFI mergers was valuation. And, in turn, that ’science’ was obscured by the lack of deal data. In fact, at that time I could find only about a dozen precedent transactions from around the world.

Since then things have improved. CGAP did some great work last year, in conjunction with JP Morgan, in assembling data from 144 transactions and the results were published in February. Opportunity International, and many of the people reading this, contributed information. Previous concerns about confidentiality were covered through signed agreements. But frankly, once the sample gets that large, it is very hard to identify individual deals from collective data.

I would encourage readers at MFIs, investors or networks to contribute to similar surveys because it does add greatly to the industry knowledge base. Proper information and advice on valuation and deal pricing can be of assistance to MFIs who, for all the other good reasons (the most important one being to expand access to financial services), decide to combine their resources and activities.

Best regards
Clay O’Brien

Indeed, merging can produce benefits for both partnering/merging companies, for the performance of the resulting merged company as well as for the markets, economies they operate in, so ultimately also for the clients.

But a successful merger requires four pillars, happy and confident owners, happy and confident management, transparent data both management and owners can rely on and an effective and an effectively accessible local legal system.

To start with the third pillar, sharing reliable transparent constructive data is an important challenge in the MF sector of many countries and, for many reasons: MFIs may not have proper owners (and representatives in the board) that hold management accountable, management don’t think that transparent performance data are in their interest, foreign MF performance data explorers do the work for management/owners in a very short period of time, there does not yet exist a large and high level of regulated bookkeepers, accountants, controllers and auditors in a country and MF sector supporters and authorities do not find that important, MFIs do not want to share data between them and with local authorities, and many are comfortable with external people that try to make some sense of it all. This issue is related to the whole hype we(‘ve) see(n) on foreign rating agencies paid by foreign donors or socially responsible investors and to the other hype of
having foreign donors and exerts creating credit reference bureaux in countries where the MFIs don’t want to exchange any bad borrower data between themselves although all MFI managers know each other and are members in the national MF Association, in which all state that slow growth of the sector is due to government and central bank and lobbying that all MFIs should be allowed to collect and intermediate public savings. Does that sound familiar to some?

The second pillar is about matching owners. Many MFIs do not have a clear ownership or they have opted for a legal status but they do not really comply as such and local authorities do not have the means to ensure full compliance with the conditions of such legal (ownership) status. In many countries one finds MFIs legally established as cooperative societies but where there is not even a cooperative authority or where MF cooperative societies fall under the supervision of authorities that do not know much of cooperative societies. Many other MFIs operate as NGOs with no persons at all to hold accountable – if I am not mistaken the Bangladeshi Central Bank is since 2007 trying to go through the applications of hundreds of MFI Credit NGOs to see whether they can become proper MFIs that can indeed be regulated, supervised with on and off-site supervision based on timely, reliable thus verifiable reporting. Only when there is clear ownership, where such
clarity is promoted and ensured by the local regulatory framework, can MFI owners out of free will, own initiative look at based on reliable data, discuss collaboration and how to organise that (with eventually a merger).

Thirdly, management. In situations where the local environment is not advanced yet or where there are no proper owners, professional managers can ensure proper management that can ensure good discussions that can produce sustained fruitful collaboration with other MFIs. But merging means that two different organisations, two different managements, two different sets of personnel, need to come together. That is a complex process of people and organisational management. How difficult that is the long list of failures of mergers in the big world of commercial companies can tell you. When it concerns a “double” or “triple” bottomline “industry” where social, cultural, religious and political issues often mix that will complicate matters even more.

The fourth pillar is most often left out in any discussion on microfinance and financial sector development, or in most discussions on “development aid” in general. “MERGER” is a legal term as such; authorities, companies, owners and management, and in particular of course all customers have a strong interest that a merger is identified, discussed and undertaken in all legal clarity with clear and enforceable responsibilities. That is why Merger (and anti-competition) Authorities in the USA and in the European Union are amongst the most important government departments with very skilled staff.

In some countries, foreign donors and even international finance institutions undertake programs to “support” MFIs to consolidate and merge. Because of all of the above, I am concerned that such foreign support, with their specific deadlines and spending pressures, with their own motives of proving trends right, will complicate things even further and undermine the first main drive towards merging, namely free will based on a verifiable commitment of sharing and will undermine the building up of local alliances together building inclusive financial systems that ensure the rights of the weakest customers.

Successful mergers is about having the basics in a local market right first. Otherwise MFIs’ sustainability and their image with clients will suffer.

Kind regards, Peter

I’ve often wondered why there are so many MFIs and why most of them remain relatively small. Is it largely because of the donations and soft money that have flowed into the industry the past 30 years? Why do a few MFIs grow, while many others do not? Are there numerous unique niches to fill in microfinance so that most countries need dozen or even hundreds — even thousands — of MFIs? What leads some MFIs to merge? If microfinance is such a great business, I wonder why more banks aren’t absorbing MFIs, or are they? Is the microfinance industry immune to the benefits of economies-of-scale? Would mergers/consolidations lessen?
two of the chronic problems in microfinance: indifferent deposit mobilization and high interest rates
on loans?

My first visit to India involved about a dozen customs officials clawing through every single item in my luggage. Much later I understood this irksome process was not designed to control what people brought into the country, but rather was employed to provide jobs for large numbers of people. Is something similar happening in microfinance?……………………….
Jane

At one time USA Based CITI Bank adopted as its Vision and Mission to become the world’s largest commercial retail bank, based on performance (profitability), takeovers and mergers.

They quickly admitted that becoming leaders in other countries (with established banks with established networks and customer & authorities relations) is very difficult and costly especially when you want to be a retail bank (which is what a professional ambitious MFI wants to become is it not?). So they gave that up and switched their ambition to become the largest bank per se.

Now they are a state-owned company that was on the brink of bankruptcy. The same can be said about the once proud Royal Bank of Scotland, Dutch-Belgian Bank-Insurance company Fortis (who tried to eat the bigger bank of ABN-AMRO, together with RBS) and one can even compare the experiences of Barclays and Standard in Africa.

On the other side, you still find in many countries with inclusive financial sectors, including in the USA, small banks that are autonomous and performing well, servicing their small retail clients (especially depositors, savers, so that such banks do not have to rely on interbank or other external sources).

Kind regards, Pete