The document discusses mergers and acquisitions (M&A) in the banking industry. It presents M&A as both a potential "cure" and "curse" for banks. On one hand, M&A can provide access to resources, distribution networks, and economies of scale. However, M&A can also divert management attention, strain technology systems, and create challenges in managing integrated operations. The document outlines HSBC's framework for evaluating acquisitions and examines the impacts of scale, capital discipline, market conditions, and complexity on M&A strategy. It concludes by reviewing HSBC's financial performance over 15 years.

1. M&A: Curse or Cure?
DOUGLAS FLINT
Group Finance Director 16 May 2007

2. Maintaining capital efficiency
US$105bn
100 20
Return on invested capital (%) US$95bn
90
US$86bn
15
80
US$bn
US$76bn
(%)
Tier 1 ratio (%)
70
10
60
US$56bn
US$52bn
50 5
2001 2002 2003 2004 2005 2006
Average invested capital employed (US$bn) Return on invested capital (%) Tier 1 ratio (%)
(1) UK gaap to 2003, IFRS basis from 2004
(2) Dividends per share in respect of each year
2

3. HSBC acquisition framework
• Strategic fit
• Human fit
• Technology fit
• Something shareholders cannot do?
• Financial returns
• Market reaction
3

4. Curse or Cure ?
Cure Curse
• Licence to operate • Management diversion
• Access to resources • Technology strain
• Access to distribution • Management and control framework
• Economies of scale • Employee engagement
• Diversification imbalances • Aggregated risk resolution
• Capital and funding gaps • Regulatory and accounting spaghetti
4

5. Challenges to successful M&A
• Balancing operational independence with consistency of control framework
• Delivering clear lines of management accountability
• Avoiding silos and tribes
• Aligning reward structures for legacy and incoming management
• Remembering what made the target successful
Demonstrate creation of shareholder value
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6. Impact of the current environment
• Real focus being given to the benefits of scale and diversification
• Capital discipline under scrutiny
• Stock market rating - Use it or Lose it
• Liquid market – high acquisition premia
• Does scale offer differentiation and returns that offset complexity?
• Disintermediating banks - is this an option for investors?
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7. Where we have come from
Financial performance over 15 years
$2.1bn provision at
US$ Mortgage Services
1.50 1.40
1.36
Asian Argentine
crisis crisis 1.18
0.99
1.00
0.80 0.81
0.76 0.73
0.69 0.66 0.66
0.61 0.63
0.54 0.60
0.53
0.49 0.48
0.50 0.41 0.44
0.35 0.34
0.31 0.28 0.31
0.22
0.15 0.14 0.16
0.08 0.10 0.12
0.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Earnings Per Share Dividends Per Share
(1) UK gaap to 2003, IFRS basis from 2004
(2) Dividends per share in respect of each year
7

8. Thank you
8