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1. Introduction Globally mergers and acquisitions have become a major way of corporate restructuring and the financial services industry has also experienced merger waves leading to the emergence of very large banks and financial institutions. The key driving force for merger activity is severe competition among firms of the same industry which puts focus on economies of scale, cost efficiency, and profitability. The other factor behind bank mergers is the too big to fail principle followed by the authorities. In some countries like Germany, weak banks were forcefully merged to avoid the problem of financial distress arising out of bad loans and erosion of capital funds. Several academic studies (see for example Berger et.al. (1999) for an excellent literature review) examine merger related gains in banking and these studies have adopted one of the two following competing approaches. The first approach relates to evaluation of the long term performance resulting from mergers by analyzing the accounting information such as return on assets, operating costs and efficiency ratios. A merger is expected to generate improved performance if the change in accounting-based performance is superior to the changes in the performance of comparable banks that were not involved in merger activity. An alternative approach is to analyze the merger gains in stock price performance of the bidder and the target firms around the announcement event. Here a merger is assumed to create value if the combined value of the bidder and target banks increases on the announcement of the merger and the consequent stock prices reflect potential net present value of acquiring banks. In the globalized economy, Merger and Acquisitions (M& As) acts as an important tool for the growth and expansion of the economy. The main motive behind the Merger and acquisitions (M&As) is to create synergy, that is one plus one is more than two and this rationale beguiles the companies for merger at the tough times. Merger and Acquisitions (M&As) help the companies in getting the benefits of greater market share and cost efficiency. Companies are confronted with the facts that the only big players can survive as there is a cut throat competition in the market and the success of the merger depends on how well the two companies integrate themselves in carrying out day to day operations. One size does not fit for all, therefore many companies finds the best way to go ahead like to expand ownership precincts through Merger and acquisitions (M&As). Merger creates synergy and economies of scale. For expanding the operations and cutting costs, Business entrepreneur and Banking Sector are using Merger and Acquisitions world wide as a strategy for achieving larger size, increased market share, faster growth, and synergy for becoming more competitive through economies of scale. A merger is a combination of two or more companies into one company or it may be in the form of one or more companies being merged into existing
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SCOPE AND OBJECTIVES OF THE STUDY To evaluate the banks performance in terms of net profitability. To analyze the performance of banks after merger in terms of return on capital employed. To find out the impact of merger on companys debt equity ratio. To examine the effects of merger on equity share holders. Our objective here is to present a panoramic view of merger trends in India, to ascertain the perceptions of two important stake-holders viz. shareholders and managers and to discuss dilemmas and other issues on this contemporary topic of Indian banking. We believe that the currently available merger cases do not form a sufficient data set to analyze the performance of mergers based on corporate finance theory because almost all the mergers are through regulatory interventions and market driven mergers are very few. In this paper, the perception of shareholders is ascertained through an event study analysis that documents the impact of bank mergers on market value of equity of both bidder and target banks. The perception of bank managers is ascertained through a questionnaire based survey that brings out several critical issues on bank mergers with insights and directions for the future. Finally, we present
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Focus of Mergers: The growing tendency towards mergers in banks world-wide, has been driven by intensifying competition, need to reduce costs, need for global size, take benefit of economies of scale, investment in technology for technology gains, desire to expand business into new areas and need for improvement in shareholder value. The underlying strategy for mergers, as it is presently being thought to be, is, larger the bank, higher its competitiveness and better prospects of survival. Due to smaller size, the Indian banks may find it very difficult to compete with international banks in various facets of banking and financial services. Hence, one of the strategies to face the intense competition could be, to consolidate through the process of mergers. LIMITATIONS The major limitation of the project is the time frame. The post merger analysis is just for one year and one year is too less period to judge the effect of a merger.
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Analysis of Results In case of forced mergers the shareholders of target banks have not gained any significant abnormal returns on announcement of merger (Table 3). In the case of Nedungadi Bank, the shareholders have gained significantly on the second day of merger announcement but thereafter no abnormal returns were found. Interestingly GTB shareholders have deeply discounted the merger. As the GTB episode was a serious crisis of bank failure the merger has given confidence to depositors but the merger announcement does not appear to have
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Board members are not effective as ideally envisaged. This is more visible in PSU banks
Boards of majority of the banks do not fulfill clear lines of responsibility and
PSU Boards formed by the Government and through nomination. In private sector banks appointments are governed by Banking Regulations Act, and the companies Act. One director each nominated to the boards of private sector banks by RBI.
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The sizes of the l Boards of PSU banks are stipulated by their respective statues
Not less than one half of the total number of directors of banks shall consist of persons who have special knowledge or practical experience.
6.Independence of directors
Disclosure The director s interest is mandatory, in case of conflict of interest arising, the director has to abstain from the decision making process relating to that case.
All banks should have minimum of 10 board members. Increasing number of professionals on Boards by specifying proportion of nonexecutive members on Boards as in case of other companies. Banks should have a specified proportion as non-executive independent directors as in case of other companies. Representation of private shareholders is required in case of mixed ownership. The recommendation of Blue ribbon commission shall be applicable. The directors nominated by the government on the boards of PSBs and all
Issued circular annexing the mandatory recommendations of the SEBI Committee on Corporate Governance. It implies that in case accompany has a
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No mandatory provisions
Whole-time Directors should have sufficiently long tenure. As per Banking Regulation Act, maximum tenure of nonexecutive Directors is eight years. Stipulated age limit of 35-65 years for non-executive Directors. The upper age limit has since been revised to 70 years.
RBI has issued circular in June 2002 directing that a Director should not be in more than 10 committees or act as a Chairman on more than 5 committees. and CEO Requested GOI for legislative changes separated as the per Ganguly Group
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10.Board Meetings
Nationalized banks to have to hold at least six meetings in a year and at least once in a quarter. .
No specific provision
12.Disclosure of remuneration
A number of banks do not disclose the entire compensation package of their full time directors.
13. Committee.
Audit Banks are yet to set up audit committee with right composition various directors
14.Remuneration Committee
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No provision.
Boards set
Audit Committee should have independent nonexecutive Directors and Executive Director should only be a permanent invitee. should Written to GOI for making necessary
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ANALYSIS AND INTERPRETATIONS In Table 2, researcher selected two cases for study, first the merger of the PNB and the Nedungadi bank on 1 Feb, 2003 second the merger of the CBOP and the HDFC bank Ltd. on 23 May, 2008 and analyzed both the cases as considered one public and other from private sector bank. In order to analyze the financial performance of banks after Merger and Acquisitions (M&As). The financial and accounting ratio like Gross profit margin, Net profit margin, Operating profit margin, Return on capital employed, Return on equity, and Debt equity ratio have been calculated. In the first case, Table 3 indicated the profile of both banks before merger. Table 4, shows the post performance of bidder bank after merger. Table 5, shows the combined performance of both banks prior to merger. Similarly, in second case, Table 6 depicts the profile of both the banks before merger, Table 7 indicates the performance of acquiring
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In second case, the merger of the Centurion Bank of Punjab and the HDFC Bank, the comparison between pre and post merger performance we have seen that the mean value of gross profit margin(70.2136% Vs 75.2397) has increased with t-value -4.008 which shows significance improvement in the gross profit margin after merger but in net profit margin and operating profit margin you can see the decline in the mean of both parameters that indicates that there is no change in the performance of banks net profit margin and operating profit margin after merger and result shows that there is no significance with mean(18.8413% Vs 17.2268%) and t-value 0.610 and (46.7550% Vs 53.4248) and t-value -2.319 and the mean return on capital employed (1.1877 percent Vs 1.3220 percent) and t-value -2.182 which is also not significant statically and shows that no change has been seen in term of investment after the merger. The mean of return on equity and debt equity ratio shows improvement, and statically conformed significant to mean value (2.1775 percent Vs 6.7197 percent) and t-value 4.711 and (1.4876 percent Vs 4.0509 percent) and t-value -5.667. The mean value of equity in post merger has been increased so it increased the shareholder return so it also shows the improved performance of bank after merger. Similarly the debt equity ratio also improved after
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MERGER OF HDFC BANK AND CENTURION BANK OF PUNJAB About HDFC Bank Promoted in 1995 by Housing Development Finance Corporation (HDFC), India's leading housing finance company, HDFC Bank is one of India's premier banks providing a wide range of financial products and services to its over 11 million customers across over three hundred cities using multiple distribution channels including a pan-India network of branches, ATMs, phone banking, net banking and mobile banking. Within a relatively short span of time, the bank has emerged as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments. The bank's competitive strength clearly lies in the use of technology and the ability to deliver world-class service with rapid response time. Over the last 13 years, the bank has successfully gained market share in its target customer franchises while maintaining healthy profitability and asset quality. As on December 31, 2007, the Bank had a network of 754 branches and 1,906 ATMs in 327 cities. For the quarter ended December 31, 2007, the bank reported a net profit of Rs. 4.3 billion, up 45.2%, over the corresponding quarter of previous year. Total deposits were Rs. 993.9 billion, up 48.9% over the corresponding quarter of previous year. Total balance sheet size too grew by 46.7% to Rs.1, 314.4 billion.
About Centurion Bank of Punjab Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership 'position'. The bank is also a strong player in foreign exchange services, personal loans, mortgages and agricultural loans. Additionally the bank offers a full suite of NRI banking products to overseas Indians. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, post obtaining all requisite statutory and regulatory approvals. This merger has further strengthened the geographical reach of the Bank in major towns and cities across the country, especially in the State of Kerala, in addition to its existing dominance in the northern part of the country. Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the major Indian stock exchanges, the Banks shares are also listed on the Luxembourg Stock Exchange. MERGED ON: HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore in one of the largest merger in the financial sector in India. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them.
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WHY DID HDFC ACQURIED CBOP? This will be HDFC Banks second acquisition after Times Bank. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. However, the merged entity would become second largest private sector bank. 1. The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. 2. CBoP has close to 170 branches in the north and around 140 branches in the south. 3. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. 4. The combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. 5. There is not much of overlapping of HDFC Bank and CBoP customers. The entire process of the merger took about four months for completion. The merged entity will be known as HDFC Bank. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3.48 in CBoP, while Bank Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. HDFC shareholding falls to will fall from 23.28 per cent to around 19 per cent in the merged entity. A senior bank official said the merger will help HDFC Bank to penetrate RURAL AREAS. The branch acquisitions will boost the presence of HDFC Bank in the NORTHERN and the SOUTHERN REGIONS. The merger will be a win-win situation for HDFC Bank as it would acquire around 400 branches and skilled personnel. CBOP HAD ALSO ACQUIRED LORD KRISHNA BANK LTD.: Before Merging of CBoP with HDFC bank, the CBoP has acquired Lord Krishna Bank ltd. The details of the merger of Lord Krishna Bank with CBop are The Reserve Bank of India has sanctioned the Scheme of Amalgamation of Lord Krishna Bank Ltd. with Centurion Bank of Punjab Ltd. The Scheme has been sanctioned in exercise of the powers contained in Sub-section (4) of Section 44A of the Banking Regulation Act, 1949. The Scheme will come into force with effect from August 29, 2007. All the branches of Lord Krishna Bank Ltd. will function as branches of Centurion Bank of Punjab Ltd. with effect from August 29, 2007.The LKB-CBoP merger in the ratio 5:7 was approved by the AGMs of the respective banks in September 2006. However, one of the shareholders Umeshkumar Pai had challenged the merger and had sought an investigation into the affairs of LKB, while arguing that the decision was taken without sufficient discussion and many shareholders were not permitted in the meeting hall.
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HDFC Bank (Bidder Bank) As on 31 Mar2005 74.17189 21.51485 53.1167 As on 31 Mar2006 71.12331 19.45729 46.00834 As on 31 Mar2007 69.94028 16.56912 47.93091
8.7116 37.23308
0.65377
1.081
0.65671
1.29413
1.18463
1.2511
29.7572 35.275661
86.9701 67.110771
77.46505 100.80164
214.77991 134.38834
278.08009 192.74861
357.38438 222.65358
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POST MERGER PERFORMANCE: Volume 2, Issue 2 (February 2012) (ISSN 2231-5985) International Journal of Research in Finance & Marketing http://www.mairec.org 324 Year/Ratio 2006-07 2007-08 2008-09 2009-10 2010-11 Mean S.D. C.V. Source: Calculated Data. Liquidity Analysis:Liquidity is one of the important parameters through which the performance of a bank is assessed. These parameters of CAMEL Model assess the ability of Bank to pay its short term liabilities towards its deposit holders in a particular span of time. It can be measured with the help of the following ratios: Liquid Assets/Total Assets: -This ratio shows the degree of liquidity preference adopted by the bank. Ratio of Liquid Assets to Total Assets indicates that what percent of total assets are held as liquid assets. This liquidity can be considered to be adequate enough to meet the immediate liabilities of the banks. Higher value of this ratio indicates higher liquidity of banks and lower value indicates lower liquidity of banks. The liquid assets include cash in hand, cash at bank and short-term deposits. The total assets include cash balances, balances with banks, investments, advances, fixed assets and other assets. Table 5 shows liquid assets/total assets of HDFC Bank in pre-merger and post-merger period. In pre-merger period, liquid assets/total assets is 0.099 in 2006-07 which further increased to 0.111 in 2007-08. In base period it declined to 0.096. In post merger period, it increased to 0.135 in 2009-10 and which declined to 0.107 in 2010-11. This indicates that ratio of liquid assets/total assets improved in post-merger period as
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Liquid Assets/Total Assets 0.099 0.111 0.096 0.135 0.107 0.109 0.015 13.76
Liquid Assets/Total Deposits 0.132 0.147 0.123 0.179 0.142 0.145 0.021 14.48
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CONCLUSIONS The present study concluded that financial performance of HDFC Bank improved in post merger period in almost all parameters of CAMEL Model that is capital adequacy, asset quality, management capability, earning quality and liquidity. Merger has significant impaction the financial performance of HDFC Bank. Various ratios calculated under CAMEL Model indicate better performance and improved position of HDFC Bank after merger with Centurion Bank of Punjab. Merger of CBOP and HDFC Bank highlights the fact that two successful banks merged to form the strong entity that could match Public sector banks in size and strength. ROLE OF HR AT THE TIME OF MERGER: The integration will be a challenge for HDFC Bank. Though the cultures of Centurion Bank employees would match with HDFC Bank but the culture of employees of Lord Krishna Bank and Bank of Punjab will definitely not be very similar to HDFC Banks Mergers are a key context for the creation and management of a modified psychological contract or employment relationships between employees and firms thereby affecting the element of trust (Rosalind H. Searle and Kirstie S. Ball, 2004). Mergers force employees to examine, and often change, their understanding of the organization. To the employees, mergers pose as an extreme form of change and are often perceived as threatening to individuals, heightening vulnerability and loss of security. HR ISSUES: When HDFC Bank acquired Centurion Bank of Punjab - itself a combination of sorts, formed by the merger of four banks. They were: 1. HDFC Bank 2. Centurion bank 3. Bank of Punjab (Punjab) 4. Lord Krishna bank (Kerala) Assimilating the cultures of two organisations together can be the trickiest exercise in any merger Following were the issues with Human Resource and how they deal with it:
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1. Lord Krishna Bank, which was merged into Centurion Bank, along with Bank of Punjab. The Kerala-based bank had a union that opposed its merger with Centurion. 2. There were branches that hadn't serviced a single customer in months. 3. When it came to appeasing employees in Punjab, Maitra the HR Manager of HDFC Bank (a Punjabi herself) travelled t h e distance alone. To address employees in Kerala, she joined managing director Aditya Puri, who asked them for a good day's work, for a good day's pay. 4. The next few months were spent in bringing together people, culturally integrating them. 5. Devising packages for compensation and perks, apart from clearing grievances. There were residual issues, ideological differences and duplication of work. 6. Close to 6,500 employees of Centurion Bank have been absorbed into HDFC Bank in a huge integration exercise. 7. The assimilation with Centurion came at a time when the economy was in the throes of a downturn. Mercer Consulting was called in to do a scientific process of job evaluation. 8. The bank also did a comprehensive cultural audit to assess the views of all the employees of the merged entity. 9. HDFC Bank is one of the few banks that doled out increments, promotions and bonuses during the downturn. People were relocated out of businesses that had slowed down, but there were no retrenchments. 10. Training and development, too, were not compromised. Mr. Deepak Parekh, Chairman, HDFC Said, We were amongst the first to get a banking licence, the first to do a merger in the private sector with Times Bank in 1999, and now if this deal happens, it would be the largest merger in the private sector banking space in India. HDFC Bank was looking for an appropriate merger opportunity that would add scale, geography and experienced staff to its franchise. This opportunity arose and we thought it is an attractive route to supplement HDFC Banks organic growth. We believe that Centurion Bank of Punjab would be the right fit in terms of culture, strategic intent and approach to business. Mr. Aditya Puri, Managing Director, HDFC Bank Said, These are exciting times for the Indian banking industry. The proposed merger will position the combined entity to significantly exploit opportunities in a market globally recognized as one of the fastest growing. Im particularly bullish about the potential of business synergies and cultural fit between the two organizations. The combined entity will be an even greater force in the market. Mr. Rana Talwar, Chairman, Centurion Bank of Punjab
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