INTRODUCTION

Mergers and acquisitions in India

Mergers and acquisitions aim towards Business Restructuring and increasing competitiveness
and shareholder value via increased efficiency. In the market place it is the survival of the
fittest.
India has witnessed a storm of mergers in recent years. The Finance Act, 1999 clarified many
issues relating to Business Reorganizations there by facilitating and making businessrestructuring tax neutral. As per Finance Minister this has been done to accelerate internal
liberalization and to release productive energies and creativity of Indian businesses.
The year 1999-2000 has notched-up deals over Rs.21000 crore which is over 1% of Indias
GDP. This level of activity was never seen in Indian corporate sector. InfoTech, Banking,
media, pharma, cement, power are the sectors, which are more active in mergers and
acquisitions.

Consolidation of banking industry-an overview

HDFC Bank and Times Bank tied the merger knot in year 1999. The coming together of two
likeminded private banks for mutual benefit was a land mark event in the history of Indian
banking.
Many analysis viewed this action as opening of the floodgate of a spate of mergers and
consolidations among the banks, but this was not to be, it took nearly a year for another
merger. The process of consolidation is a slow and painful process. But the wait and watch
game played by the banks seems to have come to an end. With competition setting in and
tightening of the prudential norms by the apex bank the players in the industry seems to be
taking turns to merge.
It was the turn Bank of Madura to integrate with ICICI Bank. This merger is remarkable
different from the earlier ones. It is a merger between banks of two different generations. It
marks the beginning of the acceptance of merger with old generation banks, which seemed to
be out of place with numerous embedded problems.
The markets seem to be in favor of bank consolidation. As in the case of HDFC Bank and
Times Bank, this time also market welcomed the merger of ICICI Bank and Bank of Madura.
Each time a merger is announced it seems to set out a signal in the industry of further
consolidation. The shares of the bank reached new heights. This time it was not only the turn

of the new private sector banks, but also the shares of old generation private banks and even
public sector banks experienced a buying interest. Are these merger moves a culmination of
the consolidation in the industry? Will any bank be untouched and which will be left out?
To answer this question let us first glance through the industry and see where the different
players are placed. The Indian banking industry is consists of four categories-public sector
banks, new private sector banks and foreign banks. The public sector banks control a major
share of the banking operations. These include some of the biggest names in the industry like
State Bank of India and its associate banks, Bank of Baroda, Corporation bank etc. their
strength lies in their reach and distribution network. Their problems rage from high NPAs to
over employment. The government controls these banks. Most of these banks are trying to
change the perception. The government controls these banks. Most of these banks are trying
to change the perception. The recent thrust on reduction of government stake, VRS and NPA
settlement are steps in this direction. However, real consolidation can happen if government
reduces its stake and changes its perception on the need of merger. The governments stand
has always been that consolidation should happen to save a bank from collapsing. The old
private sector banks are the banks, which were established prior the Banking
Nationalization Act, but could not be nationalized because of their small size. This segment
includes the Bank Of Madura, United Western Bank, Jammu and Kashmir bank; etc. who
banks are facing competition from private banks and foreign banks. They are trying to
improve their margins. Though some of the banks in this category are doing extremely well,
the investors and the markets seem not to reward them adequately. These banks are unable to
detach themselves effectively from the older tag. The new private banks came into existence
with the amendment of Banking Regulation Act in 1993, which permitted the entry of new
private sector banks.
Of the above the spotlight is on the old generation private banks .the OGPBs can become
easy takeover targets .the sizable portfolios of advances and deposits act as an incentive.
Added to this these banks have a diversified shareholder base, which inhibits them from
launching an effective battle against the potential acquirers. The effective shield against
takeovers for these banks could be to get into strategic alliances like the Vysya bank model,
which has bank Brussels Lambert of the Dutch ING Group as a strategic investor. United
Western Bank and Lord Krishna Bank are already on a lookout for strategic partners. But the
problems go beyond the shareholding pattern and are far rooted .the prudential norms like the
increasing CAR and the minimum net worth requirements are making the very existence of

these banks difficult. They are finding it difficult. They are finding difficult to raise capital
and keep up with the ever-tightening norms .one of the survival routes for these banks is to
merge with another bank.

Mergers: Making sense of it all

In the process of merger banks will have to give due importance to synergies and
complimentary adhesions. The merger must make sound business sense and reflect in
increasing the shareholder value. It should help increase the banks net worth and its capital
adequacy. A merger should expand business opportunity for both banks. The other critical and
competitive edge for survival is the cost of funds, which means stable deposits and risk
diversification. Network size is very important in this perspective because one cannot grow
staying in one place because the asset market in every place is limited. Unless one prepares
the building blocks for growth by looking outside ones area he either sells out or gets
acquired. The features, which a bank looks in its target seems to be the distribution network
(number of branches and geographical distribution), number of clients and financial
parameters like cost of funds, capital adequacy ratio, NPA and provision cover.
The merger of strong entities should be encouraged. The reason for the merger should not be
to save a bank from extinction rather the motive must be to go join for the distant advantages
of both combining banks towards a mutual benefit. PS Shenoy, chairman and managing
director, Bank of Baroda said, today public sector bank can merge with another bank only
through moratorium route. That means you can takeover only a dead and you die yourself
and allow to be merged with a strong bank. Unfortunately this is not the spirit behind the
merger and acquisition.

Strategic alliance
It is not only important for banks to merge with banks but also entities in the other business
activities. Strategic partnership could become the important thing. Strategic mergers between
banks for using each others infrastructure enabling remittance of funds to various centers
among the strategic partner banks can give the account holder the flexibility of purchasing a
draft payable at centers where the strategic tie-up exists. The strategic tie-up could also
include a bank with another specialized investment bank to provide value-added services.
Tie-ups could also be between a bank and technology firm to provide advanced services. It is

these strategic tie-ups that are set to increase in future. These along with providing valueadded benefits, also help in building positive perceptions in the market.
In a macro perspective mergers and acquisition can prove effective on strengthening the
Indian financial sector. Today, while Indian banks have made tremendous strides in extending
the reach domestically, internationally the Indian system is conspicuous by its absence. There
are very few catering mostly to India related business. As a result India does not have a
presence in international financial markets. If India has to emerge as an international banking
center the presence of large banks with foreign presence is essential. With globalization and
strategic alliances Indian banks would grow originally. The large banks with international
presence. Globally the banking industry is consolidating through cross-border mergers. India
seems to be far behind. The law does not allow the foreign banks with branch network to
acquire Indian banks. But who knows with pressures of globalization the law of the land
could be amended paving way for a cross border deal.
While the private sector banks are on the threshlod of improvement, the public sector banks
(PSBs) are slowly contemplating automation to accelerate and cover the lost ground. To
contend with new challenges posed by the private sector banks, PSBs are pumping huge
amounts to update their It. but still, it looks like, public sector banks need to shift the gears,
accelerate their moivements, in the right direction by automation their branches and
providing, Internet banking services.
Private sector banks, in order to compete with large and well-established public sector banks,
are not only foraying into IT, but also shaking hands with peer banks to establish themselves
in the market. While one of the first initiatives was taken in November 1999, when Deepak
Prakesh of HDFC and S.M.Datta of Times bank shook hands, created history. It is the first
merger in the Indian banking, signaling that Indian banking sector joined the mergers and
acquisitions bandwagon. Prior to this private bank merger, there have been quite a few
attempts made by the government to rescue weak banks and synergize the operations to
achieve scale economies but unfortunately they were all futile. Presently size of the bank is
recognized as one of the major strengths in the industry. And, mergers amongst strong banks
can both a means to strengthen the base, and of course, to face the cutthroat competition.

The appetite for mergers is making a comeback among the public sector banking industry.
The instincts are aired openly at various forums and conferences. The bank economist
conference perhaps set the ball rolling after the special secretary for banking Devi Dayal
stressed the importance of the size as a factor. He pointed out the consolidation through
merger and acquisition was becoming a trend in the global banking scenario wanted the
Indian counterparts to think on the same lines. There is also a feeling threat there are far too
many banks. PS Shenoy, chairman and managing director of Bank of Baroda, said, There are
too many banks to handle the size of business. The pace of mergers will hasten. As the time
runs out and the choice of target banks with complementary businesses gets reduced there
would be a last minute rush to acquire the remaining banks, which will hasten the process of
consolidation.

The Indian Banking Sector

The history of Indian banking can be divided into three main phases.
I.
II.
III.

Phase I (1786- 1969) - Initial phase of banking in India when many small banks were
set up
Phase II (1969- 1991) - Nationalisation, regularisation and growth
Phase III (1991 onwards) - Liberalisation and its aftermath
With the reforms in Phase III the Indian banking sector, as it stands today, is mature in
supply, product range and reach, with banks having clean, strong and transparent balance
sheets. The major growth drivers are increase in retail credit demand, proliferation of
ATMs and debit-cards, decreasing NPAs due to Securitisation, improved macroeconomic
conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g.
amendments to the Banking Regulation Act).
Certain trends like growing competition, product innovation and branding, focus on
strengthening risk management systems, emphasis on technology have emerged in the
recent past. In addition, the impact of the Basel II norms is going to be expensive for
Indian banks, with the need for additional capital requirement and costly database creation
and maintenance processes. Larger banks would have a relative advantage with the
incorporation of the norms.

Recommendations of Narasimham Committee on Banking Sector Reforms

The Narasimham Committee on banking sector reforms suggested that merger should not be
viewed as a means of bailing out weak banks. They could be a solution to the problem of
weak banks but only after cleaning up their balance sheet. The government has tried to find a
solution on similar lines, and passed an ordinance on September 4, 1993, and took the

initiative to merger New Bank of India (NBI) with Punjab National Bank (PNB). Ultimately,
this turned out to be an unhappy event. Following this, there was a long silence in the market
till HDFC Bank successfully took over Times Bank. Market gained confidence, and
subsequently, there were two more mega mergers. The merger on Bank Of Madura with
ICICI Bank, and of Global Trust Bank with UTI Bank, emerging as a new bank, UTI Bank,
emerging as a new bank, UTI-Global Bank.
The following are the recommendations of the committee

1) Globally, the banking and financial systems have adopted information and
communications technology. This phenomenon has largely bypassed the Indian
banking system, and the committee feels that requisite success needs to be achieved in
the following areas:
a) Bank automation
b) Planning, standardization of electronic payment systems
c) Telecom infrastructure
d) Data warehousing network
2) Mergers between banks and DFIs and NBFCs need to be based on synergies and
should make a sound commercial sense. Committee also opines that mergers between
strong banks/FIs would make for greater economic and commercial sense and would
be a case where the whole is greater than the sum of its parts and have a force
multiplier effect. It is also opined that mergers should not be seen as a means of
bailing out weak banks.
3) A weak bank could be nurtured into healthy units. Merger could also be a solution to a
weak bank, but the committee suggests it only after cleaning up their balance sheets.
It also says, if there is no voluntary response to a takeover of their banks a
restructuring, merger amalgamation, or if not closure.
4) The committee also opines that, licensing new private sector banks, the initial capital
requirements need to be reviewed. It also emphasized on a transparent mechanism for
deciding the ability of promoters to professionally manage the banks. The committee
also feels that a minimum threshold capital for old private banks also deserves
attention and mergers could be one of the options available for reaching the required
threshold capitals. The committee also opined that a promoter group couldnt hold
more than 40% of the equity of a bank.

The Indian banking and financial sector-a wealth creator or a wealth

destroyer?
The Indian banking and financial sector (BFS) destroyed 22 paise of market value added
(MVA) for every rupee invested in it, which is really poor compared to the BFS sector in the
U.S, which has created 92 cents of MVA per unit of invested capital. The good news is that
the performance of the wealth creating Indian banks has been better than that of the wealthy
creating US banks.
But the sad part is that the banks, which h destroy 59 paise of wealth for every rupee
invested, consume about 88% of total capital invested in out BFS sector. As a benchmark, the
US economy invests 83% of its capital in wealth creators.
In the banking and financial sector too. The winners on the MVA-scale are different from
those on traditional Size-based measures such as total assets, revenues, and profit after tax
and market value of equity. Indeed, the banks with most assets such as State Bank of India
and Industrial Development Bank of India are amongst the biggest wealth destroyers. SBI
tops on size-based measures like revenues, PAT, total assets, market value of equity, but
appears among the bottom ranks for wealth creation. On the other hand, HDFC and HDFC
Bank top the MVA rankings even though they do not appear in the top 10 ranking based on
total assets or revenues.

RESEARCH METHODOLOGY
Objectives:
1. To critically analyse the impact of Mergers and Acquisitions on Operating
performance of Banking firms in India.
2. To Identify how Mergers and Acquisitions in banking sector look for strategic benefits
in terms of
a) Profits
b) Increase in Customer Base
c) Increase in shareholders value.

Research Design: Descriptive Research

Type of Data: Secondary Data
Research Instrument: Financial Ratios, Analysis of Economic Value and Market Value.

Critical Analysis of Impact of Mergers and Acquisitions

Mergers and acquisitions bring a number of changes within the organization. The size of the
organizations change, its stocks, shares and assets also change, even the ownership may also
change due to the mergers and acquisitions. The mergers and acquisitions play a major role
on the activities of the organizations. However, the impact of mergers and acquisitions varies
from entity to entity; it depends upon the group of people who are being discussed here. The
impact of mergers and acquisitions also depend on the structure of the deal.
Impact of Mergers and Acquisitions

Impacts on Employees
Mergers and acquisitions may have great economic impact on the employees of the
organization. In fact, mergers and acquisitions could be pretty difficult for the
employees as there could always be the possibility of layoffs after any merger or
acquisition. If the merged company is pretty sufficient in terms of business
capabilities, it doesn't need the same amount of employees that it previously had to do
the same amount of business. As a result, layoffs are quite inevitable. Besides, those
who are working, would also see some changes in the corporate culture. Due to the
changes in the operating environment and business procedures, employees may also
suffer from emotional and physical problems.

Impact on Management
The percentage of job loss may be higher in the management level than the general
employees. The reason behind this is the corporate culture clash. Due to change in
corporate culture of the organization, many managerial level professionals, on behalf
of their superiors, need to implement the corporate policies that they might not agree
with. It involves high level of stress.

Impact on Shareholders
Impact of mergers and acquisitions also include some economic impact on the
shareholders. If it is a purchase, the shareholders of the acquired company get highly
benefited from the acquisition as the acquiring company pays a hefty amount for the
acquisition. On the other hand, the shareholders of the acquiring company suffer some
losses after the acquisition due to the acquisition premium and augmented debt load.

Impact on Competition
Mergers and acquisitions have different impact as far as market competitions are
concerned. Different industry has different level of competitions after the mergers and
acquisitions. For example, the competition in the financial services industry is

relatively constant. On the other hand, change of powers can also be observed among
the market players.

INTRODUCTION TO MERGERS AND ACQUISITIONS

The concept of mergers and acquisitions is very much popular in the current scenario. More,
so it is significantly popular concept after 1990s where India entered in to the Liberalization,
Privatization and Globalization (LPG). The winds of LPG are blowing over all the sectors of
the Indian economy but its maximum impact is seen in the industrial sector. It caused the
market to become hyper-competitive, to avoid unhealthy competition and to face
international and multinational companies.
Meaning and Definition of Merger and Acquisition
Merger is defined as combination of two or more companies into a single company where one
survives and the other lose their corporate existence. The survivor acquires the assets as well
as liabilities of the merged company or companies.
According to the Oxford Dictionary the expression merger or amalgamation means
Combining of two commercial companies into one and Merging of two or more business
concerns into one respectively.
A merger is just one type of acquisition. One company can acquire another in several other
ways including purchasing some or all of the companys assets or buying up its outstanding
share of stock.
Usually the assets and liabilities of the smaller firms are merged into those of larger firms.
Merger may take two forms1.
2.

Merger through absorption

Merger through consolidation.

Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one loose their identity in a merger through absorption.
Consolidation
A consolidation is a combination if two or more combines into a new company. In this form
of merger all companies are legally dissolved and a new entity is created. In consolidation the
acquired company transfers its assets, liabilities and share of the acquiring company for cash
or exchange of assets.

To end up the word MERGER may be taken as an abbreviation which means:

M - Mixing
E - Entities
R - Recourses for
G - Growth
E - Enrichment and
R - Renovation.
Acquisition
Acquisition in general sense is acquiring the ownership in the property. Acquisition is the
purchase by one company of controlling interest in the share capital of another existing
company. This means that even after the takeover although there is change in the
management of both the firms retain their separate legal identity.
Mergers Vs Acquisition
Although these are often used as synonymous, the terms merger and acquisition mean
slightly different things. When a company takes over another one and clearly becomes the
new owner, the purchase is called an acquisition. From the legal point of view, the target
company ceases to exist and the buyer swallows the business and stock of the buyer
continues to be traded.
In the pure sense of the term, a merger happens when two firms, often about the same size,
agree to go forward as a new single company rather than remain separately owned and
operated. This kind of action is more precisely referred to as a merger of equals. Both companies
stocks are surrendered and new company stock is issued in its place.

TYPES OF MERGERS
Mergers can be a distinguished into the following four types:1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger
Horizontal Merger
Horizontal merger is a combination of two or more corporate firms dealing in same lines of
business activity. Horizontal merger is a co centric merger, which involves combination of
two or more business units related to technology, production process, marketing research,
development and management
Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production or
distribution that are usually separate. The vertical Mergers chief gains are identified as the
lower buying cost of material. A vertical merger is one of the most common types of
mergers. When a company merges with either a supplier or a customer to create an
extension of the supply chain, it is known as a vertical merge or integration.
Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in respect of
technology, production process or market and management. Conglomerate mergers are types
of mergers that are in different market businesses. There is no relationship between the types
of business one company is in and the type the other is in. The merger is typically part of a
desire on the part of one company to grow its financial wealth. By merging with a completely
unrelated, but often equally profitable company, the resulting conglomerate gains a revenue
stream in many types of industries.
Concentric Merger
Concentric merger are based on specific management functions whereas the conglomerate
mergers are based on general management functions. If the activities of the segments brought
together are so related that there is carry over on specific management functions. Such as
marketing research, Marketing, financing, manufacturing and personnel.

Advantages of Mergers and Acquisitions

1. Network Economies. In some industries, firms need to provide a national network.
This means there are very significant economies of scale. A national network may
imply the most efficient number of firms in the industry is one.
2. Research and development. In some industries, it is important to invest in research
and development to discover new products / technology. A merger enables the firm to
be more profitable and have greater funds for research and development. This is
important in industries such as drug research.
3. Other Economies of Scale. The main advantage of mergers is all the potential
economies of scale that can arise. In a horizontal merger, this could be quite
extensive, especially if there are high fixed costs in the industry. Examples of
economies of scale. If the merger was a vertical merger or conglomerate merger, the
scope for economies of scale would be lower.
4. Avoid Duplication. In some industries it makes sense to have a merger to avoid
duplication. For example two bus companies may be competing over the same stretch
of roads. Consumers could benefit from a single firm with lower costs. Avoiding
duplication would have environmental benefits and help reduce congestion.

5. Regulation of Monopoly. Even if a firm gains monopoly power from a merger, it

doesnt have to lead to higher prices if it is sufficiently regulated by the government.
For example, in some industries the government have price controls to limit price
increases. That enables firms to benefit from economies of scale, but consumer dont
face monopoly prices.
6. Growth or Diversification: Companies that desire rapid growth in size or market
share or diversification in the range of their products may find that a merger can be
used to fulfil the objective instead of going through the tome consuming process of
internal growth or diversification. The firm may achieve the same objective in a short
period of time by merging with an existing firm. In addition such a strategy is often
less costly than the alternative of developing the necessary production capability and
capacity. If a firm that wants to expand operations in existing or new product area can
find a suitable going concern. It may avoid many of risks associated with a design;
manufacture the sale of addition or new products.
7. Synergy: Implies a situation where the combined firm is more valuable than the sum
of the individual combining firms. It refers to benefits other than those related to
economies of scale. Operating economies are one form of synergy benefits. But apart
from operating economies, synergy may also arise from enhanced managerial
capabilities, creativity, innovativeness, R&D and market coverage capacity due to the
complementarity of resources and skills and a widened horizon of opportunities
Merger may result in financial synergy and benefits for the firm in many ways:i.

By eliminating financial constraints

ii.

By enhancing debt capacity. This is because a merger of two companies can bring
stability of cash flows which in turn reduces the risk of insolvency and enhances
the capacity of the new entity to service a larger amount of debt

iii.

By lowering the financial costs. This is because due to financial stability, the
merged firm is able to borrow at a lower rate of interest.

8. Other Motives for Mergers: Merger may be motivated by other factors that
should not be classified under synergism. These are the opportunities for acquiring
firm to obtain assets at bargain price and the desire of shareholders of the acquired
firm to increase the liquidity of their holdings.
a) Purchase of Assets at Bargain Prices: Mergers may be explained by opportunity to
acquire assets, particularly land mineral rights, plant and equipment, at lower cost

than would be incurred if they were purchased or constructed at the current market
prices. If the market price of many socks have been considerably below the
replacement cost of the assets they represent, expanding firm considering construction
plants, developing mines or buying equipments often have found that the desired
assets could be obtained where by heaper by acquiring a firm that already owned and
operated that asset. Risk could be reduced because the assets were already in place
and an organization of people knew how to operate them and market their products.
b) Increased Managerial Skills or Technology: Occasionally a firm will have good
potential that is finds it unable to develop fully because of deficiencies in certain areas
of management or an absence of needed product or production technology. If the firm
cannot hire the management or the technology it needs, it might combine with a
compatible firm that has needed managerial, personnel or technical expertise. Of
course, any merger, regardless of specific motive for it, should contribute to the
maximization of owners wealth.
c) Acquiring New Technology: To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller
company with unique technologies, a large company can maintain or develop a
competitive edge.
i.

Operating Economies: Arise because, a combination of two or more firms may

result in cost reduction due to operating economies. In other words, a combined firm
may avoid or reduce over-lapping functions and consolidate its management functions
such as manufacturing, marketing, R&D and thus reduce operating costs

ii.

Increased Revenue or Market Share: This assumes that the buyer will be absorbing
a major competitor and thus increase its market power (by capturing increased market
share) to set prices.

iii.

Cross-Selling: For example, a bank buying a stock broker could then sell its banking
products to the stock broker's customers, while the broker can sign up the bank's
customers for brokerage accounts. Or, a manufacturer can acquire and sell
complementary products.

Procedure for Evaluating the decision or Merger & Acquisitions

Merger and acquisition process is the most challenging and most critical one when it comes
to corporate restructuring. One wrong decision or one wrong move can actually reverse the
effects in an unimaginable manner. It should certainly be followed in a way that a company
can gain maximum benefits with the deal.
Following are some of the important steps in the M&A process:
Business Valuation
Business valuation or assessment is the first process of merger and acquisition. This step
includes examination and evaluation of both the present and future market value of the target
company. A thorough research is done on the history of the company with regards to capital
gains, organizational structure, market share, distribution channel, corporate culture, specific
business strengths, and credibility in the market. There are many other aspects that should be
considered to ensure if a proposed company is right or not for a successful merger.
Proposal Phase
Proposal phase is a phase in which the company sends a proposal for a merger or an
acquisition with complete details of the deal including the strategies, amount, and the
commitments. Most of the time, this proposal is send through a non-binding offer document.
Planning Exit
When any company decides to sell its operations, it has to undergo the stage of exit planning.
The company has to take firm decision as to when and how to make the exit in an organized
and profitable manner. In the process the management has to evaluate all financial and other
business issues like taking a decision of full sale or partial sale along with evaluating on
various options of reinvestments.
Structuring Business Deal
After finalizing the merger and the exit plans, the new entity or the takeover company has to
take initiatives for marketing and create innovative strategies to enhance business and its
credibility. The entire phase emphasize on structuring of the business deal.
Stage of Integration
This stage includes both the company coming together with their own parameters. It includes
the entire process of preparing the document, signing the agreement, and negotiating the deal.
It also defines the parameters of the future relationship between the two.
Operating the Venture
After signing the agreement and entering into the venture, it is equally important to operate
the venture. This operation is attributed to meet the said and pre-defined expectations of all
the companies involved in the process. The M&A transaction after the deal include all the

essential measures and activities that work to fulfil the requirements and desires of the
companies involved.

Benefits of merger and acquisition Banks

The fruits of Merger and Acquisitions for banks are reducing unhealthy competition amongst
banks, sound financial position, huge business, large assets, benefits of core banking
solutions, networking and technological advancements at low cost, low cost of maintenance
and human resource management, large profits, larger customer coverage. Moreover,
recapitalisation of weaker banks in the lights of Basel II Norms.
Customers Customer are also benefited by better and faster services, competitive pricing of
all products and services, increased number of branches, improved and upgraded technology,
etc.
RBI Through Merger and Acquisition RBI is benefited by better monitoring, interaction with
less number of CEOs, easy implementation of policy and convenience in surveillance due to
better and updated technology, etc.
Depositors Depositor have better investment opportunity, negotiable environment, higher
dividends, etc.
Other related parties They get Indian banks of International Standards, sound and large
Indian Banks, no risk in performance of contracts and higher dividends, better and huge deals
with one banks rather than two or more etc.

MERGER AND ACQUISITION IN BANKING PRESENT SCENARIO

In the LPG era, the proposal to grant autonomy to banks board could go a long way to
improve the operational flexibility of Public Sector Banks, which is crucial in the competitive
environment that banks operate in. the urgency of granting autonomy is so acute that unless
the public sector banks managements are given adequate powers to speedily respond to the
new competitive and information technology challenges, these banks may not be viable in the
long run.
The Government also proposes to recapitalize weak banks. The recapitalisation of weak
banks has not yielded the expected results in the past and hence should be linked to a viable
and time bound restructuring plan. The process of merger and acquisition is not new for
Indian banking Times Bank merged with HDFC Bank, Bank of Madura with ICICI Bank,
Nedungadi Bank Ltd with Punjab National Bank and most recently Global Trust Bank with
Oriental Bank of Commerce.

Mergers and Acquisitions of Banks:

1. HDFC Bank Acquires Centurion Bank of Punjab (May '08)
Intent

For HDFC Bank, this merger provided an opportunity to add scale, geography (northern
and southern states) and management bandwidth. In addition, there was a potential of
business synergy and cultural fit between the two organizations.
For CBoP, HDFC bank would exploit its underutilized branch network that had the
requisite expertise in retail liabilities, transaction banking and third party distribution. The
combined entity would improve productivity levels of CBoP branches by leveraging
HDFC Bank's brand name.
Benefits
The deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in India),
providing massive scale economies and improved distribution with 1,148 branches and
2,358 ATMs (the largest in terms of branches in the private sector). CBoP's strong SME
relationships complemented HDFC Bank's bias towards high-rated corporate entities.
There were significant cross-selling opportunities in the short-term. CBoP management
had relevant experience with larger banks (as evident in the Centurion Bank and BoP
integration earlier) managing business of the size commensurate with HDFC Bank.
Drawbacks
The merged entity will not lend home loans given the conflict of interest with parent
HDFC and may even sell down CBoP's home-loan book to it. The retail portfolio of the
merged entity will have more by way of unsecured and two-wheeler loans, which have
come under pressure recently.
Merger of HDFC and Centurion Bank of Punjab08
S.NO.

Contents

HDFC

1.
2.
3.
4.
5.

Branches
ATMs
Deposits
Net profit
Net worth

452
674
7.11 crore
132.1 crore
713.3 crore

Centurion bank of Merged entity

Punjab
274
746
393
1047
5.70 crore
15.8 crore
102.5 crore
224.5 crore
699.3 crore
848.7 crore

2. Standard Chartered Acquires ANZ Grindlays Bank (November '00)

Intent
Standard Chartered wanted to capitalise on the high growth forecast for the Indian
economy. It aimed at becoming the world's leading emerging markets bank and it thought
that acquiring Grindlays would give it a well-established foothold in India and add strength
to its management resources. For ANZ, the deal provided immediate returns to its
shareholders and allowed it to focus on the Australian market. Grindlays had been a poor
performer and the Securities Scam involvement had made ANZ willing to wind up.
Benefits
Standard Chartered became the largest foreign bank in India with over 56 branches and
more than 36% share in the credit card market. It also leveraged the infrastructure of ANZ
Grindlays to service its overseas clients. 2

For ANZ, the deal, at a premium of US $700 million over book value, funded its share
buy-back in Australia (a defence against possible hostile takeover). The merger also greatly
reduced the risk profile of ANZ by reducing its exposure to default prone markets. 3
Drawbacks
The post-merger organisational restructuring evoked widespread criticism due to unfair
treatment of former Grindlays employees. 4 There were also rumours of the resulting
organisation becoming too large an entity to manage efficiently, especially in the fast
changing financial sector.

3. ICICI Bank Ltd. Acquires Bank of Madura (March '01)

Intent
ICICI Bank Ltd wanted to spread its network, without acquiring RBI's permission for
branch expansion. BoM was a plausible target since its cash management business was
among the top five in terms of volumes. In addition, there was a possibility of reorienting
its asset profile to enable better spreads and create a more robust micro-credit system postmerger. 8
BoM wanted a (financially and technologically) strong private sector bank to add
shareholder value, enhance career opportunities for its employees and provide first rate,
technology-based, modern banking services to its customers.
Benefits
The branch network of the merged entity increased from 97 to 378, including 97 branches
in the rural sector.9 The Net Interest Margin increased from 2.46% to 3.55 %. The Core fee
income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. IBL gained an
additional 1.2 million customer accounts, besides making an entry into the small and
medium segment. It possessed the largest customer base in the country, thus enabling the
ICICI group to cross-sell different products and services.
Drawbacks
Since BoM had comparatively more NPAs than IBL, the Capital Adequacy Ratio of
the merged entity was lower (from 19% to about 17%). The two banks also had a
cultural misfit with BoM having a trade-union system and IBL workers being
young and upwardly mobile, unlike those for BoM. There were technological
issues as well as IBL used Banks 2000 software, which was very different from
BoM's ISBS software. With the manual interpretations and procedures and the
lack of awareness of the technology utilisation in BoM, there were hindrances in
the merged entity.

Merger of ICICI Bank with Bank of Madura01

Key financials for the year ended Mar. 2000

Particulars

ICICI Bank

Bank of Madura

0003(12)

0003(12)

Net Interest Income

185.92

104.12

Net Profit

105.3

45.58

Deposits

9866.02

3631.04

Advances (Incl. Credit Substitutes)

5030.96

2072

Total Assets

12072.6

4443.7

Capital Adequacy Ratio (%)

19.6

15.8

RoNW (%)

30.1

19.9

RoA (%)

0.9

Cost of Deposits (%)

7.3

7.3

Net NPA (%)

1.1

4.7

Business per employee

5.95

2.02

Profit per employee

0.08

0.02

Shareholding pattern in %
Pre-Merger

Post-Merger

Particulars

ICICI Bank

BOM

ICICI Bank

ICICI Ltd

62.2

55.6

ADS

16.2

14.4

FIIs

6.9

6.1

FIs

4.7

7.3

MF & Banks

1.4

1.4

1.4

BOM Promoter

24.9

2.7

Kotak Mahindra

11.4

1.2

Employees

6.2

Public

8.6

48.8

13.6

4. Oriental Bank of Commerce Acquires Global Trust Bank Ltd

(August '04)
Intent
For Oriental Bank of Commerce there was an apparent synergy post-merger as the
weakness of Global Trust Bank had been bad assets and the strength of OBC lay in
recovery.10 In addition, GTB being a south-based bank would give OBC the much-needed
edge in the region apart from tax relief because of the merger. GTB had no choice as the
merger was forced on it, by an RBI ruling, following its bankruptcy.
Benefits
OBC gained from the 104 branches and 276 ATMs of GTB, a workforce of 1400
employees and one million customers. Both banks also had a common IT platform. The
merger also filled up OBC's lacunae - computerisation and high-end technology. OBC's
presence in southern states increased along with the modern infrastructure of GTB.
Drawbacks
The merger resulted in a low CAR for OBC, which was detrimental to solvency. The bank
also had a lower business growth (5% vis-a-vis 15% of peers). A capital adequacy ratio of
less than 11 per cent could also constrain dividend declaration, given the applicable RBI
regulations.
Particulars

Global Trust
bank

Oriental Bank
of Commerce

Combined

Advances
Investments
Deposits
Net profit
Gross NPA
Net NPA
Gross NPA (%)
Net NPA (%)
Branches (nos)
Staff (nos)

32.76
26.5
69.21
-2.73
9.16
6.48
25.8
19.8
87
1314

156.77
147.8
298.09
4.57
11.46
2.25
6.9
1.4
989
13507

189.53
174.3
367.3
20.62
8.73
10.8
4.6
1076

Capital adequacy ratio

0.0

14.0

12.2

Future of M&A in Indian Banking

In 2009, further opening up of the Indian banking sector is forecast to occur due to the
changing regulatory environment (proposal for upto 74% ownership by foreign banks in
Indian banks). This will be an opportunity for foreign banks to enter the Indian market as
with their huge capital reserves, cutting-edge technology, best international practices and
skilled personnel they have a clear competitive advantage over Indian banks. Likely targets
of takeover bids will be Yes Bank, Bank of Rajasthan, and IndusInd Bank. However,
excessive valuations may act as a deterrent, especially in the post-sub-prime era.
Persistent growth in Indian corporate sector and other segments provide further motives for
M&As. Banks need to keep pace with the growing industrial and agricultural sectors to
serve them effectively. A bigger player can afford to invest in required technology.
Consolidation with global players can give the benefit of global opportunities in funds'
mobilisation, credit disbursal, investments and rendering of financial services.
Consolidation can also lower intermediation cost and increase reach to underserved
segments.
The Narasimhan Committee (II) recommendations are also an important indicator of the
future shape of the sector. There would be a movement towards a 3-tier structure in the
Indian banking industry: 2-3 large international banks; 8-10 national banks; and a few large
local area banks. In addition, M&As in the future are likely to be more market-driven,
instead of government-driven.

Motives behind Consolidation

Based on the cases, we can narrow down the motives behind M&As to the following:

Growth - Organic growth takes time and dynamic firms prefer acquisitions to grow
quickly in size and geographical reach.

Synergy - The merged entity, in most cases, has better ability in terms of both revenue
enhancement and cost reduction.

Managerial efficiency - Acquirer can better manage the resources of the target whose
value, in turn, rises after the acquisition.

Strategic motives - Two banks with complementary business interests can strengthen
their positions in the market through merger.

Market entry - Cash rich firms use the acquisition route to buyout an established
player in a new market and then build upon the existing platform.

Tax shields and financial safeguards - Tax concessions act as a catalyst for a strong
bank to acquire distressed banks that have accumulated losses and unclaimed depreciation
benefits in their books.

Regulatory intervention - To protect depositors, and prevent the de-stabilisation of

the financial services sector, the RBI steps in to force the merger of a distressed bank.