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Mergers and Acquisitions in banking industry

Chapter -1
Introduction
This project is about the mergers and acquisitions in banking industry. A merger occurs when
two companies combine to form a single company. A merger is very similar to an acquisition or
takeover, except that in the case of a merger existing stockholders of both companies involved
retain a shared interest in the new corporation. By contrast, in an acquisition one company
purchases a bulk of a second companys stock, creating an uneven balance of ownership in the
new combined company.
Recent years have also brought about a change in the nature and quality of employment
in the sector. As far as retail banking is concerned, most of the Indian private sector banks are
becoming more aggressive. They are following the acquisition route for getting more and more
retail customers. During the last few years the Indian Banking system has witnessed some very
high profile mergers, such as the merger of ICICI Ltd. with its banking arm ICICI Bank Ltd. the
merger of Global Trust Bank with Oriental Bank of Commerce and more recently the merger of
IDBI with its banking arm IDBI Bank Ltd.

Basically, a merger involves a marriage of two or more banks. It is generally accepted


that mergers promote synergies. This project is all about the factors motivating mergers and
acquisitions, its procedure, its impact on employment, working condition & consumer, its
obstacles and the examples of mergers and acquisitions of banks in India.
With the globalization of the world economy, companies are growing by merger and
acquisition in a bid to expand operations and remain competitive. The complexity of such
transactions often makes it difficult to assess all risk exposures and liabilities, and requires the
skills of a specialist advisor.
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MERGERS & ACQUISITIONS

A merger occurs when two companies combine to form a single company. A merger is very
similar to an acquisition or takeover, except that in the case of a merger existing stockholders
of both companies involved retain a shared interest in the new corporation. By contrast, in an
acquisition one company purchases a bulk of a second companys stock, creating an uneven
balance of ownership in the new combined companies.

Mergers and Acquisitions in banking industry


Banks are facing an increasingly competitive business environment, which is driving them to
constantly improve services and increase efficiency. Growth by cross-border Mergers and
Acquisitions (M&A) is one way for them to respond to this challenge, but a number of serious
obstacles still hamper this kind of expansion.
Mergers and acquisitions (M&As), joint ventures (JVs) and other forms of strategic alliances
have recorded a tremendous growth in recent years.
Acquisitions have become a generic strategy for many companies.
To drive the global economy and control
Facilitate synergies between merged organizations,
Generate efficiency improvements and increase competitiveness.
Indeed, they hold that mergers, by increasing economies of scale and spreading costs over a
larger customer base, enable financial operators to provide services at lower prices.
If mergers improve efficiency, then larger, combined firms may be expected to pass some
savings on to consumers through lower prices or improved service.
Many financial executives argue that preventing consolidation and the efficiency gains
M&As make possible would be tantamount to forcing enterprises to engage in social
policy through retaining unnecessary levels of employment and preserving distribution
outlets that would be redundant in the event of a merger. They therefore believe that M&As
are part of necessary restructuring to improve efficient use of resources which can only be
beneficial for long-term employment.
The basic argument that M&As increase shareholder value through exploitation of synergies
is based on the assumption that the combined organization can be operated in a way that
generates greater value than would be the sum of the value generated by the stand-alone
companies (the 2+2>4 equation).
Mergers and acquisitions (M&As) are driving most profit-making sectors towards
consolidation and concentration and nowhere is this truer than in the financial services sector.
The phrase mergers and acquisitions or M&A refers to the aspect of corporate finance
strategy and management dealing with the merging and acquiring of different companies as well
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as other assets. Usually mergers occur in a friendly setting where executives from the respective
companies participate in a due diligence process to ensure a successful combination of all parts.
Historically, though, mergers have often failed to add significantly to shareholder value.
Although the economic consideration is similar for both Mergers & Acquisitions but the
legal procedure involved in Mergers and Acquisitions are different

A) Mergers: The term merger or amalgamation refers to a combination of two or more


corporate (in this case banks) into a single entity. Mergers are governed by companies Act, the
court & law.
B) Acquisition: This may be defined as an act of acquiring effective control by one corporate
over the assets or management of the other corporate without any combination of both of them.
Acquisitions are a regulated activity by SEBI.

TYPES OF MERGERS

Merger or acquisition depends upon the purpose of the offeror company it wants to
achieve. Based on the offerors objectives profile, combinations could be vertical, horizontal,
circular and conglomeratic as precisely described below with reference to the purpose in view of
the offeror company.

(A) Vertical combination:


A company would like to takeover another company or seek its merger with that company to
expand espousing backward integration to assimilate the resources of supply and forward
integration towards market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods, implements its
production plans as per the objectives and economizes on working capital investments. In other
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words, in vertical combinations, the merging undertaking would be either a supplier or a buyer
using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company i.e.
1. It gains a strong position because of imperfect market of the intermediary products, scarcity
of resources and purchased products;
2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process.
The acquiring firm belongs to the same industry as the target company. The mail purpose of such
mergers is to obtain economies of scale in production by eliminating duplication of facilities and
the operations and broadening the product line, reduction in investment in working capital,
elimination in competition concentration in product, reduction in advertising costs, increase in
market segments and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution


and research facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement. The acquiring company obtains benefits in the form of economies of
resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi
Industries. The basic purpose of such amalgamations remains utilization of financial resources
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and enlarges debt capacity through re-organizing their financial structure so as to service the
shareholders by increased leveraging and EPS, lowering average cost of capital and thereby
raising present worth of the outstanding shares.

DIFFERENCE BETWEEN MERGERS AND ACQUISTION


Merger

Acquisition

The case when two companies (often of same size) The case when one company takes over another and
decide to move forward as a single new company establishes itself as the new owner of the business.
instead of operating business separately.

The stocks of both the companies are surrendered, The buyer company swallows the business of the
while new stocks are issued afresh.

target company, which ceases to exist.

For example, Glaxo Wellcome and SmithKline Dr. Reddy's Labs acquired Betapharm through an
Beehcam ceased to exist and merged to become a agreement amounting $597 million.
new company, known as Glaxo SmithKline.

Mergers and Acquisitions in banking industry

MERGERS & ACQUISITIONS IN BANKING SECTOR


As far as retail banking is concerned, most of the Indian private sector banks are
becoming more aggressive. They are following the acquisition route for getting more and more
retail customers, NPAs notwithstanding. So do you think you are fighting an uneven battle,
because firstly the rules do not allow you to acquire Indian banks and secondly, there are
restrictions on the number of branches you can open. The only way to expand in India will be to
acquire a foreign bank overseas (which has operations in India), like you bid for ANZ.
During the last few years the Indian Banking system has witnessed some very high profile
mergers, such as the merger of ICICI Ltd. with its banking arm ICICI Bank Ltd. the merger
of Global Trust Bank with Oriental Bank of Commerce and more recently the merger of IDBI
with its banking arm IDBI Bank Ltd.
The Union Finance Minister, P. Chidambaram gave an inkling of the governments stance
on mergers in the banking sector when he stated that The Government would encourage
consolidation among banks in order to make them globally competitive. The Government will
not force consolidation, but if two banks want to consolidate, we would encourage them. We will
encourage them if it helps banks grow in size, scale and muscle so that they can compete
globally. To facilitate such mergers, a small amendment to the Income-tax Act would be made
during the budget session of Parliament next year. Similarly, banks would be encouraged to go to
the market to raise resources.
The above statement of the Honourable Finance Minister has to be understood in the
context of the Basel II Accord, which was proposed in June 1999 by the Basel Committee on
Banking Supervision. As per the Quantitative Impact Study published by the Basel Committee in
May 2003, there would be an increase in capital requirements by 12% for banks in developing
countries on implementation of the Basel II Accord. Mergers among banks will be one of the
ways to increase market power and thereby increase the revenue generation of banks, which
would in turn enable them to access the capital market to raise funds and meet the increased
capital requirement.
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Banks are introducing Automated Teller Machine (ATM) cards and, lately, debit cards as well.
This promises to change the face of banking forever. The industry is currently in a transition
phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system are in
the process of shedding their flab in terms of excessive manpower, excessive Non-Performing
Assets (NPAs) and excessive governmental equity, while on the other hand the private sector
banks are consolidating themselves through mergers and acquisitions. PSBs, which currently
account for more than 78 percent of total banking industry assets are saddled with NPAs (a mindboggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern
technology and a massive workforce while the new private sector banks are forging ahead and
rewriting the traditional banking business model by way of their sheer innovation and service.
The PSBs are of course currently working out challenging strategies even as 20 percent of their
massive employee strength has dwindled in the wake of the successful Voluntary Retirement
Schemes (VRS) schemes. Public Sector banks that imbibe new concepts in banking, turn tech
savvy, leaner and meaner post VRS and obtain more autonomy by keeping governmental stake to
the minimum can succeed in effectively taking on the private sector banks by virtue of their
sheer size. Weaker PSU banks are unlikely to survive in the long run. Consequently, they are
likely to be either acquired by stronger players or will be forced to look out for other strategies to
infuse greater capital. The private players however cannot match the PSBs great reach, great
size and access to low cost deposits. Therefore, one of the means for them to combat the PSBs
has been through the merger and acquisition (M& A) route. Over the last two years, the industry
has witnessed several such instances. For instance, HDFC Banks merger with Times Bank ICICI
Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank,
Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global
Trust Bank merger however opened a Pandoras box and brought about the realization that all
was not well in the functioning of many of the private sector banks. Foreign banks are likely to
succeed in their niche markets and be the innovators in terms of technology introduction in the
domestic scenario. While their focused operations, lower but more productive employee force etc
will stand them good, possible acquisitions of PSU banks will definitely give them the much
needed scale of operations and access to lower cost of funds. These banks will continue to be the
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early technology adopters in the industry, thus increasing their efficiencies. Also, they have been
amongst the first movers in the lucrative insurance segment. Already, banks such as ICICI Bank
and HDFC Bank have forged alliances with Prudential Life and Standard Life respectively. This
is one segment that is likely to witness a greater deal of action in the future. In the near term, the
low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a
greater focus on better asset-liability management procedures. Consequently, only banks that
strive hard to increase their share of fee-based revenues are likely to do better in the future.

CHANGE IN SCENARIO OF BANKING SECTOR


1. The first mega merger in the Indian banking sector that of the HDFC Bank with Times
Bank, has created an entity which is the largest private sector bank in the country.

2. The merger of the city bank with Travelers Group and the merger of Bank of America
with Nation Bank have triggered the mergers and acquisition market in the banking sector
worldwide.

3. With the help of M & A in the banking sector, the banks can achieve significant growth in
their operations and minimize their expenses to a significant level Competition is reduced
because merger eliminates competitors from the banking industry.

4. In India mergers especially of the PSBS may be subject to technology and trade union
related problem. The strong trade union may prove to be big obstacle for the PSBS
mergers. Technology of the merging banks to should complement each other NPA
management. Management of efficiency, cost reduction, tough competition from the
market players and strengthens of the capital base of the banks are some of the problem
which can be faced by the merge entities. Mergers for private sector banks will be much
smoother and easier as again that of PSBS.
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THE BANKING SCENARIO HAS BEEN CHANGING AT FAST


PLACE
Bank traditionally just borrower and lenders, has started providing complete corporate
and retail financial services to its customers

1. Technology drive has benefited the customers in terms of faster improve convenient banking
services and Varity of financial products to suit their requirement. ATMs, Phone Banking,
Net banking, Anytime and Any where banking are the services which bank have started
offering following the changing trend in sectors. In plastic money segment customer have
also got a new option of debits cards against the earlier popular credit card. Earlier customers
had to conduct their banking transaction within the restricted time frame of banking hours.
Now banking hours are extended.

2. ATMs, Phone banking and Net banking had enable the customers to transact as per their
convince customer can now without money at any time and from any branch across country
as certain their account transaction, order statements of their account and give instruction
using the tally banking or on online banking services.

3. Bank traditionally involve working capital financing have started offering consumer loans
and housing loans. Some of the banks have started offering travel loans, as well as many
banks have started capitalizing on recent capital market boom by providing IPO finance to
the investors.

POSSIBLE IMPACT OF MERGERS AND ACQUISITIONS


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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. 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.

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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.

ADVANTAGES OF MERGERS
Mergers and takeovers are permanent form of combinations which vest in management
complete control and provide centralized administration which are not available in combinations
of holding company and its partly owned subsidiary. Shareholders in the selling company gain
from the merger and takeovers as the premium offered to induce acceptance of the merger or
takeover offers much more price than the book value of shares. Shareholders in the buying
company gain in the long run with the growth of the company not only due to synergy but also
due to boots trapping earnings.

Mergers and acquisitions are caused with the support of shareholders, managers ad
promoters of the combing companies. The factors, which motivate the shareholders and
managers to lend support to these combinations and the resultant consequences they have to bear,
are briefly noted below based on the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companys subject to merger


should enhance in value. The sale of shares from one companys shareholders to another and
holding investment in shares should give rise to greater values i.e. The opportunity gains in
alternative investments. Shareholders may gain from merger in different ways viz. From the
gains and achievements of the company i.e. through
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(a) Realization of monopoly profits;
(b) Economies of scales;
(c) Diversification of product line;
(d) Acquisition of human assets and other resources not available otherwise;
(e) Better investment opportunity in combinations.

One or more features would generally be available in each merger where


shareholders may have attraction and favor merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs
of the company effectively for all round gains and growth of the company which will provide
them better deals in raising their status, perks and fringe benefits. Mergers where all these things
are the guaranteed outcome get support from the managers. At the same time, where managers
have fear of displacement at the hands of new management in amalgamated company and also
resultant depreciation from the merger then support from them becomes difficult.

(3) Promoters gains

Mergers do offer to company promoters the advantage of increasing the size of their
company and the financial structure and strength. They can convert a closely held and private
limited company into a public company without contributing much wealth and without losing
control.
4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and


costs to:
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(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the worker in the
companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form of
lower prices and better quality of the product which directly raise their standard of living and
quality of life. The balance of benefits in favour of consumers will depend upon the fact whether
or not the mergers increase or decrease competitive economic and productive activity which
directly affects the degree of welfare of the consumers through changes in price level, quality of
products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring company


may have the effect on both the sides of increasing the welfare in the form of purchasing power
and other miseries of life. Two sides of the impact as discussed by the researchers and
academicians are: firstly, mergers with cash payment to shareholders provide opportunities for
them to invest this money in other companies which will generate further employment and
growth to uplift of the economy in general. Secondly, any restrictions placed on such mergers
will decrease the growth and investment activity with corresponding decrease in employment.
Both workers and communities will suffer on lessening job

Opportunities, preventing the distribution of benefits resulting from diversification of


production activity.

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(c) General public


Mergers result into centralized concentration of power. Economic power is to be understood as
the ability to control prices and industries output as monopolists. Such monopolists affect social
and political environment to tilt everything in their favour to maintain their power ad expand
their business empire. These advances result into economic exploitation. But in a free economy a
monopolist does not stay for a longer period as other companies enter into the field to reap the
benefits of higher prices set in by the monopolist. Every merger of two or more companies has to
be viewed from different angles in the business practices which protects the interest of the
shareholders in the merging company and also serves the national purpose to add to the welfare
of the employees, consumers and does not create hindrance in administration of the Government
polices.

REGULATIONS OF MERGER AND ACQUISTIONS

Mergers and acquisitions are regulated under various laws in India. The objective of the laws is
to make these deals transparent and protect the interest of all shareholders. They are regulated
through the provisions of:

The Companies Act, 1956


The Act lays down the legal procedures for mergers or acquisitions:

Permission for merger: - Two or more companies can amalgamate only when
the amalgamation is permitted under their memorandum of association. Also, the
acquiring company should have the permission in its object clause to carry on the
business of the acquired company. In the absence of these provisions in the
memorandum of association, it is necessary to seek the permission of the
shareholders, board of directors and the Company Law Board before affecting the
merger.
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Information to the stock exchange: - The acquiring and the acquired companies
should inform the stock exchanges (where they are listed) about the merger.

Approval of board of directors: - The board of directors of the individual


companies should approve the draft proposal for amalgamation and authorize the
managements of the companies to further pursue the proposal.

Application in the High Court: - An application for approving the draft


amalgamation proposal duly approved by the board of directors of the individual
companies should be made to the High Court.

Shareholders' and creators' meetings: - The individual companies should hold


separate meetings of their shareholders and creditors for approving the
amalgamation scheme. At least, 75 percent of shareholders and creditors in
separate meeting, voting in person or by proxy, must accord their approval to the
scheme.

Sanction by the High Court: - After the approval of the shareholders and
creditors, on the petitions of the companies, the High Court will pass an order,
sanctioning the amalgamation scheme after it is satisfied that the scheme is fair
and reasonable. The date of the court's hearing will be published in two
newspapers, and also, the regional director of the Company Law Board will be
intimated.

Filing of the Court order: After the Court order, its certified true copies will be
filed with the Registrar of Companies.

Transfer of assets and liabilities: - The assets and liabilities of the acquired
company will be transferred to the acquiring company in accordance with the
approved scheme, with effect from the specified date.

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Payment by cash or securities: - As per the proposal, the acquiring company


will exchange shares and debentures and/or cash for the shares and debentures of
the acquired company. These securities will be listed on the stock exchange.

The Competition Act, 2002


The Act regulates the various forms of business combinations through Competition.
Under the Act, no person or enterprise shall enter into a combination, in the form of an
acquisition, merger or amalgamation, which causes or is likely to cause an appreciable
adverse effect on competition in the relevant market and such a combination shall be
void. Enterprises intending to enter into a combination may give notice to the
Commission, but this notification is voluntary. But, all combinations do not call for
scrutiny unless the resulting combination exceeds the threshold limits in terms of assets
or turnover as specified by the Competition Commission of India. The Commission
while regulating a 'combination' shall consider the following factors:

Actual and potential competition through imports;

Extent of entry barriers into the market;

Level of combination in the market;

Degree of countervailing power in the market;

Possibility of the combination to significantly and substantially increase prices or


profits;

Extent of effective competition likely to sustain in a market;

Availability of substitutes before and after the combination;


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Market share of the parties to the combination individually and as a combination;

Possibility of the combination to remove the vigorous and effective competitor or


competition in the market;

Nature and extent of vertical integration in the market;

Nature and extent of innovation;

Whether the benefits of the combinations outweigh the adverse impact of the
combination.

Thus, the Competition Act does not seek to eliminate combinations and only aims to
eliminate their harmful effects

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THE INDIAN BANKING SYSTEM:


Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks and
non-scheduled banks. The scheduled banks are those, which are entered, in the Second Schedule
of RBI Act, 1934. Such banks are those, which have a paid-up capital and reserves of an
aggregate value of not less than Rs. 5 lacs and which satisfy RBI that their affairs are carried out
in the interest of their depositors. All commercial banks- Indian and Foreign, regional rural banks
and state co-operative banks-are Scheduled banks. Non-Scheduled banks are those, which have
not been included in the Second Schedule of the RBI Act, 1934. The organized banking system
in India can be broadly divided into three categories:
(i)

Commercial banks,

(ii)

Regional Rural Banks and

(iii)

Co-operative banks.
The Reserve Bank of India is the supreme monetary and banking authority in the country

and has the responsibility to control the banking system in the country. It keeps the reserves of all
commercial banks and hence is known as the Reserve Bank.
Commercial Banks has been in existence for many decades. Commercial banks mobilize
savings in urban areas and make them available to large and small industrial and trading units
mainly for working capital requirements. After 1969 commercial banks are broadly classified
into nationalised or public sector banks and private sector banks.

Current Scenario:
The Indian Banking industry has been undergoing rapid changes reflecting a number of
underlying changes. Liberalization and deregulation witnessed in the Indian markets in the 1990s
have resulted in a spurt in banking activity in India. Significant advances in communication have
enabled banks to expand their reach, both in terms of geography covered as well as new products
introduced. With increased competition in wholesale banking due to the entry of foreign banks
and new private sector banks, the sector has witnessed a squeeze in margins.
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The value of worldwide M&As has grown dramatically during the past two decades
(1980-99), at the rate of 42 per cent a year. In 1999, their completed value was about $2.3
trillion, representing 24,000 deals.

EMERGENCE OF TWO SCENARIOS


There could be two basic banking structures that could emerge. The first structure
involves a big bank taking over a smaller bank or a group of smaller banks. Whereas in the
second structure could involve a merger of group of mid-sized banks to form a larger institution.
The first structure is a perfect fit for the new private sector bank taking over an old
smaller bank or a group of small banks. In the second structure, a group of midsize public sector
banks going for a merger.
The primary advantage of the first structure could be seen as the creation of a larger
branch network. Whereas it could be argued that the merger of a group of small sized banks as
envisaged in the second structure is still insufficient to create institutions that are regionally
competitive and may require further consolidation.
First Structure Consolidation within the Private Sector
We are assuming here an existing new private sector bank taking over a smaller bank or a
group of smaller banks. When we look at the table, it is apparent that ICICI Bank emerges as the
largest player in the private sector bank. There is always a possibility for HDFC Bank to merge
with HDFC Ltd. and hence it could be reckoned as another large player.
When we look at the next category of asset size between Rs. 10,000 - Rs. 25,000 crores,
we have only four players, namely; UTI Bank, Federal Bank, IndusInd Bank and IDBI Bank.
There is already the merger announcement of IDBI Bank with IDBI Ltd. UTI has significant
holding in UTI Bank and the possibility of UTI Bank merging with IDBI or any of the
nationalised banks. Hence there is a need for the remaining 16 banks to look at the options
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growth in size. Either larger bank could absorb them or these small banks could group together
and merge.
The scenario that could emerge will be that each of new private sector banks, such as
ICICI Bank, HDFC Bank, merged entity of IDBI Bank absorbing 4 or 5 old private sector banks.
Even some foreign banks, when they are permitted will be interested in this route. From the list
of 20 odd private sector banks, we could see not more than 5 banks to survive after 3 or 4 years.
Consolidation is inevitable.

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Second Structure Consolidation within the Nationalised Banks/PSU Banks
A) Consolidation within the SBI group
The consolidation within the SBI group is always on the cards. The group is already in
the process of integrating treasury practices. Similarly, the group will be integrating risk
management practices. SBI group as one entity in the future will become a largest bank in the
country.
The combined entity of the SBI group is currently holding close to one-third of the
market share. SBI is already a player who is well positioned to be on the global map. It is
important for the group not to lose the market share.

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B) Consolidation within the Nationalised Banks
A cluster approach could emerge in the case of nationalised banks. There are five banks
with size of over Rs. 80,000 crores. Each of the banks could look at absorbing one bank in the
size category of Rs. 25,000-80,000 crores. In addition, they could absorb one bank with size less
than Rs. 25,000 crores. The ideal scenario that will merge will be that not more than five banks
among the nationalized banks to remain in the long run. The process of M&A is comparatively
easier for the Nationalised banks as the controlling interest is with the Government.

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PROCEDURE OF MERGERS & ACQUISITIONS


Public announcement:
To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:


The acquirer shall appoint a merchant banker registered as category I with SEBI to advise
him on the acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:


Public announcement shall be made at least in one national English daily one Hindi daily
and one regional language daily newspaper of that place where the shares of that company are
listed and traded.

3. Timings of announcement:
Public announcement should be made within four days of finalization of negotiations or
entering into any agreement or memorandum of understanding to acquire the shares or the voting
rights.

4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI Regulations.
(1)

Paid up share capital of the target company, the number of fully paid up and
partially paid up shares.

(2)

Total number and percentage of shares proposed to be acquired from public


subject to minimum as specified in the sub-regulation (1) of Regulation 21
that is:
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a) The public offer of minimum 20% of voting capital of the company to the
shareholders;
b) The public offer by a raider shall not be less than 10% but more than 51%
of shares of voting rights. Additional shares can be had @ 2% of voting
rights in any year.

(3)

The minimum offer price for each fully paid up or partly paid up share;

(4)

Mode of payment of consideration;

(5)

The identity of the acquirer and in case the acquirer is a company, the identity
of the promoters and, or the persons having control over such company and
the group, if any, to which the company belong;

(6)

The existing holding, if any, of the acquirer in the shares of the target
company, including holding of persons acting in concert with him;

(7)

Salient features of the agreement, if any, such as the date, the name of the
seller, the price at which the shares are being acquired, the manner of
payment of the consideration and the number and percentage of shares in
respect of which the acquirer has entered into the agreement to acquirer the
shares or the consideration, monetary or otherwise, for the acquisition of
control over the target company, as the case may be;

26

Mergers and Acquisitions in banking industry


(8)

The highest and the average paid by the acquirer or persons acting in concert
with him for acquisition, if any, of shares of the target company made by him
during the twelve-month period prior to the date of the public announcement;

(9)

Objects and purpose of the acquisition of the shares and the future plans of
the acquirer for the target company, including disclosers whether the acquirer
proposes to dispose of or otherwise encumber any assets of the target
company:
Provided that where the future plans are set out, the public announcement
shall also set out how the acquirers propose to implement such future plans;

The specified date as mentioned in regulation 19;

(10)

The date by which individual letters of offer would be posted to each of the
shareholders;

(11)

The date of opening and closure of the offer and the manner in which and the
date by which the acceptance or rejection of the offer would be
communicated to the share holders;

(12)

The date by which the payment of consideration would be made for the
shares in respect of which the offer has been accepted;

(13)

Disclosure to the effect that firm arrangement for financial resources required
to implement the offer is already in place, including the details regarding the
sources of the funds whether domestic i.e. from banks, financial institutions,
or otherwise or foreign i.e. from Non-resident Indians or otherwise;
27

Mergers and Acquisitions in banking industry

(14)

Provision for acceptance of the offer by person who own the shares but are
not the registered holders of such shares;

(15)

Statutory approvals required to obtained for the purpose of acquiring the


shares under the Companies Act, 1956, the Monopolies and Restrictive Trade
Practices Act, 1973, and/or any other applicable laws;

(16)

Approvals of banks or financial institutions required, if any;

(17)

Whether the offer is subject to a minimum level of acceptances from the


shareholders; and

(18)

Such other information as is essential fort the shareholders to make an


informed design in regard to the offer.

28

Mergers and Acquisitions in banking industry

Chapter -2
Review of literature
ACCORDING TO CAPIRO & LEVINE
There are two interrelated factors of the financial intermediaries that affect corporate
governance.

First, with banks being more non-transparent, there arises an agency


problem. The information difference between the insiders & outsiders in banking lead to
more difficulty for equity & debt holders in monitoring the managers, and in turns, it
become easier forth managers to use the benefit of controls, rather the focusing on
maximizing the value.

Second, heavy regulations imposed on the banks stand as an obstacle


for natural

corporate governance mechanism.

Directors poor decisions and ineffective board processes are to pay the price. For measuring
the board performance4 against certain benchmarks set for good governance,

ACCORDING TO SHLEIFER & VISHNY DEFINE


CORPORATE GOVERNANCE AS:
Dealing with the ways that supplier of finance to corporations to assures themselves of gettin
g a return on their investment.

ACCORDING TO AGENCY THEORY,

29

Mergers and Acquisitions in banking industry


I managers operate independently, they make financing, investment & payout decision that are
determinately to shareholders. To mitigate the conflict between managers and shareholders, the
literature offers several solutions, such as monitoring by the board of directors and the block
holders, compensation structure, and managerial equity investment.
Investors and depositors, regulators have direct interest in the bank performance. On a more
aggregate level, regulators are concerned with the effect governance has on the performance of
financial institution because the health of the overall economy depends upon the board of
directors of the banking firm is placed in a crucial role in its governance structure.

One major area likely to be affected by


regulation is the structure of executive compensation. Stock-based compensation motivates
top management to undertake more value enhancing decision, but regulators would also want
to consider how to stock option affect risk taking.

Resolution of the financially distresses is


necessary because this usually leads to liquidation, and the incumbent is removed from
management.

Large grant to top executives have the


potential to impact banking firms capital by way of future share repurchase. Therefore, large
grants of options in any given year have the potential to affect the capital base adversely in
later years.

Kishor Mundargi
The Shamrao Vithal Co-operative Bank Ltd.

30

Mergers and Acquisitions in banking industry


Mumbai
While considering any proposal for merger of banks, it will be necessary to evaluate the
impact of the merger on the safety and soundness of the banking system. There is a definite
need to develop a merger review process and to identify the authority that will be responsible
for conducting the merger review process.
The Impact of Mergers and Acquisitions on the Stakeholders of Banking Sectors.

Dr. S. Hasan Banu,


Reader
H.K.R.H. College
Uthamapalayam
Consolidation through mergers and acquisition is considered one of the best ways of
restructuring for effectively facing the competitive pressures. Mergers are only one of the
alternatives for restructuring of the financial sector and there could be better and more
advantageous option to leverage optimum utilization of bank stakeholders.
Consolidation in Banking Industry through Mergers and Acquisitions: Corporate Restructuring
Widens

Ms. Shallu Singh Lobana


Lecturer, Guru Nanak Girls College, Ludhiana
The factors favouring growth, enrichment and renovation should be taken into due
consideration before stepping into the process of M&As so that Indian Banking Industry will
be able to stand right forth the global banking competition hurricane.

References:
www.google.com
www.yahoo.com

31

Mergers and Acquisitions in banking industry


www.icici.com
www.obc.com
www.pnb.com

Chapter -3
Research Methodology
Research methodology is a way to systematically solve the problem. It is a game plan
for conducting research. In this we describe various steps that are taken by the researcher,
All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to
inquiry and inquiry leads to invention.
Research in a common parlance is a search for knowledge. Research is an art of scientific and
systematic investigation. Thus research comprises defining and redefining problems, formulating
hypothesis or suggested solutions; collecting, organizing and evaluating data, making deductions
and reaching conclusions. Research methodology is the arrangement of condition for collection
and analysis of data in a manner that aims to combine relevance to the research purpose with
economy in procedure. Research Methodology is the conceptual structure within which research
is conducted. It constitutes the blueprint for the collection measurement and analysis of the data.
Research methodology is a framework for the study and is used as a guide in collecting and
analyzing the data. It is a strategy specifying which approach will be used for gathering and
analyzing the data. it also includes time and cost budget since most studies are done under these
two constraints. The research methodology include over all research design, the sampling
procedure, the data collection method and analysis procedure.
Issues regarding research are:
32

Mergers and Acquisitions in banking industry


To gain familiarity with the phenomenon or to achieve new insight into it.
To portray accurately the characteristics of a particular individual, situation or group.
To determine the frequency with which something occur.

Significance of Research

Research provides the basis for all government policies in our economic system.

It has its special significance in solving various operational and planning issues of
business and industry.

For professional in research methodology, research may mean a source of live hood.

OBJECTIVES OF THE STUDY

Main objective is to study

The emerging scenario of Mergers and Acquisitions in banking sector.


The Merger procedure in banks
The reasons of Mergers and Acquisitions of banks in India.
The impact of mergers and acquisitions on working and employment conditions.
The impact of mergers and acquisitions on consumers.

Research Design
This part contains relevant information pertaining to research design and methodology used in
the research project. The research design has been distinctive described to the objective of the
study.
There are three types of research design that are used frequently used by the various researchers.
These are:
33

Mergers and Acquisitions in banking industry


Exploratory research
Descriptive research
Causal research
Sources of Data
Data used in research can be of any form. It can be primary data or the secondary data.
Secondary data is one, which has already been collected or is made publicly available in the
past and the researcher has just made some modifications in the data according to the
requirement.
In this research project only secondary data has been used. This is collected from different
websites of the Internet, through magazines, newspapers and various journals.

34

Mergers and Acquisitions in banking industry

LIMITATIONS

Mergers & Acquisitions are hard to occur, so the information about them is very
less.

It was not possible to cover every aspect. This poses to be a serious limitation.

The information was collected from secondary data, so the limitation occurred in
the exact interpretation.

Also the information was collected from secondary data, so sometimes the results
may be related to some specific area/aspect.

As the process of mergers and acquisitions of banks is kept secret with the general
public, so the exact procedure and the reasons behind them are difficult to find.

As the data has been taken form the books and various websites, the data available
is not recent.

Various financial terms related to mergers and acquisitions are the difficult to
understand.

It is difficult to explain specific impacts made on consumers from merger and


acquisition activity within the financial services sector.

35

Mergers and Acquisitions in banking industry

Chapter -4
Analysis

36

Mergers and Acquisitions in banking industry

CASE STUDIES
Case study 1

Agrees to amalgamate Bank of Rajasthan:


ICICI Bank has entered into an agreement with certain shareholders of Bank of Rajasthan (BoR)
to amalgamate BoR, with a tentative share exchange ratio of 1:4.72 (25 shares of ICICI Bank for
118 shares of BoR). The final exchange ratio will be based on due diligence and independent
valuation reports. Assuming a share swap ratio of 1:4.72, the deal values BoR at Rs30.4b and
will lead to ~3% equity dilution for ICICI Bank.
Branch addition, stronger North India network are key positives:
The key positives for ICICI Bank will be a 23% increase in the number of branches and a
stronger network in North India. Over 60% of BoRs 463 branches are in the state of Rajasthan
and ~70% are in North India. BoRs biggest competitors in the state of Rajasthan are SBIs
subsidiary, State Bank of Bikaner and Jaipur (~750 branches), Bank of Baroda (~350 branches)
and Punjab National Bank (~310 branches).

37

Mergers and Acquisitions in banking industry

Deal at a significant premium; Improvement in deposit franchisee will be key


value driver:
The implied valuation of BoR at 4.8x trailing book value appears expensive, as the book needs to
be adjusted for the re-assessment of BoRs NPAs by ICICI Bank. The key near-term challenges
for ICICI Bank will be assessment of
BoRs asset quality, rationalization and re-positioning of BoRs branches, and possible regulatory
issues. We will review our target price for ICICI Bank post the merger
details. Maintain Buy.

Valuing BoR at Rs66m/branch


While BoRs asset base is just 5% of ICICI Banks, its 463 branches will result in a ~23%
increase in ICICI Banks existing network of 2,000 branches. A share swap ratio of 1:4.72 (25
shares of ICICI Bank for 118 shares of BoR) implies a valuation of Rs66m per branch and 0.2x
the deposit base for BoR. It is noteworthy that ICICI Bank has opened 580 new branches (1.3x
BoRs branch network) since March 2009 at a cost of Rs8m-10m per branch. However, it takes
almost two years for a new branch to break even.

38

Mergers and Acquisitions in banking industry

Comparision of BOR and ICICI


Basis

BoR

ICICI BANK

CASA Deposits

Rs 4163crores

Rs 21000crores

Business per month

Rs 47crores

Rs 304crores

Return on average assets

0.7%

1%

Net non-performing assets

1.05%

2.1%

Implied price per branch lower than last deal in the sector
In the last deal in the sector, HDFC Bank had valued CBoP at Rs285m per branch and
0.5x the deposit base. ICICI Bank had acquired Sangli Bank at Rs3.5b, valuing Sangli
Bank at ~Rs18m per branch. While the price that ICICI Bank is paying is in line with the
valuations of other old private sector banks, it is significantly lower than the CBoP deal.

39

Mergers and Acquisitions in banking industry

DETAILS OF LAST FEW DEALS IN THE SECTOR

Banks

BRANCHES

Sangli bank
UWI
LKB
CBOP
BOR

200
229
118
394
463

Deposits
20
65
20
207
152

Approx price

Value

Value

3.5
3.5
3.3
112.2
30.5

(branches)
17.5
15.3
28.0
284.8
65.9

(deposits)
0.18
0.05
0.17
0.54
0.20

500
450
400
350
300
250

branches

deposits

app. Price

value

value2

200
150
100
50
0
sangli

uwi

lkb

Benefit of Merger for ICICI Bank


40

cbop

bor

Mergers and Acquisitions in banking industry


The proposed amalgamation would substantially enhance ICICI Banks branch network,
already the largest among Indian private sector banks, and especially strengthen its
presence in northern and western India.

The rationale for the merger, according to the ICICI Bank management, is that it would
have taken the bank three years to build the kind of low-cost current account and savings
account (CASA) relationship; it gets to build upon now with the latest move. ICICI Bank
has had its sights set firmly on expanding its share of CASA deposits.
Adds 25% to their branch network.

CASE STUDY 2

PRESENT STATUS OF STATE BANK OF INDIA


41

Mergers and Acquisitions in banking industry

State Bank of India is the largest state-owned banking and financial services company in
India, by almost every parameter - revenues, profits, assets, market capitalization, etc.

SBI has 21000 ATMs, 26500 branches including the branches of its associate banks.

The bank has 131 overseas offices spread over 32 countries. It has branches of the parent
in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los
Angeles, Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo.

42

Mergers and Acquisitions in banking industry

Financial Performance OF STATE BANK OF INDIA


RATIOS
Net Profit Margin

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

11.21

10.12

11.65

12.03

10.54

15.94

14.50

13.72

15.74

13.89

3.71

3.85

3.87

3.79

3.82

5.10

5.44

6.32

7.20

7.26

56.32

59.35

65.23

67.28

66.66

11.88

12.34

13.47

14.25

13.39

65.66

76.16

78.31

78.34

74.22

62.11

73.44

77.51

74.97

75.96

Return on Net Worth(%)

Net Interest Income/Total


Funds
Asset Turnover Ratio

Interest expended/
Interest earned
Capital Adequacy Ratio

Advances/total funds(%)

Credit Deposit Ratio

43

Mergers and Acquisitions in banking industry


90
80
70
60
50
40

Mar'06

Mar'07

Mar'08

Mar'09

Mar'10

30
20
10
0
NPM

RONW

NII

ATR

IE

CAR

ATF

CDR

STATE BANK OF INDORE


On August 26, 2010, State Bank of Indore was officially merged with State Bank of
India.

State Bank of Indore was formerly named as Bank of Indore Ltd. It was established under
a special charter of His Highness Maharaja Tukojirao Holker-III, the then ruler of Malwa
region.

It became a subsidiary of State Bank of India on 1 January 1960, under the State Bank of
India Subsidiary Banks Act, 1959.

In the following year (1962), State Bank of Indore took over the business of The Bank of
Dewas Ltd.

In 1965, State Bank of Indore took over The Dewas Senior Bank Ltd. as well.
44

Mergers and Acquisitions in banking industry


State Bank of Indore was upgraded to class 'A' category bank in 1971.

The business turnover of the Bank crossed Rs.47000 Crore at the end of December 2008.

It has emerged as the premier bank of Madhya Pradesh due to its steady progress.

The SBI with the sanction of Govt. of India entered into negotiations with State Bank of
Indore for the acquisition on Oct 8, 2009.
The Board of Directors of State Bank of Indore On October 31, 2009, approved the
Scheme of Acquisition of State Bank of Indore (SBIN) by SBI, under Section 35 of the
SBI Act, 1955.
SBI has already announced a share swap ratio of 34:100 for the merger. That means, SBI
would give its 34 shares for every 100 shares of State Bank of Indore held by minority
shareholders.
For this purpose, SBI would issue up to over 1.16 lakh shares of face value Rs 10 each to
minority shareholders of State Bank of Indore.
After the merger, the issued capital of SBI would increase from Rs 634.96 crore up to a
maximum of Rs 635.08 crore.

45

Mergers and Acquisitions in banking industry


Both the banks separately and independently appointed M/s Haribhakti & company
(qualified chartered accountants and M/s Axis Bank ltd. (Category 1 merchant bankers)
as the independent valuers.
M/s Kotak Mahindra capital company ltd.(Category 1 merchant bankers) was appointed
by both the banks independently to provide a fairness opinion to valuation of the
independent valuers.
After the merger, SBI will be left with five associate banks, State Bank of Bikaner and
Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State
Bank of Hyderabad. Among these, the State Banks of Bikaner and Jaipur, Mysore and
Travancore are listed companies.

PURPOSE OF THE MERGER


The merger would avoid competition between the two entities and lead to easier access to
funds at competitive rates, compared to what State Bank of Indore would have managed
for its growing balance sheet.
Acquisition of State Bank of Indore by SBI would allow economies of scale in terms of
footprint, manpower and other resources.
State Bank of Indore has a large number of branches outside Madhya Pradesh and
Chhattisgarh and all of them would be controlled conveniently from SBI's local head
offices in various states leading to substantial cost savings.

Case study 3
46

Mergers and Acquisitions in banking industry

The merger that was announced on, 2006 between Deutsche Bank and Dresdner Bank,
Germanys largest and the third largest bank respectively was considered as Germanys response
to increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the balance
sheet total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This
would put the merged bank for ahead of the second largest banking group, U.S. based citigroup,
with a balance sheet total amounting to 1.2 trillion marks and also in front of the planned
Japanese book mergers of Sumitomo and Sukura Bank with 1.7 trillion marks as the balance
sheet total.

The new banking group intended to spin off its retail banking which was not making
much profit in both the banks and costly, extensive network of bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Banks
green corporate color in its logo. The future core business lines of the new merged Bank included
investment Banking, asset management, where the new banking group was hoped to outside the
traditionally dominant Swiss Bank, Security and loan banking and finally financially corporate
clients ranging from major industrial corporation to the mid-scale companies.
With this kind of merger, the new bank would have reached the no.1 position of the US
and create new dimensions of aggressiveness in the international mergers.
But barely 2 months after announcing their agreement to form the largest bank in the world, had
negotiations for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.

47

Mergers and Acquisitions in banking industry


The main issue of the failure was Dresdner Banks investment arm, Kleinwort Benson,
which the executive committee of the bank did not want to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Benson would be
integrated into the merged bank. But from the outset these considerations encountered resistance
from the asset management division, which was Deutsche Banks investment arm.

Deutsche Banks asset management had only integrated with Londons investment group
Morgan Grenfell and the American Bankers trust. This division alone contributed over 60% of
Deutsche Banks profit. The top people at the asset management were not ready to undertake a
new process of integration with Kleinwort Benson. So there was only one option left with the
Dresdner Bank i.e. To sell Kleinwort Benson completely. However Walter, the chairman of the
Dresdner Bank was not prepared for this. This led to the withdrawal of the Dresdner Bank from
the merger negotiations.

Case study 4

Private Banks are taking to the consolidation route in a big way. Bank of Punjab (BoP) and
Centurion Bank (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI has
approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The
merger is at a swap ratio 9:4 and the combined bank is will be called Centurion Bank of Punjab.
48

Mergers and Acquisitions in banking industry


The merger of the banks will have a presence of 240 branches and extension counters, 386
ATMs, about 2.2 million customers. As on March 2005, the net worth of the combined entity is
Rs 696 crore and the capital adequacy ratio is 16.1 per cent
In the private sector, nearly 30 banks are operating. The top five control nearly 65% of the assets.
Most of these private sector banks are profitable and have adequate capital and have the
technology edge.
Due to intensifying competition, access to low-cost deposits is critical for growth. Therefore, size
and geographical reach becomes the key for smaller banks. The choice before smaller private
banks is to merge and form bigger and viable entities or merge into a big private sector bank.
The proposed merger of Bank of Punjab and Centurion Bank is sure to encourage other private
sector banks to go for the M&A road for consolidation.

Highlights of the merger-Centurion Bank and Bank of Punjab


Bank of Punjab will be merged into Centurion Bank.
New entity will be named 'Centurion Bank of Punjab'.
Centurion Bank's chairman Rana Talwar will take over as the chairman of the merged entity.
Centurion Bank's MD Shailendra Bhandari will be the MD of the merged entity.
KPMG India Pvt Ltd and NM Raiji & Co are the independent valuers and Ambit Corporate
Finance was the sole investment banker to the transaction.
Swap ratio has been fixed at 4: 9, that is, for every four shares of Rs 10 of Bank of Punjab, its
49

Mergers and Acquisitions in banking industry


shareholders would receive nine shares of Rs 1 of Centurion Bank.
There has been no cash transaction in the course of the merger; it has been settled through the
swap of shares.
There will no downsizing via the voluntary retirement scheme.

Financials of the merged entity- Centurion Bank of Punjab


The cost of deposit of Bop were lower than Centurion, while Centurion had a net interest margin
of around 5.8%. The net interest margin of the merged entity will be at 4.8%.
The combined entity will have net non performing assets (NPAs) of about 3.6 per cent as per
Performa March 2005 data. Centurion banks net NPAs as on 31 March 2005 stood at 2.49 per
cent while for Bank of Punjab the figure stood at 4.6 per cent.
The combined entity will have adequate capital adequacy of 16.1 per cent to provide for its
growth plans. Centurion banks capital adequacy on a standalone basis stood at 23.1 per cent
while for Bank of Punjab the figure stood at 9.21per cent.
The Performa net worth of combined entity as at March 2005 stood at Rs 696 crore with
Centurion's net worth at Rs 511 crore and Bank of Punjab's net worth at Rs 181 crore, and the
combine entity (Centurion Bank of Punjab) will have total asset 9,395 crore, deposit 7,837crore
and operating profit 43 crore.
The merged entity will have a paid up share capital of Rs 130 cr and a net worth of Rs 696 cr.
The merged entity will have 235 Branches & extension counters, 382 ATMs and 2.2 million
customers .
50

Mergers and Acquisitions in banking industry

Gains from the merger


Combined entity the Punjab-centurion bank would be the among the top 10 private sector banks
in the country.
Merged entity would benefit from the fact that centurion bank had recently written of its bad
loans against equity.
Branch network of the two banks will complement each other. The combined entity will have a
nationwide reach.
Centurion Bank is strong in South India, Maharashtra and Goa whereas Bank of Punjab is strong
in Punjab, Haryana and Delhi. While Centurion Bank has 82 per cent of its business coming
from retail, Bank of Punjab is strong in the Small and Medium Enterprises (SMEs) segment and
agricultural sector.
The book value of the bank would also go up to around Rs 300 crore. The higher book value
should help the combine entity to mobilize funds at lower rate.
The combined bank will be full-service commercial bank with a strong presence in the Retail,
SME and Agricultural segments.

Case study 5

51

Mergers and Acquisitions in banking industry

HDFC Bank, Centurion swap ratio fixed at 1:29


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.
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.
The merger will strengthen HDFC Bank's distribution network in the northern and the
southern regions. CBoP has close to 170 branches in the north and around 140 branches in the
south. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. The
combined entity will have a network of 1148 branches. HDFC will also acquire a strong SME
(small and medium enterprises) portfolio from CBoP. There is not much of overlapping of
HDFC Bank and CBoP customers.
The entire process of the merger would take 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.
Mr Rana Talwar, Chairman of Centurion Bank, has been offered a seat on the Board as nonexecutive director and Mr Shailendra Bhandari, Managing Director, Centurion Bank, has been
invited to join as the Executive Director on the board post merger.
52

Mergers and Acquisitions in banking industry

According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri,
Integration will be smooth as there is no overlap. In an interview, he mentioned that at 40%
growth rate there will be no lay-offs. The integration of the second rung officials should be
smooth as there is hardly any overlap.
The boards of the two banks will meet again on February 28 to consider the draft scheme of
amalgamation, which will be subject to regulatory approvals. HDFC Bank will consider
making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC).
The move would allow HDFC to maintain the same level of shareholding in the bank.

RECENT TRENDS IN MERGERS AND ACQUISITION IN


BANKING SECTOR
Banking sector reforms in India are in the progress. Both Finance Ministry of India and
Reserve Bank of India (RBI) are actively suggesting many far reaching reforms for banking
and financial industry of India.
One of such reforms pertains to regulating mergers and acquisitions (M&A) pertaining to
banking sector. Till now the Competition Commission of India (CCI) has a say in the M&A
pertaining to banking companies.
However, with the recent proposed amendments in the Banking Regulations Act, 1949, only
RBI would have power to regulate M&A pertaining to banking sector. In fact, the proposed
amendments have already been approved by Cabinet of India.

53

Mergers and Acquisitions in banking industry


Finance Minister Pranab Mukherjee has also recently said that RBI would have the final
say on bank M&A. He told that banking mergers and acquisitions will not come under the
purview of the Competition Act or the Companies Act.

Indian mergers and acquisitions in 2011 may surpass this years record $71 billion of deals,
led by oil and gas, metals and mining companies, according to M&A bankers including Topsy
Mathew of Standard Chartered.
Billionaire Sunil Mittals $10.7 billion acquisition of mobile-phone operators in Africa led an
almost four-fold increase in takeovers this year as deals surpassed 2007s $69 billion,
according to data compiled by Bloomberg.
Companies in Asia-Pacific including India and China are expected to be the most acquisitive
buyers in 2011 as attractive valuations and domestic competition drive deals globally,
according to Bloombergs M&A Global Outlook survey. Overseas firms may target Indian
pharmaceutical and consumer firms, and local enterprises will seek natural resources, said
Bank of America, ranked No. 3.
Outbound deals would continue to be highly active given that international companies
valuations are still relatively depressed, and Indian companies have access to debt and equity
capital, Saurabh Agrawal, the 41-year-old head of India investment banking at Charlotte,
North Carolina-based Bank of America, wrote in an e-mailed response to questions. Inbound
and local deals will also take place.
Cross-border deals rose to a record $59.2 billion in India this year, after Mittals New DelhiBharti Airtel in March agreed to buy the African assets of Zain for $10.7 billion. Outbound
M&A accounted for 74% of that volume. The acquisition spree in India, China and Brazil
contrasts with a slowdown in global deals. Mergers worldwide are down 46% from 2007s
record. In the US, the worlds largest market, volumes are 51% lower, and levels in Europe are
down by 59%.

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Large Indian corporate are going through a growth phase: they think there is a lot of
opportunity, they think they have access to capital, 35-year-old Mathew, managing director
for M&A for India, said in an interview. The London-based bank climbed 13 places to No. 2
among Indian takeover advisers this year, its highest ranking. They are capitalizing on the
positive sentiment to undertake long-term strategic transactions, he said.
The mergers and acquisitions of banks will now come under the purview of the Banking
Regulation Act. This means M&A in banking sector would no more require the approval of the
Competition Commission of India.

BANK MERGER TO AFFECT ON INSURANCE SECTOR


Feb 26 (IANS) Bank mergers in India are likely to impact the insurance sector as many
insurers have select banks as their banc assurance partners. Banc assurance is the sale of life,
pension and investment products through the branch network of a bank.
The recent merger announcement of HDFC Bank and Centurion Bank of Punjab Ltd is
expected to impact the business of Aviva Life Insurance Co Ltd and ICICI Lombard General
Insurance Co Ltd.
Centurion Bank is the banc assurance partner for these two insurers.
The arrangements might be discontinued because HDFC Bank sells life and non-life insurance
policies of group companies HDFC Standard Life Insurance Co Ltd and HDFC General
Insurance Co Ltd.
After the opening up of the insurance sector, banks have come to occupy an important role in
insurance distribution, particularly for private life insurers.
Banks procure nearly 40 percent of the fresh business for life insurers. It is not surprising
therefore to have life insurers whose very lifeline is their banking partners.
Insurers find recruiting and training individual agents a time-consuming and costly process.
There are also issues like agency attrition and small-sized policies procured by agents.

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For new private life insurers who want to achieve fast revenue growth, banks are the only
source of business.
Banks also find that selling life insurance products is a lucrative activity.
Normally banc assurance deals are for three years and each bank can represent only one
insurer as a corporate agent.
Realizing their vital role, banks are now dictating the terms of the banc assurance deals. In
some cases banks are demanding commission and other fees totaling nearly 70 percent of the
first year premium on a policy, say industry experts However, new private life insurers are
finding it difficult to sign up a banking partner to sell their products as early entrants have
already inked distribution agreements with them.
Some banks have started representing a new life insurer at regular intervals.
For instance, Aviva Life had recently inked a banc assurance deal with the Bank of Rajasthan,
which has switched life insurance partners in recent times.
Initially, the bank vended policies of Birla Sun Life Insurance Co Ltd. It changed over to Life
Insurance Corp of India (LIC) before signing up with Aviva Life.
V. Srinivasan, chief financial officer of Bharti Axa Life Insurance Co Ltd, said that the one
bank-one insurer concept was not right and would lead to skewed scenario.
A bank has a wide variety of customers. No single insurer can satisfy the needs of all the
bank customers. A bank should be allowed to be a broker and sell the policies of different
insurers. Mergers and Acquisitions increase the value when the value of combined firm is
greater than their sum of the independent entities
NAV = VBT ( VB + VT )
Where NAV=Net Value Increase
VBT = Value of Firms Combined
VB = Value of Bidder Alone
VT = Value of Target Alone
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Chapter -5
Conclusion

A combination of factors - increased global competition, regulatory changes, fast


changing technology, need for faster growth and industry excess capacity - have
fuelled mergers and acquisitions (M&A) in recent times.
The M & A phenomenon has been noticeable not only in developed markets like
the US, Europe and Japan but also in emerging markets like India.
Major acquisitions have strategic implications because they leave little scope for
trial and error and are difficult to reverse.
Moreover, the risks involved are much more than financial in scope. A failed
merger can disrupt work processes, diminish customer confidence, damage the
companys reputation, cause employees to leave and result in poor employee
motivation levels. So the old saying, discretion is the better part of valour, is well
and truly applicable here.
A comprehensive assessment of the various risks involved is a must before
striking an M&A deal. Circumstances under which the acquisition may fail
including the worst case scenarios should be carefully considered.
Even if the probability of a failure is very low but the consequences of the failure
are significant, one should think carefully before rushing to complete the deal.

One of the most common reasons for mergers and acquisitions


is the belief that

"synergies" exist, allowing the two companies to

work more efficiently together than either would separately. Such


synergies may result from the firms' combined ability to exploit
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economies of scale, eliminate duplicated functions, share managerial
expertise, and raise larger amounts of capital.
Another reason for banks to move towards merger is that they are
motivated by a desire for greater market power.
The 'human factor' is a major cause of difficulty in making the
integration between two companies work successfully. If the transition
is carried out without sensitivity towards the employees who may
suffer as a result of it, and without awareness of the vast differences
that may exist between corporate cultures, the result is a stressed,
unhappy and uncooperative workforce - and consequently a drop in
productivity
Decision to carry out a merger or acquisition should consider not only
the legal and financial implications, but also the human consequences
- the effect of the deal upon the two companies' managers and
employee
Almost 60 -70% mergers and acquisitions and the reason for the failure
is cultural differences, flawed intentions, and sometimes decisions are
taken without properly analysis the future of the merger.
Merger of BoR an old private sector bank with India's 2nd largest private
sector bank will definitely help both of this parties as ICICI Bank can
extend it activities as it total number branches will go up by 25% and
BoR will also get new direction as it already witness the share price of
BoR in BSE is almost doubled after the announcement of the merger

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SUGGESTIONS
Nothing can guarantee that the shiny new company will bring with it untold riches, nor can
you assure yourself that you won't be exposing your most sensitive information assets to risk
by coupling your network infrastructures. What you can do is mitigate the risk of a costly and
embarrassing security breach. Link it to your financial due diligence and make it happen.
Assess the Business Risk
Analyze the external perimeters
Pay attention to attitude
Review the company's security program
Review critical applications
Pay attention to antiviral efforts
Learn how security intelligence is gathered and systems are monitored
Look at emergency response processes

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BIBLIOGRAPHY
www.google.com
www.yahoo.com
www.icici.com
www.obc.com
www.pnb.com

www.investopedia.com
www.business.mapsofindia.com
www.bloomberg.com
www.legalserviceindia.com
www.slideboom.com
www.papercamp.com
www.moneycontrol.com

Books:
Mergers & Acquisitions- J. Fred Weston & Samwel C. Weaver
Financial Services M. Y. Khan
Marketing of Financial Services- V. A. Avadhani
Newspapers & Magazines
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