MERGER & ACQUISITION OF HDFC &

CBOP

TERM PAPER : (Term 2 )

TOPIC : MERGER AND ACQUISITION OF HDFC AND CBOP

SUBJECT : STRATEGIC MANAGEMENT

SUBMITTED BY : PANKAJ SINGH (B51)

Roll no : RRB51

SUBJECT : MGT 612

SECTION : RR1904

SUBMITED TO : MISS. NEHA

Lovely School of Business…. Date: 14/11/2010

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ACKNOWLEDGEMENT

I take this opportunity to present my votes of thanks to all those guidepost who really acted as
lightening pillars to enlighten our way throughout this project that has led to successful and
satisfactory completion of this study.

I am highly thankful to MISS. NEHA for her active support, valuable time and advice, whole-
hearted guidance, sincere cooperation and pains-taking involvement during the study and in
completing the assignment of preparing the said paper within the time stipulated.

Without the active participation of our teachers it would have been extremely difficult for me
to prepare the project in a time bound framework.

Name: PANKAJ SINGH

Regd.No: 10907098

Rollno: RRB51

Sec: RR1904

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MERGER AND ACQUISITION

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance
and management dealing with the buying, selling and combining of different companies that
can aid, finance, or help a growing company in a given industry grow rapidly without having
to create another business entity. An acquisition, also known as a takeover or a buyout, is the
buying of one company (the ‘target’) by another. The acquisition process is very complex
and various studies shows that only

50% acquisitions are successful. An acquisition may be friendly or hostile. In a friendly

takeover a company’s cooperate in negotiations. In the hostile takeover, the takeover target is
unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition
usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller
firm will acquire management control of a larger or longer established company and keep its
name for the combined entity. This is known as a reverse takeover.

Although merger and amalgamation mean the same, there is a small difference between the
two. In a merger one company acquires the other company and the other company ceases to
exist. In an amalgamation, two or more companies come together and form a new business

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entity.

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate
finance world. Every day, Wall Street investment bankers arrange M&A transactions, which
bring separate companies together to form larger ones. When they're not creating big
companies from smaller ones, corporate finance deals do the reverse and break up companies
through spinoffs, carve-outs or tracking stocks. Not surprisingly, these actions often make
the news. Deals can be worth hundreds of millions, or even billions, of dollars. They can
dictate the fortunes of the companies involved for years to come. For a CEO, leading an
M&A can represent the highlight of a whole career. And it is no wonder we hear about so
many of these transactions; they happen all the time. Next time you flip open the newspaper’s
business section, odds are good that at least one headline will announce some kind of M&A
transaction.

Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this
question, this tutorial discusses the forces that drive companies to buy or merge with others, or
to split-off or sell parts of their own businesses. Once you know the different ways in which
these deals are executed, you'll have a better idea of whether you should cheer or weep when a
company you own buys another company - or is bought by one. You will also be aware of the
tax consequences for companies and for investors.

 MERGERS - A merger is a combination of two companies into one larger

company, which involves stock swap or cash payment to the target.

 ACQUISITION - When one company takes over another and clearly

established itself as the new owner, the purchase is called an acquisition.

GOVERNING LAW

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The Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It deals with
schemes of merger/acquisition which are given in s.390-394 'A', 395, 396 and 396 'A'.

CLASSIFICATIONS OF MERGERS

• Horizontal merger – is the merger of two companies which are in produce of Same
products.This can be again classified into large horizontal merger and Small
horizontal merger.Horizontal merger helps to come over from the competition between
two companies merging together strengthens the company to compete with other
companies. Horizontal merger between the small companies would not effect the industry
in large. But between the larger companies will make an impact on the economy and gives
them the monopoly over the market. Horizontal mergers between the two small
companies are common in India. When large companies merging together we need to
look into legislations which prohibit the monopoly.

• Vertical merger – If a merger between two companies producing different goods

or services for one specific finished product. Vertical merger takes between the customer
and company or a company and a supplier. IN this a manufacture may merge with the
distributor or supplier of its products. This makes other competitors difficult to access to an
important component of product or to an important channel of distribution which
are called as "vertical foreclosure" or "bottleneck" problem. Vertical merger
helps to avoid sales taxes and other marketing expenditures.

• Market-extension merger - is a merger of two companies that deal in same products in

different markets. Market extension merger helps the companies to have access to the
bigger market and bigger client base.
• Product-extension merger – takes place between the two or more companies which
sells different products but related to the same category. This type of merger
enables the new company to go in for a pooling in of their products so as to serve a

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common market, which was earlier fragmented among them. This merger is
between two companies that sell different, but somewhat related products, in a
common market. This allows the new, larger company to pool their products and
sell them with greater success to the already common market that the two separate
companies shared. The product extension merger allows the merging companies to
group together their products and get access to a bigger set of consumers. This
ensures that they earn higher profits.
 Conglomeration - Two companies that have no common business areas. A
conglomeration is the merger of two companies that have no related products or
markets. In short, they have no common business ties. Conglomerate merger in
which merging firms are not competitors, but use common or related production
processes and/or marketing and distribution channels. Co generic merger: Merger
between firms in the same general industry but having no Mutual buyer-seller
relationship, such as a merger between a bank and a leasing company.

 Purchase mergers - this kind of merger occurs when one company

purchases another. The purchase is made with cash or through the issue of some
kind of debt instrument; the sale is taxable. Acquiring companies often prefer this
type of merger because it can provide them with a tax benefit. Acquired assets can
be written-up to the actual purchase price, and the difference between the book
value and the purchase price of the assets can depreciate annually, reducing taxes
payable by the acquiring company.
 Consolidation mergers - With this merger, a brand new company is formed
and both companies are bought and combined under the new entity. The tax terms
are the same as those of a purchase merger. A unique type of merger called a reverse
merger is used as a way of going public without the expense and time required by an
IPO. Accretive mergers are those in which an acquiring company's earnings per
share (EPS) increase. An alternative way of calculating this is if a company with a

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high price to earnings ratio (P/E) acquires one with a low P/E

RESEARCH METHODOLOGY

OBJECTIVES
1. To study the merger and acquisitions in the banking sector.

2. To study the risk involved in merger and acquisition.

3. To study the benefits of merger and acquisition of HDFC AND CBOP.

LIMITATION OF THE STUDY

The analysis is purely based on the secondary data. So, any error in the secondary data might
also affect the study.

SIGNIFICANCE OF THE STUDY

The study which I have under taken is significant and useful as it has given me an
experience and knowledge about the recent merger and acquisitions in banking sector and
what was its impact on the performance of the company.

DATA COLLECTION

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The data’s which is collected from various secondary sources like internet, journals and other
publications.

REVIEW OF LITERATURE
1. AN EXAMINATION OF BANK SECTOR
This article helps to discuss various regulations which are faced by banks in order to enter the
merger and acquisition phase. In the banking sector, market entry is generally governed by a
specific banking regulator .Actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm to
proclaim that the action is a merger of equals, even if it is technically an acquisition.

2. CHALLENGES THE INDIAN BANKS FACE

This article is about the various challenges faced by Indian banking sector. It discussed the
position of banks after merger and acquisition. It discusses the challenges such as: interest rates
risk, credit risk by private banks. 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.

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3. MOTIVES FOR MERGERS AND ACQUISITIONS IN THE
INDIAN BANKING SECTOR - A NOTE ON OPPORTUNITIES &
IMPERATIVES

Recent reports on banking sector often indicate that India is slowly but surely moving from a
regime of 'large number of small banks' to 'small number of large banks'. The aim of this paper is
to probe into the various motivations for mergers and acquisitions in the Indian Banking sector.
Thus, literature is reviewed to look into the various motivations behind a banks' merger/
acquisition event. Given the increasing role of the economic power in the turf war of nations, the
paper looks at the significant role of the state and the central bank in protecting customer's
interests vis-à-vis creating players of international size. While, gazing at the mergers &
acquisitions in the Indian Banking Sector both from an opportunity and as imperative
perspectives, the paper also glances at the large implications for the nation.

MERGERS AND ACQUISITIONS - THE INDIAN BANKING SCENARIO

This article studies M&A activities in the Indian banking sector and says that even though the
objective of present bank mergers is to place the weak banks in safe hands, the future mergers
will focus more on strategic issues like increasing geographical reach and improving product
mix.

M&AS IN THE INDIAN BANKING SECTOR - STRATEGIC AND

FINANCIAL IMPLICATIONS
Like all business entities, banks want to safeguard against risks, as well as exploit available
opportunities indicated by existing and expected trends. M&As in the banking sector have been
on the rise in the recent past, both globally and in India. In this backdrop of emerging global and
Indian trends in the banking sector, this article illuminates the key issues surrounding M&As in
this sector with the focus on India. It seeks to explain the motives behind some M&As that have
occurred in India post-2000, analyse the benefits and costs to both parties involved and the

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consequences for the merged entity. A look at the future of the Indian banking sector, and some
key recommendations for banks, follow from this analysis.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were synonymous,
the terms merger and acquisition mean slightly different things. When one company takes over
another and clearly established itself as the new owner, the purchase is called an acquisition.
From a legal point of view, the target company ceases to exist,the buyer "swallows" the business
and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new 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. For example, both Daimler-Benz
and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,
was created. In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm to
proclaim that the action is a merger of equals, even if it's technically an acquisition. Being
bought out often carries negative connotations, therefore, by describing the deal as a merger, deal
makers and top managers try to make the takeover more palatable. A purchase deal will also be
called a merger when both CEOs agree that joining together is in the best interest of both of
their companies. But when the deal is unfriendly - that is, when the target company does not
want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered
a merger or an acquisition really depends on whether the purchase is friendly or hostile and how
it is announced. In other words, the real difference lies in how the purchase is communicated to
and received by the target company's board of directors, employees and shareholders.
MERGERS AND ACQUISITIONS IN INDIA

Merger and acquisitions are on the rise. Volume of mergers and acquisitions in India in

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2007 are expected to grow two fold from 2006 and four times compared to 2005. India has
emerged as one of the top countries with respect to merger and acquisition deals. In 2007,
the first two months alone accounted for merger and acquisition deals worth $40 billion in
India. The estimated figures for the entire year projected a total of more than $ 100 billion
worth of mergers and acquisitions in India. This is twofold growth from 2006 and a growth
of almost four times from 2005.

MERGERS AND ACQUISITIONS IN DIFFERENT SECTORS IN

INDIA

Sector wise, large volumes of mergers and mergers and acquisitions in India have occurred
in finance, telecom, FMCG, construction materials, automotives and metals. In 2005
finance topped the list with 20% of total value of mergers and acquisitions in India taking
place in this sector. Telecom accounted for 16%, while FMCG and construction materials
accounted for 13% and 10% respectively. In the banking sector, important mergers and
acquisitions in India in recent years include the merger between IDBI (Industrial
Development bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6
million (Rs. 7.6 billion in Indian currency). Another important merger was that between
Centurion Bank and Bank of Punjab. Worth $82.1 million (Rs. 3.6 billion in Indian
currency), this merger led to the creation of the Centurion Bank of Punjab with 235
branches in different regions of India.

In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti
Telecom was worth $252 million (Rs. 10.9 billion in Indian currency). In the Foods and
FMCG sector a controlling stake of Shaw Wallace and Company was acquired by United
Breweries Group owned by Vijay Mallya. This deal was worth $371.6 million (Rs. 16.2
billion in Indian currency). Another important one in this sector, worth $48.2 million (Rs
2.1 billion in Indian currency) was the acquisition of 90% stake in Williamson Tea Assam
by McLeod Russell India In construction materials 67 % stake in Ambuja Cement India Ltd
was acquired by Holmic, a Swiss company for $634.9 million (Rs 27.3 billion in Indian

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currency).

HDFC Bank acquired Centurion Bank of Punjab

HDFC BANK OVERVIEW

HDFC Bank Ltd is a major Indian financial services company based in India, incorporated in
August 1994, after the Reserve Bank of India allowed establishing private sector banks. The
Bank was promoted by the Housing Development Finance Corporation, a premier housing
finance company (set up in 1977) of India. HDFC Bank has 1,725 branches and over 4,232
ATMs, in 779 cities in India, and all branches of the bank are linked on an online real-time basis.
As of 30 September 2008 the bank had total assets of Rs.1006.82 billion. For the fiscal year

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2008-09, the bank has reported net profit of 2,244.9 crore (US$ 509.59 million), up 41% from
the previous fiscal. Total annual earnings of the bank increased by 58% reaching at 19,622.8
crore (US$ 4.45 billion) in 2008-09.

HISTORY OF HDFC BANK

HDFC Bank was incorporated in 1994 by Housing Development Finance Corporation Limited
(HDFC), India's largest housing finance company. It was among the first companies to receive
an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private
sector. The Bank started operations as a scheduled commercial bank in January 1995 under the
RBI's liberalisation policies.

Times Bank Limited (owned by Bennett, Coleman & Co. / Times Group) was merged with
HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India. Shareholders
of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more than
1,000. The amalgamated bank emerged with a base of about Rs. 1,22,000 crore and net advances
of about Rs.89,000 crore. The balance sheet size of the combined entity is more than Rs.
1,63,000 crore.

BUSINESS FOCUS

HDFC Bank deals with three key business segments - Wholesale Banking Services, Retail
Banking Services, Treasury. It has entered the banking consortia of over 50 corporates for
providing working capital finance, trade services, corporate finance and merchant banking. It is
also providing sophisticated product structures in areas of foreign exchange and derivatives,
money markets and debt trading and equity research.

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WHOLESALE BANKING SERVICES

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian
corp to small & mid-sized corporates and agri-based businesses. For these customers, the Bank
provides a wide range of commercial and transactional banking services, including working
capital finance, trade services, transactional services, cash management, etc. The bank is also a
leading provider of structured solutions, which combine cash management services with vendor
and distributor finance for facilitating superior supply chain management for its corporate
customers. HDFC Bank has made significant inroads into the banking consortia of a number of
leading Indian corporates including multinationals, companies from the domestic business
houses and prime public sector companies. It is recognized as a leading provider of cash
management and transactional banking solutions to corporate customers, mutual funds, stock
exchange members and banks.

RETAIL BANKING SERVICES

The objective of the Retail Bank is to provide its target market customers a full range of financial
products and banking services, giving the customer a one-stop window for all his/her banking
requirements. The products are backed by world-class service and delivered to customers
through the growing branch network, as well as through alternative delivery channels like
ATMs, Phone Banking, NetBanking and Mobile Banking.]] [[HDFC Bank was the first bank in
India to launch an International Debit Card in association with VISA (VISA Electron) and issues
the Mastercard Maestro debit card as well. The Bank launched its credit card business in late
2001. By March 2009, the bank had a total card base (debit and credit cards) of over 13 million.
The Bank is also one of the leading players in the “merchant acquiring” business with over
70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant
establishments.]] The Bank is well positioned as a leader in various net based B2C opportunities
including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments,
etc.

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TREASURY

Within this business, the bank has three main product areas - Foreign Exchange and Derivatives,
Local Currency Money Market & Debt Securities, and Equities. These services are provided
through the bank's Treasury team. To comply with statutory reserve requirements, the bank is
required to hold 25% of its deposits in government securities. The Treasury business is
responsible for managing the returns and market risk on this investment portfolio.

MERGER AND ACQUISITION OF HDFC AND CBOP

CENTURION BANK OF PUNJAB

The Centurion Bank of Punjab (formerly Centurion Bank) was an Indian private-sector bank
that provided retail and corporate banking services. It operated on a strong nationwide franchise
of 403 branches and had over 5,000 employees. The Bank's shares were listed on the major
Indian stock exchangesand on the Luxembourg Stock Exchange.

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On 23 May 2008 HDFC Bank acquired Centurion Bank of Punjab.

MERGER & ACQUISITION OF HDFC AND CBOP

 1994 Centurion Bank was incorporated on 30 June 1994 and received its certificate of
Commencement of Business on 20 July. It was a joint venture between 20th Century Finance
Corporation and its associates and Keppel Group of Singapore through Kephinance
Investment (Mauritius). Centurion had a network of ten branches, which grew to 29 branches
the next year.
 1995 Centurion Bank amalgamated 20th Century Finance Corporation.
 2005 On 29 June 2005, the Boards of Directors of Centurion Bank and Bank of Punjab
agreed to a merger of the two banks. The combined bank took as its name Centurion Bank
of Punjab. Bank of Punjab had been founded in 1995.
 2006 Centurion Bank of Punjab acquired Kochi-based Lord Krishna Bank. Lord Krishna
Bank had been established at Kodungallur in Thrissur District,Kerala in 1940. During the
1960's, Lord Krishna acquired three commercial banks: Thiyya Bank, Josna Bank and Kerala
Union Bank.
 2008 HDFC Bank acquired Centurion Bank of Punjab.

The swap ratio is expected to be around 1:25-30,” said a banking source. The merger will make
HDFC Bank the country’s seventh largest bank after Bank of India (BoI) and ahead of IDBI
Bank, from the current 10th position. The merger talks between the two banks began in January
2008 after the principal shareholders of CBoP – Bank Muscat with 14.02 per cent

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stake, Sabre Capital with 3.48 per cent stake and Kephinance Investment (Mauritius) with 6.13
per cent — decided to exit.

Procedure of Bank Merger

 The procedure for merger either voluntary or otherwise is outlined in the respective state
statutes/ the Banking regulation Act. The Registrars, being the authorities vested with the
responsibility of administering the Acts, will be ensuring that the due process prescribed
in the Statutes has been complied with before they seek the approval of the RBI. They
would also be ensuring compliance with the statutory procedures for notifying the
amalgamation after obtaining the sanction of the RBI.

 Before deciding on the merger, the authorized officials of the acquiring bank and the
merging bank sit together and discuss the procedural modalities and financial terms.
After the conclusion of the discussions, a scheme is prepared incorporating therein the all
the details of both the banks and the area terms and conditions.

 Once the scheme is finalized, it is tabled in the meeting of Board of directors of

respective banks. The board discusses the scheme thread bare and accords its approval if
the proposal is found to be financially viable and beneficial in long run.

 After the Board approval of the merger proposal, an extra ordinary general meeting of the
shareholders of the respective banks is convened to discuss the proposal and seek their
approval.

 After the board approval of the merger proposal, a registered valuer is appointed to
valuate both the banks. The valuer valuates the banks on the basis of its share
capital,market capital, assets and liabilities, its reach and anticipated growth and sends its
report to the respective banks.

 Once the valuation is accepted by the respective banks , they send the proposal along

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with all relevant documents such as Board approval, shareholders approval, valuation
report etc to Reserve Bank of India and other regulatory bodies such Security & exchange
board of India (SEBI) for their approval.

 After obtaining approvals from all the concerned institutions, authorized officials of both
the banks sit together and discuss and finalize share allocation proportion by the
acquiring bank to the shareholders of the merging bank (SWAP ratio)

 After completion of the above procedures , a merger and acquisition agreement is signed
by the bank.

HR Issues in Mergers & Acquisitions

People issues like staffing decision, organizational design, etc., are most sensitive issues in case
of M&A negotiations, but it has been found that these issues are often being overlooked.

 Before the new organization is formed, goals are established, efficiencies projected and
opportunities appraised as staff, technology, products, services and know-how are
combined.
 But what happens to the employees of the two companies? How will they adjust to the
new corporate environment? Will some choose to leave?
 When a merger is announced, company employees become concerned about job security
and rumors start flying creating an atmosphere of confusion, and uncertainty about
change.
 Roles, behaviors and attitudes of managers affect employees' adjustment to M&A.
 Multiple waves of anxiety and culture clashes are most common causes of merger failure.
 HR plays an important role in anticipating and reducing the impact of these cultural
clashes.

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 Lack of communication leads to suspicion, demoralization, loss of key personnel and
business even before the contract has been signed.
 Gaining emotional and intellectual buy-in from the staff is not easy, and so the employees
need to know why merger is happening so that they can work out options for themselves.
 Major stress on the accompany merger activity are: -
* Power status and prestige changes
* Loss of identity
* Uncertainty
 Unequal compensation may become issue of contention among new co-workers.

HIGHLIGHT

THE MERGER- HDFC AND CENTURION BANK OF PUNJAB

1) HDFC bank is merged with Centurion Bank of punjab

2) New entity is named as “HDFC bank itself”.

3) The merger will strengthen HDFC Bank's distribution network in the northern and the

southern regions.

4) HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank

of Punjab (CBoP) for Rs 9,510 crore.

BENEFITS FROM THIS DEAL

 The corporate world is a place where only the vigilant, the sharp and the spontaneous can
explore their way up the ladder, while the remaining admire or envy the success of the
former . Here, every second tests the mental acumen of the professionals by putting them

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into various odd situations which demand spontaneous, impromptu decisions to be
crafted, keeping a long-term perspective in sight.
 The expected merger of the HDFC Bank with the Centurion Bank of Punjab (CBoP) is
believed to broaden the scope and reach of HDFC by crediting to its already well-
distributed network. The HDFC Bank, which currently spans India with its chain of 746
branches, will add to itself 394 branches of the CBoP to itself, to make its network bigger
and stronger. The merger talks between the two banks began in January 2008, after the
principal shareholders of CBoP – Bank Muscat with 14.02 per cent stake, Sabre Capital
with 3.48 per cent stake and the Kephinance Investment (Mauritius) with 6.13 per cent
stake decided to move away from this partnership.
 The HDFC Bank is further expected to pay Rs 100 billion to Rs 120 billion in shares for
acquiring the CBoP. In what claims to be the largest ever private bank merger, the share
swap ratio stands at 1:29, that is every shareholder of CBoP will get one share of HDFC
Bank for every 29 shares of CBoP owned. Though this ratio is believed to have been
worked out after rigorous discussions among the Board of Directors of both the banks, it
has failed to receive a positive reaction from the CBoP shareholders. It has come as a yet
another setback for them after a volatile period witnessing a decline in CBoP shares and
an unstable management.
 The HDFC Bank which presently enjoys the 10th position in the list of largest banks in
India on the basis of assets, and with this merger, will now witness a jump to the 7th
position. At the same time, the current stake of HDFC in the CBoP, which is 23.38% is
projected to fall to about 19% on completion of the deal.Another important concern that
rises with such mergers is the question of blending the two distinct and diverse styles of
functioning and ensuring a smooth transition to a new work culture, absorbing the
strengths of both the merging companies. It is a meticulous task to ensure that the
fundamental ways of working and the ideology of the two companies supplement the
growth of each other rather than leaving any one of the potential organizations obsolete.
 This merger has come after a series of activities marking an eventful past for CBoP,
which include acquiring the Lord Krishna Bank and the Bank of Punjab. As the CBoP
stands at a new dawn, we wish it brings some reason to rejoice for the shareholders that
have stood through its history of highs and lows.

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EFFECT OF MERGER AND ACQUISITION OF HDFC AND CBOP

 HDFC Bank's ability to grow at over 30 per cent annually in the last nine years, along
with superior credit risk management practices, which have helped it maintain asset
quality, would ensure that it will be among the least affected in a slowdown.

 The bank's focus on technology and superior margins with support from low-cost
deposits will ensure profitable growth in the future.

 The merger of retail focused-Centurion Bank of Punjab (CBOP) with HDFC Bank [Get
Quote] effective May 23, 2008, will shore up revenues in the medium-term. However, the
synergies from the merger with start reflecting over 12-24 months, and boost
profitability. Put together, the gains from organic and inorganic initiatives will help the
bank sustain growth rates in excess of its historical average of 29-30 per cent, and in a
profitable manner.

POST-MERGER

 The inherent synergies of HDFC Bank and CBOP in their retail focus was the driver for
the merger, which added around 400 branches to HDFC Banks' branch strength of 760
(as on March 2008) along with a 15-20 per cent increase in the asset base to more than Rs
1.7 lakh crore. While the merger has helped increase the size of HDFC Bank, it has also
led to some pressure on key ratios (see Merger Effects) for the combined entity; CBoP
ratios were lower than that of HDFC Bank. The next pertinent question is the pace of
integration, and how fast HDFC Bank can ramp up efficiency levels of CBOP to its own
benchmarks.

 The integration plan is on schedule. The re-branding of CBOP was completed in May
itself; training processes to assign all the employees of CBOP in their new roles is

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marching ahead with almost 90 per cent of the people retrained. With regards the
systems, treasury, wholesale banking and retail loan segments, they have already been
integrated with HDFC's platform, while the overall retail banking is expected to be
completed in the next two months.

MERGER EFFECTS
Rs crore CBOP ** HDFC Bank** Standalone Post-merger
9 Mths 9 Mths FY 08 H1 FY09
Net Int. Income 505 3,586 5,228 3,590
Other Income 459 1,734 2,283 1,237
Net Profit 123 1,119 1,590 992
Cost/income (%) 63.0 49.7 49.9 55.4
NIM (%) 3.6 4.3 4.4 4.2
CASA (%) 24.5 50.9 55 44.0
Net NPA (%) 1.7 0.4 0.5 0.6
CAR (%) 11.5 13.8 13.6 11.4

The actual benefits will start to filter in the next 12-24 months, with improved productivity in
terms of net revenue (net interest income and other income) and CASA (the ratio of low cost
deposits to total deposits) growth of CBoP branches on par with HDFC outlets. But before that to
happen, HDFC bank will have to shoulder the pressure in the medium-term.

For instance, on the efficiency front, the cost to income ratio has also increased from 50 per cent
in March, 2008 to around 55 per cent in Q2 FY09 on the back of higher employee costs and
integration costs, post the merger. The integration of the two banks' technology-based platforms
is expected to be completed by the end of this fiscal, and will improve the cost efficiencies going
forward.

Likewise, the capital adequacy ratio (CAR) dropped to 11.4 per cent in Q2 FY09; this can
partially be attributed to the merger blues and also organic growth of loan book. However, it is
comfortably above the regulatory requirement of 9 per cent. Notably, CAR will improve and
provide capital for future growth, if the promoters exercise their right to convert warrants and

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infuse Rs 3,500 crore (warrants already issued, conversion price of Rs 1,500 per share, deadline
is December 2009).

Bibliography

Books

1. Merger and acquisition :- C.H.Rajeshwar

Paper
The Economics times

WEB

 www.wikipedia/acquisition.com

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 MERGER & ACQUISITION OF HDFC &
CBOP
 www.smartmanagementonline.com/Magazines/Articles/Mergers%20and
%20Acquisitions/IPMA0025.htm
 International Review of Business Research
 Papers Vol. 4 No.1 January 2008
 http://www.rediff.com/money/2005/feb/17guest.htm
 www.smartmanagementonline.com/Magazines/Articles/Mergers%20and
%20Acquisitions/IPMA0025.htm

 http://tejas-iimb.org/articles/01.php

 http://www.rediff.com/money/2008/nov/24bcrisis-why-hdfc-bank-will-not-be-
hit.htm

JOURNALS

 papers.ssrn.com/sol3/papers.cfm?abstract_id=1008717
 papers.ssrn.com/sol3/papers.cfm?abstract_id=1008717

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