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Mergers has been defined as an arrangement whereby the one company (which may or may not be one of the original two companies), which has, as its share holders, all or substantial all the share holders of the companies, it may also include fusion of two or more companies into other. In a merger one or the two existing companies merger it’s identify into another existing companies may form a new company, or one or another form a new company and merger there identify into another existing company.
The term Merger, Acquisition and Take-over are all part of the Merger parlance. In a merger, the companies come together to combine and share their resources to achieve common objectives, the shareholders of the combining firms often remain as joint owners of the combined entity, an acquisition resembles more of an arm’s-length deal, with one firm’s shareholders ceasing to be owners of that firm. In a merger, a new entity may be formed subsuming the merging firms, whereas in an acquisition the acquired firm becomes the subsidiary of the acquirer firm.
Types of Mergers:
From an economic standpoint, different types of merger can be grouped on the basis of their stage of economic of the form 1) Horizontal merger 2) Vertical merger 3) Conganaric merger 4) Conglomerate merger The situation may be illustrated as under: There are two companies “A” & “B”, which decide to merge: Option 1; where “A” co. merges with “B” co. Combined merged co. Emerges as “B” Ltd. Option 2; where “B” co. merges into “A” co, combined merged company emerges as “A” Ltd. Option 3; “A” co & -“B” co. Both merges to formed a new company “C” combined merged companies emerges as “C” Ltd. Merger is a marriage between two companies of roughly same size. It is thus, one of the various forms of corporate restructuring modes.
In detail the types of merger are as follows:
1) 2) 3)
Horizontal Mergers Vertical Mergers Conglomerate Mergers
1. Horizontal Mergers
This type of merger involves two firms that operate and compete in a similar kind of business. The merger is based on the assumption that it will provide economies of scale from the larger combined unit. Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc.
2. Vertical Mergers
Vertical mergers take place between firms in different stages of production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communication and coordinating production. Both production and inventory can be improved on account of efficient information flow within the organization.
Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process and capitalize on the demand for the product. Forward integration takes place when a raw material supplier finds a regular procurer of its products while backwards integration takes place when a manufacturer funds a cheap source of raw material supplier. Example: Merger of Usha Martin and Usha Beltron
3. Conglomerate Mergers
Conglomerate mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied, engineering, production, marketing and so on. This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic location also proceed with these types of mergers. Conglomerate mergers have been sub-divided into:
Financial Conglomerates Managerial Conglomerates Concentric Companies
Reasons for undergoing Mergers for bank
Some of the reasons for mergers include: 1. Synergy: The most used word in Merger is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses. 2. Diversification / Sharpening Business Focus: These two conflicting goals have been used to describe thousands of Mergers transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry's performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations. 3. Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves - instead, they buy a competitor's business for a price. Usually, these are called horizontal mergers.
For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers. 4. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost. 5. Eliminate Competition: Many Mergers deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. The downside of this is that a large premium is usually required to convince the target company's shareholders to accept the offer.
Advantages of Bank Merger:
1. The first advantage is said to be an economies of scale. The larger the scale of assets & liabilities the lower should be the intermediation cost as a ratio of the former. 2. The primary advantage of the transaction is that a merger is legally simple & does not cost as much as other forms of acquisition. 3. The merger also reduces the number of competition in the markets & captures additional economic scale of market. 4. Is that of the pooling together of the branches of separate banks? 5. Terms of probable greater scope for spreading of risk in the asset portfolio. 6. A merger can be accomplished tax-free for both parties. 7. A merger realizes the appreciation potential of the merge entity instead of being limited to sales proceeds. 8. A merger allows the shareholder of smaller entities to own a smaller piece of a larger pie increasing their overall net worth.
Disadvantages of Bank Merger
1. Diseconomies of scale if business become too large, which leads to higher unit costs. 2. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. 3. May need to make some workers redundant, especially at management levels – this may have an effect on motivation. 4. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make & causing disruption in the running of the business. 5. There is the cost that the parts of the business face are separated. 6. When a firm divides itself into smaller units it may the synergy that it had a large entity. 7. The must be approved by votes of the stockholder of each firm. Typically two thirds of the shares votes are required for approval. 8. One of the strong disadvantages would be that inevitable cultural disharmony that couldn’t be avoided no matter how amiable the work atmosphere is. be losing
Merger/Amalgamation in the co-operative banking sector-RBI Guidelines 1. With a view to encouraging and facilitating consolidation and emergence of strong entities and providing an avenue for nondisruptive exit of weak/unviable entities in the co-operative banking sector, the Reserve Bank has issued suitable guidelines to facilitate merger/amalgamation in the sector. 2. When the net worth of the acquired bank is positive and the acquirer bank assures to protect entire deposits of all the depositors of the acquired bank; 3. When the net worth of the acquired bank is negative but the acquirer bank on its own assures to protect deposits of all the depositors of the acquired bank; and 4. When net worth of the acquired bank is negative and the acquirer bank assures to protect the deposits of all the depositors with financial support from the State Government extended upfront as part of the process of merger.
5. The Reserve Bank has further stated that in all cases of merger/ amalgamation, the financial parameters of the acquirer bank post merger will have to conform to the prescribed minimum prudential and regulatory requirement for urban co-operative banks. The realizable value of assets will have to be assessed through a process of due diligence. 6. While considering such proposals, the Reserve Bank will confine itself to the financial aspects of the merger and to the interests of depositors as well as the stability of the financial system.
Who can merge?
A co-operative bank can merge only with another cooperative bank situated in the same state or with a co-operative bank registered under Multi State Cooperative Societies Act.
Mergers Announcements in India
Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Numbers of M & A 15 18 25 71 135 288 363 430 541 636 730 20.0 38.9 184.0 90.1 113.3 26.0 18.5 25.8 17.6 14.8 Percent change
LIST OF BANK MERGERS
BANK OF BIHAR
STATE BANK OF INDIA
NATIONAL BANK OF LAHORE
STATE BANK OF INDIA UNITED BANK OF INDIA
HINDUSTAN MERCENTILE BANK
UNITED BANK OF INDIA
JHARIA INDUSTRIAL BANK
UNITED COMMERCIAL BANK
LOKSHMI BANK TRADERS BANK
CANARA BANK BANK OF BARODA
NEW BANK OF INDIA
PUNJAB NATIONAL BANK BANK OF INDIA STATE BANK OF INDIA ORIENTAL BANK OF COMMERCE BANK OF BARODA
BANK OF KARAD KASHINATH SETH BANK
BAARI DOAB BANK
BAREILY CORPORATION BANK
TIMES BANK GLOBAL TRUST BANK
HDFC BANK ORIENTAL BANK OF COMMERCE STATE BANK OF INDIA
INDIAN OCEAN INTERNATIONAL BANK, MAURITIUS
ICICI and Bank of Madura
The takeover of Bank of Madura (BoM) by ICICI Bank has been the second success story in the banking industry after the takeover of Times bank by HDFC Bank last year. The Board of Directors of ICICI Bank and Bank of Madura (BoM) approved the merger of the two banks at their respective meetings held on 11thDecember and agreed to a share swap ratio of two shares of ICICI Bank for one share of BoM. The amalgamation scheme was placed for approval at the meeting of shareholders of the two banks on January 19 .The proposed date of merger was February 1, 2001. ICICI Bank Limited has fixed Wednesday, April 11, 2001 as the 'Record Date' to determine the shareholders of Bank of Madura Limited who would be entitled to receive the equity shares of ICICI Bank. ICICI Bank was third time lucky after two earlier attempts of merger. The first was a proposed merger with Centurion Bank, which fizzled out after the bank’s promoters asked for higher valuations, the second a recent reverse merger with parent ICICI. The integration exercise was scheduled to be completed by September 2001.
Before we move onto why the two banks decided to merge. Let us look at why ICICI decided to merge with Bank of Madura? ICICI Bank had been scouting for a private banker for merger. Though it had 21 percent of stake, the choice of Federal bank, was not lucrative due to the employee size (6600), per employee business is as low at Rs.161 lakhs and a snail pace of technical up gradation. While, BOM had an attractive business per employee figure of Rs.202 lakhs, a better technological edge and had a vast base in southern India when compared to Federal bank.
Reasons for the merger:
BoM was bankrupt (with assets which are Rs.350 crores behind liabilities) and had a leverage of 41 times. If it were to be brought up to a point where its assets were 10% ahead of liabilities, which is broadly consistent with the Basle Accord, this would require an infusion of Rs.800 crores of equity capital, which would be impossible for them to rise. BoM had a network, which ICICI Bank wanted. They had many regional branches, which would help ICICI increase their reach in the regional markets.
Financial consolidation was becoming necessary for the growth of BoM. The merger with a new private sector bank, particularly a financially and technological strong bank like ICICI would add to shareholder value and enhance career opportunities for the employees besides providing first rate, technology based, modern banking services to customers. A major problem for old banks is funds. Reserve Bank of India has asked several South India based banks to raise their paid-up capital to Rs 50 crores by March 2001. This could also be one of the reasons that they merged. BoM is extremely strong in the south and this merger would help ICICI grow in that area. ICICI wanted to increase their client base.
For BoM, the most significant benefit would be the brand equity it would acquire by becoming a part of the ICICI group, with the most overt advantage being technology infusion. BoM would not have been able to raise the Rs800 crores that it needs to get the assets 10% ahead of its liabilities, but after the merger with ICICI this amount will be infused into the bank.
The shareholders of both the banks will benefit. Although the swap ratio favors BoM the ICICI bank shareholders still earn higher Earnings per Share (EPS). ICICI Bank’s growth prospects had improved, as it would now get access to the branch network of Bank of Madura. Larger Client base: 1. To get an additional 1.2 million customers, which is BoM's client base now; it would have required a minimum of two years. Hence they get 1.2 million customers in one go, this is significant especially when viewed in the light that ICICI Bank took almost 7 years to build a customer base of 1.9m. 2. Thus, the merger enables ICICI to have an aggregate of 2.7 million customer base and a combined asset base of Rs.16, 000 crores, cross selling opportunities for assets and other products, and good cash management services. 3. BoM is strong in south India states and ICICI is very strong in Central and North Indian states, which would give a complacent advantage to both the banks. The south has a high rate of economic development. This merger has enabled ICICI Bank to gain a size and presence, which on its own would have taken around 2-3 years. Moreover, it also opens up the south Indian market for the bank where it had a very low presence earlier.
4. The south is considered to be a big retail market, which has been untapped by the new generation private sector banks. This merger will provide ICICI Bank with a significant lead in this region. Whereas it would give BoM a chance to explore the Northern Territories. Financial Capability: The amalgamation will enable them to have a stronger financial and operational structure, which is supposed to be capable of greater resource/deposit mobilization. And ICICI will emerge as one of the largest private sector banks in the country. Tech edge: The merger will enable ICICI to provide ATMs, Phone and the Internet banking and financial services and products to a large customer base, with expected savings in costs and operating expenses. BoM would not have to close down due to bankruptcy. It gets a new lease on life.
Problems in the merger:
Managing rural branches:
ICICI’s major branches are in major metros and cities, whereas BOM spread its wings mostly in semi urban and city segments of south India. There is a task ahead lying for the merged entity to increase dramatically the business mix of rural branches of BOM. On the other hand, due to geographic location of its branches and level of competition, ICICI Bank will have a tough time to cope with.
Another task, which stands on the way is technology. While ICICI Bank, which is a fully automated entity is using the package, Banks 2000; BOM has computerized 90 percent of its businesses and was conversant with ISBS software. The BOM branches are supposed to switch over to Banks 2000. Though it is not a difficult task, with 80 percent computer literate staff would need effective retraining which involves a cost. The ICICI Bank needs to invest Rs.50 crores, for upgrading BOM’s 263 branches.
Managing Human resources:
One of the greatest challenges before ICICI Bank is managing human resources. When the head count of ICICI Bank is taken, it is less than 1500 employees; on the other hand, BOM has over 2500. The merged entity will have about 4000 employees which will make it one of the largest banks among the new generation private sector banks. The staff of ICICI Bank is drawn from 75 various banks, mostly young qualified professionals with computer background and prefer to work in metros or big cities with good remuneration packages. While under the influence of trade unions most of the BOM employees have low career aspirations.
State Bank of India & Bank of Saurashtra
Mumbai/New Delhi, Aug. 25: The State Bank of India (SBI) will merge its associate, the State Bank of Saurashtra (SBS), with itself. This is the first time that a subsidiary bank will be merged with the parent in the SBI family. SBI has decided to merge SBS, a wholly owned associate bank, with itself. The boards of both SBI & SBS have given an in-principle approval to the merger proposal, a senior SBI official confirmed on Saturday. SBI will now have to get approvals from both the Government, the majority owner of the bank holding 59.73% stake, & the RBI. “Consolidation will benefit all the stake holders, be it shareholders, employees, customers & the SBI as an entity,” said an SBI official. “There is a lot of business synergy. The merger would enhance the capital & the balance sheet of SBI. This is important for the bank to grow its business,” he added.
SBS is the smallest among the seven associate banks of SBI, in terms of net worth. The other six associates are State Bank of Travancore, State Bank of Mysore, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore & State Bank of Patiala. Of these, the first
three are listed on the stock exchanges. SBI’s controlling interest in the associate banks range from 75% to 100%. SBS has a branch network of 460 & SBI officials said once the merger is approved, consolidation of the branch network for eliminating duplication of branches in the same geographical area would start in six months. SBS reported a net profit of Rs. 87.4 crores in 2006-07, a jump of 45.4% from Rs. 60.1 crores in the previous year. The bank has paid-up equity capital of Rs. 314 crores. SBS’s total deposits stood at Rs. 15,804 crores while total advances were at Rs. 11,081 crores. The capital adequacy stood at 12.78% as on March 31, 2007. Banking analysts said the merger was a significant move as it could be a prelude at a larger stage. The SBI is looking to expand its presence in the country to take on foreign banks. The RBI has earlier said it would allow foreign banks to acquire private sector banks from 2009. “It is not only the foreign banks with big pockets that are a threat to the SBI. Even banks such as ICICI Bank, which recently completed a massive follow-up offering, can pose a threat. The bank, therefore, wants to be bigger & mightier,” a banking analyst with a foreign brokerage said.
“Marriages in the corporate world”, “King of Corporate Marriages” These words seem to be flashing in front of our eyes day in and day out. One wonders why the importance to marriages. But the catchword here is “corporate”. Today marriage is the image associated with mergers or acquisitions. The word is not used only because it is in “vogue” or to attract attention. A marriage is the coming together of two people to become one, but each of them has their own individuality and in order to make the marriage a success compromises need to be made. This is also true for mergers and acquisitions. When two companies come together both of them have their individual work cultures and identities but in order to work together successfully they have to make some changes. Only then can a merger or an acquisition be successful. This is very simply put. However it is not so simple, nor is it just a matter of making changes. In fact there are a lot of things that go into making a merger successful. These are the issues that one needs to take care of while going in for a merger. A merger can be friendly or hostile. If the merger or acquisition is friendly it has higher chances of success. Now we move onto the important issues that one needs to look at in order to be successful or in order to carry out a merger.
It is imperative to carry out a due diligence process before the merger takes place since this helps the merging or acquiring company to assess the value of the target company. The due diligence must be thorough, only if the result is positive then one should continue the merger process. Communication with the employees, suppliers and customers is crucial. When a company is going through a merger process the people related to the organization tend to feel vulnerable. They have no idea what the outcome of the process will be and where they stand, hence it is important to constantly communicate with everyone who has an interest in the organization. Synergy is extremely crucial to a merger or an acquisition because that is what will ensure that the merger is a success. Synergy means that 2+2 > 4, which is to say that the companies must create a higher value together than they create when they are functioning on a standalone basis. Companies may merge worldwide but when it comes to India, very often they do not get the same benefits that they get in other countries. This is due to various factors like size of the companies, legislation in India and so on. The Indian environment is not as merger friendly as it can be; a few ways in which to make India more mergers friendly are given. To conclude I would like to say that this is just the beginning….. The best is yet to come the marriages are going to get bigger & bigger…..
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