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MERGERS AND ACQUISITIONS OF INDIAN BANKING SECTOR
INTRODUCTION We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business.
With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisition’s may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisition’s at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisitions.. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into Before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. E.g. A due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to -1–
Mergers And Acquisitions shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.
WHAT IS MERGER?
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
• • • •
Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.
WHAT IS ACQUISITION? Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.
Methods of Acquisition: An acquisition may be affected by
Mergers And Acquisitions a) Agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; b) Purchase of shares in open market; c) To make takeover offer to the general body of shareholders; d) Purchase of new shares by private treaty; e) Acquisition of share capital through the following forms of considerations viz. Means of cash, issuance of loan capital, or insurance of share capital.
A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. The process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offeree company being more cooperative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
Mergers And Acquisitions
PURPOSE OF THE MERGER AND ACQUISITION
The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -
(1) Procurement of supplies:
1. To safeguard the source of supplies of raw materials or intermediary product; 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials.
(2) Revamping production facilities:
1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. To standardize product specifications, improvement of quality of product, expanding
3. Market and aiming at consumers satisfaction through strengthening after sale Services; 4. To obtain improved production technology and know-how from the offered company 5. To reduce cost, improve quality and produce competitive products to retain and Improve market share.
Mergers And Acquisitions (3) Market expansion and strategy:
1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights.
(4) Financial strength: 1. To improve liquidity and have direct access to cash resource; 2. To dispose of surplus and outdated assets for cash out of combined enterprise; 3. To enhance gearing capacity, borrow on better strength and the greater assets backing; 4. To avail tax benefits; 5. To improve EPS (Earning per Share).
(5) General gains:
1. To improve its own image and attract superior managerial talents to manage its affairs; 2. To offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror company’s own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. But might feel resource constraints with
(8) Corporate friendliness: Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. Such integration could be operational or financial. various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. (9) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. secure additional financial facilities.Mergers And Acquisitions limitations of funds and lack of skill managerial personnel’s. (7) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal. Thus. eliminate competition and strengthen its market position. The combining corporate aim at circular combinations by pursuing this objective. This gives birth to conglomerate combinations. vertical. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations. product expansion. -6– . market extensional or other specified unrelated objectives depending upon the corporate strategies. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities.
It is also responsible for granting licenses for new bank branches.nearly 2000 cooperative banks operate. the regional rural banks which operate in rural areas not covered by the scheduled banks. -7– . (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). (iii) Regional Rural Banks. Scheduled and non Scheduled Banks There are 93 scheduled commercial banks. 196 regional rural banks. All large Indian banks are nationalized. in both urban and rural areas. and the cooperative and special purpose rural banks. dominate the banking sector. These bank groups are: (I) State Bank of India and its associates. These are the scheduled commercial banks. It is the sole authority for issuing bank notes and the Supervisory body for banking operations in India6. (ii) Nationalized Banks. namely the State Bank of India and the nationalized banks. In Cooperative sector. which include non scheduled banks. but for the purpose of assessment of performance of banks. Indian Banking System The banking system has three tiers.Mergers And Acquisitions OVER VIEW OF INDIAN BANKING INDUSTRY India has an extensive banking network. the Reserve Bank of India categories them as public sector banks. The Reserve Bank of India is the central banking institution. 36 foreign banks operate in India with full banking licenses. Indian and foreign. It supervises and administers exchange control and banking regulations. new private sector banks and foreign banks. the public sector banks. Scheduled Commercial Banks (SCBs) in India are categorized in five different groups according to their ownership and/or nature of operation. The site provides facility of aggregating data for various bank-groups. In terms of business. old private sector banks. Commercial banks are categorized as scheduled and non-scheduled banks. and administers the government's monetary policy. and all Indian financial institutions are in the public sector.
The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods. horizontal.e. In other words. in vertical combinations. resources and purchased products. implements its production plans as per the objectives and economizes on working capital investments. 1. The following main benefits accrue from the vertical combination to the acquirer company i. Based on the offerors’ objectives profile. -8– . combinations could be vertical. Has control over products specifications. It gains a strong position because of imperfect market of the intermediary products.Mergers And Acquisitions TYPES OF MERGERS Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. scarcity of 2. (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 merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.
(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. elimination in competition concentration in product. reduction in investment in working capital. lowering average cost of capital and thereby raising present worth of the outstanding shares.. 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. The acquiring firm belongs to the same industry as the target company. (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 and enlarges debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS. reduction in advertising costs.Mergers And Acquisitions (B) Horizontal combination: It is a merger of two competing firms which are at the same stage of industrial process. -9– . increase in market segments and exercise better control on market.
Glaxo Wellcome and SmithKline Dr. which ceases to exist. Reddy's Labs acquired Betapharm through an Beehcam ceased to exist and merged to become a agreement amounting $597 million. For example.10 – . target company.Mergers And Acquisitions 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. . new company. instead of operating business separately. known as Glaxo SmithKline. The buyer company “swallows” the business of the while new stocks are issued afresh. The stocks of both the companies are surrendered.
Impact on Management The percentage of job loss may be higher in the management level than the general employees. On the other hand. If it is a purchase. it doesn't need the same amount of employees that it previously had to do the same amount of business.. many managerial level professionals. 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. Due to change in corporate culture of the organization.11 – . It involves high level of stress. The reason behind this is the corporate culture clash. on behalf of their superiors. For example. change of powers can also be observed among the market players. On the other hand. Impact on Shareholders Impact of mergers and acquisitions also include some economic impact on the shareholders. If the merged company is pretty sufficient in terms of business capabilities. employees may also suffer from emotional and physical problems. the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load. . Impact on Competition Mergers and acquisitions have different impact as far as market competitions are concerned. need to implement the corporate policies that they might not agree with. the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. the competition in the financial services industry is relatively constant. Due to the changes in the operating environment and business procedures.Mergers And Acquisitions POSSIBLE IMPACT OF MERGERS AND ACQUISITIONS Impacts on Employees Mergers and acquisitions may have great economic impact on the employees of the organization. Different industry has different level of competitions after the mergers and acquisitions.
Economies of scales. Shareholders may gain from merger in different ways viz. The opportunity gains in alternative investments. The factors.12 – . which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear.e. The sale of shares from one company’s shareholders to another and holding investment in shares should give rise to greater values i. manager’s ad promoters of the combing companies. 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”.e. 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. Better investment opportunity in combinations. Mergers and acquisitions are caused with the support of shareholders. From the gains and achievements of the company i. Diversification of product line. Acquisition of human assets and other resources not available otherwise.Mergers And Acquisitions 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. through (a) (b) (c) (d) (e) Realization of monopoly profits. 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 companies subject to merger should enhance in value.
(c) costs to: General public affected in general having not been user or consumer or the worker in the companies under merger plan. 4) Benefits to general public Impact of mergers on general public could be viewed as aspect of benefits and (a) Consumer of the product or services. perks and fringe benefits. At the same time.Mergers And Acquisitions 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. Mergers where all these things are the guaranteed outcome get support from the managers. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control. (a) Consumers . (b) Workers of the companies under combination. (3) Promoter’s gains Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength.13 – . 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. 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.
. 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. These advances result into economic exploitation. 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. quality of products. 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. preventing the distribution of benefits resulting from diversification of production activity.14 – . Economic power is to be understood as the ability to control prices and industries output as monopolists. Secondly. Two sides of the impact as discussed by the researchers and academicians are: firstly. 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. consumers and does not create hindrance in administration of the Government polices. any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. 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.Mergers And Acquisitions 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. Both workers and communities will suffer on lessening job Opportunities. after sales service. (c) General public Mergers result into centralized concentration of power.
the High Court will pass an order. They are regulated through the provisions of: The Companies Act. Shareholders' and creators' meetings:. the regional director of the Company Law Board will be intimated. Sanction by the High Court: . Approval of board of directors: . board of directors and the Company Law Board before affecting the merger. and also. it is necessary to seek the permission of the shareholders.Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association.The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme.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. Application in the High Court: . .15 – . its certified true copies will be filed with the Registrar of Companies. the acquiring company should have the permission in its object clause to carry on the business of the acquired company. on the petitions of the companies. At least. Transfer of assets and liabilities: . In the absence of these provisions in the memorandum of association.The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme. sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. must accord their approval to the scheme. voting in person or by proxy.Mergers And Acquisitions REGULATIONS OF MERGER AND ACQUISTIONS Mergers and acquisitions are regulated under various laws in India.After the approval of the shareholders and creditors. 1956 The Act lays down the legal procedures for mergers or acquisitions:• • • • • • • • Permission for merger:.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. Information to the stock exchange: . Also. 75 percent of shareholders and creditors in separate meeting. The date of the court's hearing will be published in two newspapers. with effect from the specified date. Filing of the Court order: After the Court order.The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger. The objective of the laws is to make these deals transparent and protect the interest of all shareholders.
the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects. These securities will be listed on the stock exchange. the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company. 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. merger or amalgamation. 2002 The Act regulates the various forms of business combinations through Competition. Level of combination in the market. Degree of countervailing power in the market. Enterprises intending to enter into a combination may give notice to the Commission. Extent of effective competition likely to sustain in a market.Mergers And Acquisitions • Payment by cash or securities:. which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. The Competition Act. 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.16 – . The Commission while regulating a 'combination' shall consider the following factors:• • • • • • • • • • • • Actual and potential competition through imports. But. . Market share of the parties to the combination individually and as a combination. but this notification is voluntary. Under the Act. no person or enterprise shall enter into a combination. Extent of entry barriers into the market. Thus. Availability of substitutes before and after the combination. Possibility of the combination to significantly and substantially increase prices or profits.As per the proposal. in the form of an acquisition.
Mergers And Acquisitions CHANGE IN SCENARIO OF BANKING SECTOR 1.17 – . The strong trade union may prove to be big obstacle for the PSBS mergers. 4. Management of efficiency. 3. The first mega merger in the Indian banking sector that of the HDFC Bank with Times Bank. 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. 2. Technology of the merging banks to should complement each other NPA management. In India mergers especially of the PSBS may be subject to technology and trade union related problem. . 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 world wide. 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. Mergers for private sector banks will be much smoother and easier as again that of PSBS. With the help of M & A in the banking sector. cost reduction. has created an entity which is the largest private sector bank in the country.
Atms. Phone Banking. order statements of their account and give instruction using the tally banking or on online banking services. Now banking hours are extended. Technology drive has benefited the customers in terms of faster improve convenient banking services and Varity of financial products to suit their requirement.Phone banking and Net banking had enable the customer 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. Bank traditionally involve working capital financing have started offering consumer loans and housing loans. Some of the banks have started offering travel loans. Any time and Any where banking are the services which bank have started offering following the changing trend in sectors. has started providing complete corporate and retail financial services to its customers 1.Mergers And Acquisitions THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE. Earlier customers had to conduct their banking transaction within the restricted time frame of banking hours. 3. 2. In plastic money segment customer have also got a new option of debits cards against the earlier popular credit card. as well as many banks have started capitalizing on recent capital market boom by providing IPO finance to the investors. Atms . . Net banking.18 – . Bank traditionally just borrower and lenders.
19 – . (1) Paid up share capital of the target company. 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. the number of fully paid up and partially paid up shares. 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: (2) .Mergers And Acquisitions 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. 3. 4. Contents of announcement: Public announcement of offer is mandatory as required under the SEBI Regulations. 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. 2.
if any. of shares of the target company made by him during the twelve month period prior to the date of the public announcement. the public announcement shall also set out how the acquirers propose to implement such future plans. (3) (4) (5) The minimum offer price for each fully paid up or partly paid up share. as the case may be. 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. if any. Additional shares can be had @ 2% of voting rights in any year. (6) (7) (8) (9) (10) . The existing holding. of the acquirer in the shares of the target company. the price at which the shares are being acquired. Salient features of the agreement. The highest and the average paid by the acquirer or persons acting in concert with him for acquisition. The identity of the acquirer and in case the acquirer is a company. to which the company belong. or the persons having control over such company and the group. monetary or otherwise. for the acquisition of control over the target company. 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. Mode of payment of consideration. the identity of the promoters and. if any. including holding of persons acting in concert with him.Mergers And Acquisitions a) The public offer of minimum 20% of voting capital of the company to the shareholders. such as the date. the name of the seller.20 – . if any. b) The public offer by a raider shall not be less than 10% but more than 51% of shares of voting rights. The ‘specified date’ as mentioned in regulation 19.
the Monopolies and Restrictive Trade Practices Act. from Non-resident Indians or otherwise. Approvals of banks or financial institutions required. 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) (13) (14) (15) (16) (17) (18) (19) .e.21 – .e. 1956. Provision for acceptance of the offer by person who own the shares but are not the registered holders of such shares. and Such other information as is essential fort the shareholders to make an informed design in regard to the offer. if any. or otherwise or foreign i. financial institutions. Whether the offer is subject to a minimum level of acceptances from the shareholders. Statutory approvals required to obtained for the purpose of acquiring the shares under the Companies Act. 1973. Disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place. The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted. from banks.Mergers And Acquisitions (11) The date by which individual letters of offer would be posted to each of the shareholders. including the details regarding the sources of the funds whether domestic i. and/or any other applicable laws.
Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business. The Obstacles to Making it Work Coping with a merger can make top managers spread their time too thinly and neglect their core business. flexible work schedules or even a relaxed dress code. a global consultancy. In theory. use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. the decision is typically based on product or market synergies. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. When a company is acquired. spelling doom. For example. potential difficulties seem trivial to managers caught up in the thrill of the big deal. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms. the problems associated with trying to make merged companies work are all too concrete. merge a few departments. while revenues. It can sound so simple: just combine computer systems. employees at a target company might be accustomed to easy access to top management. It's a mistake to assume that personnel issues are easily overcome. 1+1 = 3 sounds great. and ultimately. but if new management removes them. The chances for success are further hampered if the corporate cultures of the companies are very different.22 – . but in practice. but cultural differences are often ignored. the result can be resentment and shrinking productivity. .Mergers And Acquisitions WHY MERGERS FAIL? It's no secret that plenty of mergers don't work. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. Too often. things can go awry. In many cases. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. thereby prompting nervous customers to flee. The study concludes that companies often focus too intently on cutting costs following mergers. suffer. More insight into the failure of mergers is found in the highly acclaimed study from McKinsey. These aspects of a working environment may not seem significant. which means they will lose value on the stock market. profits.
Table: Definition of the variables Sr. we measure change of performance as the difference between the merged banks‟ two-year average return on equity (ROE) after the acquisition and the weighted average of the ROE of the merging banks two years before the acquisition.No Definition 1 Performance Change (ΔROE) 2 3 4 5 6 7 8 9 Liquidity (LIQ) Cost-income ratio (COST/INC) Capital to asset ratio (CA/TA) Loans to total assets ratio (LOAN/TA)) Credit Risk (BADL/INT_INC) formula Return on equity (After merger) Liquid Asset/Total Deposit Total cost/Total revenue Total capital/Total asset Net Loans/Total asset Loan loss provision/Net interest revenues Other operational revenues/Total assets Off balance sheet item/Total asset Customer loan to Customer deposit Diversity Earning (OOR/TA) Off balance sheet (OBS/TA) Loans to deposit ratio (LOANS/DEP) .Mergers And Acquisitions FINANCIAL IMPLICATIONS OF BANKING M&A These indicators include measures of financial performance: asset and liability composition capital structure liquidity risk exposure profitability financial innovation and efficiency As dependent variable.23 – .
Based on the calculation. Before going for any merger or acquisition. both the companies may have different theories about the worth of the target company.Mergers And Acquisitions COST OF MERGERS AND ACQUISITIONS Costs of mergers and acquisitions are an important and integral part of mergers and acquisitions process. whereas buyer will try to seal the deal at a lower price.24 – . they decide whether they should go with the deal or not. . both the companies calculate the costs of mergers and acquisitions to find out the viability and profitability of the deal. In mergers and acquisitions. There are a number of legitimate methods for valuation of companies. The seller tries to project the value of the company high.
Some of those can be listed as: Replacement Cost Method In Replacement Cost Method. .Mergers And Acquisitions VALUATION MODEL IN MERGERS AND ACQUISTIONS There are a number of methods used in mergers and acquisition valuations. Replacement cost method isn't applicable to service industry.25 – . The acquiring company offers to buy all these from the target company at the given cost. where key assets (people and ideas) are hard to value. Here the value of all the equipments and staffing costs are taken into consideration. cost of replacing the target company is calculated and acquisitions are based on that.
Estimated Cash Flow = Net Income + Depreciation/Amortization . Economic Profit Model In this model.26 – . the value of the organization is calculated by summing up the amount of capital invested and a premium equal to the current value of the value created every year moving forward. based .Weighted Average Cost of Capital) Economic Profit = Net Operating Profit Less Adjusted Taxes . Economic Profit = Invested Capital x (Return on Invested Capital .(Invested Capital x Weighted Average Cost of Capital) Value = Invested Capital + Current Value of Estimated Economic Profit Price-Earnings Ratios (P/E Ratio) This is one of the comparative methods adopted by the acquiring companies.Capital Expenditures . It calculates the current value of the organization according to the estimated future cash flows. organization's Weighted Average Costs of Capital (WACC) is used for the calculation. Here.Mergers And Acquisitions Discounted Cash Flow (DCF) Method Discounted Cash Flow (DCF) method is one of the major valuation tools in mergers and acquisitions. DCF method is one of the strongest methods of valuation.Change in Working Capital These estimated cash flows are discounted to a present value.
Here.Mergers And Acquisitions on which they put forward their offers. It also keeps a tab on the price-to-sales ratio of other companies. acquiring company offers multiple of the target company's earnings. Enterprise-Value-to-Sales Ratio (EV/Sales) Here. acquiring company offers multiple of the revenues.27 – . REASONS FOR MERGERS AND ACQUISITIONS Capacity Economies of Scale Accessing technology or skills Tax reasons Growth with External Efforts Deregulation Technology New Products/Services Over Capacity .
They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI. After the conclusion of the discussions. the authorized officials of the acquiring bank and the merging bank sit together and discuss the procedural modalities and financial terms. a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions. will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI. being the authorities vested with the responsibility of administering the Acts. . Before deciding on the merger.28 – .Mergers And Acquisitions Customer Base Merger of Weak Banks PROCEDURE FOR BANK MERGER The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act. The Registrars.
The valuer valuates the banks on the basis of its share capital. 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. a merger and acquisition agreement is signed by the bank . its reach and anticipated growth and sends its report to the respective banks. assets and liabilities. market capital. 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 . an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval. valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India (SEBI) for their approval. a registered valuer is appointed to valuate both the banks. Once the valuation is accepted by the respective banks . After obtaining approvals from all the concerned institutions. After the board approval of the merger proposal.Mergers And Acquisitions Once the scheme is finalized.29 – . it is tabled in the meeting of Board of directors of respective banks. After the Board approval of the merger proposal. shareholders approval. they send the proposal along with all relevant documents such as Board approval.
1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of banks. Although the Banking Regulation Act. it has been decided to frame guidelines to encourage merger/amalgamation in the sector. . inter alia. the State Governments have incorporated in their respective Acts a provision for obtaining prior sanction in writing. of RBI for an order.Mergers And Acquisitions GUIDELINES ON MERGERS & ACQUISITIONS OF BANKS With a view to facilitating consolidation and emergence of strong entities and providing an avenue for non disruptive exit of weak/unviable entities in the banking sector.30 – . for sanctioning a scheme of amalgamation or reconstruction.
Mergers And Acquisitions The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a bank/s registered under State Act. Reserve Bank will confine its examination only to financial aspects and to the interests of depositors as well as the stability of the financial system while considering such proposals. In other words. the position with regard to take over of a co-operative bank registered under the State Act by a co-operative bank registered under the CENTRAL Although there are no specific provisions in the State Acts or the Central Act for the merger of a co-operative society under the State Acts with that under the Central Act. it is felt that.31 – . . While the State Acts specifically provide for merger of cooperative societies registered under them. if all concerned including administrators of the concerned Acts are agreeable to order merger/ amalgamation. RBI may consider proposals on merits leaving the question of compliance with relevant statutes to the administrators of the Acts.
if any. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent on the merger. 3. Copies of the reports of the valuers appointed for the determination of realizable value of assets (net of amount payable to creditors having precedence over depositors) of the acquired bank. Computation based on such pro-forma balance sheet of the following:• • Tier I Capital Tier II Capital . Annual reports of each of the Banks for each of the three completed financial years immediately preceding the proposed date for merger. Information which is considered relevant for the consideration of the scheme of merger including in particular:- A. D. B. 2.Mergers And Acquisitions INFORMATION & DOCUMENTS TO BE FURNISHED BY THE ACQUIRER OF BANKS 1. published by each of the Banks for any period subsequent to the financial statements prepared for the financial year immediately preceding the proposed date of merger. Financial results. C.32 – .
if any. the names and relation to such information designations of the persons who have provided such information and the extent of verification.Mergers And Acquisitions • • • • • • • • • Risk-weighted Assets Gross and Net npas Ratio of Tier I Capital to Risk-weighted Assets Ratio of Tier II Capital to Risk-weighted Assets Ratio of Total Capital to Risk-weighted Assets Tier I Capital to Total Assets Gross and Net npas to Advances Cash Reserve Ratio Statutory Liquidity Ratio 4.33 – . made by the values in D. If the values have relied upon projected information. if any. The information and documents on which the values have relied and the extent of the verification. Details of the projected information on which the values have relied . The method of valuation used by the values B. made by the values to test the accuracy of such information C. Information certified by the values as is considered relevant to understand the net realizable value of assets of the acquired bank including in particular:- A.
34 – . It also have merger should not be seen as a means of bailing out weak banks. RECOMMENDATION OF NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS Globally.Mergers And Acquisitions E. the banking and financial systems have adopted information and communications technology. . Standardization of electronic payment systems - Telecom infrastructure - Data were Merger between banks and dfls and nbfcs need to be based on synergies and should make a sound commercial sense. Detailed computation of the realizable value of assets of the acquired bank. Committee also opines that merger between strong banks / fls would make for greater economic and commercial sense and would be a case where the whole is greater than the sum of its party and have a ‘force multiplier effect”. and the committee feels that requisite success needs to be achieved in the following areas:- - Banking automation - Planning. This phenomenon has largely by passed the Indian banking system.
K. out of which 82 of them are in rural areas. Thaiagarajan. As on the day of announcement of merger) 09-12-00). Merger could also be a solution to a after cleaning up their balances sheets it only say if these is no Voltaire response to a takeover of such bank. merger and amalgamations to it not closure. which has high rate of economic development. The merger will give ICICI Bank a hold on South India market.7 percent. Spic groups has about 4.35 – . a cultural integration would be a tough task ahead for ICICI Bank. a better technological edge and had a vast base in southern India when compared to Federal bank. Mr. ICICI Bank has announced a merger with 57-year-old Bank of Madure. Kotak mahindra group was holding about 12 percent stake in BOM.202 lakh. with most of them in southern India. The committee also options that while licensing new private sector banks. Changes after the merger:- While. While all these factors sound good. The Narasimham Committee also suggested that the merger could be a solution to ‘Weak banks’ Coney after clearing up the balance sheets) with a strong public sector bank. along with his associates was holding about 26 percent stake. The board of Director at ICICI has contemplated the following synergies emerging from the merger: . BOM had an attractive business per employee figure of Rs. while LIC and UTI were having marginal holdings. the Chairman BOM. a restructuring commission for such PSB.M. the initial capital requirement need to be review. Source: Narasimham Committee report on banking sector reforms.Mergers And Acquisitions A weak bank could be nurtured into healthy units. The committee also feels that a minimum threshold capital for old private banks also deserved threshold capitals. with 263 branches. It also emphasized on a transparent mechanism for deciding the ability of promoter to professionally manage the bank. The committee also opined that a promoter group couldn't hold more that 40 percent of the equity of a bank. can consider other options such as restructuring .
in its priority sector initiatives through its acquired 87 rural and 88 semi-urban branches. Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on microfinance activities through self-help groups. . The deal with Bank of Madera is likely to dilute the current equity capital by around 12 percent. Phone and the Internet banking and finical services and products and also facilitate cross-selling of products and services of the ICICI group. 2001. Customer base: The emerged largest customer base will enable the ICICI bank to offer banking financial services and products and also facilitate cross-selling of products and services of the ICICI groups. And ICICI will emerge a one of the largest private sector banks in the country. Tech edge: The merger will enable ICICI to provide atms.Mergers And Acquisitions Financial Capability: The amalgamation will enable them to have a stronger financial and operational structure. which is supposed to be capable of greater resourger/deposit mobilization. THE SWAP RATIO: The swap ratio has been approved in the ratio of 1:2 – two shares of ICICI Bank for every one share of Bank of Madera. Branch network: The ICICI’s branch network would not only 264. but also increases geographic coverage as well as convenience to its customers.36 – . Source: Report submitted at EGM on January 19. And the merger is expected to bring 20 percent gains in EPS of bank.
you need not go to it. In fact the banks may indeed be left with dad credit risk or those that cannot access the capital market. Even if a bank is just a safe place to put away your savings. There is always an ATM you can do business with.with far fewer hassles. This once again makes a shift to non-fund based the activities all the more important. A ‘AAA’ corporate can directly borrow from the market through commercial papers and get better rates in the bargain. .6 percent. you can do so on your credit card.37 – .64 percent has declined to 17. If you are solvent and want to borrow money. Indian mutual funds are queuing up to offer this facility. REASONS BEHIND THE RECENT TREND OF MERGER IN BANKING SECTOR The question on top everybody’s mind is Are banks and bankers on the road to redundancy? First consider the reasons that one does not need banks in large numbers any more A depositor today can open a cheque account with a money market mutual fund and obtain both higher returns and greater and greater flexibility. After can be drawn or a telephone bill paid easily through credit cards.Mergers And Acquisitions And also the bank’s comfortable capital Adequacy Ratio (CAR) of 19.
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. Branch addition. The final exchange ratio will be based on due diligence and independent valuation reports.72. Bank of Baroda (~350 branches) and Punjab National Bank (~310 branches).Mergers And Acquisitions CASE STUDIES Case study I Agrees to amalgamate Bank of Rajasthan: ICICI Bank has entered into an agreement with certain shareholders of Bank of Rajasthan (BoR) to amalgamate BoR.72 (25 shares of ICICI Bank for 118 shares of BoR). Over 60% of BoR’s 463 branches are in the state of Rajasthan and ~70% are in North India. the deal values BoR at Rs30. The key near-term challenges for ICICI Bank will be assessment of . with a tentative share exchange ratio of 1:4. Assuming a share swap ratio of 1:4. Deal at a significant premium. Improvement in deposit franchisee will be key value driver: The implied valuation of BoR at 4.4b and will lead to ~3% equity dilution for ICICI Bank. BoR’s biggest competitors in the state of Rajasthan are SBI’s subsidiary.8x trailing book value appears expensive.38 – . as the book needs to be adjusted for the re-assessment of BoR’s NPAs by ICICI Bank. State Bank of Bikaner and Jaipur (~750 branches).
ICICI Bank had acquired Sangli Bank at Rs3.5x the deposit base.72 (25 shares of ICICI Bank for 118 shares of BoR) implies a valuation of Rs66m per branch and 0.7% 1.05% Rs 21000crores Rs 304crores 1% 2. valuing Sangli . HDFC Bank had valued CBoP at Rs285m per branch and 0.2x the deposit base for BoR. We will review our target price for ICICI Bank post the merger details. and possible regulatory issues. Comparision of BOR and ICICI Basis BoR ICICI BANK CASA Deposits Business per month Return on average assets Net non-performing assets Rs 4163crores Rs 47crores 0. Valuing BoR at Rs66m/branch While BoR’s asset base is just 5% of ICICI Bank’s.Mergers And Acquisitions BoR’s asset quality. However.39 – .000 branches.5b. it takes almost two years for a new branch to break even. A share swap ratio of 1:4. It is noteworthy that ICICI Bank has opened 580 new branches (1. rationalization and re-positioning of BoR’s branches. Maintain Buy.1% Implied price per branch lower than last deal in the sector In the last deal in the sector.3x BoR’s branch network) since March 2009 at a cost of Rs8m-10m per branch. its 463 branches will result in a ~23% increase in ICICI Bank’s existing network of 2.
20 Benefit of Merger for ICICI Bank The proposed amalgamation would substantially enhance ICICI Bank’s branch network. is that it would have taken the bank three years to build the kind of low-cost current account and savings account (CASA) relationship. according to the ICICI Bank management.0 284.05 0. ICICI Bank has had its sights set firmly on expanding its share of CASA deposits. already the largest among Indian private sector banks. and especially strengthen its presence in northern and western India.3 112.2 30. it is significantly lower than the CBoP deal.3 28.17 0.5 3.5 15. Adds 25% to their branch network.40 – . .5 Value (branches) 17.54 0.Mergers And Acquisitions 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. The rationale for the merger. DETAILS OF LAST FEW DEALS IN THE SECTOR Banks Sangli bank UWI LKB CBOP BOR BRANCHES 200 229 118 394 463 Deposits 20 65 20 207 152 Approx price 3.9 Value (deposits) 0. it gets to build upon now with the latest move.18 0.8 65.5 3.
revenues. Frankfurt. The bank has 131 overseas offices spread over 32 countries. profits. Dhaka. Johannesburg. assets. market capitalization. Osaka. Male in the Maldives. London and environs. Muscat. 26500 branches including the branches of its associate banks. SBI has 21000 ATM’s.Mergers And Acquisitions CASE STUDY 2 PRESENT STATUS OF STATE BANK OF INDIA State Bank of India is the largest state-owned banking and financial services company in India. . and Tokyo. New York. Hong Kong. by almost every parameter . Los Angeles. Sydney. etc.41 – . It has branches of the parent in Colombo.
11 76.88 12.50 13.74 13.94 Net Interest Income/Total Funds Asset Turnover Ratio 3.39 Advances/total funds(%) 65.28 66.96 STATE BANK OF INDORE On August 26.44 78.54 5. State Bank of Indore was officially merged with State Bank of India.34 13.25 13.20 7.34 74.22 75.47 14.35 65.87 3.72 15.79 3.71 3.23 67.31 77.26 Interest expended/ Interest earned Capital Adequacy Ratio 56.42 – . .16 73.89 Mar '06 11.65 Mar '09 12.Mergers And Acquisitions Financial Performance OF STATE BANK OF INDIA RATIOS Net Profit Margin Return on Net Worth(%) 15.44 6.66 11.82 14.85 3.32 7.66 Credit Deposit Ratio 62.10 5.97 74.51 78.12 Mar '08 11.03 Mar '10 10.21 Mar '07 10. 2010.32 59.
Mergers And Acquisitions State Bank of Indore was formerly named as Bank of Indore Ltd.43 – . as well. It was established under a special charter of His Highness Maharaja Tukojirao Holker-III. In 1965. In the following year (1962). the then ruler of Malwa region.47000 Crore at the end of December 2008. It has emerged as the premier bank of Madhya Pradesh due to its steady progress. State Bank of Indore took over The Dewas Senior Bank Ltd. . The business turnover of the Bank crossed Rs. State Bank of Indore was upgraded to class 'A' category bank in 1971. under the State Bank of India Subsidiary Banks Act. 1959. State Bank of Indore took over the business of The Bank of Dewas Ltd. It became a subsidiary of State Bank of India on 1 January 1960.
Among these. the State Banks of Bikaner and Jaipur. After the merger.44 – .(Category 1 merchant bankers) was appointed by both the banks independently to provide a fairness opinion to valuation of the independent valuers. Mysore and Travancore are listed companies. The Board of Directors of State Bank of Indore On October 31. SBI would issue up to over 1. (Category 1 merchant bankers) as the independent valuers.08 crore. approved the Scheme of Acquisition of State Bank of Indore (SBIN) by SBI. of India entered into negotiations with State Bank of Indore for the acquisition on Oct 8. 1955.96 crore up to a maximum of Rs 635. That means. State Bank of Bikaner and Jaipur. 2009. State Bank of Mysore and State Bank of Hyderabad. PURPOSE OF THE MERGER . the issued capital of SBI would increase from Rs 634. State Bank of Travancore. under Section 35 of the SBI Act. SBI has already announced a share swap ratio of 34:100 for the merger. After the merger. SBI will be left with five associate banks.16 lakh shares of face value Rs 10 each to minority shareholders of State Bank of Indore. SBI would give its 34 shares for every 100 shares of State Bank of Indore held by minority shareholders. 2009. For this purpose.Mergers And Acquisitions The SBI with the sanction of Govt. Both the banks separately and independently appointed M/s Haribhakti & company (qualified chartered accountants and M/s Axis Bank ltd. State Bank of Patiala. M/s Kotak Mahindra capital company ltd.
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. Acquisition of State Bank of Indore by SBI would allow economies of scale in terms of footprint. manpower and other resources.Mergers And Acquisitions The merger would avoid competition between the two entities and lead to easier access to funds at competitive rates. .45 – . compared to what State Bank of Indore would have managed for its growing balance sheet.
had negotiations for a merger between Deutsche and Dresdner Bank failed on April 5.46 – . The new banking group intended to spin off its retail banking which was not making much profit in both the banks and costly. The merger was to create the most powerful banking group in the world with the balance sheet total of nearly 2. where the new banking group was hoped to outside the traditionally dominant Swiss Bank. But barely 2 months after announcing their agreement to form the largest bank in the world. This would put the merged bank for ahead of the second largest banking group. 2006 between Deutsche Bank and Dresdner Bank.S. Germany’s largest and the third largest bank respectively was considered as Germany’s response to increasingly tough competition markets. the new bank would have reached the no. The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank’s green corporate color in its logo.5 trillion marks and a stock market value around 150 billion marks. U. With this kind of merger. asset management.2 trillion marks and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with 1. based citigroup. .1 position of the US and create new dimensions of aggressiveness in the international mergers. Security and loan banking and finally financially corporate clients ranging from major industrial corporation to the mid-scale companies.Mergers And Acquisitions Case study 3 The merger that was announced on. The future core business lines of the new merged Bank included investment Banking. 2000. extensive network of bank branches associated with it. with a balance sheet total amounting to 1.7 trillion marks as the balance sheet total.
However Walter. So there was only one option left with the Dresdner Bank i. To sell Kleinwort Benson completely. Deutsche Bank’s asset management had only integrated with London’s investment group Morgan Grenfell and the American Banker’s trust.Mergers And Acquisitions The main issue of the failure was Dresdner Bank’s investment arm. Case study 4 . But from the outset these considerations encountered resistance from the asset management division. Kleinwort Benson. which the executive committee of the bank did not want to relinquish under any circumstances.e. the chairman of the Dresdner Bank was not prepared for this. In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into the merged bank. which was Deutsche Bank’s investment arm. This led to the withdrawal of the Dresdner Bank from the merger negotiations. This division alone contributed over 60% of Deutsche Bank’s profit.47 – . The top people at the asset management were not ready to undertake a new process of integration with Kleinwort Benson.
size and geographical reach becomes the key for smaller banks. Therefore. The merger of the banks will have a presence of 240 branches and extension counters. Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion Bank of Punjab (CBP).2 million customers. 2005. The choice before smaller private banks is to merge and form bigger and viable entities or merge into a big private sector bank. The top five control nearly 65% of the assets. The merger is at a swap ratio 9:4 and the combined bank is will be called Centurion Bank of Punjab. the net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.48 – .1 per cent In the private sector. RBI has approved merger of Centurion Bank and Bank of Punjab effective from October 1. about 2. nearly 30 banks are operating. 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. access to low-cost deposits is critical for growth. Due to intensifying competition.Mergers And Acquisitions Private Banks are taking to the consolidation route in a big way. . As on March 2005. 386 ATMs. Highlights of the merger-Centurion Bank and Bank of Punjab Bank of Punjab will be merged into Centurion Bank. Most of these private sector banks are profitable and have adequate capital and have the technology edge.
Financials of the merged entity.Mergers And Acquisitions New entity will be named 'Centurion Bank of Punjab'.21per cent. The combined entity will have net non performing assets (NPAs) of about 3.837crore and operating profit 43 crore. deposit 7. for every four shares of Rs 10 of Bank of Punjab.8%. Centurion Bank's chairman Rana Talwar will take over as the chairman of the merged entity..49 – . The net interest margin of the merged entity will be at 4. There will no downsizing via the voluntary retirement scheme. The merged entity will have 235 Branches & extension counters. that is. 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.2 million customers .1 per cent to provide for its growth plans. and the combine entity (Centurion Bank of Punjab) will have total asset 9. KPMG India Pvt Ltd and NM Raiji & Co are the independent valuers and Ambit Corporate Finance was the sole investment banker to the transaction. There has been no cash transaction in the course of the merger.Centurion Bank of Punjab The cost of deposit of Bop were lower than Centurion. The merged entity will have a paid up share capital of Rs 130 cr and a net worth of Rs 696 cr. The combined entity will have adequate capital adequacy of 16. while Centurion had a net interest margin of around 5.49 per cent while for Bank of Punjab the figure stood at 4.1 per cent while for Bank of Punjab the figure stood at 9. its shareholders would receive nine shares of Rs 1 of Centurion Bank. it has been settled through the swap of shares.8%.6 per cent as per Performa March 2005 data. Centurion banks capital adequacy on a standalone basis stood at 23.6 per cent.395 crore. Centurion Bank's MD Shailendra Bhandari will be the MD of the merged entity. Swap ratio has been fixed at 4: 9. 382 ATMs and 2. Gains from the merger Combined entity the Punjab-centurion bank would be the among the top 10 private sector banks in the country. Centurion banks net NPAs as on 31 March 2005 stood at 2. .
50 – . Centurion Bank is strong in South India. Case study 5 . Haryana and Delhi. Bank of Punjab is strong in the Small and Medium Enterprises (SMEs) segment and agricultural sector. Branch network of the two banks will complement each other. While Centurion Bank has 82 per cent of its business coming from retail. The combined entity will have a nationwide reach. Maharashtra and Goa whereas Bank of Punjab is strong in Punjab. The higher book value should help the combine entity to mobilize funds at lower rate.Mergers And Acquisitions Merged entity would benefit from the fact that centurion bank had recently written of its bad loans against equity. The book value of the bank would also go up to around Rs 300 crore. SME and Agricultural segments. The combined bank will be full-service commercial bank with a strong presence in the Retail.
There is not much of overlapping of HDFC Bank and CBoP customers. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala. The entire process of the merger would take about four months for completion. Integration will be smooth as there is no overlap. The move would allow HDFC to maintain the same level of shareholding in the bank.Mergers And Acquisitions HDFC Bank. Chairman of Centurion Bank. while Bank Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. which will be subject to regulatory approvals. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. the merged entity would become second largest private sector bank. HDFC Bank will consider making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri. The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions.510 crore in one of the largest merger in the financial sector in India. 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. The combined entity will have a network of 1148 branches. Centurion Bank. CBoP has close to 170 branches in the north and around 140 branches in the south. HDFC shareholding falls to will fall from 23. Managing Director. Mr Rana Talwar. The boards of the two banks will meet again on February 28 to consider the draft scheme of amalgamation. 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.28 per cent to around 19 per cent in the merged entity. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3. However. The merged entity will be known as HDFC Bank. This will be HDFC Bank’s second acquisition after Times Bank. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them.48 in CBoP. has been offered a seat on the Board as non-executive director and Mr Shailendra Bhandari. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. has been invited to join as the Executive Director on the board post merger.51 – .
However. He told that banking mergers and acquisitions will not come under the purview of the Competition Act or the Companies Act. according to M&A bankers including Topsy Mathew of Standard Chartered. led by oil and gas. with the recent proposed amendments in the Banking Regulations Act. “Inbound and local deals will also take place. 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. North Carolina-based Bank of America. Overseas firms may target Indian pharmaceutical and consumer firms. according to Bloomberg’s M&A Global Outlook survey.Mergers And Acquisitions LATEST NEWS ABOUT MERGERS AND ACQUISITION IN BANKING SECTOR Banking sector reforms in India are in the progress. and local enterprises will seek natural resources. In fact. wrote in an e-mailed response to questions.52 – . according to data compiled by Bloomberg. metals and mining companies. and Indian companies have access to debt and equity capital. 3.” Saurabh Agrawal. the proposed amendments have already been approved by Cabinet of India.7 billion acquisition of mobile-phone operators in Africa led an almost four-fold increase in takeovers this year as deals surpassed 2007’s $69 billion. “Outbound deals would continue to be highly active given that international companies’ valuations are still relatively depressed. only RBI would have power to regulate M&A pertaining to banking sector. the 41-year-old head of India investment banking at Charlotte. 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.” . said Bank of America. Till now the Competition Commission of India (CCI) has a say in the M&A pertaining to banking companies. Finance Minister Pranab Mukherjee has also recently said that RBI would have the final say on bank M&A. ranked No. One of such reforms pertains to regulating mergers and acquisitions (M&A) pertaining to banking sector. 1949. Indian mergers and acquisitions in 2011 may surpass this year’s record $71 billion of deals. Billionaire Sunil Mittal’s $10.
The mergers and acquisitions of banks will now come under the purview of the Banking Regulation Act.2 billion in India this year. In the US. .7 billion. 2 among Indian takeover advisers this year. its highest ranking. they think they have access to capital. managing director for M&A for India. the world’s largest market. China and Brazil contrasts with a slowdown in global deals.53 – . Mergers worldwide are down 46% from 2007’s record. This means M&A in banking sector would no more require the approval of the Competition Commission of India. The London-based bank climbed 13 places to No. Outbound M&A accounted for 74% of that volume. and levels in Europe are down by 59%. “They are capitalizing on the positive sentiment to undertake long-term strategic transactions. said in an interview. “Large Indian corporate are going through a growth phase: they think there is a lot of opportunity.Mergers And Acquisitions Cross-border deals rose to a record $59.” he said. The acquisition spree in India. after Mittal’s New Delhi-Bharti Airtel in March agreed to buy the African assets of Zain for $10. volumes are 51% lower.” 35-year-old Mathew.
Some banks have started representing a new life insurer at regular intervals. 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.54 – . which has switched life insurance partners in recent times. Centurion Bank is the banc assurance partner for these two insurers. After the opening up of the insurance sector. .Mergers And Acquisitions 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. 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. banks have come to occupy an important role in insurance distribution. It is not surprising therefore to have life insurers whose very lifeline is their banking partners. For new private life insurers who want to achieve fast revenue growth. In some cases banks are demanding commission and other fees totaling nearly 70 percent of the first year premium on a policy. Banks procure nearly 40 percent of the fresh business for life insurers. Banc assurance is the sale of life. Insurers find recruiting and training individual agents a time-consuming and costly process. Normally banc assurance deals are for three years and each bank can represent only one insurer as a corporate agent. Aviva Life had recently inked a banc assurance deal with the Bank of Rajasthan. 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. For instance. say industry experts However. banks are the only source of business. Banks also find that selling life insurance products is a lucrative activity. banks are now dictating the terms of the banc assurance deals. pension and investment products through the branch network of a bank. Realizing their vital role. particularly for private life insurers. There are also issues like agency attrition and small-sized policies procured by agents.
V. chief financial officer of Bharti Axa Life Insurance Co Ltd.Mergers And Acquisitions Initially.55 – . It changed over to Life Insurance Corp of India (LIC) before signing up with Aviva Life. Srinivasan. the bank vended policies of Birla Sun Life Insurance Co Ltd. “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 . said that the one bank-one insurer concept was not right and would lead to skewed scenario.
eliminate duplicated functions.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.56 – . unhappy and uncooperative workforce . share managerial expertise. The 'human factor' is a major cause of difficulty in making the integration between two companies work successfully. Another reason for banks to move towards merger is that they are motivated by a desire for greater market power. and without awareness of the vast differences that may exist between corporate cultures. and sometimes decisions are taken without properly analysis the future of the merger.and consequently a drop in productivity Decision to carry out a merger or acquisition should consider not only the legal and financial implications. and raise larger amounts of capital.Mergers And Acquisitions CONCLUSION One of the most common reasons for mergers and acquisitions is the belief that "synergies" exist. Such synergies may result from the firms' combined ability to exploit economies of scale. flawed intentions. the result is a stressed. but also the human consequences . allowing the two companies to work more efficiently together than either would separately. 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 . If the transition is carried out without sensitivity towards the employees who may suffer as a result of it.
57 – .Mergers And Acquisitions BIBLOGRAPHY 1.com 7. www.investopedia. www.com .com 3. www.business.moneycontrol.com 5.papercamp.bloomberg.com 6. www.mapsofindia.com 2. www.com 4.legalserviceindia. www.slideboom. www.
Mergers And Acquisitions .58 – .
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