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.

In this context, it would be essential for us to understand what corporate
restructuring and mergers and acquisitions are all about.

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 &
Acquisitions may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers
& Acquisitions 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 & Acquisition's. Many have argued that mergers increase
value and efficiency and move resources to their highest and best uses, thereby
increasing shareholder value. .


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 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
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.


Takeover:

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 co-operative.

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.











Purpose of Mergers & Acquisitions

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.


(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 companys 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 limitations of funds and
lack of skill managerial personnels. It has to aim at suitable combination where it
could have opportunities to supplement its funds by issuance of securities, secure
additional financial facilities, eliminate competition and strengthen its market
position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives
through alternative type of combinations which may be horizontal, vertical,
product expansion, market extensional or other specified unrelated objectives
depending upon the corporate strategies. Thus, various types of combinations
distinct with each other in nature are adopted to pursue this objective like vertical
or horizontal combination.

(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. The
combining corporate aim at circular combinations by pursuing this objective.


(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be operational
or financial. This gives birth to conglomerate combinations. 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.







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

(A) Vertical combination:

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

The following main benefits accrue from the vertical combination to the
acquirer company i.e.

1. It gains a strong position because of imperfect market of the intermediary
products, scarcity of resources and purchased products;

2. Has control over products specifications.


(B) Horizontal combination:

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

(C) Circular combination:

Companies producing distinct products seek amalgamation to share common
distribution and research facilities to obtain economies by elimination of cost on
duplication and promoting market enlargement. The acquiring company obtains
benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like
DCM and Modi Industries. The basic purpose of such amalgamations remains
utilization of financial resources and enlarges debt capacity through re-organizing
their financial structure so as to service the shareholders by increased leveraging
and EPS, lowering average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the acquirer company
and creates balance in the companys total portfolio of diverse products and
production processes.























[4]Advantages of Mergers

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

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

(1) From the standpoint of shareholders

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

One or more features would generally be available in each merger
where shareholders may have attraction and favour merger.

(2) From the standpoint of managers

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

(3) Promoters gains

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

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of
benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer
or the worker in the companies under merger plan.

(a) Consumers

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

(b) Workers community

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

Opportunities, preventing the distribution of benefits resulting from
diversification of production activity.

(c) General public

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






Change in scenario of Banking Sector

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

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

3. Europe and Japan are also on their way to restructure their financial sector
thought merger and acquisitions. Merger will help banks with added money
power, extended geographical reach with diversified branch Network, improved
product mix, and economies of scale of operations. Merger will also help banks
to reduced them borrowing cost and to spread total risk associated with the
individual banks over the combined entity. Revenues of the combine entity are
likely to shoot up due to more effective allocation of bank funds. ICICI Bank
has initiated merger talks with Centurian Bank but due to difference arising
over swap ration the merger didnt materialized. Now UTI Bank is egeing
Centurian Bank. The proposed merger of UTI Bank and Centurian Bank will
make them third largest private banks in terms of size and market Capitalization
State Bank of India has also planned to merge seven of its associates or part of
its long-term policies to regroup and consolidate its position. Some of the
Indian Financial Sector players are already on their way for mergers to
strengthen their existing base.

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

















THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE.

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

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

2. Atms ,Phone banking and Net banking had enable the 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, order statements of
their account and give instruction using the tally banking or on online banking
services.

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





Procedure of Mergers & Acquisitions

Public announcement:

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

1. Appointment of merchant banker:

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

2. Use of media for announcement:

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

3. Timings of announcement:

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




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



Procedure of Bank Merger

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

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

Once the scheme is finalized, it is tabled in the meeting of Board of directors
of respective banks. The board discusses the scheme thread bare and accords its
approval if the proposal is found to be financially viable and beneficial in long run.

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

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


Once the valuation is accepted by the respective banks , they send the
proposal along with all relevant documents such as Board approval, shareholders
approval, valuation report etc to Reserve Bank of India and other regulatory bodies
such Security & exchange board of India SEBI for their approval.

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

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

Chapter 9: RBI 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, it has been decided to frame guidelines to encourage
merger/amalgamation in the sector.

Although the Banking Regulation Act, 1949 (AACS) does not empower
Reserve Bank to formulate a scheme with regard to merger and amalgamation of
banks, the State Governments have incorporated in their respective Acts a
provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for
sanctioning a scheme of amalgamation or reconstruction.

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. While the
State Acts specifically provide for merger of co-operative societies registered
under them, 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, 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. In other words, 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.















Chapter 10: Amalgamation of Urban Banks








Information & Documents to be furnished by BY THE ACQUIRER OF
BANKS


1. Draft scheme of amalgamation as approved by the Board of Directors of the
acquirer bank.

2. 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.

3. Information which is considered relevant for the consideration of the scheme of
merger including in particular:-

A. Annual reports of each of the Banks for each of the three completed
financial years immediately preceding the proposed date for merger.

B. Financial results, if any, 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.

C. Pro-forma combined balance sheet of the acquiring bank as it will appear
consequent on the merger.

D. Computation based on such pro-forma balance sheet of the following:-



I. Tier I Capital
Ii. Tier II Capital
Iii. Risk-weighted Assets
Iv. Gross and Net npas
V. Ratio of Tier I Capital to Risk-weighted Assets
Vi. Ratio of Tier II Capital to Risk-weighted Assets
Vii. Ratio of Total Capital to Risk-weighted Assets
Viii. Tier I Capital to Total Assets
Ix. Gross and Net npas to Advances
X. Cash Reserve Ratio
Xi. Statutory Liquidity Ratio

4. 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. The method of valuation used by the values

B. The information and documents on which the values have relied and
the extent of the verification, if any, made by the values to test the accuracy of
such information

C. If the values have relied upon projected information, the names and
designations of the persons who have provided such information and the
extent of verification, if any, made by the values in relation to such information

D. Details of the projected information on which the values have relied


E. Detailed computation of the realizable value of assets of the acquired
bank.

5. Such other information and explanations as the Reserve Bank may require.








Mergers in the Banking Sector

ICICI Bank

INTRODUCTION

ICICI Bank (formerly Industrial Credit and Investment Corporation of
India) is India's largest private bank. ICICI Bank has total assets of about Rs.20.05bn
(end-Mar 2005), a network of over 550 branches and offices, and about 1900 atms.
ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialized
subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. ICICI Bank's equity shares are listed
in India on stock exchanges at Kolkata and Vadodara, the Stock Exchange, Mumbai
and the National Stock Exchange of India Limited and its adrs are listed on the
New York Stock Exchange (NYSE). During the year 2005 ICICI bank was involved as
a defendant in cases of alleged criminal practices in its debt collection operations and
alleged fraudulent tactics to sell its products.

The industrial Credit and Investment Corporation of India Limited now known as ICICI Ltd.
Was founded b the World bank, the Government of India and representatives of private industry
on January 5, 1955. The objective was to encourage and assist industrial development and
investment in India. Over the years, ICICI has evolved into a diversified financial institution.
ICICIs principal business activities include:


Project Finance
Infrastructure Finance
Corporate Finance
Securitization
Leasing
Deferred Credit
Consultancy services
Custodial services

The ICICI Groups draws its strength from the core competencies of its
individual companies. Today, top Indian Corporate look towers ICICI as a business
partner for providing solutions to their varied financial requirements. The Group
also offers a gamut of personal finance solutions to individuals. To lead the
financial services into the new millennium, the Group is now truly positioned as a
Virtual Universal Bank. The liberalization of the Indian economy in the 1990s
offered ICICI an opportunity to provide a wide range of financial services. For
regulatory and strategic reasons, ICICI set up specialized subsidiaries in the areas
of commercial banking, investment banking, non- banking finance, investor
servicing brooking, venture capital financing and state level infrastructure
financing.

ICICI plans to focus on its retail finance business and expect the same
to contribute upto 15-20 % of its turnover in the next five years. It is trying to
change the perception that it is a corporate oriented bank. The bank hard selling its
image as a retail segment bank has for the first time come up with an advertisement
that addresses its products at the individual. This is to drive home the point that the
bank has product and services catering to all individuals. For this purpose the
network of ICICI Bank shall come into use. The parent plants to sell its products
and also raise retail funds through the banking subsidiary.

THE ICICI GROUP COMPRISES OF:
ICICI Bank Limited,
ICICI Securities and Finance Company Limited (ICICI Securities),
ICICI Credit Corporation Limited ( ICICI Credit),
ICICI Investors Services Limited (ICICI Services),
ICICI Venture Funds Management Limited (ICICI Venture),
ICICI international Limited,
ICICI -KINFRA Limited (I-KIN),


Mr. K.V. Kamath, CEO of ICICI Limited, has recently voiced the intentions
of ICICI Limited towards banking and ICICI Bank. ICICI Limited is endeavoring
to forge a closer relationship with ICICI bank. Mr. K V Kamath recently quoted in
a leading daily Banking is dead. Universal banking is in offering with a whole
range of financial products and services. The basic idea is for banks to do business
along with banking. Bankers will have to emerge as businessmen.

ICICI Bank is a focused banking company coping with the changing times
of the banking industry. So it can be a lucrative target for other player in the same
line of operations. However, when merged with ICICI Limited the attraction is
reduced manifold considering the magnitude of operations of the ICICI limited.

Of course, one would still need a bank to open letters of credit, offer
guarantees, handle documentation, and maintain current account facilities etc. So
banks will not superfluous. But nobody needs so many of them any more.

Secondly, besides credit, a customer may also want from a bank efficient
cash management, advisory services and market research on his product. Thus the
importance of fee based is increasing in comparison with the fund-based income.

The pre--merger status of ICICI Bank is as follows: it had liabilities of Rs.12,073
crore, equity market capitalization of Rs.2,466 crore and equity volatility of 0.748.
Working through options reasoning, we find that this share price and volatility are
consistent with assets worth Rs.13,249 crore with volatility 0.15. Thus, ICICI bank
had assets which are 9.7% ahead of liabilities, which is roughly consistent with the
spirit of the Basle Accord, and has leverage of 5.37 times.









History of ICICI Bank

The World bank the Government of India and representatives of Indian industry
form ICICI Limited as a development finance institution to provide medium-term
and long-term project financing to Indian businesses in 1955.

1994 ICICI establishes ICICI Bank as a subsidiary.

1999 ICICI becomes the first Indian company and the first bank or financial
institution from non-Japan Asia to list on the NYSE.

2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a
Chettiar bank, and had acquired Chettinad Mercantile Bank (est. 1933) and
Illanji Bank (established 1904) in the 1960s.

2002 The Boards of Directors of ICICI and ICICI Bank approve the merger
of ICICI, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited, with ICICI Bank. After receiving all necessary regulatory
approvals, ICICI integrates the group's financing and banking operations,
both wholesale and retail, into a single.






INTRODUCTION OF BANK OF MADURA


The pre--merger status of Bank of Madura is as follows: it had liabilities of
Rs.4,444 crore, equity market capitalization of Rs.100 crore and equity volatility of
0.69. Working through options reasoning, we may say that the stock market thinks
that its assets are worth Rs.4, 095 crore with a volatility of 0.02. Hence, bom is
bankrupt (with assets which are Rs.350 crore behind liabilities) and has a leverage
of 41 times. If we needed to bring bom 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 crore of equity capital.
How do we combine these to think of the merged entity? Assets and liabilities are
additive, so the total assets of the merged entity would prove to be roughly
Rs.17,345 crore and the liabilities would prove to be Rs.16,517 crore. The merged
entity would hence need roughly Rs.800 crore of fresh equity capital in order to
come up to a point where assets were atleast 10% ahead of liabilities.

How can we estimate the market capitalization of the merged entity? The
value of equity is the value of a call option on the assets of the merged entity.
Pricing the call requires an estimate of the volatility of the merged assets, i.e. It
requires knowledge of the extent to which the assets of the two banks are
uncorrelated. We find that using values of the correlation coefficient ranging from
80% to 95%, the volatility of assets of the merged entity proves to be around 0.12.
In this case, the valuation of the call option, i.e. An estimate of the market
capitalization of the merged entity, proves to be roughly Rs.2,500 crore.

This number is not far from the pre--merger market capitalisation of ICICI
Bank, which was Rs.2,466 crore. Hence, we can say that on purely financial
arguments, the merger is roughly neutral to ICICI Bank shareholders if bom was
merged into ICICI Bank for free. Indeed, if banking regulators took their jobs more
seriously, they would force the shareholders of bom to walk into such a merger at a
zero share price as a way of reducing

The number of bankrupt banks in India by one. Such a forced-merger would be a
politically easier alternative for the RBI when compared with closing down bom.

The shareholders of ICICI Bank have paid a non-zero fee for bom. This
reflects a hope that the products and processes of ICICI Bank will rapidly improve
the value of assets of bom in order to compensate. In addition, the merged entity
will have to rapidly raise roughly Rs.800 crore of equity capital to obtain a 10%
buffer between assets and liabilities.

Hence, this proposed merger is a godsend for bom, which was otherwise a
bankrupt entity which was headed for closure given the low probability that it
would manage to raise Rs.800 crore of equity on a base of Rs.100 crore of market
capitalisation. It is useful to observe that bom probably did not see things in this
way, given the willingness of India's banking regulators to interminably tolerate
the existence of bankrupt banks. Closure of bom would normally involve pain for
bom's shareholders and workers; instead both groups will get an extremely pleasant
ride if the merger goes through.

The proposed merger is a daunting problem for ICICI Bank. It will need to
rapidly find roughly Rs.800 crore in equity. If India's banking regulators were
serious about capital adequacy, ICICI Bank should have to pay roughly zero to
merge with bom (it is doing a favour to bom and to India's banking system);
instead ICICI Bank has paid a positive price for bom. The key question that will be
answered in the next two/three years is: Will ICICI Bank's superior knowledge of
products and processes revitalize the assets and employees of bom, and generate
shareholder value in the merged entity? ICICI's top management clearly thinks so,
and it would be a very happy outcome if this did indeed happen
.
The proposed merger is a good thing for India's economy, since the
headcount of bankrupt banks will go down by one, and there is a possibility of
obtaining higher value added out of the poorly utilized assets and employees of
bom. If the merger goes through, then it will reduce the say of the management
team of bom in India's resource allocation, which is a good thing.









Chapter 13: Merger of ICICI Bank with Bank of Madura



The proposed merger between ICICI Bank and Bank of Madura (bom) is a
remarkable one. The pre--merger market capitalization of ICICI Bank was roughly
Rs.2500 crore while bom was at roughly Rs.100 crore. Bom is known to have a
poor asset portfolio. What will the merged entity be worth?

The key rationale underlying every merger is the question of synergy. Can
ICICI Bank's products and technology bring new life to the 263 branches of bom?
Will ICICI Bank (which has 1,700 employees) be able to overcome the 2,600
employees that bom carries, given that Indian labour law makes it troublesome and
expensive to sack workers?

In applying these ideas to ICICI Bank and to bom, we need to believe that
the stock market effectively processes information to produce estimates of the
price and volatility of the shares of both these banks. This assumption is suspect,
because both securities have poor stock market liquidity. Hence, we should be
cautious in interpreting the numbers shown here. There are many other aspects in
which this reasoning leans on models, which are innately imperfect depictions of
reality. However, these models are powerful tools for understanding the basic
factors at work, and they probably convey the broad picture quite effectively.

The stock of ICICI Bank may be in the limelight on the back of the proposed
acquisition of Bank of Madura.

Though the stock has gained sharply in the last two months after hitting a
recent low of Rs 110, some upside may be left as the bank could get re-rated on
account of the merger. Existing shareholders could hold their exposures in ICICI
Bank while investors with an appetite for risk could contemplate exposures despite
the impressive gains of the past few months. ICICI Bank continues to be one of the
better options in the banking sector at the moment and the possible merger with
ICICI may well be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sector bank.
The merger may be viewed favorably since Bank of Madura has focused strengths
and a reasonably good quality balance sheet. The board of directors is to meet on
December 11 to consider the merger.

It is quite likely that the swap ratio may be fixed in a manner that holds out a
good deal for the shareholders of Bank of Madura. This may also be influenced by
the fact that the Bank of Madura stock has gained sharply by around 70 per cent in
the past fortnight in the homestretch to the deal.

As the acquisition is to be financed by issuance of stock, the rise in the
market capitalization of Bank of Madura may mean a higher degree of equity
issuance by ICICI Bank. But the price may well be worth paying as this is the only
way that ICICI Bank may be able to get control over banks with reasonable quality
balance sheets that could make a difference in the medium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs 3,395 crore
as of March 2000. The fact that the bank has a capital adequacy of 15.8 per cent
with shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger
phase) will have more leeway to pursue growth without expanding the equity base
(other than paying for the acquisition).
Strong capital adequacy, a strong beachhead on the Internet arena, a revamped IT
architecture, a growing retail client base through a brick-and-click strategy, and
improving asset quality and earnings growth are positive features as far as ICICI
Bank is concerned.

Despite these factors, the share had been on a downtrend from after touching
a high of Rs 271, eight months ago. The uptrend then was on the back of the
announcement of its ADR issue and new technology initiatives. The subsequent
downtrend was triggered by the possibility of the merger with its parent. There is
continuing concern on asset quality of ICICI. It has been a stated goal of the ICICI
group to go in for universal banking. It is clear that once regulatory hurdles are
removed, such a possibility becomes distinctly feasible. But

Given the battering that bank stock took, ICICI may now hesitate to pursue this
path. Also ICICI Bank is the most visible investor-friendly face for the group in
terms of returns to shareholders and it may well be maintained as a separate entity.
In this backdrop, the stock may hold scope for improvement in the valuation of the
stock.







Financial standing of ICICI Bank & Bank of Madura

Parameters ICICI Bank Bank of Madura
1998-1999 1999-2000 1998-1999 1999-2000
Net worth 308.33 1129.90 211.32 247.83
Total Deposit 6072.94 9866.02 3013.00 3631.00
Advances 3377.60 5030.96 1393.92 1665.42
Net Profit 63.75 105.43 30.13 45.58
Share Capital 165.07 196.81 11.08 11.08
Capital Adequacy
Ratio
11.06%

19.64% 18.83% 14.25%
Gross Advances /
Gross NPs
4.72% 2.54% 8.13% 11.09%
Net Advances /
Net NPs
2.88% 1.53% 4.66% 6.23%



Source: Complied from Annual Report (March 2000) of ICICI Bank & Bank
of Madura.

Crucial Parameters: - How they stand

Name of the Bank of ICICI
Bank Madura Bank
Book value of bank on
the day of merger
announcement

183.0

58.0
Market price on the day
announcement of
merger

183.0

169.90
Earning per share
Dividend paid (in%)
P/E Ratio
38%
55%
1.73
5.4
15%
783











The Generation Gap:- the merger of 57 year old BOM sooth bared old
generation bank with a fast growing technology say new Generation bank will
help the latter and the start merger is likely to bring cheer to shareholder and
bank employees of BOM and some amount of discomfort and anxiety to those
of ICICI bank.

The scheme of amalgamation will increase the equity bank of ICICI
Bank to RS 220.36 CR. ICICI Bank will issue 235.4-lakh share of RS 10
each to the shareholder of BOM. The merger entity will have an increase
of a net base over RS 160 bn and deposit base of RS 131 bn.

The merged entity will have 360 branches and a similar number of ATMs
across the country and also enable the ICICI to serve a large customer bone
of 1.2 million customers of BOM through a wider network, adding to the
antoma bare to 2.7 million.

Managing rural branches:

ICICI major branches are in major and cities, where as BOM spreads its
wings mostly in semi urban and city segments of south India. There in 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 Geographical location of its
branches and level of competition. ICICI Bank will have a tough time to cope
with.




Managing software:

Another task which stand on the way is technology while ICICI bank which is
fully automatic.

Quality of assets:- the nature of assets a bank is holding would signify its
operational efficiency. Usually the level of Non performing Assets ( NPAS)
judges the quality of assets. The lower the NAPS to total advances or total
assets the better the quality is and vice versa.

Staff productivity: - One of the key area where banks can develop competition
advantage. The measurement of staff productivity becomes one of the essential
factors while measuring the performance of the banks.

Liquidity:- While assessing the liquidity of a bank the most sought ratio is net
loans to total assets. A rise in the net loans to total assets may be considered as
a fall in the liquidity of the bank.

Book Value per share:- It is simply the net worth of the company (which is
equal to the paid up equity capital plus resource and surplus) divided by the
number of outstanding equity shares.

Earning per share:- specific valuation per unit of investment given by Net
income after income taxes and after dividends on preferred stock of the
company.

Net work:- Book value of a company is common stock, surplus, resources and
retained earnings.

Profitability: - the most crucial ratio in measuring the profitability is net profit
of the bank. The ratio such as Net Interest Income (NIL) and Net Interest
Margin (NIM) measure sustenance ability of the bank based on the spread.
Entity is using the package, Banks 2000, BOM computerized 90 percent of its
business and was converted with ISBS software.

The BOM branches are supposed to switch over to Banks 2000. Though it is not
a difficult task, with 80% computer literate staff would need effective retraining
which involves a cost. The ICICI Bank need to invest RS 50 core for upgrading
BOMs 263 branches.

Managing Human Resources:

One of the greatest challenges before ICICI Banks is managing human
resources. When the head count of ICICI Bank is taken it in less than 1500
employees on the other hand BOM has over 2500.

The merged entity will have bout 4000 employees which will make it one of the
largest banks among the new generation private sector banks. Th staff of ICICI
Banks are drawn from 75 various banks mostly young qualified professionals with
computer background and prefer to work in metro or by either with good
remuneration packages.

While under the influence of tread unions most of the BOM employees have
low career aspiration. The announcement by H.N. signor, CEO and MD of ICICI,
that three would be no VRS or retrenchment, creates a new hope amongst the
BOM employees. It is a tough task ahead to manage. On the other hand their pay
would be revised up wards. It is not a Herevlean task to integrate two work
welters?


Managing Client Base:-

The clients base of ICICI Bank after merger, will be as 2.7 Million from it
past 0.5 Million, as accumulation of 2.2 Million from BOM. The nature and quality
of clients is not of uniform quality.

The BOM had built up it client base for a long time, in a hard way, on the
basis of personalized services. In order to deal with the BOM clientele, the ICICI
Bank needs to redefine its strategies to suit to the new clientele. The sentiments or
a relationship of small and medium borrower is hurt it may be difficult for them to
reestablish the relationship which could also hamper the image of the bank.

Given the situation, we need to wait and view, as to how the ICICI will face this
challenge.



Recommendation of Narasimham Committee on banking sector reforms


Globally, the banking and financial systems have adopted information and
communications technology. This phenomenon has largely by passed the Indian
banking system, and the committee feels that requisite success needs to be
achieved in the following areas:-

- Banking automation

- Planning, 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. 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. It also have merger should not be seen as a
means of bailing out weak banks.


A weak bank could be nurtured into healthy units. 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, a restructuring commission for
such PSB, can consider other options such as restructuring , merger and
amalgamations to it not closure.

The committee also options that while licensing new private sector banks, the
initial capital requirement need to be review. It also emphasized on a
transparent mechanism for deciding the ability of promoter to professionally
manage the bank. The committee also feels that a minimum threshold capital
for old private banks also deserved threshold capitals. The committee also
opined that a promoter group couldn't hold more that 40 percent of the equity of
a bank.
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.
Source: Narasimham Committee report on banking sector reforms.

Changes after the merger:-

While, BOM had an attractive business per employee figure of Rs.202 lakh,
a better technological edge and had a vast base in southern India when compared to
Federal bank. While all these factors sound good, a cultural integration would be a
tough task ahead for ICICI Bank.

ICICI Bank has announced a merger with 57-year-old Bank of Madure, with
263 branches, out of which 82 of them are in rural areas, with most of them in
southern India. As on the day of announcement of merger) 09-12-00), Kotak
mahindra group was holding about 12 percent stake in BOM, the Chairman BOM,
Mr.K.M. Thaiagarajan, along with his associates was holding about 26 percent
stake, Spic groups has about 4.7 percent, while LIC and UTI were having marginal
holdings. The merger will give ICICI Bank a hold on South India market, which
has high rate of economic development.


The board of Director at ICICI has contemplated the following synergies emerging
from the merger:

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. And ICICI will emerge a one of the largest private
sector banks in the country.

Branch network: The ICICIs branch network would not only 264, but also
increases geographic coverage as well as convenience to its customers.

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.

Tech edge: The merger will enable ICICI to provide atms, Phone and the Internet
banking and finical services and products and also facilitate cross-selling of
products and services of the ICICI group.

Focus on Priority Sector: The enhanced branch network will enable the Bank to
focus on micro-finance activities through self-help groups, in its priority sector
initiatives through its acquired 87 rural and 88 semi-urban branches.

Source: Report submitted at EGM on January 19, 2001.



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.

The deal with Bank of Madera is likely to dilute the current equity capital by
around 12 percent. And the merger is expected to bring 20 percent gains in EPS of
bank.

And also the banks comfortable capital Adequacy Ratio (CAR) of 19.64 percent
has declined to 17.6 percent.







Chapter 14: Reasons behind the recent trend of merger in Banking Sector

The question on top everybodys mind is
Are banks and bankers on the road to redundancy?
First consider the reasons who 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. Indian mutual
funds are queuing up to offer this facility.

After can be drawn or a telephone bill paid easily through credit cards.

Even if a bank is just a safe place to put away your savings, you need not go to
it. There is always an ATM you can do business with.

If you are solvent and want to borrow money, you can do so on your credit
card- with far fewer hassles.

A AAA corporate can directly borrow from the market through commercial
papers and get better rates in the bargain. In fact the banks may indeed be left
with dad credit risk or those that cannot access the capital market. This once
again makes a shift to non-fund based the activities all the more important.



Case Studies

Case study I

IDBI UNITED WESTERN MERGER BANK (Merger)

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

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

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

The merged bank was to retain the name Deutsche Bank but adopted the
Dresdner Banks green corporate color in its logo. The future core business lines of
the new merged Bank included investment Banking, asset management, where the
new banking group was hoped to outside the traditionally dominant Swiss Bank,
Security and loan banking and finally financially corporate clients ranging from
major industrial corporation to the mid-scale companies.



With this kind of merger, the new bank would have reached the no.1
position of the US and create new dimensions of aggressiveness in the
international mergers.
But barely 2 months after announcing their agreement to form the largest bank in
the world, had negotiations for a merger between Deutsche and Dresdner Bank
failed on April 5, 2000.

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

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

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

In economic and political circles, the planned merger was
celebrated as Germanys advance into the premier league of the
international financial markets. But the failure of the merger led to the
disaster of Germany as the financial center.




















Case study II

MERGER OF ICICI BANK WITH SANGLI BANK


COMING TOGETHER: The regional office of Sangli Bank in Mumbai.
The merger that was announced on APRIL 18, 2007 between ICICI Bank and SANGLI Bank.All
branches of Sangli Bank functions as branches of ICICI Bank from April 19, said the Reserve
Bank of India.
Sangli Bank is an unlisted private bank headquartered at Sangli in Maharashtra. As on March 31,
2006, Sangli Bank had deposits of Rs. 2,004 crore, advances of Rs. 888 crore, net NPA (non-
performing assets) ratio of 2.3 per cent and capital adequacy of 1.6 per cent. Its loss at the end of
2005-06 amounted to Rs. 29 crore.
It has 198 branches and extension counters, including 158 branches in Maharashtra and 31
branches in Karnataka.
About 50 per cent of the total branches are located in rural and semi-urban areas and 50 per cent
in metropolitan and urban centres. The bank has about 1,850 employees. ICICI Bank is the
second largest bank in India and the biggest in terms of market capitalisation.
As on September 30, 2006, ICICI Bank had total assets of Rs. 282,373 crore. In the six months
ended September 30, 2006, it made a net profit of Rs. 1,375 crore.
It had 632 branches and extension counters and 2,336 ATMs as on that date, and is in the process
of setting up additional branches and ATMs pursuant to authorisations granted by the RBI. It has
about 31,500 employees.
ICICI Bank offers a wide range of financial products and services directly and through
subsidiaries in the areas of life and general insurance, asset management and investment
banking.
Its shares are listed on the Bombay Stock Exchange Limited and the National Stock Exchange of
India Limited and its American Depositary Shares are listed on the New York Stock Exchange