Abhimanyu

INTRODUCTION TO MERGER AND ACQUISITION

MERGERS
A merger occurs when two or more companies combines and the resulting firm maintains the
identity of one of the firms. One or more companies may merger with an existing company or
they may merge to form a new company.
Usually the assets and liabilities of the smaller firms are merged into those of larger firms.
Merger may take two forms1. Merger through absorption
2. Merger through consolidation.

Absorption
Absorption is a combination of two or more companies into an existing company. All
companies except one loose their identify in a merger through absorption.
Consolidation
A consolidation is a combination if two or more combines into a new company. In this form
of merger all companies are legally dissolved and a new entity is created. In consolidation the
acquired company transfers its assets, liabilities and share of the acquiring company for cash
or exchange of assets.

ACQUISITION
A fundamental characteristic of merger is that the acquiring company takes over the
ownership of other companies and combines their operations with its own operations.
An acquisition may be defined as an act of acquiring effective control by one company over
the assets or management of another company without any combination of companies.

TAKEOVER
A takeover may also be defined as obtaining control over management of a company by
another company.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

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

In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain separately owned and
operated. This kind of action is more precisely referred to as a "merger of equals." Both
companies' stocks are surrendered and new company stock is issued in its place. For example,
both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new
company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim
that the action is a merger of equals, even if it's technically an acquisition. Being bought out
often carries negative connotations, therefore, by describing the deal as a merger, deal makers
and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in
the best interest of both of their companies. But when the deal is unfriendly - that is, when the
target company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the

purchase is friendly or hostile and how it is announced. In other words, the real difference lies
in how the purchase is communicated to and received by the target company's board of
directors, employees and shareholders.

TYPES OF MERGERS
Mergers are of many types. Mergers may be differentiated on the basis of activities, which
are added in the process of the existing product or service lines. Mergers can be a
distinguished into the following four types:-

1. Horizontal Merger
2. vertical Merger
3. Conglomerate Merger
4. Concentric Merger

Horizontal merger
Horizontal merger is a combination of two or more corporate firms dealing in same lines of
business activity. Horizontal merger is a co centric merger, which involves combination of
two or more business units related to technology, production process, marketing research
and development and management.

Vertical Merger
Vertical merger is the joining of two or more firms in different stages of production or
distribution that are usually separate. The vertical Mergers chief gains are identified as the
lower buying cost of material. Minimization of distribution costs, assured supplies and
market increasing or creating barriers to entry for potential competition or placing them at a
cost disadvantage.

Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in respect of
technology, production process or market and management. In other words, firms engaged in
the different or unrelated activities are combined together. Diversification of risk constitutes
the rational for such merger moves.

Concentric Merger
Concentric merger are based on specific management functions where as the conglomerate
mergers are based on general management functions. If the activities of the segments brought
together are so related that there is carry over on specific management functions. Such as
marketing research, Marketing, financing, manufacturing and personnel.

BENEFITS OF MERGERS

1. GROWTH 0R DIVERSIFICATION: - Companies that desire rapid growth in

size or market share or diversification in the range of their products may find that a
merger can be used to fulfill the objective instead of going through the tome consuming
process of internal growth or diversification. The firm may achieve the same objective in
a short period of time by merging with an existing firm. In addition such a strategy is
often less costly than the alternative of developing the necessary production capability
and capacity. If a firm that wants to expand operations in existing or new product area
can find a suitable going concern. It may avoid many of risks associated with a design;
manufacture the sale of addition or new products. Moreover when a firm expands or
extends its product line by acquiring another firm, it also removes a potential competitor.

2. SYNERGISM: - The nature of synergism is very simple. Synergism exists when ever
the value of the combination is greater than the sum of the values of its parts. In other
words, synergism is 2+2=5. But identifying synergy on evaluating it may be difficult,
infact sometimes its implementations may be very subtle. As broadly defined to include
any incremental value resulting from business combination, synergism in the basic
economic justification of merger. The incremental value may derive from increase in
either operational or financial efficiency.

Operating Synergism: - Operating synergism may result from economies of scale,

some degree of monopoly power or increased managerial efficiency. The value may be
achieved by increasing the sales volume in relation to assts employed increasing profit
margins or decreasing operating risks. Although operating synergy usually is the result
of either vertical/horizontal integration some synergistic also may result from
conglomerate growth. In addition, some times a firm may acquire another to obtain
patents, copyrights, technical proficiency, marketing skills, specific fixes assets,
customer relationship or managerial personnel.

Operating synergism occurs when these assets, which are intangible, may be combined with
the existing assets and organization of the acquiring firm to produce an incremental value.
Although that value may be difficult to appraise it may be the primary motive behind the
acquisition.

Financial synergism

Among these are incremental values resulting from complementary internal funds flows more
efficient use of financial leverage, increase external financial capability and income tax
advantages.
a) Complementary internal funds flows
Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by
merger. If so, financial synergism results in reduction of working capital requirements of the
combination compared to those of the firms standing alone.
b) More efficient use of Financial Leverage
Financial synergy may result from more efficient use of financial leverage. The acquisition
firm may have little debt and wish to use the high debt of the acquired firm to lever earning
of the combination or the acquiring firm may borrow to finance and acquisition for cash of a
low debt firm thus providing additional leverage to the combination. The financial leverage
advantage must be weighed against the increased financial risk.
c) Increased External Financial Capabilities
Many mergers, particular those of relatively small firms into large ones, occur when the
acquired firm simply cannot finance its operation. Typical of this is the situations are the
small growing firm with expending financial requirements. The firm has exhausted its bank
credit and has virtually no access to long term debt or equity markets. Sometimes the small
firm has encountered operating difficulty, and the bank has served notice that its loan will not
be renewed? In this type of situation a large firms with sufficient cash and credit to finance
the requirements of smaller one probably can obtain a good buy bee. Making a merger
proposal to the small firm. The only alternative the small firm may have is to try to interest 2
or more large firms in proposing merger to introduce, competition into those bidding for
acquisition. The smaller firms situations might not be so bleak. It may not be threatened by
non renewable of maturing loan. But its management may recognize that continued growth to
capitalize on its market will require financing be on its means. Although its bargaining
position will be better, the financial synergy of acquiring firms strong financial capability
may provide the impetus for the merger. Sometimes the acquired firm possesses the financing
capability. The acquisition of a cash rich firm whose operations have matured may provide
additional financing to facilitate growth of the acquiring firm. In some cases, the acquiring
may be able to recover all or parts of the cost of acquiring the cash rich firm when the merger
is consummated and the cash then belongs to it.
d) The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a
merger, e.g. assume that a firm A has earnings before taxes of about rupees ten crores per
year and firm B now

break even, has a loss carry forward of rupees twenty crores

accumulated from profitable operations of previous years. The merger of A and B will allow
the surviving corporation to utility the loss carries forward, thereby eliminating income taxes
in future periods.

Counter Synergism
Certain factors may oppose the synergistic effect contemplating from a merger. Often another
layer of overhead cost and bureaucracy is added.

Do the advantages outweigh

disadvantages? Sometimes the acquiring firm agrees to long term employments contracts
with managers of the acquiring firm. Such often are beneficial but they may be the opposite.
Personality or policy conflicts may develop that either hamstring operations or acquire
buying out such contracts to remove personal position of authority.
Particularly in conglomerate merger, management of acquiring firm simply may not have
sufficient knowledge of the business to control the acquired firm adequately. Attempts to
maintain control may induce resentment by personnel of acquired firm. The resulting
reduction of the efficiency may eliminate expected operating synergy or even reduce the post
merger profitability of the acquired firm. The list of possible counter synergism factors could
goon endlessly; the point is that the mergers do not always produce that expected results.
Negative factors and the risks related to them also must be considered in appraising a
prospective merger.

Other motives For Merger

Merger may be motivated by two other factors that should not be classified under synergism.
These are the opportunities for acquiring firm to obtain assets at bargain price and the desire
of shareholders of the acquired firm to increase the liquidity of their holdings.

1. Purchase of Assets at Bargain Prices

Mergers may be explained by opportunity to acquire assets, particularly land mineral rights,
plant and equipment, at lower cost than would be incurred if they were purchased or
constructed at the current market prices. If the market price of many socks have been
considerably below the replacement cost of the assets they represent, expanding firm

considering construction plants, developing mines or buying equipments often have found
that the desired assets could be obtained where by heaper by acquiring a firm that already
owned and operated that asset. Risk could be reduced because the assets were already in
place and an organization of people knew how to operate them and market their products.
Many of the mergers can be financed by cash tender offers to the acquired firms
shareholders at price substantially above the current market. Even so, the assets can be
acquired for less than their current casts of construction. The basic factor underlying this
apparently is that inflation in construction costs not fully rejected in stock prices because of
high interest rates and limited optimism by stock investors regarding future economic
conditions.

2. Increased Managerial Skills or Technology

Occasionally a firm will have good potential that is finds it unable to develop fully because of
deficiencies in certain areas of management or an absence of needed product or production
technology. If the firm cannot hire the management or the technology it needs, it might
combine with a compatible firm that has needed managerial, personnel or technical expertise.
Of course, any merger, regardless of specific motive for it, should contribute to the
maximization of owners wealth.
3. Acquiring new technology -To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller
company with unique technologies, a large company can maintain or develop a
competitive edge.

NEED FOR MERGER AND ACQUISITION

The South East Asian crisis and the earlier economic turmoil in several developing
nations demonstrated that strong banking system is critical. Throughout the world,
banking industry has been transformed from highly protected and regulated to
competitive and deregulated. Globalization coupled with technological development
has shrinked the boundaries. Trade has become transactional from international. Due
to this, there is no difference between domestic and foreign currency. As a result
innovations and improvement assumed greatest significance in institutional
performance. This trend of global banking has been marked by twin phenomena of

consolidation and convergence. The trend towards consolidation has been driven by
the need to attain meaningful balance sheet size and market share in the face of
intensified competition. The trend towards convergence is driven by a move across
industry to provide most of the financial services under one roof. Indian banking
experienced wide ranging reforms in the last decade and these reforms have
contributed to a great extent in enhancing their competitiveness. The issue of bank
restructuring assumes significance from the point of view of making Indian banking
strong and sound apart its growth and development to become suitable. International
evidence also strongly indicates greater gains to banking industries after the
restructuring process. With the impending capital account convertibility, cross border
movement of financial capital would become a reality. Such a scenario would lead to
the alignment of various structures with the international Indian banks for that matter
almost all the banks in Asia, especially in small emerging countries are at
disadvantage on all fonts- size, technology, capital base, cost of fund, availability of
highly trained personnel to deal in international market, world wide networking and
freedom of actions. If we cannot consolidate our size, it is rather difficult to find
reasons that could prevent Indian banks from being swallowed by the powerful
foreign banks in the long run, under the free for all environments. The core objective
of restructuring is to maintain long term profitability and strengthen the competitive
edge of banking business in the context of changes in the fundamental market
scenario. Restructuring can have both internal and external dimensions.

The following are the important aspects for staying in the market:
Competition from global majors.
Competition from new Indian banks.
Disinter mediation and competition resulting into pressure or spread.
Qualitative change in the banking paradigm.
The competencies required from a banker would be sharper information technology
and knowledge centric.

MERGER AND INDIAN BANKING SECTOR

Mergers and acquisitions encourage banks to gain global reach and better synergy and allow
large banks to acquire the stressed assets of weaker banks. Merger in India between
weak/unviable banks should grow faster so that the weak banks could be rehabilitated
providing continuity of employment with the working force, utilization of the assets blocked
up in the weak/unviable banks and adding constructively to the prosperity of the nation
through increased flow of funds.
The process of merger and acquisition is not a new happening in case of Indian Banking,
Grind lay Bank merged standard charated Bank, Times Bank with HDFC Bank, bank of
Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and most
recdently Global Trust Bank merged with Oriental Bank of Commerce.
The small and medium sized banks are working under threats from economic environment
which is full of problem for them, viz. inadequacies of resources, outdated technology, on
systemized management pattern, faltering marketing efforts and weak financial structure.
Their existence remains under challenge in the absence of keeping pace with growing
automation and techniques obsolescence and lack of product innovations. These banks
remain, at times, under threat from large banks. Their reorganization through
consolidation/merger could offer succor to re-establish them in viable banks of optimal size
with global presence.
Merger and amalgamation in Indian banking so far has been to provide the safeguard and
hedging to weak bank against their failure and too at the initiative of RBI, rather than to pay
the way to initiate the banks to come forward on their own record for merger and
amalgamation purely with a commercial view and economic consideration.
As the entire Indian banking industry is witnessing a paradigm shift in systems, processes,
strategies, it would warrant creation of new competencies and capabilities on an on going
basis for which an environment of continuous learning would have to be created so as to
enhance knowledge and skills.
There is every reason to welcome the process of creating globally strong and competitive
banks and let big Indian banks create big thunders internationally in the days to come.

RISKS ASSOCIATED WITH MERGER

There are several risks associated with consolidation and few of them are as follows: -

1) When two banks merge into one then there is an inevitable increase in the size of the
organization. Big size may not always be better. The size may get too widely and go
beyond the control of the management. The increased size may become a drug rather
than an asset.
2) Consolidation does not lead to instant results and there is an incubation period before
the results arrive. Mergers and acquisitions are sometimes followed by losses and
tough intervening periods before the eventual profits pour in. Patience, forbearance
and resilience are required in ample measure to make any merger a success story. All
may not be up to the plan, which explains why there are high rate of failures in
mergers.
3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy
decision and willingness of the rank and file of both entities may not be forthcoming.
This leads to problems of industrial relations, deprivation, depression and
demotivation among the employees. Such a work force can never churn out good
results. Therefore, personal management at the highest order with humane touch alone
can pave the way.
4) The structure, systems and the procedures followed in two banks may be vastly
different, for example, a PSU bank or an old generation bank and that of a
technologically superior foreign bank. The erstwhile structures, systems and
procedures may not be conducive in the new milieu. A thorough overhauling and
systems analysis has to be done to assimilate both the organizations. This is a time
consuming process and requires lot of cautions approaches to reduce the frictions.
5) There is a problem of valuation associated with all mergers. The shareholder of
existing entities has to be given new shares. Till now a foolproof valuation system for
transfer and compensation is yet to emerge.
6) Further, there is also a problem of brand projection. This becomes more complicated
when existing brands themselves have a good appeal. Question arises whether the
earlier brands should continue to be projected or should they be submerged in favour
of a new comprehensive identity. Goodwill is often towards a brand and its submerger is usually not taken kindly.

MERGER STORY SO FAR

YEAR

BANK

MERGED WITH

1969
1970
1971
1974
1976
1984-85
1984-85
1985
1986
1988
1989-90
1989-90
1989-90
1989-90
1990-91
1993-94
1993-94
1995-96
1996
1997

Bank Of Bihar
National Bank Of Lahore
Eastern Bank Ltd.
Krishnaram Baldeo Bank Ltd.
Belgaum Bank Ltd.
Lakshmi Commercial Bank
Bank Of Cochin
Miraj State Bank
Hindustan Commercial Bank
Traders Bank Ltd.
United Industrial Bank
Bank Of Tamilnad
Bank Of Thanjavur
Parur Central Bank
Purbanchal Bank
New Bank Of India
Bank Of Karad
Kasinath Seth Bank
SCICI
ITC Classic
BARI Doab Bank
Punjab Co-operative Bank
Anagram Fianance
Bareilly Corporation Bank
Sikkim Bank ltd.
Times bank
Bank of Madura
Benaras state bank
Nedungadi Bank
South Gujrat Local Area Bank
Global Trust Bank
Bank of Punjab

State Bank Of India

State Bank Of India
Chartered Bank
State Bank Of India
Union Bank Of India
Canara Bank
State Bank Of India
Union Bank Of India
Punjab National Bank
Bank Of Baroda
Allahabad Bank
Indian Overseas Bank
Indian Bank
Bank Of India
Central Bank Of India
Punjab National Bank
Bank Of India
State Bank Of India
ICICI
ICICI
Oriental Bank of Commerce
Oriental Bank of Commerce
ICICI
Bank of Baroda
Union Bank
HDFC Bank
ICICI
Bank of Baroda
Punjab national Bank
Bank of Baroda
Oriental Bank of Commerce
Centurion bank

1997
1998
1998
1999
1999
2000
2001
2002
2003
2004
2004
2005

Challenges and opportunities: FOREIGN BANKS India is experiencing greater presence of foreign banks over
time. As a result number of issues will arise like how will smaller national banks

compete in India with them, and will they themselves need to generate a larger
international presence? Second, overlaps and potential conflicts between home
country regulators of foreign banks and host country regulators: how will these be
addressed and resolved in the years to come? It has been seen in recent years that
even relatively strong regulatory action taken by regulators against such global banks
has had negligible market or reputational impact on them in terms of their stock price
or similar metrics. Thus, there is loss of regulatory effectiveness as a result of the
presence of such financial conglomerates. Hence there is inevitable tension between
the benefits that such global conglomerates bring and some regulatory and market
structure and competition issues that may arise.
GREATER CAPITAL MARKET OPENNESS - An important feature of the
Indian financial reform process has been the calibrated opening of the capital account
along with current account convertibility. It has to be seen that the volatility of capital
inflows does not result in unacceptable disruption in exchange rate determination
with inevitable real sector consequences, and in domestic monetary conditions. The
vulnerability of financial intermediaries can be addressed through prudential
regulations and their supervision; risk management of non-financial entities. This will
require market development,
TECHNOLOGY IS THE KEY IT is central to banking. Foreign banks and the
new private sector banks have embraced technology right from their inception and
continue to do so even now. Although public sector banks have crossed the 70%level
of computerization, the direction is to achieve 100%. Networking in banks has also
been receiving focused attention in recent times. Most recently the trend observed in
the banking industry is the sharing of ATMs by banks. This is one area where
perhaps India needs to do significant catching up. It is wise for Indian banks to
exploit this globally state-of-art expertise, domestically available, to their fullest
advantage.
CONSOLIDATION We are slowly but surely moving from a regime of "large
number of small banks" to "small number of large banks." The new era is one of
consolidation around identified core competencies i.e., mergers and acquisitions.
Successful merger of HDFC Bank and Times Bank; Stanchart and ANZ Grindlays;
Centurion Bank and Bank of Punjab have demonstrated this trend. Old private sector

banks, many of which are not able to cushion their NPAs, expand their business and
induct technology due to limited capital base should be thinking seriously about
mergers and acquisitions.
PUBLIC SECTOR BANKS - It is the public sector banks that have the large and
widespread reach, and hence have the potential for contributing effectively to achieve
financial inclusion. But it is also they who face the most difficult challenges in
human resource development. They will have to invest very heavily in skill
enhancement at all levels: at the top level for new strategic goal setting; at the middle
level for implementing these goals; and at the cutting edge lower levels for delivering
the new service modes. Given the current age composition of employees in these
banks, they will also face new recruitment challenges in the face of adverse
compensation structures in comparison with the freer private sector.
COST MANAGEMENT Cost containment is a key to sustainability of bank
profits as well as their long-term viability. In India, however, in 2003, operating costs
as proportion of total assets of scheduled commercial banks stood at 2.24%, which is
quite high as compared to in other economies. The tasks ahead are thus clear and
within reach.
RECOVERY MANAGEMENT This is a key to the stability of the banking
sector. Indian banks have done a remarkable job in containment of non-performing
loans (NPL) considering the overhang issues and overall difficult environment.
Recovery management is also linked to the banks interest margins. Cost and
recovery management supported by enabling legal framework hold the key to future
health and competitiveness of the Indian banks. Improving recovery management in
India is an area requiring expeditious and effective actions in legal, institutional and
judicial processes.
REACH AND INNOVATION - Higher sustained growth is contributing to
enhanced demand for financial savings opportunities. In rural areas in particular,
there also appears to be increasing diversification of productive opportunities. Also
industrial expansion has accelerated; merchandise trade growth is high; and there are
vast demands for infrastructure investment, from the public sector, private sector and
through public private partnerships. Thus, the banking system has to extend itself and

innovate. Banks will have to innovate and look for new delivery mechanisms and
provide better access to the currently under-served. Innovative channels for credit
delivery for serving new rural credit needs will have to be found. The budding
expansion of non-agriculture service enterprises in rural areas will have to be
financed. Greater efforts will need to be made on information technology for record
keeping, service delivery, and reduction in transactions costs, risk assessment and
risk management. Banks will have to invest in new skills through new recruitment
and through intensive training of existing personnel.
RISK MANAGEMENT Banking in modern economies is all about risk
management. The successful negotiation and implementation of Basel II Accord is
likely to lead to an even sharper focus on the risk measurement and risk management
at the institutional level. Sound risk management practices would be an important
pillar for staying ahead of the competition. Banks can, on their part, formulate early
warning indicators suited to their own requirements, business profile and risk
appetite in order to better monitor and manage risks.
GOVERNANCE The quality of corporate governance in the banks becomes
critical as competition intensifies, banks strive to retain their client base, and
regulators move out of controls and micro-regulation. The objective should be to
continuously strive for excellence. Improvement in policy-framework, regulatory
regime, market perceptions, and indeed, popular sentiments relating to governance in
banks need to be on the top of the agenda to serve our societys needs and realities
while being in harmony with the global perspective.

MERGERS AND AMALGAMANTION IN INDIA

Banking in India originated in the first decade of 18th century with The General Bank of
India coming into existence in 1786. This was followed by Bank of Hindustan. Both these
banks are now defunct. The oldest bank in existence in India is the State Bank of India being
established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later,

foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that
point of time, Calcutta was the most active trading port, mainly due to the trade of the British
Empire, and due to which banking activity took roots there and prospered. The first fully
Indian owned bank was the Allahabad Bank, which was established in 1865.
By the 1900s, the market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were
founded under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935. After India's independence
in 1947, the Reserve Bank was nationalized and given broader powers.

BEFORE LIBERALISATION
In India the companies act 1956 and the monopolies and restrictive trade practices act, 1969
are statutes governing mergers among companies.s
In the companies act, as procedural has been laid down, in terms of which the merger can be
effectuated. Sanction of the company court is essential perquisite for the effectiveness of a
scheme of merger.
The other statue regulating mergers was the hitherto monopolies and restrictive trade
practices act. After the amendments the status does not regulate mergers.
The regulatory provisions in the MRTP act were removed through the 1991 amendments,
with a view to giving effect to the new industrial policy of liberalization and deregulation,
aimed at achieving economies of scale for ensuringhigher productivity competitiveness.

Liberalization
In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation
and gave licences to a small number of private banks, which came to be known as New
Generation tech-savvy banks, which included banks such as UTI Bank (the first of such new
generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid
growth in the economy of India, kickstarted the banking sector in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely, government
banks, private banks and foreign banks.The next stage for the Indian banking has been setup

with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign
Investors in banks may be given voting rights which could exceed the present cap of 10%.
The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.
All this led to the retail boom in India. People not just demanded more from their banks but
also received more.
Sarrriya Committee
In 1972 examined the restructuring of banks in greater depth and recommended that there
should be three all India banks and 5 or 6 regional banks plus a network of cooperative or
rural banks in the rural areas.
N.Vagul suggested the restructuring on the basis of location and functioning of the bank and
recommended four sets of banks in the public sector.
1) There should be district banks having the network of around 300 branches and Rs.
250 crores or more. Their functions similar to that of commercial banks.
2) National saving banks which will be located only in urban and metropolitan towns.
3) The third and fourth set of banks will be trade and industry banks and foreign
exchange banks and located at urban and metropolitan centers catering to designate
clientele only.
In July 1976, a commission under the chairmanship of Sh. Manubhai shah suggested the
reduction in the number of existing banks and making the smallest nationalized banks
bigger so as to have strong regional character in states of UP, MP, Bihar, and Orissa and
North east part of the country.

James Raj Committee appointed by RBI in June 1997 recommended that

A banks size should be in the range of 1000 to 1500 branches.

SBI group should be converted into holing company with 5 zones subsidiaries and

Streamlining of the rural and semi urban branches.

Shri R.C.Shah, the then chairman of Bank of Baroda, speaking at third National seminar on
banking held at M.S. University, Baroda, in which, 1981, on restructuring presented his
views.

The number of public sector commercial banks be reduced ( through merger/amalgamation)

to maximum of 10 to 12, not more than 3 of which should have all India character; the
remaining would be zonal banks operating in ( a zonal comprising 2,3); geographically
contiguous states, with all India banks operating up to district Head quarters levels and in
urban areas. Shri Shah had also suggested some bifurcation of market segments for credit
expansion purposes amongst all India and zonal banks due to various constraints viz; nonclarity of legal.

Narasimhan Committee Report

The first report of the Narsimhan committee on the financial system had
recommended a broad pattern of the structure of the banking system as under:
3 or 4 larger banks (including the State Bank of India) which could become
international in character.
8 to 10 national banks with a network of branches throughout the country
engaged in universal banking.
Local banks whose operations would be generally confined to a specific
region.
Rural banks (including RRBs) whose operations would be confined to the
rural areas and whose business would be predominantly engaged in financing
of agricultural and allied activities.
The Narsimhan committee was of the view that the move towards this revised system should
be market driven and based on profitability considerations and brought about through a
process of mergers and acquisitions.

Narsimhan Committee (1998)

The second report of the Narsimhan committee on the banking sector reforms on the
structural issues made following recommendations.
Merger between banks and between banks and DFIs and NBFCs need to be based on
synergies and locational and business specific complimentary of the concerned institutions
and must obviously make sound commercial sense. Mergers of public sector banks should
emanate from the managements of banks with the govt. as the common shareholder playing a
supportive role. Such mergers however can be worthwhile if they lead to rationalization of
workforce and branch network otherwise the mergers of public sector banks would tie down
the management with operational issues and distract attention from the real issue. It would be
necessary to evolve policies aimed at right sizing and redeployment of the surplus staff either

by the way of retraining them and giving them appropriate alternate employment or by
introducing a VRS with appropriate incentives. This would necessitate the corporation and
understanding of the employees and towards this direction. Management should initiate
discussion with the representatives of staff and would need to convince their employees about
the intrinsic soundness of the idea, the competitive benefits that would accrue and the scope
and potential foe employees own professional advancement in a larger institution. Mergers
should not be seen as a means of bailing out weak banks. Mergers between strong banks/FIs
would make for greater economic and commercial sense and would greater than the sum of
its parts and have a force multiplier effect. It can hence be seen from the recommendations of
Narsimhan Committee that mergers of the public sector banks were expected to emanate
from the management of the banks with government as common shareholder playing a
supportive role.

BANK MERGER/AMALGAMATION UNDER VARIOUS ACTS

The relevant provisions regarding merger, amalgamation and acquisition of banks under
various acts are discussed in brief as under:
Mergers- banking Regulation act 1949
Amalgamations of banking companies under B R Act fall under categories are voluntary
amalgamation and compulsory amalgamation.
Section 44A Voluntary Amalgamation of Banking Companies.
Section 44A of the Banking Regulation act 1949 provides for the procedure to be followed in
case of voluntary mergers of banking companies. Under these provisions a banking company
may be amalgamated with another banking company by approval of shareholders of each
banking company by resolution passed by majority of two third in value of shareholders of
each of the said companies. The bank to obtain Reserve Banks sanction for the approval of
the scheme of amalgamation. However, as per the observations of JPC the role of RBI is
limited. The reserve bank generally encourages amalgamation when it is satisfied that the
scheme is in the interest of depositors of the amalgamating banks.
A careful reading of the provisions of section 44A on banking regulation act 1949 shows that
the high court is not given the powers to grant its approval to the schemes of merger of
banking companies and Reserve bank is given such powers. Further, reserve bank is

empowered to determine the Markey value of shares of minority shareholders who have
voted against the scheme of amalgamation. Since nationalized banks are not Baking
Companies and SBI is governed by a separate statue, the provisions of section 44A on
voluntary amalgamation are not applicable in the case of amalgamation of two public sector
banks or for the merger of a nationalized bank/SBI with a banking company or vice versa.
These mergers have to be attempted in terms of the provisions in the respective statute under
which they are constituted. Moreover, the section does not envisage approval of RBI for the
merger of any other financial entity such as NBFC with a banking company voluntarily.
Therefore a baking company can be amalgamated with another banking company only under
section 44A of the BR act.

Section 45- Compulsory Amalgamation of banks

Under section 45(4) of the banking regulation act, reserve bank may prepare a scheme of
amalgamation of a banking company with other institution (the transferee bank) under subsection (15) of section 45. Banking institution means any banking company and includes SBI
and subsidiary banks or a corresponding new bank. A compulsory amalgamation is a pressed
into action where the financial position of the bank has become week and urgent measures
are required to be taken to safeguard the depositors interest. Section 45 of the Banking
regulation Act, 1949 provides for a bank to be reconstructed or amalgamated compulsorily
i.e. without the consent of its members or creditors, with any other banking institutions as
defined in sub section(15) thereof. Action under there provision of this section is taken by
reserve bank in consultation with the central government in the case of banks, which are
weak, unsound or improperly managed. Under the provisions, RBI can apply to the central
government for suspension of business by a banking company and prepare a scheme of
reconstitution or amalgamation in order to safeguard the interests of the depositors.
Under compulsory amalgamation, reserve bank has the power to amalgamate a banking
company with any other banking company, nationalized bank, SBI and subsidiary of SBI.
Whereas under voluntary amalgamation, a banking company can be amalgamated with
banking company can be amalgamated with another banking company only. Meaning
thereby, a banking company can not be merged with a nationalized bank or any other
financial entity.

Companies Act

Section 394 of the companies act, 1956 is the main section that deals with the reconstruction
and amalgamation of the companies. Under section 44A of the banking Regulation Act, 1949
two banking companies can be amalgamated voluntarily. In case of an amalgamated of any
company such as a non banking finance company with a banking company, the merger would
be covered under the provisions of section 394 of the companies act and such schemes can be
approved by the high courts and such cases do not require specific approval of the RBI.
Under section 396 of the act, central government may amalgamate two or more companies in
public interest.

MERGERS OF CENTURIAN BANK

AND BANK OF PUNJAB

BANK OF PUNJAB

It was incorporated on may27, 1994 under the companies act, 1956.

The registered office of the bank was situated at SCO 46-47, sector 9-D, Madhya
Marg, Chandigarh- 160017.

It is banking company under the provisions of regulation act, 1949.

The objects of bank are banking business as set out in its memorandum and articles of
association.

The bank is a new private sector bank in operating for more than 10 years, with a
national network of 136 branches( including extension counters) having a significant
presence in the most of the major banking sectors of the country. The transferor bank
offers a host of banking products catering to various classes of customers ranging
from small and medium enterprises to large cooperates.

The bank is listed on the stock exchange, Mumbai, the national stock exchange of
India limited and the Ludhiana stock exchange.

CENTURION BANK

It was incorporated on june30, 1994 under the companies act, 1956.

The registered office of the Bank was situated at Durga Niwas, Mahatma Gandhi
Road, Panaji, 403001, Goa.

It is a banking company under the provisions of banking regulation act, 1949.

The objectives of transferee bank are banking business as set out in its memorandum
and articles of association.

The bank is a profitable and well capitalized new private sector bank having a
national presence of over 99 branches( including extension counter)

It has a significant presence in the retail segment offering a range of products across
various categories.

The bank is listed on the stock exchange, Mumbai and the National stock exchange of
India limited, Mangalore stock exchange of India limited, Mangalore stock exchange
and its global depository receipts are listed on the Luxembourg stock exchange.

The amalgamation of the Transferor bank (BOP) with the transferee bank (centurion) is
effected subject to the terms and conditions embodied in the scheme of merger pursuant to
section 44A of banking regulation act, 1949( hereinafter the act). In terms of section 44A
of the said act, a resolution is required to be passed by a majority in number and two-third in
the value of the members of the Transferor and the Transferee Bank, present rather in person
or by proxy at the respective meetings. As both the companies are banking companies, the
amalgamation is regulated by the provisions of the act and would require the sanction of the
reserve bank of India under the said act. The provisions of section 391-394 of the companies
act, 1956 relating to amalgamation are not applicable to the amalgamation of the transferor
bank with the transferee bank and therefore the scheme is not be required to be sanctioned by
a high court under the provisions of the companies act, 1956.

About Centurion Bank of Punjab

Centurion bank of Punjab is a new generation private bank offering a wide spectrum of retail,
SME and corporate banking products and services. It has been among the earliest banks to
offer a technology enabled customer interface that provides easy access and superior
customer service.
Centurion Bank of Punjab has a nationwide reach through its network of 241 branches and
389 ATMs.The bank aims to serve all the banking and financial needs of its customers
through multiple delivery channels, each of which is supported by state of the art technology
architecture.

Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab,
both of which had strong retail franchises in their respective markets. Centurion Bank had a
well managed and growing retail assets business, including leadership positions in two
wheeler loans and commercial vehicles loans and a strong capital base. Bank of Punjab
brings with it a strong retail deposit customer base in North India in addition to a sizable
SME and agriculture portfolio.
The shares of the bank are listed on the major stock exchanges in India and also on the
Luxembourg Stock exchange. Among centurion bank of Punjabs greatest strengths is the
fact that it is a professionally managed bank with a globally experienced and capable
management team. The day to day operations of the bank are looked by Mr. Shilnder
bhandari, managing Director & CEO, assisted by a senior management team, under the
overall supervision and control of the Board of directors. Mr. Rana Talwar is the chairman of
the board. Some of our major shareholders are saber capital, Bank Muscat and Keppel
Corporation, Singapore are represented on the Board.
The book value of the bank would also go up to around Rs 300 crores. The higher book value
should help the combine entity to mobilize funds at lower rate.
The combined bank will be full service commercial bank with a strong presence in the Retail,
SME and Agricultural segments.

Share holding pattern of Centurion Bank of Punjab

After the merger shareholding of Bank of Punjab (BOP) promotes will shrink to 5%. The
family of Darshanjit Singh which promoted Bop currently holds 15.62% while associates
hold another 11.40% the promoter stake will now fall down to around 5% ad for associate
that would be 7-8%.
The major shareholder of the centurion bank, bank of Muscats stake will fall to 20.5% from
25.91%, Keppels stake will be at 9% from current level of 11.33% and Rana Talwars
capital will have a stake of 4.4% as against 5.61%.
The promoters of BoP and major stakeholders of centurion bank will have a combine stake of
around 42% in the merged entity- centurion bank of Punjab.
The costs of deposit of Bop were lower than Centurion; While Centurion had a net interest
margin of around 5.8%. The net interest margin of the merged entity will be at 4.8%.

The combined entity will have adequate capital of 16.1% to provide for its growth plans.
Centurion banks capital adequacy on a standalone basis stood at 23.1% while Bank of Punjab
figure stood at 9.21%.
The performance net worth of combined entity as at march 2005 stood at Rs. 696 crores with
centurions net worth at Rs. 511 crore and Bank of Punjabs net worth at Rs. 181 crore, and
combine entity( centurion Bank of Punjab) will have total asset 9395 crore, deposit 7837
crore and operating profit 43 crore.
The merged entity will have a paid up share capital of Rs. 130 cr and a net worth of Rs. 696
cr.
The merged entity will have 235 Branches and extension counters, 382 ATMs and 2.2 million
customers.

MERGER POSITION
Private Banks is taking to the consolidation route in a big way. Bank of Punjab (BOP) and
Centurion Banks (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI
approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005. The
merger is at swap ratio 9:4 and the combined bank is called Centurion bank of Punjab. The
merger of the banks will have a presence of 240 branches and extension counters, 386 ATMs,
about 2.2 million customers. As on March 2005, the net worth of the combined entity is Rs
696 crore and the capital adequacy ratio is 16.1% in the private sector, nearly 30 banks are
operating. The top five control nearly 65% of the assets. Most of these private sector banks
are profitable and have adequate capital and have the technology edge. Due to intensifying
competition, access to low cost deposits is critical for growth. Therefore, size and
geographical reach becomes the key for smaller banks. The choice before smaller private
banks is to merge and form bigger and viable entities or merge into a big private sector bank.
The proposed merger of bank of Punjab and Centurion Bank is sure to encourage other
private sector banks to go for the M&A road for consolidation.
The merger of Centurion bank and Bank of Punjab, both of which had strong retail franchises
in their respective markets, formed centurion bank of Punjab. Centurion bank had a well
managed and growing retail assets business, including leadership positions in 2 wheeler loans
and commercial vehicle loans, and a strong capital base. Bank of Punjab brings with it a
strong retail deposit customer base in North India in addition to a sizeable SME and

agricultural portfolio. The shares of the bank are listed on the major stock exchanges in India
and also on the Luxembourg stock exchange. Bank of Punjab has net non- performing assets
of around Rs 110.45 crore as on March 2004, which will be carried to Centurion Banks books
after merger. Both the brands are strong in their respective geographers and business hence
the merged entity will have the elements of both, he added. Centurion Bank has a presence in
south and west and Bank of Punjab has a strong presence in the north. The merger will give
us scale geographical reach and entry into new products segments said the official.
Bank of Punjab is strong in small and medium enterprises (ME) business in the north, with
good retail assets and an agriculture portfolio as well as deposit franchisee Centurion Bank
has a capital, ability to generate retail assets, risk management systems and good treasury
division. Market players except the swap ratio 2:1, said sources. For very two stocks of
Centurion bank, a shareholder will get one stock of Bank of Punjab. The merged entity will
have a asset base of Rs.10, 000 crore, said a senior bank official. The depository base of
entity will be around Rs. 7165.67 crore and advances will be around Rs. 3909.87 crore. The
organization structure for the combined bank is in place and the grades and incentives across
the organization have largely been realigned. Centurion bank of Punjab said in a statement.
The operations of the bank have been integrated across the entire network.
A decision has been taken on a common system for the banks and a phased migration has
been planned to ensure minimum disruption of customer service and operation across the
bank Centurion Bank of Punjab Said.

HIGHLIGHTS OF THE MERGER- CENTURION BANK AND

BANK OF PUNJAB
Bank of Punjab is merged into Centurion Bank.
New entity is named as Centurion Bank of Punjab.
Centurion Banks chairman Rana Talwar has taken over as the chairman of the
merged entity.
Centurion banks MD Shailendra Bhandari is the MD of the merged entity.

 KPMG India pvt ltd and NM Raiji & Co are the independent values and ambit
corporate finance was the sole investment banker to the transaction.
Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of
Punjab, its shareholders would receive 9 shares of Centurion Bank.
There has been no cash transaction in the course of the merger; it has been settled
through the swap of shares.
There is no downsizing via the voluntary retirement scheme.

In the opinion of the Board of Directors of Bank of Punjab the following are amongst others,
the benefits that are expected to accrue to the members from the proposed scheme:

(a) Financial Capability: The amalgamation is expected to enable the merge

Entity to have a stronger financial and business profile, which could be synergized to
both for resources and mobilization and asset generation.
(b) Branch Network: As a result of the amalgamation, the branch network of the merged
entity would increase to 235 branches, providing increased geographic coverage,
particular in the southern India and giving it a larger national foot print as well as
convenience to its customers.

(c) Retail Customer Base: The amalgamation would enable the merged entity to
increase its retail customer base. This larger customer base will provide the merged entity
enhanced opportunities for offering banking and financial services and products and
facilitate cross selling of products and services.

(d) Use of Technology: Post amalgamation, the merged entity would be able to provide
through its branches, ATMs, phone and the internet banking and financial services and
products to a larger customer base, with expected savings in costs and operating
expenses.

(e) Larger Size: the larger asset base of the merged entity will put the merged entity
amongst the bigger players in the private sector banking space.

(f) International Listing: The members will become shareholders of an internationally

listed entity which has the advantage of greater access to raising capital.

THE KEY FINANCIAL PARAMETERS OF

THE TWO ENTITIES LOOK AS FOLLOWS AS ON 31 MARCH 2005

Capital Reserve

184.26

511.44

695.70

Total assets

4848.28

4490.29

9338.53

Deposits

4306.62

3530.38

7837

Advances

2416.99

2193.95

4610.94

23.16

42.64

Operating

Profit

before 19.48

provisions & contingencies

Business

6723.61

5724.33

12447.94

Interest margin

134.92

177.88

312.80

Capital adequacy

9.23

21.42

30.65

Banking officers

136

99

235

Rs. In Crores

Market capitalization

315

1477.97

1792.97

MERGER OF ICICI BANK AND BANK OF MADURA

The ICICI, one of largest financial institutions in India had an asset base of Rs.582 bn in
2000. It is an integrated wide spectrum of financial activities, with its presence in almost all
the areas of financial services, right from lending, investment and commercial banking,
venture capital financing, consultancy and advisory services to on-line stock broking, mutual
funds and custodial services. In July 1998, to synergize its group operations, restructuring
was designed, and as a result ICICI Bank has emerged.
ICICI Bank has announced a merger with the 57-year-old Bank of Madura Ltd. (BOM) in an
all share deal. The boards of the both the banks have approved the merger and decided the
share exchange ratio of two shares of ICICI Bank for every one share of BOM. The
shareholders of BOM stand to gain with this merger ratio.
BOM with an extensive network of 263 branches has a significant presence in Southern
India. The merger will enable ICICI Bank to spread its network (currently 106 branches) to
16 states without seeking the RBIs permission for branch expansion.
The merged entity will have an asset base of over Rs 160 bn and deposits base of over Rs 131
bn. The merger will give ICICI Bank a huge presence in the South which is an important
market given the high rate of economic development, as most of the technology companies
are South based leading to higher income per head.
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 group has about 4.7 percent, while LIC
and UTI were having marginal holdings. The merger will give ICICI Bank a hold on South
Indian market, which has high rate of economic development.

THE BOARD OF DIRECTORS AT ICICI HAS CONTEMPLATED THE

FOLLOWING SYNERGIES EMERGING FROM THE MERGER:

1) FINANCIAL CAPABILITY: The amalgamation will enable them to have a stronger

financial and operational structure, which is suppose to be capable of greater
resource/deposit mobilization. And ICICI will emerge as one of the largest private sector
banks in the country.
2) BRANCH NETWORK: The ICICIs branch network would not only increase by 264,
but also increases geographic coverage as well as convenience to its customers.
3) CUSTOMER BASE: The emerged largest customer base will enable the ICICI bank
to offer banking and financial services and products and also facilitate cross-selling of
products and services of the ICICI group.
4) TECH EDGE: The merger will enable ICICI to provide ATMs, Phone and the Internet
banking and financial services and products to a large customer base, with expected
savings in costs and operating expenses.
5) 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.

Crucial Parameters: How they stand

Book value of Market price on
Name of Bank on the day the
the Bank of

day

of Earnings

merger announcement per share

announcement of merger
Bank of
Madura
ICICI
Bank

Dividend
paid
%)

(in

Profit
P/E employee

ratio (in lakh) 19992000

183.0

131.60

38.7

55%

3% 1.73

58.0

169.90

5.4

15%

Challenges Post Merger

THE GENERATION GAP

per

7.83

Will the merger of 57-year old BOM, south based old generation bank with a fast growing
tech savvy new generation bank, help the latter? For sure, the stock merger is likely to bring
cheer to shareholders 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 base of ICICI Bank to Rs. 220.36 cr.
ICICI Bank will issue 235.4 lakh shares of Rs.10 each to the share- holders of BOM. The
merged entity will have an increase of asset base over Rs.160 bn and a 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 base of 1.2 million customers of
BOM through a wider network, adding to the customer base to 2.7 million.

MANAGING RURAL BRANCHES

ICICIs major branches are in major metros and cities, whereas BOM spread its wings mostly
in semi urban and city segments of south India. There is a task ahead lying for the merged
entity to increase dramatically the business mix of rural branches of BOM. On the other hand,
due to geographic location of its branches and level of competition, ICICI Bank will have a
tough time to cope with.

MANAGINGSOFTWARE:
Another task, which stands on the way, is technology. While ICICI Bank, which is a fully
automated entity, is using the package, Banks 2000, BOM has computerized 90 percent of its
businesses and was conversant with ISBS software. The BOM branches are supposed to
switch over to Banks 2000. Though it is not a difficult task, with 80 percent computer literate
staff would need effective retraining which involves a cost. The ICICI Bank needs to invest
Rs.50 crore, for upgrading BOMs 263 branches.

MANAGING HUMAN RESOURCES:

One of the greatest challenges before ICICI Bank is managing human resources. When the
head count of ICICI Bank is taken, it is less than 1500 employees; on the other hand, BOM
has over 2500. The merged entity will have about 4000 employees which will make it one of
the largest banks among the new generation private sector banks. The staff of ICICI Bank is
drawn from 75 various banks, mostly young qualified professionals with computer
background and prefer to work in metros or big cities with good remuneration packages.

While under the influence of trade unions most of the BOM employees have low career
aspirations. The announcement by H.N. Sinor, CEO and MD of ICICI, that there 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 upwards. Is it not a
Herculean task to integrate two work cultures.
MANAGING CLIENT BASE:
The client base of ICICI Bank, after merger, will be as big as 2.7 million from its past 0.5
million, an accumulation of 2.2 million from BOM. The nature and quality of clients is not of
uniform quality. The BOM has built up its client base for a long time, in a hard way, on the
basis of personalized services. In order to deal with the BOMs clientele, the ICICI Bank
needs to redefine its strategies to suit to the new clientele. The sentiments or a relationship of
small and medium borrowers is hurt, it may be difficult for them to reestablish the
relationship, which could also hamper the image of the bank.

Key Ratios
Particulars
CAR
NPAs as a % of net advances
ROA
Interest spread as a % of total assets

ICICI Bank
17.6%
1.5%
0.9%
1.5%

Bank of Madura
15.8%
4.8%
1.1%
2.3%

Comparative Valuations
Particulars
ICICI Bank Bank of Madura
Market Price (Rs) 170
132
PER (x)
22.7
3.0
Dividend yield
0.9%
4.2%
Price/Book value (x) 2.7
0.6

MERGER OF TIMES BANK WITH HDFC BANK

Times Bank was a new generation private sector bank established by the Times group. As
part of HDFC Bank's strategy of attaining great heights it decided to merge with Times Bank.
As per the scheme of amalgamation issued by HDFC bank to its shareholder the following
were the reasons cited for the merger deal.
1. Branch Network would increase by over 50 percent and thus providing increased
geographical coverage.
2. Increase the total number of retail customer accounts so as to increase deposit and loan
products.
3 After the merger the bank would be able to use Times Bank's lower cost alternative
channels like phone banking, internet banking etc. and thereby the reducing of operating
costs.
4. The merger would increase the presence of HDFC bank in the depository participant
activities.
5. Improved infra structure facilities and central processing would help in deriving economies
of large scale. and share holding pattern have been looked into.

PROFITABILITY
Profit is the ultimate aim of any business. And the future of a business depends upon the level
of profitability. Here the Spread Burden model has been adopted to measure banks
profitability. Where Spread denotes the difference between interest income and interest
expense, Burden implies difference between non interest income and non interest expense
and profit margin refers to the profit earned by the bank before making provisions and
contingencies.

ITEM

POST-MERGER

Spread/Total Income

COMBINED
PRE-MERGER
AVERAGE
6.56

Burden/Total Income

418.55

-14.52

Profit Margin/ Total -18.25

Income

-9.85

9.20

TOTAL INCOME
Income refers to the streams of revenue of a business. Bank may generate income from
activities directly related to its activities or other activities. Since it assumes great importance
it has been chosen as a variable for measuring the impact of merger .

ITEM

COMBINED AVERAGE POST-MERGER

PRE-MERGER

Interest Income/Total
Income
Interest
Expenses/Total
Income
Non-Interest
Income/Total Income
Non-Interest
Expense/Total Income
Contingencies/ Total
Income

6.15

-0.49

8.53

6.56

26.49

2.63

0.22

1.69

34.28

16.31

EFFICIENCY OF BRANCH
The branch of any bank is a representative of the whole banking business. Possessing
geographically widespread network of branches is a valuable asset for any bank. It would
assist mobilizing and disbursing huge amount of funds over a wider portfolio. Considering
the importance of branches for the success of a bank it has been included as a variable.

CAGR OF BRANCH WISE PERFORMANCE

ITEM
Advance Per Branch

COMBINED
PRE- POST-MERGER
MERGER AVERAGE
7.10
14.70

Deposits Per Branch

1.45

16.61

Net
Revenue
Per 7.14
Branch
Working Fund Per 7.61
Branch
Transaction Cost Per 1.66
Branch

26.75
15.10
25.97

DEPOSIT MOBILIZATION EFFICIENCY

Deposits are an important source of Finance for all banks. In this era of globalisation there is
intense competition among banks in mobilising deposits. In the private sector, remuneration
of bank officials to an extend depends upon the targets of deposits raised by them. Thus
deposits being an important component for a bank it is taken as a variable for measurement.
Here deposit mix refers to the ratio of total of current and saving deposits to total deposits.
Investment refers to the total of all investments made by the bank.

DEPOSIT MOBILIZATION RATIOS

ITEM

COMBINED
PREMERGER AVERAGE
Investment To Deposit 12.03
-7.76
Credit Deposit Ratio
1.00
Operating
Expense/Total Deposit
31.88
Deposit Mix
Income To Deposit

1.51

POST-MERGER
-0.15
-1.63
8.03
6.33
9.88

WORKING CAPITAL
Working fund refers to that part of capital which is required for financing the activities during
its operating cycle. Working capital has assumed such significance that it is now being taught
as a discipline in various universities. Here working fund refers to total of all assets and this
definition has been adopted from the annual reports of HDFC Bank.

WORKING CAPITAL FUNDS

ITEM

COMBINED
PRE- %
MERGER AVERAGE POST MERGER
10.78
Interest
Income/ -5.63
Working Fund
14.25
Non Interest Income/ -34.58
Working Fund
-11.13
11.33
Total
Income/Working
Fund
18.62
Interest
Expense/ -3.24
Working Fund
9.44
Non Interest Expense/ -11.54
Working Fund
15.82
Total
Expense/ -5.81
Working Fund
-7.46
Contingent Liability/ -18.56
Working Fund

OPERATING PERFORMANCE VARIABLES

Some more variables which are considered to be indicators of a banks operating performance
have also been included to measure exactly the real impact of merger between HDFC and
Times bank. based on actual figures have been summarized in the below

CAGR OF PERFORMANCE VARIABLES

ITEM

TOTAL INCOME
EBT
PAT
CAR

COMBINED
PRE-MERGER
AVERAGE
36.39
22.65
23.78
-12.92

%
POST MERGER
59.03
47.63
57.32
3.62

SHARE HOLDING PATTERN

The share holding pattern that might be influenced in a merger deal has also been closely
analyzed.

SHARE HOLDING PATTERNS OF HDFC BANK

ITEM

PRE-MERGER
AVERAGE
28.78
HDFC GROUP
INDIAN
PRIVATE 10.00
EQUITY FUND
4.99
INDOCEAN
FINANCIAL
HOLDINGS
NIL
BENNET,
COLEMAN
COMPANY
AND
GROUP
56.23
PUBLIC
100

%
POST MERGER
25.74
8.95
4.46

7.78

53.07
100

On analyzing all the above variables it can be found that

1. Before the merger the combined average non-operating losses of the bank was only 2.2 per
cent of the total income. But that has increased to 6.15 per cent after the merger.
2. The average spread has increased by 10 per cent after the merger. This implies that HDFC
Bank has truly benefited by merging with Times bank that had a good retail banking
business.
3. During the pre merger era the combined entity used to consume only 8.08 per cent of its
total income for provisions. But after the merger this increased to 13.82 per cent denoting a
rising level of N.P.A
4. After the merger the bank has been following a policy of generating income from nonbusiness activities. This is very clear from the investment deposit ratio.
5. The post merged HDFC bank has been able to mobilize more amounts of cheap funds in
the form of current and savings deposits. So it can inferred that the HDFC bank could
properly utilize the good foundation that Times bank had in retail banking.
6. The merger deal did not result in a huge dilution of ownership as the Times group
promoters got only a 7% stake in the newly merged entity. The findings with regard to the
aspect of achieving synergy or not on an account of the merger. From the foregoing analysis
we can see that out of the 25 variables which have been identified for measuring the impact
of merger, 15 ratios indicate a synergy. This implies a success ratio of 60 percentages. So we
conclude that the merger between times and HDFC Bank has turned out to be successful.

AVERAGE MOVEMENT OF IMPORTANT RATIOS

ITEM

PREMERGER
HDFC

TIMES
BANK

COMBINED %
PREPOST
MERGER
MERGER

BURDEN/TOTAL
INCOME
SPREAD/TOTAL
INCOME
PROVISION/TOTAL
INCOME
INVESTMENT
DEPOSIT
DEPOSIT MIX

-2.53

-1.91

-2.2

-6.15

33.55

15.4

24.5

34.6

11.39

4.77

8.08

13.82

58.23

35.30

46.76

65.83

42.17

20.69

31.43

42.6

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