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Capstone(m&a IN BANKS IN INDIA)

Capstone(m&a IN BANKS IN INDIA)

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Published by Mandeep Singh
STUDY OF BANKS m & a DURING LAST 5 YEARS IN INDIA
STUDY OF BANKS m & a DURING LAST 5 YEARS IN INDIA

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Published by: Mandeep Singh on Apr 20, 2010
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MERGER & ACQUISITION IN BANKING SECTOR

SYNOPSIS
ON ³MERGERS & ACQUISITIONS IN INDIAN BANKING SECTOR´

SUBMITTED TO : MR. AMRITPAL SINGH

SUBMITTED BY: PRACHI SHARMA RT1801B35 GURPREET KAUR RT1801B57 MANDEEP SINGH RT1801B58

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MERGER & ACQUISITION IN BANKING SECTOR

ABSTRACT
Corporate mergers and acquisitions (M&As) have become popular across the globe during the last two decades thanks to globalization, liberalization, technological developments and intensely competitive business environment. The synergistic gains from M&As may result from mor e efficient management, economies of scale, more profitable use of assets, exploitation of market power, and the use of complementary resources. Interestingly, the results of many empirical studies show that M&As fail to create value for the shareholders of acquirers. In this backdrop, the paper discusses the causes for the failure of M&As by drawing the results of the following areas. This paper is an attempt to evaluate the impact of Mergers on the performance of the companies. Theoretically it is assumed that Mergers improves the performance of the company due to increased market power, Synergy impact and various other qualitative and quantitative factors. Although the various studies done in the past showed totally opposite results. Four parameters; Total performance improvement, Economies of scale, Operating Synergy and Financial Synergy. My paper shows that Indian companies are no different than the companies in other part of the world and mergers were failed to contribute positively in the performance improvement.

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MERGER & ACQUISITION IN BANKING SECTOR

RESEARCH METHODOLOGY
OBJECTIVES
y y y y y

To study the merger and acquisitions in the banking sector during last 5 years. To study the process of merger and acquisition. To study the HR issues during merger and acquisition. To study the risk involved in merger and acquisition. To analyze the performance of banks before merger and after merger.

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

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

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

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MERGER & ACQUISITION IN BANKING SECTOR

REVIEW OF LITERATURE
1. AN EXAMINATION OF BANK SECTOR
International Review of Business Research Papers Vol. 4 No.1 January 2008 This article helps to discuss various regulations which are faced by banks in order to enter the merger and acquisition phase. In the banking sector, market entry is generally governed by a specific banking regulator .Actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition.

2. CHALLENGES THE INDIAN BANKS FACE
SOURCE : http://www.rediff.com/money/2005/feb/17guest.htm

This article is about the various challenges faced by Indian banking sector. It discussed the position of banks after merger and acquisition. It discusses the challenges such as: interest rates risk, credit risk by private banks. The first mega merger in the Indian banking sector that of the HDFC Bank with Times Bank, has created an entity which is the largest private sector bank in the country.

3. MOTIVES FOR MERGERS AND ACQUISITIONS IN THE INDIAN BANKING SECTOR - A NOTE ON OPPORTUNITIES & IMPERATIVES
SOURCE :http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1008717 Recent reports on banking sector often indicate that India is slowly but surely moving from a regime of 'large number of small banks' to 'small number of large banks'. The aim of this paper is to probe into the various motivations for mergers and acquisitions in the Indian Banking sector. Thus, literature is reviewed to look into the various motivations behind a banks' merger/ acquisition event. Given the increasing role of the economic power in the turf war of nations, the paper looks at the significant role of the state and the central bank in protecting customer's interests vis-à-vis creating players of international size. While, gazing at the mergers &

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acquisitions in the Indian Banking Sector both from an opportunity and as imperative perspectives, the paper also glances at the large implications for the nation.

4. MERGERS AND ACQUISITIONS - THE INDIAN BANKING SCENARIO
SOURCE:http://www.smartmanagementonline.com/Magazines/Articles/Mergers%20and%20Ac quisitions/IPMA0025.htm This article studies M&A activities in the Indian banking sector and says that even though the objective of present bank mergers is to place the weak banks in safe hands, the future mergers will focus more on strategic issues like increasing geographical reach and improving product mix.

5. M&AS IN THE INDIAN BANKING SECTOR - STRATEGIC AND FINANCIAL IMPLICATIONS
SOURCE : http://tejas-iimb.org/articles/01.php Like all business entities, banks want to safeguard against risks, as well as exploit available opportunities indicated by existing and expected trends. M&As in the banking sector have been on the rise in the recent past, both globally and in India. In this backdrop of emerging global and Indian trends in the banking sector, this article illuminates the key issues surrounding M&As in this sector with the focus on India. It seeks to explain the motives behind some M&As that have occurred in India post-2000, analyse the benefits and costs to both parties involved and the consequences for the merged entity. A look at the future of the Indian banking sector, and some key recommendations for banks, follow from this analysis.

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INTRODUCTION TO THE TOPIC
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. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

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:
y y y y

Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.

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MERGER & ACQUISITION IN BANKING SECTOR
In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a "merger" rather than an acquisition is done purely for political or marketing reasons. Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover.

ACQUISITION
An Acquisition usually refers to a purchase of a smaller firm by a larger one. known as a takeover or a buyout, is the buying of one company by another. Acquisitions or takeovers occur between the bidding and the target company. There may be either hostile or friendly takeovers. 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. acquisition, also

TAKEOVER
In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company. A µtakeover¶ 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
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of transaction is less in takeover than in mergers, top management of the offeree company being more co-operative.

MERGER AND ACQUISITIONS OF LAST 5 YEARS

2004 2005 2005 2006 2007 2008

Global Trust Bank Bank of Punjab IDBI bank ICICI bank SBI HDFC bank

Oriental Bank of Commerce Centurion bank IDBI Sangli bank SBS Centurion bank of Punjab

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.

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MERGER & ACQUISITION IN BANKING SECTOR 
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

HR Issues in Mergers & Acquisitions
People issues like staffing decision, organizational design, etc., are most sensitive issues in case of M&A negotiations, but it has been found that these issues are often being overlooked.  Before the new organization is formed, goals are established, efficiencies projected and opportunities appraised as staff, technology, products, services and know-how are combined.  But what happens to the employees of the two companies? How will they adjust to the new corporate environment? Will some choose to leave?  When a merger is announced, company employees become concerned about job security and rumors start flying creating an atmosphere of confusion, and uncertainty about change.  Roles, behaviors and attitudes of managers affect employees' adjustment to M&A.  Multiple waves of anxiety and culture clashes are most common causes of merger failure.  HR plays an important role in anticipating and reducing the impact of these cultural clashes.
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MERGER & ACQUISITION IN BANKING SECTOR 
Lack of communication leads to suspicion, demoralization, loss of key personnel and business even before the contract has been signed.  Gaining emotional and intellectual buy-in from the staff is not easy, and so the employees need to know why merger is happening so that they can work out options for themselves.  Major stress on the accompany merger activity are: * Power status and prestige changes * Loss of identity * Uncertainty  Unequal compensation may become issue of contention among new co-workers.

Risk invoved in merger and acquisition
y y y y y y y y y
y y y y

Credit risk: The risk that someone who owes you money does not pay it back. Liquidity risk: the risk that you cannot refinance a borrowing when it comes due, or alternatively that you cannot liquidate an asset to cover a liability. Market Risk: The risk that the value of your assets change less/more than the value of your liabilities in response to changes in market rates/prices. Operational Risk: The risk that you suffer a loss due to some operational process going wrong (e.g. fraud) Legal Risk: The risk that you cannot enforce a legal contract. Compliance Risk: The risk that you break a law or reugulation. Model Risk: The risk that you suffer a loss because you do not price an asset correctly or misunderstand its properties. Job loss Insecurity
Diseconomies of scale if business becomes too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. May need to make some workers redundant, especially at management levels ± this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.

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HIGHLIGHTS OF THE MERGER
THE MERGER- HDFC AND CENTURION BANK OF PUNJAB
1) HDFC bank is merged with Centurion Bank of punjab 2) New entity is named as HDFC bank itself . 3) The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. 4) HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9,510 crore

THE MERGER- IDBI AND IDBI BANK
y

On April 2, 2005, the merger of IDBI Bank Ltd. with its parent company (IDBI held 57% stake in IDBI Bank) was announced.

y y

The merged entity was to be called IDBI Ltd. IDBI Ltd, will become the holding company with two strategic business units ² IDBI and IDBI Bank

y

Swap ratio was established at 1:1.42 , that is, IDBI issued 100 equity shares for every 142 equity shares held by the shareholders in IDBI Bank.

y

Merger aimed at consolidating businesses across the value chain and realizing economies of scale.

y y

Merger would benefit both IDBI and IDBI Bank. They can start operations as a full-fledged bank without incurring expenditure on setting up branches, inducting technology, or bringing in new people.

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MERGER & ACQUISITION IN BANKING SECTOR 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 Bank s chairman Rana Talwar had taken over as the chairman of the merged en tity.  Centurion bank s MD Shailendra Bhandari became 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.

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Bibliography
Books 1. Financial management:-Subir Kumar Banarjee 2. Merger and acquisition :- C.H.Rajeshwar Paper The Economics times Web y y
y y y y y

www.deccanherald.com www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1008717 www.smartmanagementonline.com/Magazines/Articles/Mergers%20and%20Acquisitions/ IPMA0025.htm www.tejas-iimb.org/articles/01.php www.rediff.com/money/2005/feb/17guest.htm www.wikipedia/acquisition.com www.wikipedia/merger.com

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