Mergers And Acquisitions
MERGERS AND ACQUISITIONS OF INDIAN BANKING SECTOR
INTRODUCTION We have been learning about the companies coming together to from another company and companies taking over the existing companies to expand their business.
With recession taking toll of many Indian businesses and the feeling of insecurity surging over our businessmen, it is not surprising when we hear about the immense numbers of corporate restructurings taking place, especially in the last couple of years. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side Mergers & Acquisition’s may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisition’s at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisitions.. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. We have discussed almost all factors that the management may have to look into Before going for merger. Considerable amount of brainstorming would be required by the managements to reach a conclusion. E.g. A due diligence report would clearly identify the status of the company in respect of the financial position along with the net worth and pending legal matters and details about various contingent liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the impact of the same on the business, administrative costs benefits, addition to -1–
Mergers And Acquisitions shareholders' value, tax implications including stamp duty and last but not the least also on the employees of the Transferor or Transferee Company.
WHAT IS MERGER?
Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and the extinguished company is the seller.
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
• • • •
Equity shares in the transferee company, Debentures in the transferee company, Cash, or A mix of the above modes.
WHAT IS ACQUISITION? Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.
Methods of Acquisition: An acquisition may be affected by
Mergers And Acquisitions a) Agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; b) Purchase of shares in open market; c) To make takeover offer to the general body of shareholders; d) Purchase of new shares by private treaty; e) Acquisition of share capital through the following forms of considerations viz. Means of cash, issuance of loan capital, or insurance of share capital.
A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover differs from merger in approach to business combinations i.e. The process of takeover, transaction involved in takeover, determination of share exchange or cash price and the fulfillment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is less in takeover than in mergers, top management of the offeree company being more cooperative.
De-merger or corporate splits or division:
De-merger or split or divisions of a company are the synonymous terms signifying a movement in the company.
Mergers And Acquisitions
PURPOSE OF THE MERGER AND ACQUISITION
The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position.
Other possible purposes for acquisition are short listed below: -
(1) Procurement of supplies:
1. To safeguard the source of supplies of raw materials or intermediary product; 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials.
(2) Revamping production facilities:
1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. To standardize product specifications, improvement of quality of product, expanding
3. Market and aiming at consumers satisfaction through strengthening after sale Services; 4. To obtain improved production technology and know-how from the offered company 5. To reduce cost, improve quality and produce competitive products to retain and Improve market share.
Mergers And Acquisitions (3) Market expansion and strategy:
1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights.
(4) Financial strength: 1. To improve liquidity and have direct access to cash resource; 2. To dispose of surplus and outdated assets for cash out of combined enterprise; 3. To enhance gearing capacity, borrow on better strength and the greater assets backing; 4. To avail tax benefits; 5. To improve EPS (Earning per Share).
(5) General gains:
1. To improve its own image and attract superior managerial talents to manage its affairs; 2. To offer better satisfaction to consumers or users of the product.
(6) Own developmental plans:
The purpose of acquisition is backed by the offeror company’s own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. But might feel resource constraints with
. This gives birth to conglomerate combinations. market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus.Mergers And Acquisitions limitations of funds and lack of skill managerial personnel’s. eliminate competition and strengthen its market position.
(9) Desired level of integration:
Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. secure additional financial facilities.
(7) Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities. product expansion. 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.
(8) Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. Such integration could be operational or financial. various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination. The combining corporate aim at circular combinations by pursuing this objective. vertical.
(iii) Regional Rural Banks. and the cooperative and special purpose rural banks. namely the State Bank of India and the nationalized banks. old private sector banks. the regional rural banks which operate in rural areas not covered by the scheduled banks. in both urban and rural areas. the public sector banks. The Reserve Bank of India is the central banking institution. 196 regional rural banks. the Reserve Bank of India categories them as public sector banks. (ii) Nationalized Banks. Scheduled Commercial Banks (SCBs) in India are categorized in five different groups according to their ownership and/or nature of operation. (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).
. but for the purpose of assessment of performance of banks. and all Indian financial institutions are in the public sector. Scheduled and non Scheduled Banks There are 93 scheduled commercial banks. It is the sole authority for issuing bank notes and the Supervisory body for banking operations in India6. Indian Banking System The banking system has three tiers. dominate the banking sector. and administers the government's monetary policy. Commercial banks are categorized as scheduled and non-scheduled banks. These are the scheduled commercial banks. Indian and foreign. 36 foreign banks operate in India with full banking licenses. In Cooperative sector. It supervises and administers exchange control and banking regulations.Mergers And Acquisitions
OVER VIEW OF INDIAN BANKING INDUSTRY
India has an extensive banking network.nearly 2000 cooperative banks operate. These bank groups are: (I) State Bank of India and its associates. The site provides facility of aggregating data for various bank-groups. In terms of business. All large Indian banks are nationalized. It is also responsible for granting licenses for new bank branches. new private sector banks and foreign banks. which include non scheduled banks.
The following main benefits accrue from the vertical combination to the acquirer company i. implements its production plans as per the objectives and economizes on working capital investments. In other words.
(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. combinations could be vertical. It gains a strong position because of imperfect market of the intermediary products.e.
1. resources and purchased products. the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.Mergers And Acquisitions
TYPES OF MERGERS
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. horizontal. circular and conglomeratic as precisely described below with reference to the purpose in view of the offeror company.
. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods. Has control over products specifications. Based on the offerors’ objectives profile. in vertical combinations.
The mail purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and the operations and broadening the product line. The acquiring 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. elimination in competition concentration in product. reduction in investment in working capital.Mergers And Acquisitions (B) Horizontal combination:
It is a merger of two competing firms which are at the same stage of industrial process.. increase in market segments and exercise better control on market. The acquiring firm belongs to the same industry as the target company.
(C) Circular combination:
Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. reduction in advertising costs. lowering average cost of capital and thereby raising present worth of the outstanding shares. 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.
instead of operating business separately.10 –
. known as Glaxo SmithKline. new company.
. target company.Mergers And Acquisitions
DIFFERENCE BETWEEN MERGERS AND ACQUISTION
Merger Acquisition The case when two companies (often of same size) The case when one company takes over another and decide to move forward as a single new company establishes itself as the new owner of the business. Reddy's Labs acquired Betapharm through an Beehcam ceased to exist and merged to become a agreement amounting $597 million.
For example. which ceases to exist. Glaxo Wellcome and SmithKline Dr.
The stocks of both the companies are surrendered. The buyer company “swallows” the business of the while new stocks are issued afresh.
Impact on Management The percentage of job loss may be higher in the management level than the general employees. many managerial level professionals.
Impact on Shareholders Impact of mergers and acquisitions also include some economic impact on the shareholders. need to implement the corporate policies that they might not agree with. mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. Due to change in corporate culture of the organization. on behalf of their superiors. it doesn't need the same amount of employees that it previously had to do the same amount of business.Mergers And Acquisitions
POSSIBLE IMPACT OF MERGERS AND ACQUISITIONS
Impacts on Employees Mergers and acquisitions may have great economic impact on the employees of the organization. Different industry has different level of competitions after the mergers and acquisitions. If it is a purchase.. If the merged company is pretty sufficient in terms of business capabilities. Impact on Competition Mergers and acquisitions have different impact as far as market competitions are concerned. On the other hand.11 –
. In fact. It involves high level of stress. the competition in the financial services industry is relatively constant. Due to the changes in the operating environment and business procedures. For example. On the other hand. The reason behind this is the corporate culture clash. change of powers can also be observed among the market players. the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load. . employees may also suffer from emotional and physical problems.
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”. which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear.12 –
. 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. Acquisition of human assets and other resources not available otherwise. through (a) (b) (c) (d) (e) Realization of monopoly profits. Economies of scales.
Mergers and acquisitions are caused with the support of shareholders.Mergers And Acquisitions
ADVANTAGES OF MERGERS
Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centralized administration which are not available in combinations of holding company and its partly owned subsidiary. Diversification of product line. The factors. manager’s ad promoters of the combing companies.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger should enhance in value. Shareholders may gain from merger in different ways viz.e. Better investment opportunity in combinations. The sale of shares from one company’s shareholders to another and holding investment in shares should give rise to greater values i. From the gains and achievements of the company i. The opportunity gains in alternative investments. are briefly noted below based on the research work by various scholars globally.e.
(2) From the standpoint of managers
Managers are concerned with improving operations of the company.Mergers And Acquisitions One or more features would generally be available in each merger where shareholders may have attraction and favor merger.
4) Benefits to general public
Impact of mergers on general public could be viewed as aspect of benefits and (a) Consumer of the product or services. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control. 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.
. (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. perks and fringe benefits. At the same time.
(3) Promoter’s gains
Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. 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. Mergers where all these things are the guaranteed outcome get support from the managers.
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. quality of products. 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.14 –
. These advances result into economic exploitation. etc. after sales service. Both workers and communities will suffer on lessening job
(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.Mergers And Acquisitions The economic gains realized from mergers are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. Two sides of the impact as discussed by the researchers and academicians are: firstly. any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. 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.
(c) General public Mergers result into centralized concentration of power. consumers and does not create hindrance in administration of the Government polices. 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. Secondly. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power ad expand their business empire. preventing the distribution of benefits resulting from diversification of production activity. Economic power is to be understood as the ability to control prices and industries output as monopolists.
the regional director of the Company Law Board will be intimated.The board of directors of the individual companies should approve the draft proposal for amalgamation and authorize the managements of the companies to further pursue the proposal.The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger.Mergers And Acquisitions
REGULATIONS OF MERGER AND ACQUISTIONS
Mergers and acquisitions are regulated under various laws in India.The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. board of directors and the Company Law Board before affecting the merger. At least. The date of the court's hearing will be published in two newspapers.An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court. Transfer of assets and liabilities: . with effect from the specified date.After the approval of the shareholders and creditors. Sanction by the High Court: . its certified true copies will be filed with the Registrar of Companies. Application in the High Court: . the High Court will pass an order. must accord their approval to the scheme. Approval of board of directors: . and also. it is necessary to seek the permission of the shareholders. Filing of the Court order: After the Court order. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. 75 percent of shareholders and creditors in separate meeting. Also.
. voting in person or by proxy. In the absence of these provisions in the memorandum of association. They are regulated through the provisions of:
The Companies Act.15 –
.Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Information to the stock exchange: .The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme. on the petitions of the companies. Shareholders' and creators' meetings:. sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. the acquiring company should have the permission in its object clause to carry on the business of the acquired company. 1956 The Act lays down the legal procedures for mergers or acquisitions:•
Permission for merger:.
Market share of the parties to the combination individually and as a combination. the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company.
The Competition Act.16 –
. These securities will be listed on the stock exchange. but this notification is voluntary. Availability of substitutes before and after the combination. in the form of an acquisition. Nature and extent of innovation. Enterprises intending to enter into a combination may give notice to the Commission. all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India. Possibility of the combination to remove the vigorous and effective competitor or competition in the market. 2002 The Act regulates the various forms of business combinations through Competition. But. no person or enterprise shall enter into a combination. Extent of entry barriers into the market.
Thus. the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects. Possibility of the combination to significantly and substantially increase prices or profits. which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. merger or amalgamation. Under the Act. The Commission while regulating a 'combination' shall consider the following factors:• • • • • • • • • • • •
Actual and potential competition through imports.
.Mergers And Acquisitions
Payment by cash or securities:. Level of combination in the market. Extent of effective competition likely to sustain in a market. Nature and extent of vertical integration in the market. Degree of countervailing power in the market.As per the proposal. Whether the benefits of the combinations outweigh the adverse impact of the combination.
Management of efficiency. cost reduction. Mergers for private sector banks will be much smoother and easier as again that of PSBS. the banks can achieve significant growth in their operations and minimize their expenses to a significant level Competition is reduced because merger eliminates competitors from the banking industry.
. Technology of the merging banks to should complement each other NPA management. The first mega merger in the Indian banking sector that of the HDFC Bank with Times Bank.
2.Mergers And Acquisitions
CHANGE IN SCENARIO OF BANKING SECTOR
. With the help of M & A in the banking sector. 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.
3. 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.
4. has created an entity which is the largest private sector bank in the country. tough competition from the market players and strengthens of the capital base of the banks are some of the problem which can be faced by the merge entities.
Some of the banks have started offering travel loans. Bank traditionally involve working capital financing have started offering consumer loans and housing loans.18 –
. has started providing complete corporate and retail financial services to its customers
1. Net banking. Atms. Phone Banking. Earlier customers had to conduct their banking transaction within the restricted time frame of banking hours.
3. order statements of their account and give instruction using the tally banking or on online banking services.
Bank traditionally just borrower and lenders. 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. as well as many banks have started capitalizing on recent capital market boom by providing IPO finance to the investors. Any time and Any where banking are the services which bank have started offering following the changing trend in sectors.Mergers And Acquisitions
THE BANKING SCENARIO HAS BEEN CHANGING AT FAST PLACE. Now banking hours are extended.
. Technology drive has benefited the customers in terms of faster improve convenient banking services and Varity of financial products to suit their requirement. In plastic money segment customer have also got a new option of debits cards against the earlier popular credit card.
4. Total number and percentage of shares proposed to be acquired from public subject to minimum as specified in the sub-regulation (1) of Regulation 21 that is:
. 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. Contents of announcement: Public announcement of offer is mandatory as required under the SEBI Regulations. Timings of announcement: Public announcement should be made within four days of finalization of negotiations or entering into any agreement or memorandum of understanding to acquire the shares or the voting rights. the number of fully paid up and partially paid up shares.
Paid up share capital of the target company. 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.Mergers And Acquisitions
PROCEDURE OF MERGERS & ACQUISITIONS
Public announcement: To make a public announcement an acquirer shall follow the following procedure:
or the persons having control over such company and the group. the identity of the promoters and. including holding of persons acting in concert with him. (3) (4) (5) The minimum offer price for each fully paid up or partly paid up share. for the acquisition of control over the target company.Mergers And Acquisitions a) The public offer of minimum 20% of voting capital of the company to the shareholders. Objects and purpose of the acquisition of the shares and the future plans of the acquirer for the target company. including disclosers whether the acquirer proposes to dispose of or otherwise encumber any assets of the target company: Provided that where the future plans are set out. The highest and the average paid by the acquirer or persons acting in concert with him for acquisition.
. Additional shares can be had @ 2% of voting rights in any year. if any. the price at which the shares are being acquired.20 –
. The ‘specified date’ as mentioned in regulation 19. the public announcement shall also set out how the acquirers propose to implement such future plans. b) The public offer by a raider shall not be less than 10% but more than 51% of shares of voting rights. The identity of the acquirer and in case the acquirer is a company. if any. of shares of the target company made by him during the twelve month period prior to the date of the public announcement. such as the date. monetary or otherwise. the name of the seller. as the case may be. Salient features of the agreement. The existing holding. if any. the manner of payment of the consideration and the number and percentage of shares in respect of which the acquirer has entered into the agreement to acquirer the shares or the consideration. to which the company belong. of the acquirer in the shares of the target company. if any. Mode of payment of consideration.
Whether the offer is subject to a minimum level of acceptances from the shareholders. Statutory approvals required to obtained for the purpose of acquiring the shares under the Companies Act. or otherwise or foreign i. 1956. 1973. The date of opening and closure of the offer and the manner in which and the date by which the acceptance or rejection of the offer would be communicated to the share holders. from banks. and/or any other applicable laws.Mergers And Acquisitions
The date by which individual letters of offer would be posted to each of the shareholders.
. financial institutions. The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted. if any.e.21 –
. Disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place. from Non-resident Indians or otherwise. Provision for acceptance of the offer by person who own the shares but are not the registered holders of such shares.e. the Monopolies and Restrictive Trade Practices Act. including the details regarding the sources of the funds whether domestic i. and Such other information as is essential fort the shareholders to make an informed design in regard to the offer. Approvals of banks or financial institutions required.
1+1 = 3 sounds great.
. When a company is acquired. spelling doom.Mergers And Acquisitions
WHY MERGERS FAIL?
It's no secret that plenty of mergers don't work. In many cases. while revenues. It can sound so simple: just combine computer systems. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. suffer. but if new management removes them. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business. For example. The chances for success are further hampered if the corporate cultures of the companies are very different. More insight into the failure of mergers is found in the highly acclaimed study from McKinsey. potential difficulties seem trivial to managers caught up in the thrill of the big deal. In theory. the decision is typically based on product or market synergies. but in practice. The study concludes that companies often focus too intently on cutting costs following mergers. which means they will lose value on the stock market. It's a mistake to assume that personnel issues are easily overcome. employees at a target company might be accustomed to easy access to top management. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. The Obstacles to Making it Work Coping with a merger can make top managers spread their time too thinly and neglect their core business. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms. These aspects of a working environment may not seem significant. use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. a global consultancy. merge a few departments. but cultural differences are often ignored. things can go awry. Too often. profits. the problems associated with trying to make merged companies work are all too concrete. flexible work schedules or even a relaxed dress code. the result can be resentment and shrinking productivity. thereby prompting nervous customers to flee. and ultimately.22 –
. we measure change of performance as the difference between the merged banks‟ two-year average return on equity (ROE) after the acquisition and the weighted average of the ROE of the merging banks two years before the acquisition. Table: Definition of the variables Sr.Mergers And Acquisitions
FINANCIAL IMPLICATIONS OF BANKING M&A
These indicators include measures of financial performance: asset and liability composition capital structure liquidity risk exposure profitability financial innovation and efficiency As dependent variable.No Definition 1 Performance Change (ΔROE) 2 3 4 5 6 7 8 9 Liquidity (LIQ) Cost-income ratio (COST/INC) Capital to asset ratio (CA/TA) Loans to total assets ratio (LOAN/TA)) Credit Risk (BADL/INT_INC) formula Return on equity (After merger) Liquid Asset/Total Deposit Total cost/Total revenue Total capital/Total asset Net Loans/Total asset Loan loss provision/Net interest revenues Other operational revenues/Total assets Off balance sheet item/Total asset Customer loan to Customer deposit
Diversity Earning (OOR/TA)
Off balance sheet (OBS/TA) Loans to deposit ratio (LOANS/DEP)
whereas buyer will try to seal the deal at a lower price.24 –
. The seller tries to project the value of the company high. Based on the calculation. In mergers and acquisitions. Before going for any merger or acquisition. There are a number of legitimate methods for valuation of companies. both the companies may have different theories about the worth of the target company. both the companies calculate the costs of mergers and acquisitions to find out the viability and profitability of the deal. they decide whether they should go with the deal or not.Mergers And Acquisitions
COST OF MERGERS AND ACQUISITIONS
Costs of mergers and acquisitions are an important and integral part of mergers and acquisitions process.
where key assets (people and ideas) are hard to value. Some of those can be listed as: Replacement Cost Method In Replacement Cost Method.25 –
.Mergers And Acquisitions VALUATION MODEL IN MERGERS AND ACQUISTIONS There are a number of methods used in mergers and acquisition valuations.
. cost of replacing the target company is calculated and acquisitions are based on that. Replacement cost method isn't applicable to service industry. The acquiring company offers to buy all these from the target company at the given cost. Here the value of all the equipments and staffing costs are taken into consideration.
DCF method is one of the strongest methods of valuation.26 –
.Mergers And Acquisitions Discounted Cash Flow (DCF) Method Discounted Cash Flow (DCF) method is one of the major valuation tools in mergers and acquisitions. Here.(Invested Capital x Weighted Average Cost of Capital) Value = Invested Capital + Current Value of Estimated Economic Profit Price-Earnings Ratios (P/E Ratio) This is one of the comparative methods adopted by the acquiring companies. Economic Profit = Invested Capital x (Return on Invested Capital . Estimated Cash Flow = Net Income + Depreciation/Amortization . based . organization's Weighted Average Costs of Capital (WACC) is used for the calculation. the value of the organization is calculated by summing up the amount of capital invested and a premium equal to the current value of the value created every year moving forward. It calculates the current value of the organization according to the estimated future cash flows. Economic Profit Model In this model.Capital Expenditures .Weighted Average Cost of Capital) Economic Profit = Net Operating Profit Less Adjusted Taxes .Change in Working Capital These estimated cash flows are discounted to a present value.
Enterprise-Value-to-Sales Ratio (EV/Sales) Here.Mergers And Acquisitions on which they put forward their offers. acquiring company offers multiple of the revenues.27 –
. acquiring company offers multiple of the target company's earnings.
REASONS FOR MERGERS AND ACQUISITIONS
Capacity Economies of Scale Accessing technology or skills Tax reasons Growth with External Efforts Deregulation Technology New Products/Services Over Capacity
. It also keeps a tab on the price-to-sales ratio of other companies. Here.
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. The Registrars. will be ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI.
Before deciding on the merger. . They would also be ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI. a scheme is prepared incorporating therein the all the details of both the banks and the area terms and conditions.Mergers And Acquisitions
Customer Base Merger of Weak Banks
PROCEDURE FOR BANK MERGER
The procedure for merger either voluntary or otherwise is outlined in the respective state statutes/ the Banking regulation Act.28 –
. being the authorities vested with the responsibility of administering the Acts.
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 registered valuer is appointed to valuate both the banks.
After the board approval of the merger proposal. a merger and acquisition agreement is signed by the bank
. shareholders approval. it is tabled in the meeting of Board of directors of respective banks. valuation report etc to Reserve Bank of India and other regulatory bodies such Security & exchange board of India (SEBI) for their approval.Mergers And Acquisitions
Once the scheme is finalized.
Once the valuation is accepted by the respective banks .
After obtaining approvals from all the concerned institutions. assets and liabilities. The valuer valuates the banks on the basis of its share capital.
After the Board approval of the merger proposal.29 –
. 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. its reach and anticipated growth and sends its report to the respective banks. an extra ordinary general meeting of the shareholders of the respective banks is convened to discuss the proposal and seek their approval. market capital. they send the proposal along with all relevant documents such as Board approval.
Although the Banking Regulation Act.30 –
. inter alia.
. for sanctioning a scheme of amalgamation or reconstruction.Mergers And Acquisitions
GUIDELINES ON MERGERS & ACQUISITIONS OF BANKS
With a view to facilitating consolidation and emergence of strong entities and providing an avenue for non disruptive exit of weak/unviable entities in the banking sector. it has been decided to frame guidelines to encourage merger/amalgamation in the sector. 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.
. it is felt that. 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. 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. While the State Acts specifically provide for merger of cooperative societies registered under them.
.Mergers And Acquisitions The request for merger can emanate from banks registered under the same State Act or from banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a bank/s registered under State Act. 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.
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. Financial results.
D. Annual reports of each of the Banks for each of the three completed financial years immediately preceding the proposed date for merger. Pro-forma combined balance sheet of the acquiring bank as it will appear consequent on the merger. Computation based on such pro-forma balance sheet of the following:• • Tier I Capital Tier II Capital
. if any.
3. Information which is considered relevant for the consideration of the scheme of merger including in particular:-
B.Mergers And Acquisitions
INFORMATION & DOCUMENTS TO BE FURNISHED BY THE ACQUIRER OF BANKS
1. Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank.
2. published by each of the Banks for any period
financial statements prepared for the financial year immediately preceding the proposed date of merger.
the names and relation to such information
persons who have provided such information and the extent of verification.Mergers And Acquisitions • • • • • • • • • Risk-weighted Assets Gross and Net npas Ratio of Tier I Capital to Risk-weighted Assets Ratio of Tier II Capital to Risk-weighted Assets Ratio of Total Capital to Risk-weighted Assets Tier I Capital to Total Assets Gross and Net npas to Advances Cash Reserve Ratio Statutory Liquidity Ratio
4. Details of the projected information on which the values have relied
. made by the values in
D. if any. The information and documents on which the values have relied and the extent of the verification. made by the values to test the accuracy of such information
C. If the values have relied upon projected information. The method of valuation used by the values
B. 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. if any.
. Standardization of electronic payment systems
Merger between banks and dfls and nbfcs need to be based on synergies and should make a sound commercial sense.
RECOMMENDATION OF NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS
Globally. Committee also opines that merger between strong banks / fls would make for greater economic and commercial sense and would be a case where the whole is greater than the sum of its party and have a ‘force multiplier effect”. and the committee feels that requisite success needs to be achieved in the following areas:-
Planning. Detailed computation of the realizable value of assets of the acquired bank.
.Mergers And Acquisitions E. This phenomenon has largely by passed the Indian banking system. It also have merger should not be seen as a means of bailing out weak banks. the banking and financial systems have adopted information and communications technology.
Changes after the merger:-
ICICI Bank has announced a merger with 57-year-old Bank of Madure. Mr. the Chairman BOM. It also emphasized on a transparent mechanism for deciding the ability of promoter to professionally manage the bank. along with his associates was holding about 26 percent stake. Thaiagarajan. while LIC and UTI were having marginal holdings. with most of them in southern India. a cultural integration would be a tough task ahead for ICICI Bank.202 lakh.
The board of Director at ICICI has contemplated the following synergies emerging from the merger: . a better technological edge and had a vast base in southern India when compared to Federal bank. While all these factors sound good. The Narasimham Committee also suggested that the merger could be a solution to ‘Weak banks’ Coney after clearing up the balance sheets) with a strong public sector bank. 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.
The committee also options that while licensing new private sector banks. the initial capital requirement need to be review. As on the day of announcement of merger) 09-12-00). which has high rate of economic development. The committee also opined that a promoter group couldn't hold more that 40 percent of the equity of a bank.M. Spic groups has about 4.35 –
. The merger will give ICICI Bank a hold on South India market. The committee also feels that a minimum threshold capital for old private banks also deserved threshold capitals.7 percent. with 263 branches.K. can consider other options such as restructuring . out of which 82 of them are in rural areas.Mergers And Acquisitions A weak bank could be nurtured into healthy units. Kotak mahindra group was holding about 12 percent stake in BOM. merger and amalgamations to it not closure. BOM had an attractive business per employee figure of Rs. a restructuring commission for such PSB. Source: Narasimham Committee report on banking sector reforms.
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. but also increases geographic coverage as well as convenience to its customers. which is supposed to be capable of greater resourger/deposit mobilization.36 –
. And ICICI will emerge a one of the largest private sector banks in the country. Phone and the Internet banking and finical services and products and also facilitate cross-selling of products and services of the ICICI group.
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.
Focus on Priority Sector: The enhanced branch network will enable the Bank to focus on microfinance activities through self-help groups.
Branch network: The ICICI’s branch network would not only 264. 2001.Mergers And Acquisitions
Financial Capability: The amalgamation will enable them to have a stronger financial and operational structure.
The deal with Bank of Madera is likely to dilute the current equity capital by around 12 percent.
Source: Report submitted at EGM on January 19. And the merger is expected to bring 20 percent gains in EPS of bank. in its priority sector initiatives through its acquired 87 rural and 88 semi-urban branches.
6 percent. This once again makes a shift to non-fund based the activities all the more important.
After can be drawn or a telephone bill paid easily through credit cards.
If you are solvent and want to borrow money.with far fewer hassles.37 –
. In fact the banks may indeed be left with dad credit risk or those that cannot access the capital market.
Even if a bank is just a safe place to put away your savings.
REASONS BEHIND THE RECENT TREND OF MERGER IN BANKING SECTOR
The question on top everybody’s mind is Are banks and bankers on the road to redundancy? First consider the reasons that one does not need banks in large numbers any more
A depositor today can open a cheque account with a money market mutual fund and obtain both higher returns and greater and greater flexibility. you need not go to it. Indian mutual funds are queuing up to offer this facility. you can do so on your credit card.64 percent has declined to 17. There is always an ATM you can do business with.
.Mergers And Acquisitions And also the bank’s comfortable capital Adequacy Ratio (CAR) of 19.
A ‘AAA’ corporate can directly borrow from the market through commercial papers and get better rates in the bargain.
8x trailing book value appears expensive. stronger North India network are key positives: The key positives for ICICI Bank will be a 23% increase in the number of branches and a stronger network in North India. State Bank of Bikaner and Jaipur (~750 branches). the deal values BoR at Rs30. as the book needs to be adjusted for the re-assessment of BoR’s NPAs by ICICI Bank. Branch addition.72. The key near-term challenges for ICICI Bank will be assessment of
. Over 60% of BoR’s 463 branches are in the state of Rajasthan and ~70% are in North India. Assuming a share swap ratio of 1:4. Deal at a significant premium. Improvement in deposit franchisee will be key value driver: The implied valuation of BoR at 4. BoR’s biggest competitors in the state of Rajasthan are SBI’s subsidiary. Bank of Baroda (~350 branches) and Punjab National Bank (~310 branches).4b and will lead to ~3% equity dilution for ICICI Bank. with a tentative share exchange ratio of 1:4.38 –
.Mergers And Acquisitions
Case study I
Agrees to amalgamate Bank of Rajasthan: ICICI Bank has entered into an agreement with certain shareholders of Bank of Rajasthan (BoR) to amalgamate BoR. The final exchange ratio will be based on due diligence and independent valuation reports.72 (25 shares of ICICI Bank for 118 shares of BoR).
2x the deposit base for BoR. ICICI Bank had acquired Sangli Bank at Rs3.
Valuing BoR at Rs66m/branch While BoR’s asset base is just 5% of ICICI Bank’s.3x BoR’s branch network) since March 2009 at a cost of Rs8m-10m per branch. it takes almost two years for a new branch to break even. HDFC Bank had valued CBoP at Rs285m per branch and 0.5x the deposit base.72 (25 shares of ICICI Bank for 118 shares of BoR) implies a valuation of Rs66m per branch and 0. Comparision of BOR and ICICI Basis BoR ICICI BANK
CASA Deposits Business per month Return on average assets Net non-performing assets
Rs 4163crores Rs 47crores 0. Maintain Buy. valuing Sangli . We will review our target price for ICICI Bank post the merger details.Mergers And Acquisitions BoR’s asset quality. It is noteworthy that ICICI Bank has opened 580 new branches (1. A share swap ratio of 1:4. However.05%
Rs 21000crores Rs 304crores 1% 2. its 463 branches will result in a ~23% increase in ICICI Bank’s existing network of 2.5b. rationalization and re-positioning of BoR’s branches.7% 1. and possible regulatory issues.1%
Implied price per branch lower than last deal in the sector In the last deal in the sector.000 branches.39 –
18 0. already the largest among Indian private sector banks. While the price that ICICI Bank is paying is in line with the valuations of other old private sector banks. and especially strengthen its presence in northern and western India.40 –
. is that it would have taken the bank three years to build the kind of low-cost current account and savings account (CASA) relationship. ICICI Bank has had its sights set firmly on expanding its share of CASA deposits.2 30.5 15.5
Value (branches) 17. it is significantly lower than the CBoP deal.20
Benefit of Merger for ICICI Bank
The proposed amalgamation would substantially enhance ICICI Bank’s branch network.3 112.
DETAILS OF LAST FEW DEALS IN THE SECTOR
Banks Sangli bank UWI LKB CBOP BOR
BRANCHES 200 229 118 394 463
Deposits 20 65 20 207 152
Approx price 3.
.5 3.5 3.17 0.0 284.
The rationale for the merger.9
Value (deposits) 0.
Adds 25% to their branch network.8 65. it gets to build upon now with the latest move. according to the ICICI Bank management.05 0.Mergers And Acquisitions Bank at ~Rs18m per branch.54 0.3 28.
Mergers And Acquisitions
CASE STUDY 2
PRESENT STATUS OF STATE BANK OF INDIA
State Bank of India is the largest state-owned banking and financial services company in India. assets.
. by almost every parameter .
The bank has 131 overseas offices spread over 32 countries. and Tokyo. Frankfurt. Hong Kong.
SBI has 21000 ATM’s.41 –
. 26500 branches including the branches of its associate banks. London and environs. Sydney. Male in the Maldives.revenues. etc. It has branches of the parent in Colombo. Osaka. Muscat. profits. New York. Los Angeles. Dhaka. market capitalization. Johannesburg.
32 59.97 74.89 Mar '06 11.11 76.21 Mar '07 10.66 Credit Deposit Ratio 62.32
.85 3.12 Mar '08 11.03 Mar '10 10.54
5.16 73.51 78.94 Net Interest Income/Total Funds Asset Turnover Ratio 3.66
Interest expended/ Interest earned Capital Adequacy Ratio 56.88
.44 78. 2010.23 67.72 15.82 14.44
Advances/total funds(%) 65.50 13.20
STATE BANK OF INDORE On August 26. State Bank of Indore was officially merged with State Bank of India.79 3.Mergers And Acquisitions
Financial Performance OF STATE BANK OF INDIA RATIOS Net Profit Margin Return on Net Worth(%) 15.28 66.35 65.34 74.22 75.65 Mar '09 12.71 3.
It has emerged as the premier bank of Madhya Pradesh due to its steady progress. as well.
It became a subsidiary of State Bank of India on 1 January 1960.
In 1965. State Bank of Indore took over The Dewas Senior Bank Ltd.47000 Crore at the end of December 2008. It was established under a special charter of His Highness Maharaja Tukojirao Holker-III.
State Bank of Indore was upgraded to class 'A' category bank in 1971.
The business turnover of the Bank crossed Rs.
In the following year (1962). 1959.
.Mergers And Acquisitions
State Bank of Indore was formerly named as Bank of Indore Ltd. the then ruler of Malwa region. under the State Bank of India Subsidiary Banks Act. State Bank of Indore took over the business of The Bank of Dewas Ltd.43 –
SBI has already announced a share swap ratio of 34:100 for the merger. State Bank of Patiala. SBI would give its 34 shares for every 100 shares of State Bank of Indore held by minority shareholders. After the merger. SBI would issue up to over 1.44 –
. State Bank of Bikaner and Jaipur. SBI will be left with five associate banks. the State Banks of Bikaner and Jaipur. under Section 35 of the SBI Act. approved the Scheme of Acquisition of State Bank of Indore (SBIN) by SBI.16 lakh shares of face value Rs 10 each to minority shareholders of State Bank of Indore. 2009. PURPOSE OF THE MERGER
. 2009. M/s Kotak Mahindra capital company ltd. That means. After the merger. Both the banks separately and independently appointed M/s Haribhakti & company (qualified chartered accountants and M/s Axis Bank ltd.(Category 1 merchant bankers) was appointed by both the banks independently to provide a fairness opinion to valuation of the independent valuers. State Bank of Travancore. (Category 1 merchant bankers) as the independent valuers. 1955. Mysore and Travancore are listed companies. State Bank of Mysore and State Bank of Hyderabad.08 crore. The Board of Directors of State Bank of Indore On October 31. of India entered into negotiations with State Bank of Indore for the acquisition on Oct 8.Mergers And Acquisitions
The SBI with the sanction of Govt. the issued capital of SBI would increase from Rs 634. Among these. For this purpose.96 crore up to a maximum of Rs 635.
compared to what State Bank of Indore would have managed for its growing balance sheet.
State Bank of Indore has a large number of branches outside Madhya Pradesh and Chhattisgarh and all of them would be controlled conveniently from SBI's local head offices in various states leading to substantial cost savings.45 –
Acquisition of State Bank of Indore by SBI would allow economies of scale in terms of footprint.Mergers And Acquisitions The merger would avoid competition between the two entities and lead to easier access to funds at competitive rates. manpower and other resources.
Security and loan banking and finally financially corporate clients ranging from major industrial corporation to the mid-scale companies. had negotiations for a merger between Deutsche and Dresdner Bank failed on April 5.5 trillion marks and a stock market value around 150 billion marks. with a balance sheet total amounting to 1. 2000. U. the new bank would have reached the no. The future core business lines of the new merged Bank included investment Banking.2 trillion marks and also in front of the planned Japanese book mergers of Sumitomo and Sukura Bank with 1.
The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank’s green corporate color in its logo. based citigroup.46 –
. This would put the merged bank for ahead of the second largest banking group. Germany’s largest and the third largest bank respectively was considered as Germany’s response to increasingly tough competition markets. where the new banking group was hoped to outside the traditionally dominant Swiss Bank. . But barely 2 months after announcing their agreement to form the largest bank in the world.
The new banking group intended to spin off its retail banking which was not making much profit in both the banks and costly.
The merger was to create the most powerful banking group in the world with the balance sheet total of nearly 2.7 trillion marks as the balance sheet total.S.1 position of the US and create new dimensions of aggressiveness in the international mergers. extensive network of bank branches associated with it. asset management.
With this kind of merger.Mergers And Acquisitions
Case study 3
The merger that was announced on. 2006 between Deutsche Bank and Dresdner Bank.
e. But from the outset these considerations encountered resistance from the asset management division. which the executive committee of the bank did not want to relinquish under any circumstances.
Deutsche Bank’s asset management had only integrated with London’s investment group Morgan Grenfell and the American Banker’s trust. This led to the withdrawal of the Dresdner Bank from the merger negotiations.
Case study 4
. So there was only one option left with the Dresdner Bank i. The top people at the asset management were not ready to undertake a new process of integration with Kleinwort Benson. This division alone contributed over 60% of Deutsche Bank’s profit. Kleinwort Benson. which was Deutsche Bank’s investment arm.
In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated into the merged bank. the chairman of the Dresdner Bank was not prepared for this. To sell Kleinwort Benson completely.Mergers And Acquisitions
The main issue of the failure was Dresdner Bank’s investment arm.47 –
. However Walter.
. The choice before smaller private banks is to merge and form bigger and viable entities or merge into a big private sector bank.1 per cent In the private sector. RBI has approved merger of Centurion Bank and Bank of Punjab effective from October 1. access to low-cost deposits is critical for growth. size and geographical reach becomes the key for smaller banks. Due to intensifying competition.Mergers And Acquisitions
Private Banks are taking to the consolidation route in a big way.2 million customers. The merger of the banks will have a presence of 240 branches and extension counters. The merger is at a swap ratio 9:4 and the combined bank is will be called Centurion Bank of Punjab. The top five control nearly 65% of the assets. 386 ATMs. the net worth of the combined entity is Rs 696 crore and the capital adequacy ratio is 16.
Highlights of the merger-Centurion Bank and Bank of Punjab Bank of Punjab will be merged into Centurion Bank. Therefore.
. 2005. 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. nearly 30 banks are operating. Most of these private sector banks are profitable and have adequate capital and have the technology edge. Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion Bank of Punjab (CBP). about 2. As on March 2005.
The Performa net worth of combined entity as at March 2005 stood at Rs 696 crore with Centurion's net worth at Rs 511 crore and Bank of Punjab's net worth at Rs 181 crore. 382 ATMs and 2.837crore and operating profit 43 crore. .1 per cent to provide for its growth plans. The combined entity will have net non performing assets (NPAs) of about 3. The net interest margin of the merged entity will be at 4. There will no downsizing via the voluntary retirement scheme.395 crore. The merged entity will have a paid up share capital of Rs 130 cr and a net worth of Rs 696 cr.1 per cent while for Bank of Punjab the figure stood at 9. its shareholders would receive nine shares of Rs 1 of Centurion Bank. Centurion banks net NPAs as on 31 March 2005 stood at 2. that is. Centurion Bank's MD Shailendra Bhandari will be the MD of the merged entity.6 per cent. Centurion banks capital adequacy on a standalone basis stood at 23.6 per cent as per Performa March 2005 data.Mergers And Acquisitions New entity will be named 'Centurion Bank of Punjab'. The merged entity will have 235 Branches & extension counters. Swap ratio has been fixed at 4: 9.49 per cent while for Bank of Punjab the figure stood at 4. Financials of the merged entity. KPMG India Pvt Ltd and NM Raiji & Co are the independent valuers and Ambit Corporate Finance was the sole investment banker to the transaction.
Gains from the merger Combined entity the Punjab-centurion bank would be the among the top 10 private sector banks in the country. There has been no cash transaction in the course of the merger. and the combine entity (Centurion Bank of Punjab) will have total asset 9.49 –
. for every four shares of Rs 10 of Bank of Punjab.2 million customers . while Centurion had a net interest margin of around 5.8%. deposit 7. The combined entity will have adequate capital adequacy of 16..8%.21per cent. it has been settled through the swap of shares.Centurion Bank of Punjab The cost of deposit of Bop were lower than Centurion. Centurion Bank's chairman Rana Talwar will take over as the chairman of the merged entity.
Maharashtra and Goa whereas Bank of Punjab is strong in Punjab.Mergers And Acquisitions Merged entity would benefit from the fact that centurion bank had recently written of its bad loans against equity. SME and Agricultural segments. Centurion Bank is strong in South India. Branch network of the two banks will complement each other. Haryana and Delhi. While Centurion Bank has 82 per cent of its business coming from retail. Bank of Punjab is strong in the Small and Medium Enterprises (SMEs) segment and agricultural sector.
Case study 5
. The book value of the bank would also go up to around Rs 300 crore. 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.50 –
. The combined entity will have a nationwide reach.
There is not much of overlapping of HDFC Bank and CBoP customers. Mr Rana Talwar. The merger will strengthen HDFC Bank's distribution network in the northern and the southern regions. Rana Talwar's Sabre Capital would hold less than 1 per cent stake in the merged entity from 3. According to HDFC Bank Managing Director and Chief Executive Officer Aditya Puri. The combined entity will have a network of 1148 branches. However. This will be HDFC Bank’s second acquisition after Times Bank. HDFC Bank will consider making a preferential offer to its parent Housing Development Finance Corp Ltd (HDFC). he mentioned that at 40% growth rate there will be no lay-offs. The integration of the second rung officials should be smooth as there is hardly any overlap. Integration will be smooth as there is no overlap. CBoP has close to 170 branches in the north and around 140 branches in the south. HDFC Bank will jump to the 7th position among commercial banks from 10th after the merger. Chairman of Centurion Bank. CBoP has a concentrated presence in the in the Indian states of Punjab and Kerala.28 per cent to around 19 per cent in the merged entity. Centurion swap ratio fixed at 1:29 HDFC Bank Board on 25th February 2008 approved the acquisition of Centurion Bank of Punjab (CBoP) for Rs 9. has been invited to join as the Executive Director on the board post merger. Centurion Bank. HDFC will also acquire a strong SME (small and medium enterprises) portfolio from CBoP. CBoP shareholders will get one share of HDFC Bank for every 29 shares held by them. Managing Director. The entire process of the merger would take about four months for completion. The merged entity will be known as HDFC Bank. has been offered a seat on the Board as non-executive director and Mr Shailendra Bhandari. The move would allow HDFC to maintain the same level of shareholding in the bank.510 crore in one of the largest merger in the financial sector in India.48 in CBoP.51 –
. which will be subject to regulatory approvals. The boards of the two banks will meet again on February 28 to consider the draft scheme of amalgamation. HDFC shareholding falls to will fall from 23.
. the merged entity would become second largest private sector bank.Mergers And Acquisitions
HDFC Bank. while Bank Muscat's holding will decline to less than 4 per cent from over 14 per cent in CBoP. In an interview.
and Indian companies have access to debt and equity capital. One of such reforms pertains to regulating mergers and acquisitions (M&A) pertaining to banking sector. Till now the Competition Commission of India (CCI) has a say in the M&A pertaining to banking companies. the 41-year-old head of India investment banking at Charlotte. Finance Minister Pranab Mukherjee has also recently said that RBI would have the final say on bank M&A. Companies in Asia-Pacific including India and China are expected to be the most acquisitive buyers in 2011 as attractive valuations and domestic competition drive deals globally. metals and mining companies. according to Bloomberg’s M&A Global Outlook survey.”
. the proposed amendments have already been approved by Cabinet of India.” Saurabh Agrawal.7 billion acquisition of mobile-phone operators in Africa led an almost four-fold increase in takeovers this year as deals surpassed 2007’s $69 billion.Mergers And Acquisitions
LATEST NEWS ABOUT MERGERS AND ACQUISITION IN BANKING SECTOR
Banking sector reforms in India are in the progress. He told that banking mergers and acquisitions will not come under the purview of the Competition Act or the Companies Act. Overseas firms may target Indian pharmaceutical and consumer firms. In fact. according to data compiled by Bloomberg.52 –
. only RBI would have power to regulate M&A pertaining to banking sector. North Carolina-based Bank of America. Both Finance Ministry of India and Reserve Bank of India (RBI) are actively suggesting many far reaching reforms for banking and financial industry of India. 1949. said Bank of America. with the recent proposed amendments in the Banking Regulations Act. led by oil and gas. Indian mergers and acquisitions in 2011 may surpass this year’s record $71 billion of deals. according to M&A bankers including Topsy Mathew of Standard Chartered. Billionaire Sunil Mittal’s $10. 3. However. “Inbound and local deals will also take place. wrote in an e-mailed response to questions. “Outbound deals would continue to be highly active given that international companies’ valuations are still relatively depressed. ranked No. and local enterprises will seek natural resources.
managing director for M&A for India. China and Brazil contrasts with a slowdown in global deals.” he said. The London-based bank climbed 13 places to No. The acquisition spree in India. said in an interview.53 –
. the world’s largest market. The mergers and acquisitions of banks will now come under the purview of the Banking Regulation Act. they think they have access to capital.7 billion. “They are capitalizing on the positive sentiment to undertake long-term strategic transactions. after Mittal’s New Delhi-Bharti Airtel in March agreed to buy the African assets of Zain for $10. its highest ranking. Mergers worldwide are down 46% from 2007’s record. In the US. 2 among Indian takeover advisers this year.Mergers And Acquisitions Cross-border deals rose to a record $59. volumes are 51% lower.
“Large Indian corporate are going through a growth phase: they think there is a lot of opportunity.2 billion in India this year. and levels in Europe are down by 59%. This means M&A in banking sector would no more require the approval of the Competition Commission of India. Outbound M&A accounted for 74% of that volume.
.” 35-year-old Mathew.
For instance. For new private life insurers who want to achieve fast revenue growth. particularly for private life insurers. new private life insurers are finding it difficult to sign up a banking partner to sell their products as early entrants have already inked distribution agreements with them. Insurers find recruiting and training individual agents a time-consuming and costly process. Banks also find that selling life insurance products is a lucrative activity. pension and investment products through the branch network of a bank. Banks procure nearly 40 percent of the fresh business for life insurers. Aviva Life had recently inked a banc assurance deal with the Bank of Rajasthan. In some cases banks are demanding commission and other fees totaling nearly 70 percent of the first year premium on a policy.Mergers And Acquisitions
BANK MERGER TO AFFECT ON INSURANCE SECTOR
Feb 26 (IANS) Bank mergers in India are likely to impact the insurance sector as many insurers have select banks as their banc assurance partners. Normally banc assurance deals are for three years and each bank can represent only one insurer as a corporate agent. banks are now dictating the terms of the banc assurance deals. After the opening up of the insurance sector. There are also issues like agency attrition and small-sized policies procured by agents. The arrangements might be discontinued because HDFC Bank sells life and non-life insurance policies of group companies HDFC Standard Life Insurance Co Ltd and HDFC General Insurance Co Ltd.54 –
. Some banks have started representing a new life insurer at regular intervals. banks are the only source of business. banks have come to occupy an important role in insurance distribution.
. say industry experts However. The recent merger announcement of HDFC Bank and Centurion Bank of Punjab Ltd is expected to impact the business of Aviva Life Insurance Co Ltd and ICICI Lombard General Insurance Co Ltd. which has switched life insurance partners in recent times. Realizing their vital role. Banc assurance is the sale of life. Centurion Bank is the banc assurance partner for these two insurers. It is not surprising therefore to have life insurers whose very lifeline is their banking partners.
said that the one bank-one insurer concept was not right and would lead to skewed scenario. V. the bank vended policies of Birla Sun Life Insurance Co Ltd. Srinivasan. No single insurer can satisfy the needs of all the bank customers. It changed over to Life Insurance Corp of India (LIC) before signing up with Aviva Life.Mergers And Acquisitions Initially. A bank should be allowed to be a broker and sell the policies of different insurers
. chief financial officer of Bharti Axa Life Insurance Co Ltd. “A bank has a wide variety of customers.
and raise larger amounts of capital. Another reason for banks to move towards merger is that they are motivated by a desire for greater market power.56 –
. Such synergies may result from the firms' combined ability to exploit economies of scale. but also the human consequences . unhappy and uncooperative workforce . eliminate duplicated functions. share managerial expertise. The 'human factor' is a major cause of difficulty in making the integration between two companies work successfully. the result is a stressed. If the transition is carried out without sensitivity towards the employees who may suffer as a result of it.Mergers And Acquisitions
One of the most common reasons for mergers and acquisitions is the belief that "synergies" exist.the effect of the deal upon the two companies' managers and employee Almost 60 -70% mergers and acquisitions and the reason for the failure is cultural differences. flawed intentions. Merger of BoR an old private sector bank with India's 2nd largest private sector bank will definitely help both of this parties as ICICI Bank can extend it activities as it total number branches will go up by 25% and BoR will also get new direction as it already witness the share price of BoR in BSE is almost doubled after the announcement of the merger
. and without awareness of the vast differences that may exist between corporate cultures.and consequently a drop in productivity Decision to carry out a merger or acquisition should consider not only the legal and financial implications. allowing the two companies to work more efficiently together than either would separately. and sometimes decisions are taken without properly analysis the future of the merger.
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Mergers And Acquisitions