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Mergers and Acquisition 1
Mergers and Acquisition 1
Executive Summary
Merger - It's the most talked about term today creating lot of excitement and
speculative activity in the markets. But before Mergers & Acquisitions (M&A)
activity speeds up, it has to actually pass through a long chain of procedures (both
Mergers and Acquisitions have been lowered. The numbers of Mergers and
Acquisitions have increased many times in the last decade compared to the slack
period of 1970-80s when legal hurdles trimmed the M&A growth. To put things in
perspective, from 15 mergers in 1998, the number crossed to over 280 in FY01. With
a downturn in the capital markets, valuations have come down to historic lows. It's
undertakings into one, consequent to which each undertaking would lose their
separate identity. The most common reasons for mergers are, operating synergies,
tax savings. However, these are just some of the illustrations and not the exhaustive
benefits.
firm needs to understand its own capabilities and industry position. It also needs to
know the same about the other firms it seeks to tie up with, to get a real benefit from a
merger.
highly challenging environment a strong reason for merger and acquisition is a desire
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to survive. Thus apart from growth, the survival factor has off late, spurred the merger
unprofitable business for banks due to high risk of asset quality, banks including
financial institutions are tapping the retail finance segment. ICICI's acquisition of
Anagram Finance from Lalbhai group, HDFC Bank's merger with Times Bank and
ICICI Bank's merger with Bank of Madura are some of the latest examples of
consolidation in the banking sector. We could see the similar trend perking up in other
sectors.
The present study gives some insight as to why the banks are going foe
merger and acquisition and what are the legal, tax and financial aspects governing
them. The study also deals with other aspects such as types of merger, motives,
reasons, bank too much on merger, and successful consolidation in merger, recent
trend in merger and acquisition activity. Lastly a case study involving the merger of
Objective of study:
acquisitions negotiations.
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2. Mergers and Acquisition
Introdction:
They have played an important role in the financial and economic growth of a firm.
One or more companies may merge with an existing company or they may merge to
form a new company. Laws in India use the term amalgamation for merger. For
example, Section 2(1A) of the Income Tax Act, 1961 defines amalgamation as the
merger of one or more companies with another company or the merger of two or
company (called amalgamated company) in such a way that all assets and liabilities
of the amalgamated company and shareholders holding not less than nine-tenths in
Absorption:
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Consolidation:
company. In this form of merger, all companies are legally dissolved and a new
liabilities and shares to the acquiring company for cash or exchange of shares.
Acquisition:
consolidation) is that the acquiring company (existing or new) takes over the
ownership of other companies and combine their operations with its own
Takeover:
company by another. Under the Monopolies and Restrictive Trade Practices Act,
takeover means acquisition of not less than 25% of the voting power in a
company. If a company wants to invest in more than 10% of the subscribe capital
excess of 10% of the subscribed capital can result into their takeover.
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Types of Merger
There are three major types of mergers they can be explain as follows:
1 Horizontal Merger :
2 Vertical Merger :
production or distribution. Vertical merger may take the form of forward or backward
merger.
Forward merger: When it combines with the customer, it is known as forward merger.
3 Conglomerate Merger :
agencies.
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Advantages of Merger and Acquisitions
scale.
another.
power.
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3. Motives behind the Merger
1 Growth:
acquisitions driven growth. Since the former is very slow, steady and relatively
consumes more time the latter is preferred by firms which are dynamic and ready to
capitalize on opportunities.
2 Synergy:
business combination to be more profitable than the sum of the profits of the
individual firms that were combined. It may be in the form of revenue enhancement
or cost reduction.
3 Managerial Efficiency:
Some acquisitions are motivated by the belief that the acquires management
can better manage the targets resources. In such cases, the value of the target firm
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4 Strategic:
The strategic reasons could differ on a case-to-case basis and a deal to the
other. At times, if the two firms have complimentary business interests, mergers may
5 Market entry:
Firms that are cash rich use acquisition as a strategy to enter into new market
6 Tax shields:
acquisitions can eliminate the acquiring firms liability by benefiting from a merger
Benefits of Mergers
1 Limit competition
3 Overcome the problem of slow growth and profitability in ones own industry
4 Achieve diversification
5 Gain economies of scale and increase income with proportionately less investment
to a
foreign market.
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9 Circum government regulations.
10 Reap speculative gains attendant upon new security issue or change in P/E ratio.
There are three important steps involved in the analysis of merger and
1 Planning:
The most important step in merger and acquisition is planning. The planning of
acquisition will require the analysis of industry specific and the firm specific
information. The acquiring firm will need industry data on market growth, nature of
competition, capital and labour intensity, degree of regulation etc. About the target
firm the information needed will include the quality of management, market share,
size, capital structure, profit ability, production and marketing capabilities etc,
Search focuses on how and where to look for suitable candidates for
acquisition. Screening process short lists a few candidates from many available.
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Merger objectives may include attaining faster growth, improving profitability,
cost reduction etc. These objectives can be achieved in various ways rather than
through merger alone. The alternatives to merger include joint venture, strategic
alternative, the acquiring firm must satisfy itself that it is the best available option in
3 Financial Evaluation :
flows, area of risk, the maximum price payable to the target company and the best
way to finance the merger. The acquiring firm must pay a fair consideration to the
target firm for acquiring its business. In a competitive market situation with capital
market efficiency, the current market value is the current market value of its share of
the target firm. The target firm will not accept any offer below the current market
value of its share. The target firm in fact, expect that merger benefits will accrue to
A merger is said to be at a premium when the offer price is higher than the
target firms pre merger market price. The acquiring firm may pay the premium if it
thinks that it can increase the target firms after merger by improving its operations
and due to synergy. It may have to pay premium as an incentive to the target firms
shareholders to induce them to sell their shares so that the acquiring firm is enabled to
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5. Reasons for Merger
1 Accelerated Growth:
excitement to the executives as well as opportunities for their job enrichment and
rapid career development. This help to increase managerial efficiency. Other things
being the same, growth leads to higher profits and increase in the shareholders value.
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2 Enhanced Profitability :
The combination of two or more firm may result in more than the average
profitability due to cost reduction and efficient utilization of resources. This may
a) Economies of Scale :
When two or more firm combine, certain economies are realized due
to the larger volume of operations of the combined entity. These economies arise
b) Operating Economies :
may result into cost reduction due to operating economies. A combined firm may
functions such as manufacturing, R & D and reduce operating costs. Foe example,
c) Strategic Benefits :
expansion may offer strategic advantages such as less risk and less cost.
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d) Complementary Resources :
If two firms have complementary resources it may make sense for them
to merge. For example, a small firm with an innovative product may need the
engineering capability and marketing reach of a big firm. With the merger of the
innovative product. Thus, the two firms, thanks to their complementary resources,
e) Tax Shields :
When a firm with accumulated losses and unabsorbed tax shelters merges
with a profit making firm, tax shields are utilized better. The firm with
accumulated losses and unabsorbed tax shelters may not be able to derive tax
advantages for a long time. However, when it merges with a profit making firm,
its accumulated losses and unabsorbed tax shelters can be set off against the
profits of the profit making firm and tax benefits can be quickly realized.
A firm in a mature industry may generate a lot of cash but may not have
make further investments, even though they may not be profitable. In such a
situation a merger with another firm involving cash compensation often represents
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4 Managerial Effectiveness:
allied benefit of a merger may be in the form of greater congruence between the
management.
6 Diversification of Risk:
the correlation between the earnings of the merging entities. While negative
correlation brings greater reduction in risk. The positive correlation brings lesser
reduction in risk.
the cost of borrowing for the merged firm. The reason for this is that the creditors of
the merged firm enjoy better protection than the creditor of the merging firms
independently.
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6. Legal, Tax and Financial aspects of Merger
The following is the procedures for merger or acquisition is fairly long dawn.
Two or more firm can amalgamate only when amalgamation is permitted under
their memorandum of association. Also, the acquiring firm should have the
permission in its object clause to carry on the business of the acquired company. In
seek the permission of the shareholders, board of directors and the Company Law
The acquiring and the acquired companies should inform the stock exchange
The boards of the directors of the individual firm should approve the draft
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An application for approving the draft amalgamation proposal duly approved
by the board of directors of the individual firm should be made to the High Court.
The High Court would convene a meeting of the shareholders and creditors to
approve the amalgamation proposal. The notice of meeting should be sent to them at
The individual firm should hold separate meetings of their shareholders and
creditors for approving the amalgamation scheme. At least 75% of shareholders and
companies, the High Court will pass order sanctioning the amalgamation scheme after
it is satisfied that the scheme is fair and reasonable. If it deems so, it can modify the
scheme. The date of the courts hearing will be published in two newspapers and also
After the Court order its certified true copies will be filed with the
Registrar of Companies.
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The asset and liabilities of the acquired firm will be transferred to the
acquiring firm in accordance with the approved scheme, with effect from the
specified date.
As per the proposal, the acquiring firm will exchange shares and
debentures and pay cash for the shares and debentures of the acquired firm. These
discussed as follows:
1 Depreciation:
has to be based on the written down value of the asset before amalgamation. For
72A (1) of the Income Tax Act. However enables the amalgamated firm to carry
firm in certain special cases of amalgamation. The benefit is available when the
The amalgamated firm should get a certificate from the specified authority
that adequate steps have been taken for the rehabilitation or revival of the
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In view of the benefit that accrues under section 72A(1) the
concerned firm should check with the specified authority fairly early in the
Since the benefit under section 72A(1) is often not easily forthcoming
regarding sale or transfer of asset and creation and utilization of reserves are
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Financial Aspects of Merger
There are many ways in which a merger can result into financial synergy. A merger
1 Financial Constraint:
to shortage of fund. The firm can grow externally by acquiring another firm by the
2 Surplus Cash:
A firm may be faced by a cash rich firm. It may not have enough
internal opportunities to invest its surplus cash. It may either distribute its surplus
cash to its shareholders or use it to acquire some other firm. The shareholders may
not really benefit much if surplus cash is returned to them since they would have
to pay tax at ordinary income tax rate. Their wealth may increase through an
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increase in the market value of their shares if surplus cash is used to acquire
another firm. If they sell their shares they would pay tax at a lower, capital gain
tax rate. The company would also be enabled to keep surplus funds and grow
through acquisition.
3 Debt capacity:
flows, can bring stability of cash flows of the combined firm. The stability of cash
flows reduces the risk of insolvency and enhances the capacity of the new entity
4 Financing cost:
Does the enhanced debt capacity of the merged firm reduce its cost of
and increased protection to lenders, the merged firm should be able to borrow at a
lower rate of interest. This advantage may, however be taken off partially or
protection to lenders.
Another aspect of the financing costs is issue costs. A merged firm is able to
capital. Issue costs are saved when the merged firm makes a larger security issue.
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7. Valuations of Merger
shares of companies involved in the merger. Based on the values so computed the
exchange ratio is worked out. It is the value at which a buyer and seller would
make a deal. There are certain basic factors, which determine the value of a
company's share. As these are very subjective factors, valuations generally vary
from case to case depending on assumptions and future projections. The following
steps are involved in the valuation of a merger which can be broadly discussed as
follows:
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Estimate the cost of capital
shares
Evaluate the impact of the merger on EPS (Earning Per Share) and PE (Price-
earning
ratio.
In a merger or acquisition the acquiring firm is buying the business of the target
firm rather than a specific asset. Thus merger is a special type of capital budgeting
decision. This should include the effect of operating efficiencies and synergy. The
acquiring firm incurs a cost (in buying the business of the target firm) in the
expectation of a stream of benefits (in the form of cash flows) in the future. The
merger will be advantageous to the acquiring firm if the present value of the target
important tool in analyzing mergers and acquisitions. Earnings are basis for
estimating cash flows. Cash flows include adjustments for depreciation, capital
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Cash Flow = EBIT (1-T) + Depreciation Changes in Working Capital
(EPS) and the price earning (P/E) ratio. The EPS and P/E ratio is the market price
per share. In the efficient market, the market price of a share should be equal to
the value arrived by the discounted cash flow technique. Thus, in addition to the
market price and the discount value of share the merger and acquisitions decisions
are also evaluated in terms of EPS, P/E ratio, book value etc.
3 Exchange Ratio:
The current market value of the acquiring and the acquired firms may
The exchange ratio in terms of the market value of shares will keep the
position of the shareholders in value terms unchanged after the merger since
proportionate wealth would remain at the pre merger level. There is no incentive
for the shareholders of the acquired firm, and they would require a premium to be
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In the absence of net economic gain, the shareholders of the acquiring
firm would become worse off unless the price earning ratio of the acquiring firm
remain the same before the merger. The shareholders of the acquiring firm to be
better off after the merger without any net economic gain either the price earnings
ratio will have to increase sufficiently higher or the share exchange ratio is low,
acquisition as a recipe for all, or even a majority, of banking sector ills. Generally
operations. But the problem does not always relate to scale. There are many
centers into smaller units. The ability of a bank to meet competition will therefore
depend upon the speed, quality and efficiency of its delivery system through a
conducive work climate and a responsive workforce. Unless both the management
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Banking experts believe that a merger with a right bank can help a
bank increase its net worth and hence its capital adequacy. This is particularly
relevant in the context of the proposed revised rules of the Basle Committee on
Banking Supervision aimed at keeping bank capital standards with the increased
In the case of private sector banks, where the promoters are required
compulsorily to dilute their stake to the stipulated 40%. Merger can be quite
useful to take care of the mandatory requirement. This apart, mergers would also
Shareholder Value:
There is no doubt that bankers in India need to be sensitive to the fast changing
increase shareholders value. To achieve this, the focus must be on ensuring that
2 Integrated HR system:
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strategy. Banks must therefore, urgently evolve an integrated HR system, wherein
In the day to come, there is bound to be greater staff mobility between banks.
Staff remuneration has to be based partly on market trends and partly on job
scales for all banks. Complete autonomy needs to be given to banks in this
regards.
concerned, ensuring at the same time that the promotion policy is objective
Based on these considerations, banks should evolve a personnel and HRD policy
with:
employees
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In this area of knowledge and information, people will inevitably be an
organizations most important asset. This calls for a new paradigm business
growth through peoples growth. Growth is created not by the entity of the
organization but by its talented and knowledge people. The growth of the banking
sector in India leading to sustained shareholder value can thus be ensured only
through its vast workforce. Banks can respond to the challenge of change and
Customer Orientation:
Another trusts area for banks in their quest for growth and creating
decision to stay loyal to a particular bank is most often based on how he has been
This is in turn directly linked to how their organisation has resolved and
Mergers generally pose another ticklish problem for the new organisation
that is bringing about harmony and a sense of identity when two banks with
could result in gross inefficiencies, defeating thereby the very objective of the
merger.
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Merger and acquisition is therefore no substitute for poor asset
month, calling for a consolidation of the Indian banking industry, there has been a
approval for the bank to go forward with its plan to acquire another bank. Earlier,
Indian Bank, which has barely wiped out its Rs 1,600 crore loss, also announced
its intentions to acquire another bank. The Chennai-based bank feels its will
Bank of Baroda has also joined the fray, basically because being a
bank with a strong presence in western India, it requires to spread its wings in the
rest of the country. Ditto goes for Vijaya Bank, Central Bank of India, United
Bank of India, Punjab & Sind Bank and Punjab National Bank. Union Bank of
India, on the other hand, already has a national level presence, but wants to
"The Indian Government will soon unveil a policy guideline to encourage mergers
The policy is expected to provide the impetus for growth in the wake
of the Governments decision to retain the public sector character by capping the
public holding of capital. Further, he said, the rapid technological advances in the
sector also spelt the need for a new breed of regulators and inspectors to keep
The move to formulate such guidelines has been fuelled by the fact
that present day banking required a smaller number of very large banks rather
than a pack of small banks. There are about 90 scheduled commercial banks, four
non-scheduled commercial banks and 196 regional rural banks (RRBs). The State
Bank and its seven associates have about 14,000 branches; 19 nationalised banks
34,000 branches; the RRBs 14,700 branches; and foreign banks around 225
branches.
However, only State Bank of India is among the top 200 banks in the
world. This fact has probably triggered off the entire process.
It is also felt that consolidation of the industry will better help banks raise
capital for growth from the financial market without further liquidating the public
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On the down side, the sector will have to be prepared for issues arising
Consolidation and creation of mega banks will also require a clear focus
on lending operations and more intensive retail banking. Public sector banks need
generally accepted that mergers promote synergies. The basic idea is that the
combined bank will create more value than the individual banks operating
independently.
by synergy. The resulting combined entity gains from operating and financial
Economies of scale refers to the lower operating cost (per unit) arising from
spreading the fixed costs over a wider scale of production and economies of scale
The cash flows arising from the merger are expected to present
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that combining two banks give rise to savings in cost, maximization in the use of
notice that the assets of the bank are not being put to their most efficient use. This
bank will then become a potential target for a takeover for a bank which believes
that under its management the asset can be fully utilized to produce better results.
To that extent merger and takeovers play a crucial economic role of moving
resources from zones of under utilization to zones of better utilization. Poorly run
companies are more prone to bring taken over by the powerful and managers
have an incentive to ensure that their company is governed properly and resources
are used to produce maximum value. Takeovers in the banking sector will ensure
that the boards and management of institutions will improve corporate governance
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based on a large body of empirical studies by academic economists and business
scope) or the success of a specific merger at some point in time after the deal
was completed. In this latter category, various yardsticks are used, including the
repositioning of the merged entity in terms of cost and profit efficiency or the
development of simple balance sheet ratios or the valuation of the new company
In general the result of these studies lead to the conclusion that most
mergers fail to add value either in the form of superior stock price performance or
in the form of cost and profit advantages of the combined institution. Moreover,
especially in the US, most large scale mergers and acquisitions in banking have
identified on any small and medium size banks only and that there is no numerical
evidence on any economies of scale. In sum the empirical results for mergers and
During the last few years the Indian Banking system has witnessed
some very high profile mergers, such as the merger of ICICI Limited with its
banking arm ICICI Bank Ltd. The merger of Global Trust Bank with Oriental
Bank of Commerce and more recently the merger of IDBI with its banking arm
IDBI Bank Ltd. The Union Finance Minister, P.chidambaram gave an inkling of
the governments stance on mergers in the banking sector when he stated that
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The Government would encourage consolidation among banks in order to make
them globally competitive. The Government will not force consolidation, but if
them if it helps banks grow in size, scale and muscle so that they can compete
globally. To facilitate such mergers, a small amendment to the Income Tax Act
would be made during the budget session of parliament next year. Similarly banks
understood in the context of the Basel II Accord which was proposed in June 1999
Basel II Accord. Mergers among banks will be one of the ways to increase market
power and there by increase the revenue generation of banks which would in turn
enable them to access the capital market to raise funds and meet the increased
capital requirement.
necessary to evaluate the impact of the merger on the safety and soundness of the
identify the authority that will be responsible for conducting the merger review
process.
surprising that bank supervisors are concerned with the success or to what
extent business leaders in the financial services industry are taking the right
decision when they initiate an merger and acquisition at least as long as other
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concerns relating to the core mission of the supervisory authorities do not come
in. Bank supervisors should be concerned whether the current merger and
supervision and whether ultimately the stability of the financial system itself
for risk management and financial sector stability. While the arguments of bank
supervisors in this realm cannot be dismissed entirely, they seem however greatly
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11. Domestic Bank Merger and Acquisition and
as follows:
period.
and relative terms, thereby affecting the market structures in some Member
States.
The number of merger and acquisitions was clearly higher in compare with
the three previous years and upward shifts in values of Merger and
domestic market structures has been estimated by relating the asset of the new
institution to the total asset of the banking system. A large domestic players,
which, when they are involved, will have a large influence on the market structure
than small institutions. The effect on regional retail clients may be equally
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institutions but the overall competitive effect on the market will be larger when
involved during the period indicating that it is not only the very small institutions
development of increased values may, therefore have taken place. There are,
however large differences among Member States, both at the level of banking
assets involved in merger and acquisitions and in the trends towards either
increases or declines.
merger and acquisitions in 1998, whereas 20% in 1999 and then percentages were
markets have, thus undergone quite some changes. Clear downward movements
Far fewer international bank merger and acquisitions have taken place than
have, often in the search for markets offering higher margins, been more common
targets for European banks over recent years than other countries. European banks
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have expanded into Latin America, South-East Asia and Central and Eastern
Europe. In some cases, they have also expanded into developed markets such as
the US.
acquisitions, since they lead to the creation of a group which is active in different
sectors of the financial industry. The largest and leading firm in a conglomerate
sector. The creation of a financial conglomerate is not the only way of offering
agreements between, for instance a bank and an insurance company may achieve
States. They are often found to be precursors for integration involving ownership
elements.
States savings banks and co-operative banks have set up such jointly owned
enterprises that provide asset management, stock broking and settlement activities
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management firm of the savings bank sector in a country. In economic terms such
credit institutions.
Credit distributions are mainly expanding into asset management and the
services activities.
1999. In the first half of 2000 the number was 67 out of 70 transactions.
are both in terms of the number of transactions and the method used (merger
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and acquisition or setting up) for conglomeration. A total of 438 transactions
It seems credit institutions expanding outside the EEA into in particular, the
conglomeration.
companies.
Banks have also been more actively expanding into other sectors on a
cross border basis than other financial service providers have been into banking.
The expansion has been mainly into the business area of other investment services
and the management of UCITS, as was found also for domestic conglomeration.
acquisitions being chosen as the legal form. It should be noted, however that a
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institutions have tended only to set up other financial institutions abroad, and it is
the other foreign financial companies that are setting up domestic credit
institutions.
Banking the world over has been experiencing large scale mergers and
between banks and major IT companies. All these mergers and acquisitions are
effectiveness etc. Some times, non economic factors like prestige, market power
or market dominance have also influenced merger and acquisition activity. Trade
This section deals with the merger of Times Bank with HDFC Bank,
Bank of Madura with ICICI Bank, besides the aborted merger of Global Trust
Bank with UTI Bank. Other cases discussed are the possible consequences of the
proposed reverse merger of IDBI and IDBI Bank (which no longer look like a
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possibility), the proposed merger of ICICI and ICICI Bank. In the international
scene, mergers in the European Union (EU) Banking Industry and the concerns
This merger signaled the willingness of the new private banks (the
The merger is between two near equal entities and is driven by the
factors like superiority of HDFC Bank technology, its compatibility, the need for
higher CAR ratio, cross selling opportunities for the products of HDFC Bank etc.
Post merger, HDFC Bank becomes the largest private sector bank. As both the
integration did not pose any challenge. While HDFC Bank has its predominant
presence in metro areas, Times Bank has its root in urban centres. This way the
merger enlarges the reach of the new entity without significant branch overlap.
This merger also forces the government to seriously consider the vital
between two young and tech savvy bankers we have a marriage between the old
and the new when Bank of Madura merged with ICICI Bank. This all stock
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merger brought cheer to the shareholders and employees of Bank of Madura and
ICICI bank was able to meet its goal of expanding access base,
enhance geographical coverage and client base through the merger. While ICICI
Bank has its branches in metros and urban centres, BOM has its 263 enters,
mostly in the south. So the merger indeed increased the geographical coverage
technology, BOM has low marks on this score. However, analysts say that the two
software models have a high degree of compatibility. The greatest challenge this
merger faces is the cultural integration between the Tech savvy young employees
While the clientele of the new entity dramatically goes up, their
profiles are dissimilar, raising questions about the success of cross selling
opportunities. The real benefits of this merger to the economy is a big question
mark
The merger that did not eventually take place between Global Trust
Bank and UTI Bank presents a good study of the disastrous consequences of
besides the dangers of banker broker nexus and above all the tragedy of near
In the first place, the swap ratio of 2.25:1 in favor of GTB has been
questioned by analysts on the grounds of due diligence. Ketan Parekh and his
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associates appeared to have been involved in manipulating the share prices of
GTB, which has also generously lent to this group, not necessarily under the name
of equity finance. In fact, GTB itself had exposure to stock market, much beyond
the prudential levels at the time of the failed merger, in the year 2001. Ramesh
Gelli, Chairman, GTB was asked to vacate his seat by RBI. Obviously, the much
Prasuna unmasks these starting irregularities and unethical practices in the deal in
her article UTI Bank GTB Merger: Whither Due Diligence. Incidentally the
recent report (year 2002) of joint parliamentary committee on the stock scam of
2001, has indicted both UTI Bank and Global Trust Bank for their actions relating
While the aborted merger between GTB and UTI Bank remains a scar
on the face of the Indian banking sector, the proposed merger between ICICI and
ICICI Bank unravels very interesting possibilities. This merger creates the first
universal bank in India and the new entity becomes a dominant player in the
funds were the factors that drove ICICI into the merger of statutory pre-emptions
and 49% priority sector lending. Parthasarathi Swami and Aloka Majumdar, tells
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While the birth of the first universal bank in the form of the merger of
ICICI with ICICI Bank is a foregone conclusion, IDBI has no such luck. IDBI is
one of the oldest development financial institutions of India, with assets over
Rs.70000 cror and advances over rs.50000 crore. It is plagued with high level of
NPAs, very low profits, slow growth, inadequate net worth and insufficient
income.
IDBI Bank on the other hand is growing, at a slower pace and has
IDBI wishes to solve its problems of high cost funds through universal
bank route by merging with IDBI Bank. It also has ambitions to diversify into
retail lending segment in a big way. This proposed merger is a non starter as the
compliance with statutory pre-emptions (SLR and CRR) implies raising of vary
huge funds by IDBI Bank, in a short period a giagantic task, beyond its means.
Also the burden of NPAs of IDBI cannot be borne by IDBI cannot be borne by
IDBI Bank. Hence the merger is not in the interest of either parties.
has sharply increased world wide, recently, some of the mergers have been
perceived as failures. Bank regulators express the following concerns about the
stability of banking and financial system liquidity in the interbank markets might
shrink with less number of participants and ever more netting. Most mergers fail
to add value either in the form of superior stock price performance or in the form
of cost and profit advantages. Economies of scale are available only for small and
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medium size banks and economies of scope simply do not exist. Some market
participants might be tempted to engage in excessive risk taking (in order to make
up for declining profits). Too big to fail institutions might cause moral hazard
problems.
for bank supervisors, critically addresses all these concerns of the supervisors
( also called regulators) and concedes that most of them do have some element of
truth. However he observes that Mergers and acquisitions have long term
perspectives and long term advantages. He adds that large institutions will be able
The central point of his article is that financial regulation should not frustrate the
activity, in the last article such as Mergers and Acquisitions involving the
European union banking industry. The article studies for different types of
capital markets. Regulators face new challenges for instance when an insurance
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company and bank merge together forcing them to work together to find co-
differences are very much present. The values involved in mergers and
acquisitions are increasing and international bank mergers and acquisitions are
more often carried outside the European Economic area. While small bank
mergers and acquisitions are mostly carried out for cost efficiency, large bank
ICICI Bank is Indias second largest bank with total assets of over Rs.1 tn
and a network of about %40 branches and offices and over 1000 ATMs. ICICI
Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its
specialized subsidiaries and affiliates in the areas of investment banking life and
non life insurance, venture capital, asset management and information technology.
ICICI Banks equity shares are listed in major stock exchange in India, national
Stock Exchange of India Limited and its American Depositary Receipts (ADRs)
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ICICI Bank was originally promoted in 1994 by ICICI Limited, an an Indian
Financial institutions, and was its wholly owned subsidiary. ICICIs shareholding
in ICICI Bank was reduced to 46% through a public offering of shares in India in
fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal
investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1995 at the initiative
for providing medium term and long term project financing to Indian businesses.
offering a wide variety of products and services, both directly and through a
number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the
first Indian company and the first bank or financial institution from non Japan
context of the emerging competitive scenario in the Indian banking industry, and
the more towards universal banking, the managements of ICICI and ICICU Bank
formed the view that the merger of ICICI with ICICI Bank would be the optimal
strategic alternative for both entities, and would create the optimal legal structure
for the ICICI groups universal banking strategy. The merger would enhance value
for ICICI shareholders through the merged entitys access to low cost deposits,
greater opportunities for earning fee based income and the ability to participate in
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the payments system and provide transaction banking services. The merger would
enhance value for ICICI Bank shareholders through a large capital base and scale
over five decades, entry into new business segments, higher market share in
various business segments, Particularly fee based services and access to the vast
talent pool of ICICI and its subsidiaries. In October 2001, the Board of Directors
of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly
owned retail finance subsidiaries, ICICI Personal Financial Services Limited and
ICICI Capital Services Limited, with ICICI Bank. The merger was approved by
shareholders of ICICI and ICICI Bank in January 2002, by the High Court of
Bombay and the Reserve Bank of India in April 2002. Consequent to the merger,
the ICICI groups financing and banking operations both wholesale and retail,
Channels:
extension counters to 34 call centres to 17 and ATM centres to 510 all over the
Business Multiplier, ICICI select and I-fund were the new and
innovative products introduced during the year. ICICI bank in tie up with
Munshikaka.com has extended their services for online filing and advisory of
income tax returns. Also, ICICI bank has launched and implemented a new web
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based portal which provides real tome exchange rates for corporate customers and
Bank has a credit card base of 273000 which puts it in the top third slot.
All global VISA cards can use any of the banks ATMs for their transactions. They
have their credit card, debit card and smart card. The debit card is called ICICI
Ncash. Smart cards have been introduced with pilot launches at Infosys Limited
in Banglore and in Manipal Higher Education, Manipal. Together, all these three
In all these initiatives, the bank along with the ICICI group, made full
Customer Services:
The bank has granted 15,80,200 stocks to its employees and the
managing director and the chief executive officer. Of these, 6 senior managers of
Corporate Governance:
committee work hand in hand to follow the tenets of good corporate governance.
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Performance Review Year ended March 31, 2002:
The combined entity has emerged as the largest private sector bank in
the country marking a new era in Indian Banking, adding considerable strength to
the Indian financial system. The significant features of the combined entity are:
A highly diversified asset base- with a balance sheet size of over Rs. 104000
crore, it has 34% in cash and government of India securities, short term corporate
Finance Company Limited) and long term project finance loans of 23%. The
By adopting the purchase method of accounting, based on the fair valuation of the
loan portfolio by Deloitte Haskins and Sells and marking to market of the equity
and related investment portfolio, ICICI Bank has written down assets of ICICI to
the extent of Rs.3780 crore. This amount has been utilized as follows:
extent of Rs.902 crore, increasing the coverage (Provisions and write-off against
the NPL ratio to below 5.0% at 4.7% for the merged entity and
3 Creating additional provisions to the extent of Rs.1953 crore to provide for any
the general provision against ICICIs performing loans stands increased to 4.5%
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The Bank has a network of over 400 branches and the largest connected ATM
banking. In addition, it has over 120 retail centers across more than 75
geographic locations.
The Bank has deposit customer accounts of 5.0 million bondholder accounts.
Since October 2001, when the merger decision was taken, the Bank
has added about Rs.15000 crore of deposits, which accounts for a market share of
20% in incremental deposits in the banking system, creating a sound base for the
future growth of the Bank. As a part of the merger exercise, ICICI Bank initiated
the process of selling down its asset, which created a new market for securitized
Earnings:
ICICI Banks profit after tax as per the audited unconsolidated Indian
GAAP increased by 60.2% to Rs.258 crore in FY2002 from Rs.161 crore in the
previous year. As the merger has come into effect only on March 30,2002, ICICI
Banks profit of Rs.258 crore for Fy2002 includes only two days profit of ICICI
and its merging subsidiaries, amounting to about Rs.8 crore. The profit of FY2002
for the Bank is therefore largely comparable to FY2001. Net interest income
increased 46.7% to Rs.593 crore from Rs.404 crore, and core fee income
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increased 65.5% to Rs.283 crore from Rs.171 crore. The average cost of deposits
Future Plans:
ICICI Bank will convert itself into a universal bank with a reverse merger
of its parent ICICI. The combined entity will be the second largest player in the
Indian banking sector after public sector behemoth State Bank of India.
Analysis of case:
The proposed merger between ICICI and ICICI Bank unravels very
interesting possibilities. This merger creates the first universal bank in India and
the new entity becomes a dominant player in the Indian banking scenario. When
the board of ICICI and ICICI bank met to approve the merger of the financial
institution with the bank at a share exchange ratio of one domestic equity share of
ICICI Bank for two shares of ICICI. The recent economic slowdown, sluggish
and high cost of funds were the factors that drove ICICI into the merger.
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The amalgamation will enable them to have a strong financial and
mobilization and ICICI will emerge as one of the largest private sector banks in
the country. The ICICI emerged largest customer base will enable the ICICI Bank
to offer banking and financial services and products and also facilitates cross
The merger will enable ICICI to provide ATMs, credit card, debit card and
smart cars and financial services and products to a large customer base, with
The bank network over 400 branches and the largest The Bank has a
network of over 400 branches and the largest connected ATM network of over
1000 ATMs in the country offering anytime, anywhere banking. In addition, it has
Over the past years ICICI has been talking about a migration path to
wanted to take one step at a time both in terms of creating banking assets and
liabilities as well as fulfilling the twin reserve requirements of cash reserve ratio
ICICI Bank is buying out the assets of ICICI under the purchase
method which allows the purchase ( in this case, ICICI Bank) the opportunity to
revalue the purchased asset at fair market value. This accounting practice is a god-
sent opportunity for ICICI Bank to bring down the level of non performing assets
(NPAs) without resorting to write offs. While revaluating assets (i.e. loans) of
ICICI, the bank will writedown the NPAs and drastically pare the level of stricky
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assets in the combined book of the new entity. This is the biggest achievement of
precursor to the opening up of the sector for foreign banks in 2009. The merger of
HDFC Bank with Centurion Bank of Punjab (which will now renamed as HDFC
Bank) is worth Rs 9,526 crore ($2.38 billion). The sector has till now seen only
and Bank of Punjab; or Punjab National Bank snapping up Nedungadi Bank, but
this one is a big one. HDFC Bank will give one share for every 29 shares of
Centurion held by its sharehloder, and that would have an economic value of
The merged entity will also have the largest physical presence
after State Bank of India, with 1,148 branches across the country. Indias second
largest bank ICICI Bank will have only 955 branches. In terms of assets, HDFC
Bank-Centurion will have about roughly Rs 150,000 crore, and the third largest.
This is less than half of ICICI Bank (Rs 3,76, 700 crore) and State Bank Group
(Rs 566,565 crore). The deposits of HDFC Bank reaches Rs 120,000 crore, while
Rana Talwar, the chief promoter of Sabre Capital which owns a controlling stake
in CBoP, said that they decided to merge with HDFC Bank since a merged entity
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is in a better position to capitalise on the high growth Indian market. I am not
director on the Board of the merged entity. CBOPs Managing Director and CEO
Analysts negative
buy. I think this is just a merger for the sake of a merger. I dont see any
immediate value addition to HDFC Bank because of this, Sejal Doshi, CEO at
Another analyst echoes his view. I couldnt really understand why they
There is some concern on that frontMaybe they want to grow bigger before
April 2009 so theres less possibility of becoming a takeover target when foreign
Fund.
Meanwhile, Morgan Stanley said the deal would not significantly alter
market share in lending, retail loans and deposits and so it did not see HDFC
Bank worth more than Rs 1,565. Merrill Lynch saw HDFC Bank rising up to Rs
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HDFC Bank Ltd., Indias third-biggest by market capitalistaion, has
agreed to buy another smaller private bank Centurion Bank of Punjab Ltd, in an
all stock deal. This is Indias biggest banking deal yet. The boards of both banks
satisfactory due diligence, a fair share-swap ratio and all the requisite statutory,
regulatory and corporate approvals, a joint statement said. Ernst & Young and
Dalal & Shah have been appointed to determine the share swap ratio.
market capitalisation of Rs 10,600 crore ($2.6 billion). What the deal means is
that HDFC Bank will become even stronger bank as it will gain 2.5 million
customers, mainly in Kerala and Punjab. The merged company will have 1,148
branches (Centurion had 394 branches and HDFC Bank 754 branches), which is
more than ICICI Banks 955. But in terms of assets, HDFC-Centurion combine
Ernst & Young and Dalal & Shah have been appointed to determine
the share swap ratio, HDFC Bank said in a statement to the stock exchange.
through M&A in some way. HDFC Bank bought Times Bank from the media
group Bennett Coleman & Co in 2000. Centurion has bought Bank of Punjab and
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The board of directors of ICICI Bank will meet on December 9 to
consider the proposal for amalgamation of Sangli Bank with itself, said a release
Sangli Bank has been in trouble for quite sometime. The bank's capital
adequacy ratio plummeted to 1.64 per cent as on March 31, 2006, against 9.30 per
cent in the previous year. The minimum requirement mandated by the RBI is 9 per
cent.
The Tier-I capital of the bank shrunk to 0.82 per cent (6.44 per cent),
while Tier-II dived to 0.82 per cent (2.86 per cent) over the same period. It posted
a net loss of Rs 29.27 crore (loss of Rs 31.31 crore) as on March 31, 2006. Net
non-performing assets of Sangli Bank were at Rs 20.79 crore (Rs 34.82 crore).
Sangli Bank, set up by the Raja of Sangli State in 1916, has 192
branches. The bank has a major presence in Maharashtra and thin outfits in
United Western Bank with IDBI Ltd. ICICI Bank was the first among several
expansion in branch network and boost in rural lending. The acquisition of weak
banks seems to be the way to getting round the RBI restrictions on opening new
branches.
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ICICI Bank and HDFC Bank and other private sector banks allegedly involved in
the IPO scam have found it difficult to secure licences from the RBI, said a
banking analyst. With the proposed acquisition, the branch network of ICICI
Bank will jump from the current 630 branches to 822 branches.
It recently received the RBI's nod for opening new branches and
The bank is also keen on expanding its rural portfolio, which grew by
about 70 per cent on a year-on-year basis. It can also expand its priority sector
and advances were Rs 888.29 crore (Rs 811.92 crore) as on March 31, 2006.
The bank has a capital base of Rs 23.56 crore (Rs 22.30 crore). The
staff strength stood at 1,923 employees as of end March 2005. ICICI Bank's scrip
State Bank of India, the countrys largest commercial bank, has kicked off the
consolidation process with its associate banks. SBI has decided to merge State Bank
of Saurashtra, a wholly owned associate bank, with itself. The boards of both SBI and
State Bank of Saurashtra have given an in-principle approval to the merger proposal.
SBI will now have to get approvals from both the Government, the majority owner of
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the bank holding 59.73 per cent stake, and the Reserve Bank of India. The boards of
SBI and SBS met in Mumbai and passed resolutions to merge, a step that could be the
beginning of the process of consolidation among public sector banks. The merger of
SBIs associate banks with itself was being considered for the past several years, but
could not get through because of political opposition to mergers among public sector
banks.
The reason to merge State Bank of Saurashtra first is because it offers common
advantages. Firstly, it is the smallest of the associate banks, which would mean the
merger would be very smooth. Secondly, it is 100 per cent owned by SBI, so no
Saurashtra, where (SBIs) network is not large, which means the new branches will
After the merger of all the seven subsidiary banks, SBIs net worth would rise to
about Rs 43,000 crore. ICICI Bank's net worth has doubled to over Rs 40,000 crore
after its follow-on public offer, SBI and SBS would now have to complete the
formality of seeking approvals from the government and the Reserve Bank of India
(RBI). The merger would benefit over 7,000 employees of SBS as their pay scales
would rise and they would also be entitled to the third retirement benefit of pension,
in addition to provident fund and gratuity overtaking SBIs over Rs 31,000 crore.
State Bank of Indore could be the next bank on the radar in the consolidation
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15. Conclusion
Merger and acquisition the most talked about term today creating lot
of excitement and speculative activity in the markets. However, before the idea of
M&A crystallizes, the firm needs to understand its own capabilities and industry
position. It also needs to know the same about the other firms it seeks to tie up
with, to get a real benefit from a merger. A mergers and Acquisitions activity is
that the divesting firm moves from diversifying strategy to concentrate on core
environment a strong reason for M&A is a desire to survive. Thus apart from
growth, the survival factor has off late, spurred the M&A activity worldwide.
Management reputation
Marketing network
Technology level
Financial performance
Future earnings
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Current valuations of shares in stock markets
The M&A game in the Indian context has already made a healthy start.
However, the structural and legal problems are adversely affecting the growth
rates. Although, the government has realized this fact, it is yet to become
proactive. With the entry of multinationals into the Indian markets, consolidation
differences are very much present. The values involved in mergers and
acquisitions are increasing and international bank mergers and acquisitions are
more often carried outside the European Economic area. While small bank
mergers and acquisitions are mostly carried out for cost efficiency, large bank
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Bibliography
Books :
Newspaper:
Web Sites:
www.google.com
www.rbi.org.in
www.obcindia.com
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