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INTRODUCTION TO MERGER AND ACQUISITION
A merger occurs when two or more companies combines and the resulting firm maintains the identity of one of the firms. One or more companies may merger with an existing company or they may merge to form a new company. Usually the assets and liabilities of the smaller firms are merged into those of larger firms. Merger may take two forms1. 2. Merger through absorption Merger through consolidation. Absorption Absorption is a combination of two or more companies into an existing company. All companies except one loose their identify in a merger through absorption. Consolidation A consolidation is a combination if two or more combines into a new company. In this form of merger all companies are legally dissolved and a new entity is created. In consolidation the acquired company transfers its assets, liabilities and share of the acquiring company for cash or exchange of assets.
A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies.
A takeover may also be defined as obtaining control over management of a company by another company.
DISTINCTION BETWEEN MERGERS AND ACQUISITIONS
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether 3|Page
the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.
TYPES OF MERGERS
TYPES OF MERGERS
Mergers are of many types. Mergers may be differentiated on the basis of activities, which are added in the process of the existing product or service lines. Mergers can be a distinguished into the following four types:1. 2. 3. 4. Horizontal Merger vertical Merger Conglomerate Merger Concentric Merger
Horizontal merger Horizontal merger is a combination of two or more corporate firms dealing in same lines of business activity. Horizontal merger is a co centric merger, which involves combination of two or more business units related to technology, production process, marketing research and development and management. Vertical Merger Vertical merger is the joining of two or more firms in different stages of production or distribution that are usually separate. The vertical Mergers chief gains are identified as the lower buying cost of material. Minimization of distribution costs, assured supplies and market increasing or creating barriers to entry for potential competition or placing them at a cost disadvantage. Conglomerate Merger Conglomerate merger is the combination of two or more unrelated business units in respect of technology, production process or market and management. In other words, firms engaged in the different or unrelated activities are combined together. Diversification of risk constitutes the rational for such merger moves.
Concentric Merger Concentric merger are based on specific management functions where as the conglomerate mergers are based on general management functions. If the activities of the segments brought together are so related that there is carry over on specific management functions. Such as marketing research, Marketing, financing, manufacturing and personnel.
Investors in a company that are aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them:
1. Comparative Ratios.
The following are two examples of the many comparative metrics on which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.
In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop.
Discounted Cash Flow (DCF).
A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.
BENEFITS OF MERGER
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BENEFITS OF MERGERS 1. GROWTH 0R DIVERSIFICATION: - Companies that desire rapid growth
in size or market share or diversification in the range of their products may find that a merger can be used to fulfill the objective instead of going through the tome consuming process of internal growth or diversification. The firm may achieve the same objective in a short period of time by merging with an existing firm. In addition such a strategy is often less costly than the alternative of developing the necessary production capability and capacity. If a firm that wants to expand operations in existing or new product area can find a suitable going concern. It may avoid many of risks associated with a design; manufacture the sale of addition or new products. Moreover when a firm expands or extends its product line by acquiring another firm, it also removes a potential competitor.
2. SYNERGISM: - The nature of synergism is very simple. Synergism exists when
ever the value of the combination is greater than the sum of the values of its parts. In other words, synergism is “2+2=5”. But identifying synergy on evaluating it may be difficult, infact sometimes its implementations may be very subtle. As broadly defined to include any incremental value resulting from business combination, synergism in the basic economic justification of merger. The incremental value may derive from increase in either operational or financial efficiency.
Operating Synergism: - Operating synergism may result from economies of
scale, some degree of monopoly power or increased managerial efficiency. The value may be achieved by increasing the sales volume in relation to assts employed increasing profit margins or decreasing operating risks. Although operating synergy usually is the result of either vertical/horizontal integration some synergistic also may result from conglomerate growth. In addition, some times a firm may acquire another to obtain patents, copyrights, technical proficiency, marketing skills, specific fixes assets, customer relationship or managerial personnel.
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Operating synergism occurs when these assets, which are intangible, may be combined with the existing assets and organization of the acquiring firm to produce an incremental value. Although that value may be difficult to appraise it may be the primary motive behind the acquisition. • Financial synergism Among these are incremental values resulting from complementary internal funds flows more efficient use of financial leverage, increase external financial capability and income tax advantages. a) Complementary internal funds flows Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by merger. If so, financial synergism results in reduction of working capital requirements of the combination compared to those of the firms standing alone. b) More efficient use of Financial Leverage Financial synergy may result from more efficient use of financial leverage. The acquisition firm may have little debt and wish to use the high debt of the acquired firm to lever earning of the combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt firm thus providing additional leverage to the combination. The financial leverage advantage must be weighed against the increased financial risk. c) Increased External Financial Capabilities Many mergers, particular those of relatively small firms into large ones, occur when the acquired firm simply cannot finance its operation. Typical of this is the situations are the small growing firm with expending financial requirements. The firm has exhausted its bank credit and has virtually no access to long term debt or equity markets. Sometimes the small firm has encountered operating difficulty, and the bank has served notice that its loan will not be renewed? In this type of situation a large firms with sufficient cash and credit to finance the requirements of smaller one probably can obtain a good buy bee. Making a merger proposal to the small firm. The only alternative the small firm may have is to try to interest 2 or more large firms in proposing merger to introduce, competition into those bidding for acquisition. The smaller firm’s situations might not be so bleak. It 12 | P a g e
may not be threatened by non renewable of maturing loan. But its management may recognize that continued growth to capitalize on its market will require financing be on its means. Although its bargaining position will be better, the financial synergy of acquiring firm’s strong financial capability may provide the impetus for the merger. Sometimes the acquired firm possesses the financing capability. The acquisition of a cash rich firm whose operations have matured may provide additional financing to facilitate growth of the acquiring firm. In some cases, the acquiring may be able to recover all or parts of the cost of acquiring the cash rich firm when the merger is consummated and the cash then belongs to it. d) The Income Tax Advantages In some cases, income tax consideration may provide the financial synergy motivating a merger, e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B now break even, has a loss carry forward of rupees twenty crores accumulated from profitable operations of previous years. The merger of A and B will allow the surviving corporation to utility the loss carries forward, thereby eliminating income taxes in future periods.
Counter Synergism Certain factors may oppose the synergistic effect contemplating from a merger. Often another layer of overhead cost and bureaucracy is added. Do the advantages outweigh disadvantages? Sometimes the acquiring firm agrees to long term employments contracts with managers of the acquiring firm. Such often are beneficial but they may be the opposite. Personality or policy conflicts may develop that either hamstring operations or acquire buying out such contracts to remove personal position of authority. Particularly in conglomerate merger, management of acquiring firm simply may not have sufficient knowledge of the business to control the acquired firm adequately. Attempts to maintain control may induce resentment by personnel of acquired firm. The resulting reduction of the efficiency may eliminate expected operating synergy or even reduce the post merger profitability of the acquired firm. The list of possible counter synergism 13 | P a g e
factors could goon endlessly; the point is that the mergers do not always produce that expected results. Negative factors and the risks related to them also must be considered in appraising a prospective merger.
RISKS ASSOCIATED WITH MERGER
There are several risks associated with consolidation and few of them are as follows: 1) When two banks merge into one then there is an inevitable increase in the size of the organization. Big size may not always be better. The size may get too widely and go beyond the control of the management. The increased size may become a drug rather than an asset. 2) Consolidation does not lead to instant results and there is an incubation period before the results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening periods before the eventual profits pour in. Patience, forbearance and resilience are required in ample measure to make any merger a success story. All may not be up to the plan, which explains why there are high rate of failures in mergers. 3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and willingness of the rank and file of both entities may not be forthcoming. This leads to problems of industrial relations, deprivation, depression and demotivation among the employees. Such a work force can never churn out good results. Therefore, personal management at the highest order with humane touch alone can pave the way. 4) The structure, systems and the procedures followed in two banks may be vastly different, for example, a PSU bank or an old generation bank and that of a technologically superior foreign bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu. A thorough overhauling and systems analysis has to be done to assimilate both the organizations. This is a time consuming process and requires lot of cautions approaches to reduce the frictions. 14 | P a g e
5) There is a problem of valuation associated with all mergers. The shareholder of existing entities has to be given new shares. Till now a foolproof valuation system for transfer and compensation is yet to emerge. 6) Further, there is also a problem of brand projection. This becomes more complicated when existing brands themselves have a good appeal. Question arises whether the earlier brands should continue to be projected or should they be submerged in favour of a new comprehensive identity. Goodwill is often towards a brand and its sub-merger is usually not taken kindly.
Other motives For Merger
Merger may be motivated by two other factors that should not be classified under synergism. These are the opportunities for acquiring firm to obtain assets at bargain price and the desire of shareholders of the acquired firm to increase the liquidity of their holdings. 1. Purchase of Assets at Bargain Prices Mergers may be explained by opportunity to acquire assets, particularly land mineral rights, plant and equipment, at lower cost than would be incurred if they were purchased or constructed at the current market prices. If the market price of many socks have been considerably below the replacement cost of the assets they represent, expanding firm considering construction plants, developing mines or buying equipments often have found that the desired assets could be obtained where by heaper by acquiring a firm that already owned and operated that asset. Risk could be reduced because the assets were already in place and an organization of people knew how to operate them and market their products. Many of the mergers can be financed by cash tender offers to the acquired firm’s shareholders at price substantially above the current market. Even so, the assets can be acquired for less than their current casts of construction. The basic factor underlying this apparently is that inflation in construction costs not fully rejected in stock prices because of high interest rates and limited optimism by stock investors regarding future economic conditions.
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2. Increased Managerial Skills or Technology Occasionally a firm will have good potential that is finds it unable to develop fully because of deficiencies in certain areas of management or an absence of needed product or production technology. If the firm cannot hire the management or the technology it needs, it might combine with a compatible firm that has needed managerial, personnel or technical expertise. Of course, any merger, regardless of specific motive for it, should contribute to the maximization of owner’s wealth. 3. Acquiring new technology To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
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There are several restructuring methods: doing an outright sell-off, doing an equity carveout, spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages and disadvantages for companies and investors. All of these deals are quite complex.
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the board decide that the subsidiary is better off under different ownership. Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late 1980s and early 1990s, corporate raiders would use debt to finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are unsuccessful.
More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a subsidiary public through an initial public offering (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder value. The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely be strong. That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the parent and is lacking an established track record for growing revenues and profits. Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties.
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A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct management and board. Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases, spinoffs unlock hidden shareholder value. For the parent company, it sharpens management focus. For the spinoff company, management doesn't have to compete for the parent's attention and capital. Once they are set free, managers can explore new opportunities. Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spinoff shares are issued to parent company shareholders, some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation.
A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. The stock allows the different segments of the company to be valued differently by investors. Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly higher P/E rating. Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies and share marketing, administrative support functions, a headquarters and so on. Finally, and most importantly, if the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions. Still, shareholders need to remember that tracking stocks are class B, meaning they don't grant shareholders the same voting rights as those of the main stock. Each share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of tracking stock have no vote at all.
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MERGERS AND INDIAN BANKING SECTOR
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MERGER AND INDIAN BANKING SECTOR
Mergers and acquisitions encourage banks to gain global reach and better synergy and allow large banks to acquire the stressed assets of weaker banks. Merger in India between weak/unviable banks should grow faster so that the weak banks could be rehabilitated providing continuity of employment with the working force, utilization of the assets blocked up in the weak/unviable banks and adding constructively to the prosperity of the nation through increased flow of funds. The process of merger and acquisition is not a new happening in case of Indian Banking, Grind lay Bank merged standard charated Bank, Times Bank with HDFC Bank, bank of Madura with ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and most recdently Global Trust Bank merged with Oriental Bank of Commerce. The small and medium sized banks are working under threats from economic environment which is full of problem for them, viz. inadequacies of resources, outdated technology, on systemized management pattern, faltering marketing efforts and weak financial structure. Their existence remains under challenge in the absence of keeping pace with growing automation and techniques obsolescence and lack of product innovations. These banks remain, at times, under threat from large banks. Their reorganization through consolidation/merger could offer succor to re-establish them in viable banks of optimal size with global presence. Merger and amalgamation in Indian banking so far has been to provide the safeguard and hedging to weak bank against their failure and too at the initiative of RBI, rather than to pay the way to initiate the banks to come forward on their own record for merger and amalgamation purely with a commercial view and economic consideration. As the entire Indian banking industry is witnessing a paradigm shift in systems, processes, strategies, it would warrant creation of new competencies and capabilities on an on going basis for which an environment of continuous learning would have to be created so as to enhance knowledge and skills. There is every reason to welcome the process of creating globally strong and competitive banks and let big Indian banks create big thunders internationally in the days to come. 21 | P a g e
In order to achieve the INDIAN VISION 2020 as envisaged by Hon’ble president of India Sh. A.P.J.Addul Kalam much requires to be done by banking industry in this regard. It is expected that the Indian banking and finance system will be globally competitive. For this the market players will have to be financially strong and operationally efficient. Capital would be key factor in the building a successful institution. The Banking and finance system will improve competitiveness through a process of consolidation either through mergers and acquisitions or through strategic alliances. There is need to restructure the banking sector in India through merger and amalgamation in order top makes them more capitalized, automated and technology oriented so as to provide environment more competitive and customer friendly
Mergers Of Banking Sector
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1969 1970 1971 1974 1976 1984-85 1984-85 1985 1986 1988 1989-90 1989-90 1989-90 1989-90 1990-91 1993-94 1993-94 1995-96 1996 1997
Bank Of Bihar National Bank Of Lahore Eastern Bank Ltd. Krishnaram Baldeo Bank Ltd. Belgaum Bank Ltd. Lakshmi Commercial Bank Bank Of Cochin Miraj State Bank Hindustan Commercial Bank Trader's Bank Ltd. United Industrial Bank Bank Of Tamilnad Bank Of Thanjavur Parur Central Bank Purbanchal Bank New Bank Of India Bank Of Karad Kasinath Seth Bank SCICI ITC Classic
State Bank Of India State Bank Of India Chartered Bank State Bank Of India Union Bank Of India Canara Bank State Bank Of India Union Bank Of India Punjab National Bank Bank Of Baroda Allahabad Bank Indian Overseas Bank Indian Bank Bank Of India Central Bank Of India Punjab National Bank Bank Of India State Bank Of India ICICI ICICI Oriental Bank of Commerce Oriental Bank of Commerce ICICI Bank of Baroda Union Bank HDFC Bank ICICI Bank of Baroda Punjab national Bank Bank of Baroda Oriental Bank of Commerce Centurion bank HDFC Bank Ltd
1997 BARI Doab Bank 1998 1998 1999 1999 2000 2001 2002 2003 2004 Punjab Co-operative Bank Anagram Fianance Bareilly Corporation Bank Sikkim Bank ltd. Times bank Bank of Madura Benaras state bank Nedungadi Bank South Gujrat Local Area Bank
2004 Global Trust Bank 2005 Bank of Punjab Centurion Bank of Punjab 2007-2008 Ltd(merged)
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MERGER OF TIMES BANK WITH HDFC BANK
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In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of two private banks in the New Generation Private Sector Banks. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. Times Bank was a new generation private sector bank established by the Times group. As part of HDFC Bank's strategy of attaining great heights it decided to merge with Times Bank. As per the scheme of amalgamation issued by HDFC bank to its shareholder the following were the reasons cited for the merger deal. 1. Branch Network would increase by over 50 percent and thus providing increased geographical coverage. 2. Increase the total number of retail customer accounts so as to increase deposit and loan products. 3 After the merger the bank would be able to use Times Bank's lower cost alternative channels like phone banking, internet banking etc. and thereby the reducing of operating costs. 4. The merger would increase the presence of HDFC bank in the depository participant activities. 5. Improved infra structure facilities and central processing would help in deriving economies of large scale. and share holding pattern have been looked into.
The merger deal was struck with a stock swap whereby the shareholders of Times Bank will get one share of HDFC Bank for every 5.75 shares held. The Times Bank w merged with HDFC Bank and the emerging entity continued to function as HDFC Bank. With the RBI gave a green signal, the merger came into effect by the first quarter in 2000. The Bennett Coleman group, which promoted the Times Bank, got about 7.5 percent stake in HDFC Bank. The equity capital of HDFC Bank raised from Rs. 200 crore to Rs. 233 crore. With one stroke the merger helped HDFC Bank become the largest of the private sector banks in the Indian banking industry. The merger increased the customer base of HDFC Bank by 2,00,000 taking the figure to 6,50,000. It also provided cross-selling opportunities to the increased customer population. Various products of HDFC Bank as well as the housing finance products to its patent HDFC can be offered to the new customers. Most importantly the branch network would increase from 68 to 107. HDFC Bank’s total deposits would be around Rs. 6,900 crore and the size of the balance sheet would be over Rs.9, 000 crore. Since Times banks has technology in place, HDFC Bank saves on the costs associated with technology up gradation. According to the bank some 25 | P a g e
amount of rationalization of the portfolios of corporate loans may be required. The bank also gains from existing infrastructure. The capital adequacy of HDFC Bank would be 10.3 percent post-merger and would go up to 11.1 percent after the proposed preferential offer to maintain the current level of holdings of different classes of investors. The merger of those two banks has another distinct advantage. The new private sector banks have nurtured employee culture in tune with competitive forces. Thus there is unlikely to be any clash of cultures in the new entity. This is likely to help the integration process. Reportedly the branch network of both the banks do not overlap. Despite the growth of Internet banking, branch network in the brick and mortar form is vital for reaching out to the customer especially in the Indian context. HDFC Bank’s strategy for setting up of branches has been that of incurring lowest cost with about 68 persons per branch who look after both servicing and market functions of the bank. The bank has also prompted the customers to use phone banking in a big way. Since setting up of branches a new is a costlier affair, acquiring a readymade branch network could not have been better. Product complementarily was more pronounced in the case of ATM card networks. HDFC Bank had the Visa network and Times Bank had Master Card network. On account of the merger, it would be part of both the networks. Similarities in business segments and the prospects for synergies appear to be the major inducements for the HDFC-Times merger. The table ‘Convergence Advantage’ shows that there is fair amount of convergence in the rate of business growth (in terms of deposits, advances and income) and diversification in non-interest income. Says Bandi Ram Prasad, Chief Economist, Indian Banks Association; “There is sizeable divergence in efficiency of operations (measured in terms of net profit as percent of working funds and Net NPAs as percent of working funds and Net NPAs as percent of Net Advances. With its record of higher operational efficiency HDFC Bank could contribute value addition to the business growth of the Times Bank. Since both are low on staff costs, better control of costs is also possible. With HDFC having more metro branches (65 percent) and Times Bank more urban branches (43 percent) overlapping of branch network is also not very leading to enlarged potential market. That is enough incentive for consideration of a merger.” Sanjay Sakhuja opines that the merger was an excellent transaction. He explains, “It is an excellent transaction both in terms of the speed with which it was conducted and the way in which it is put through. HDFC Bank gains in terms of size and complementarily of network. From the times point of view too, I think this merger makes sense. The merger made the shareholders of HDFC bank and erstwhile shareholders of Times Bank very happy.” Competition of late had been heating up. Foreign banks have been radically altering their strategies. Some of the public sector banks also began attempting reshaping of their competitive strategies. New private sector banks also began attempting reshaping of their strategies. New private sector banks have been aggressive in the race to grab the market share, thus for HDFC Bank the timing of merger opportunity could not have been better. 26 | P a g e
In the whole world of banking sector it was HDFC Bank and ICICI Bank, which maintained better valuations while price of rest of the banks in the industry, plummeted in the recent past. (Rs in Lakhs)
Particulars Interest Income Other Income Total Income Interest Expenditure Other Expenditure Total Expenditure Gross Profit before Tax and Depreciation Depreciation Profit before Tax Provision for taxation Net Profit Paid up Share Capital Reserves (Excluding Revaluation Reserve) Dividend % As On 31-3-2000 67987 12535 80522 37428 20963 58391 22131 2646 19485 7481 12004 24328 50824 16 As On 31-3-99 37608 6807 44415 22918 8310 31228 13187 1502 11685 3445 8240 20000 13893 13
From the above table we can conclude that the net profit of HDFC bank was increased from 8240 to 12004 increases the net profit by 3764 with the percentage of 45.67% And the reserve is also increased by 36931 and in percentage 72.66%
SHARE HOLDING PATTERN
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The share holding pattern that might be influenced in a merger deal has also been closely analyzed.
SHARE HOLDING PATTERNS OF HDFC BANK ITEM PRE-MERGER AVERAGE HDFC GROUP 28.78 INDIAN PRIVATE 10.00 EQUITY FUND INDOCEAN 4.99 FINANCIAL HOLDINGS BENNET, NIL COLEMAN COMPANY AND GROUP PUBLIC 56.23 100 % POST MERGER 25.74 8.95 4.46 7.78
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Effect Of Merger On Shareholders Wealth
Date 24-Jan-00 25-Jan-00 27-Jan-00 28-Jan-00 31-Jan-00 1-Feb-00 2-Feb-00 3-Feb-00 4-Feb-00 7-Feb-00 8-Feb-00 9-Feb-00 10-Feb-00 11-Feb-00 14-Feb-00 15-Feb-00 16-Feb-00 17-Feb-00 18-Feb-00 21-Feb-00 22-Feb-00 23-Feb-00 24-Feb-00 25-Feb-00 28-Feb-00 29-Feb-00 1-Mar-00 2-Mar-00 3-Mar-00 6-Mar-00 7-Mar-00 8-Mar-00 9-Mar-00 10-Mar-00 13-Mar-00 14-Mar-00 15-Mar-00 16-Mar-00 21-Mar-00 22-Mar-00 23-Mar-00 24-Mar-00 27-Mar-00 28-Mar-00 Close Price 201.45 217.55 229.95 228 235.15 239.55 242 225.55 230.5 245 251 251 251 230.95 234 231 249.45 250 246 239.5 222 222.45 228 226.1 228 217.6 234.95 253.7 273.95 259.2 262.25 275 263 256 276 268.9 259 256.9 254.5 264 276.1 270 272 278 Sensex 5,458.06 5,367.79 5,369.10 5,335.80 5,205.29 5,215.54 5,304.92 5,340.19 5,313.59 5,474.00 5,610.56 5,649.10 5,789.04 5,933.56 5,924.31 5,803.19 5,725.50 5,835.15 5,721.65 5,876.89 5,883.33 5,642.46 5,810.17 5,623.08 5,740.69 5,446.98 5,642.12 5,528.31 5,378.27 5,520.69 5,589.85 5,511.42 5,328.79 5,301.78 5,129.22 5,175.71 5,249.76 5,102.41 5,133.24 5,201.87 5,115.02 5,141.42 5,146.30 5,156.12 Script Return(%) 7.99 5.70 -0.85 3.14 1.87 1.02 -6.80 2.19 6.29 2.45 0.00 0.00 -7.99 1.32 -1.28 7.99 0.22 -1.60 -2.64 -7.31 0.20 2.49 -0.83 0.84 -4.56 7.97 7.98 7.98 -5.38 1.18 4.86 -4.36 -2.66 7.81 -2.57 -3.68 -0.81 -0.93 3.73 4.58 -2.21 0.74 2.21 Market Return(%) -1.65 0.02 -0.62 -2.45 0.20 1.71 0.66 -0.50 3.02 2.49 0.69 2.48 2.50 -0.16 -2.04 -1.34 1.92 -1.95 2.71 0.11 -4.09 2.97 -3.22 2.09 -5.12 3.58 -2.02 -2.71 2.65 1.25 -1.40 -3.31 -0.51 -3.25 0.91 1.43 -2.81 0.60 1.34 -1.67 0.52 0.09 0.19
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24-Jan-00 25-Jan-00 27-Jan-00 28-Jan-00 31-Jan-00 1-Feb-00 2-Feb-00 3-Feb-00 4-Feb-00 7-Feb-00 8-Feb-00 9-Feb-00 10-Feb-00 11-Feb-00 14-Feb-00 15-Feb-00 16-Feb-00 17-Feb-00 18-Feb-00 21-Feb-00 22-Feb-00 23-Feb-00 24-Feb-00 25-Feb-00 28-Feb-00 29-Feb-00 1-Mar-00 2-Mar-00 3-Mar-00 6-Mar-00 7-Mar-00 8-Mar-00 9-Mar-00 10-Mar-00 13-Mar-00 14-Mar-00 15-Mar-00 16-Mar-00 21-Mar-00 22-Mar-00 23-Mar-00 24-Mar-00 27-Mar-00 28-Mar-00
ED-30 1.04 0.62 0.78 1.23 0.58 0.20 0.46 0.75 -0.12 0.01 0.46 0.02 0.01 0.67 1.13 0.96 0.15 1.11 -0.04 0.60 1.64 -0.11 1.42 0.11 1.89 -0.26 1.13 1.30 -0.03 0.32 0.97 1.45 0.75 1.43 0.40 0.27 1.32 0.48 0.30 1.04 0.50 0.60 0.58 6.96 5.08 -1.63 1.90 1.29 0.82 -7.26 1.44 6.41 2.44 -0.46 -0.02 -8.00 0.65 -2.42 7.03 0.07 -2.71 -2.60 -7.91 -1.44 2.60 -2.26 0.73 -6.45 8.23 6.85 6.68 -5.36 0.86 3.89 -5.81 -3.41 6.38 -2.98 -3.96 -2.13 -1.41 3.44 3.54 -2.71 0.14 1.63 6.96 7.58 8.36 9.60 10.18 10.38 10.84 11.59 11.47 11.49 11.94 11.96 11.97 12.64 13.77 14.73 14.88 15.99 15.95 16.55 18.19 18.08 19.51 19.62 21.51 21.25 22.38 23.68 23.65 23.97 24.94 26.39 27.15 28.58 28.98 29.26 30.58 31.06 31.35 32.39 32.89 33.50 34.08
Accumulated Abnormal Return(%)
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ED-30 to ED-1
ED-10 to ED-1
ED-1 to ED+1
ED+1 to ED+10
ED+1 to ED+30
250.00 200.00 150.00 100.00 50.00 0.00 ED-30 to ED-1 229.99 ED-10 to ED-1 59.42 ED-1 to ED+1 0.74 ED+1 to ED+10 60.62 ED+1 to ED+30 145.62 Series1
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Acc.Abnormal Return(% )
20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 ED-30 ED-10 ED+1 ED-1 ED+10
The above chart shows accumulated abnormal return of HDFC bank. Accumulated abnormal return is a difference between actual script return and expected script return. It is clear from the above chart that abnormal return is increasing after ED-30 (i.e. a month before actual merger takes place.) The return becomes negative a day before actual merger takes place. The period between ED-30 to ED is the period in which speculator start investing and after the ED period long term investors comes in the market for investing their moneys. The person who holds the script of HDFC Bank for the period between ED-30 to ED+30 got 8.14% higher return than what they are supposed to get. So from the view point of investors the script is feasible to invest.
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Growth is always essential for the existence of a business concern. A concern is bound to die if it does not try to expand its activities. The expansion of a concern may be in the form of enlargement of its activities or acquisition of ownership and control of other concerns. Internal expansion results gradual increase in the activities of the concern. External expansion refers to “business combination” where two or more concerns combine and expand their business activities. From the report we can conclude that The net profit of HDFC bank was increased from 8240 to 12004 increases the net profit by 3764 with the by 45.67%.
The reserve is also increased by 72.66%
The fundamentals of bank become strong It is a good script to invest for long term investment.
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www.bseindia.com www.moneycontrol.com www.hdfcbank.com www.timesbank.com
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