MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

CONTENTS
“CHAPTER NUMBER” “ NAME”

1 2 3 4

INTRODUTION

TO

MERGER

&

ACQUISITION GOLDEN RULES FOR MERGERS MOTIVES FOR MERGERS AND

ACQUISITION TYPES OF COMBINATION OF MERGER OR AMALGAMATION

5 6 7 8 9

TYPES OF MERGERS AND ACQUISITION WHY MEREGER OF IN BANKING AND

INDUSTRY? PROCESS

MERGER

ACQUISITION CRITICAL FACTORS OF MERGER AND ACQUISITION RECOMMENDATIOSNS AND ACQUISITION OF MERGER

10 11

RBI GUIDELINES FOR MERGER AND ACQUISITION INTRODUCTION TO PUNJAB NATIONAL BANK

1

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s 12 13 14 15 16 17 18 19 20 21 22 INTRODUCTION TO NEDUNGADI BANK OBJECTIVES URGE TO MERGE FOUNDATION FOR MERGER’S IN INDIA RBI GUIDELINES FOR M&A IN PNB &NB BANK PROCESS FOLLOWED BY PNB &NB BANK FOR M&A NEED & REVIEW PROCESS FOR M & A CORPORATION KEY TO M & A PUBLIC SECTOR BANK TECHNOLOGY – A KEY TO MERGER KEY MESSAGES IMPACT OF MERGERS AND

AQUISITIONS

INTRODUCTION OF MERGERS & ACQUISITIONS
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MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

M e r g e r i s t h e c o m b i n a t i o n of t w o o r m or e c o m p a n i e s into a single company either t hr o u g h absorption or consolidation. In absorption, one company absorbs another

c o m p a n y w h e r e a s i n c o n s o l i d a t i o n t w o or m o r e c o m p a n i e s t o f o r m a n e w c o m p a n y . L e g a l l y , m e r g e r s ar e a l s o k n o w n a s amalgamations. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to T r a n s f e r e e C o m p a n y i n c o n s i d e r a t i o n o f p a y m e n t i n t h e f or m of: i) Equity shares in the transferee company, ii) Debentures in the transferee company, iii) Cash, or iv) A mix of the above modes.

➢ AMALGAMATION
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MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

Amalgamation company comes

can

be

defined is

as

the, known

two as

companies lose their individual identity and a new into existence, ‘Amalgamation’.

T h e w o r d ‘ M E R G E R ’ m a y b e t a k e n a s a n a b br e v i a t i o n , which means:

M E R G E R The factors f a v or i n g

Mixing Entities Resources for Growth Enrichment and Renovation gr o w t h , e nr i c h m e n t and

renovation should be taken into due consideration before stepping into the process of M&As so that the abbreviation truly comes out to be fruitful. Only then Indian banking industry will be able to stand r i g h t f o r t h t h e g l o b a l b a n k i n g c o m p e t i t i on h u r r i c a n e .

4

a s m a l l e r f i r m w i l l a c q u i r e m a n a g e m e n t c o n t r ol o f a larger or longer established banking company and keep its name for the combined entity. be change separate in legal of there control Mergers and Acquisitions in the industrial and services s e c t o r h a v e b r o u g h t n e w l i f e t o t h e s t y l e of d o i n g b u s i n e s s i n t o d a y ’ s w o r l d . h o w e v e r . m ar k e t 5 . A n a c q u i s i t i o n .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ➢ ACQUISITION: An acquisition can be defined as the two or more companies entity. G l o b a l i z a t i o n . t e c h n o l o g i c a l c h a n g e s . i s t h e b u y i n g of one company (the ‘target’) by another. may remain may independent. S o m e t i m e s . An acquisition may b e f r i e n d l y o r h o s t i l e A c q u i s i t i o n u s u a l l y r e f er s t o a p u r c h a s e o f a s m a l l e r f i r m b y a l a r g er o n e . a l s o k n o w n a s a t a k e o v e r . but companies.

I n t o d a y ’ s c o n n e c t e d w or l d . which was f or m e d by the a m a l g a m a t i o n o f t h e t hr e e p r e s i d e n c y b a n k s – t h e B a n k o f B e n g a l . technologies and products. F e w m e r g e r s h a v e t a k e n p l a c e t h e r e a f t e r – m a i nl y i n t h e p u b l i c s e c t o r . Consolidation will provide banks with new capabilities. the Indian banking industry has not been moving in tune with Indian businesses and has been s l o w e r t o r e s p o n d t o t h e h u g e gr o w t h o p p o r t u n i t i e s i n t h e market. r e d u c e t h e r i s k o f e n t e r i n g a n e w b u s i n e s s a n d r e d ef i n e t h e c o m p e t i t i v e e d g e through acquiring di f f er e n t streams of businesses. b a n k s w i l l h a v e t o b e competitive in order to face the challenges and leverage the opportunities. t h e B a n k o f B o m b a y a n d t h e B a n k of M a d r a s i n 1 9 2 1 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s deregulation and liberalization have driven the M & A wave a c r o s s t h e w o r l d . M&A in Indian banking is not new and dates back from Imperial Bank of India.p r i m ar i l y t o p r o t e c t t h e i n t e r e s t s o f 6 . b e c o m e m or e d i v e r s i f i e d . The ultimate goals of a bank are to increase i t s m a r k e t p o w e r . help to overcome entry barriers. W h i l e I n d i a n m a n u f a c t u r er s h a v e a d o p t e d M&A as their business strategy for growth and have achieved world standards. ensure immediate entry into new m ar k e t s and lower operating costs through consolidation of resources.

M e r g e r s a n d a c q u i s i t i o n s ar e e s s e n t i a l l y m e a n t t o attain realize greater on market share. synergies or to improved infrastructure. either between the banks and financial institutions or between banks and IT companies. 7 . and acquire additional new of scale brands. A n o t h e r i m p o r t a n t merger was that between Centurion Bank and Bank of Punjab. Worth $82. create capitalize effiencies economies globalize in the shorter span of time.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s d e p o s i t o r s o f w e a k p r i v a t e b a n k s . T h e m e r g er s w e r e n o t f o r economic considerations and usually distress mergers. cost effectiveness etc. economies of scale and scope of the risk mitigation through diversification. 6 b i l l i o n i n I n d i a n c ur r e n c y ) . I n t h e b a n k i n g s e c t o r . 7 . It also helps business capitalize on organizational synergies and thereby reap significant financial advantages. i m p o r t a n t m er g e r s a n d a c q u i s i t i o n s i n I n d i a i n r e c e n t y e a r s i n c l u d e t h e m er g e r b e t w e e n I D B I (Industrial Development bank of India) and its own s u b s i d i a r y I D B I B a n k . Banking the world over has been experiencing large scale mergers and acquisitions.1 million (Rs. All these mergers and acquisitions are driven by motivations like efficiency gains through synergies. 3. T h e d e a l w a s w or t h $ 1 7 4 .6 billion in Indian currency). 6 m i l l i o n ( R s . this merger led to the creation of the Centurion B a n k o f P u n j a b w i t h 2 3 5 br a n c h e s i n d i f f e r e n t r e g i o n s o f I n d i a .

T h er e ar e 1 5 di f f er e n t t y p e s o f actions that a company can take when deciding to move f o r w a r d u s i n g M & A . SOME GOLDEN RULES OF MERGER 8 . T r a d e l i b e r a t i o n . non-economic factors like prestige. Acquisitions can also happen through a hostile t a k e o v e r b y p u r c h a s i n g t h e m a j or i t y of o u t s t a n d i n g s h a r e s o f a c o m p a n y i n t h e o p e n m ar k e t a g a i n s t t h e w i s h e s of t h e target's board. t h e c o n c e p t s o f i n t er n a t i o n a l a n d Global banking. M e r g e r i s a t o o l u s e d b y c o m p a n i e s f o r t h e p u r p o s e of expanding their operations often aiming at an increase of t h e i r l o n g t e r m p r o f i t a b i l i t y .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Sometimes. pervasive effects of technology have also influenced bank mergers and acquisitions. market p o w e r o r m a r k e t d o m i n a n c e h a v e a l s o i nf l u e n c e d M & A a c t i v i t y . U s u a l l y m er g e r s o c c u r i n a c o n s e n s u a l (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties.

don’t go wandering off to a competitor. MOTIVES OF MERGER AND ACQUISITION ➢ GROWTH: 9 .  Be honest with employees: Start early and communicate constantly with them.  Time to do internal recruiting: Ensure the managers you want to keep.  Adopt each other’s best traits: Don’t assume the bigger company or the acquirer has all the answer. the culture.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s  Don’t rush the wedding: Do your homework carefully to prevent surprises.  Know what you are buying: Not only financials but. maybe more important.

S i n c e t h e f o r m er i s v e r y s l o w . s t e a d y a n d r e l a t i v e l y c o n s u m e s m o r e t i m e t h e l a t t e r i s p r e f er r e d b y f i r m s . ➢ MARKET ENTRY : Firms that are cash rich use acquisition as a strategy t o e n t e r i n t o n e w m ar k e t o r n e w t e r r i t o r y o n w h i c h they can build their platform WHY THERE IS THE NECESSITY OF PUBLIC SECTOR BANK MERGER? 10 . w h i c h a r e d y n a m i c a n d r e a d y t o c a p i t a l i z e o n o p p or t u n i t i e s . m er g e r s m a y r e s u l t i n c o n s o l i d a t i n g t h e i r p o s i t i o n i n t h e m ar k e t . ➢ MANAGERIAL EFFICIENCY : S o m e a c q u i s i t i o n s ar e m o t i v a t e d b y t h e b e l i ef t h a t t h e acquirer’s management can better manage the target’s r e s o u r c e s . ➢ STRATEGY : T h e s t r a t e g i c r e a s o n s c o u l d d i f f e r o n a c a s e . I n s u c h c a s e s . if the two firms have c o m p l i m e n t a r y b u s i n e s s i n t e r e s t s .t o. t h e v a l u e o f t h e t ar g e t f i r m w i l l rise under the management control of the acquirer. At times.c a s e basis and a deal to the other.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s O n e o f t h e f u n d a m e n t a l m o t i v e s t h a t e n t i c e m er g e r s i s i m p u l s i v e g r o w t h . O r g a n i z a t i o n s t h a t i nt e n d t o e x p a n d n e e d to choose between organic growth or acquisitions driven g r o w t h .

P. h e said. associations in each bank. made it clear that the United Progressive Alliance Government would go ahead with as its policy were decision of f or encouraging competition m er g e r s in the and a c q u i s i t i o n s f o r c o n s o l i d a t i o n o f p u bl i c s e c t o r b a n k s ( P S B s ) they necessary global financial markets.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s The Finance Minister. I n a u g u r a t i n g a b r a n c h of t h e P u n j a b N a t i o n a l B a n k h e r e ." TYPES OF COMBINATION OF MERGERS & AMALGAMATION. c o n v e r g e n c e a n d c o n s o l i d a t i o n w i l l b e t h e k e y dr i v e r s o f t h e b a n k i n g i n d u s t r y i n t h e f u t ur e . Chidambaram. convergence and consolidation — of the banking industry among the employees and staff. t h e b a n k i n g staff and the management should take the lead in spreading t h e m e s s a g e a t e v e r y l e v e l a s a m a t t er o f r e s p o n s i b i l i t y . h e urged the PSB staff to bear in mind that "competition.” There are unions. " A n d i n t h i s . Each one h a s a r e s p o n s i b i l i t y t o c o m m u n i c a t e a b o u t t h e n e w d r i v er s — competition. TAKEOVER & ACQUISITIONS 11 .

these terms are used in broad sense. t a k e o v e r . One or more companies may m e r g e w i t h a n e x i s t i n g c o m p a n y or t h e y m a y m er g e t o f o r m a n e w c o m p a n y . s e c t i o n 2 ( 1 A) of t h e i n c o m e t a x a c t . W e s h a l l d e f i n e t h e s e t er m s k e e p i n g i n m i n d t h e r e l e v a n t l e g a l f r am e w o r k i n I n d i a . Sometimes.t e n t h s i n v a l u e of t h e s h a r e s i n 12 . 1 9 6 1 d e f i n e s a m a l g a m a t i o n a s t h e m er g e r o f o n e or m o r e c o m p a n i e s w i t h a n o t h e r c o m p a n y o r t h e m er g e r of t w o o r more companies (called amalgamating company or companies) to form a new company (called amalgamated company) in such a way that all assets and liabilities of the A m a l g a m a t i n g c o m p a n y or c o m p a n i e s b e c o m e a s s e t s a n d liabilities of the amalgamated company and shareholders h o l d i n g n o t l e s s t h a n n i n e . while sometimes they are defined in a r e s t r i c t e d l e g a l s e n s e . r e g a r d i n g t h e p r e c i s e m e a n i n g o f t er m s r e l a t i n g t o t h e business combination. m e r g er . F o r e x a m p l e . amalgamation and consolidation. ➢ MERGER OR AMALGAMATION : A m e r g e r i s s a i d t o o c c u r w h e n t w o or m o r e c o m p a n i e s combine into one company. encompassing most dimensions of business combination. a c q u i s i t i o n . L a w s i n I n di a u s e t h e t e r m a m a l g a m a t i o n f or m e r g e r .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s There is a great deal of confusion and disagreement v i z .

An 13 . i n a n a c q u i s i t i o n t w o or m or e c o m p a n i e s m a y r e m a i n i n d e p e n d e n t . ➢ TAKEOVER A t a k e o v e r m a y a l s o b e d ef i n e d a s o b t a i n i n g of control over management of a company by another. Merger or amalgamation may take two forms: ● Merger through absorption ● Merger through consolidation ➢ ACQUISITION: A f u n d a m e n t a l c h a r a c t e r i s t i c o f m e r g e r ( e i t h er through absorption or consolidation) is that the acquiring c o m p a n y ( e x i s t i n g o r n e w) t a k e s o v e r t h e o w n e r s h i p of o t h e r c o m p a n i e s a n d c o m b i n e s t h e i r o p er a t i o n s w i t h i t s o w n o p e r a t i o n s . A n a c q u i s i t i o n m a y b e d e f i n e d a s a n a c t of a c q u i r i n g e f f e c t i v e c o n t r o l b y o n e c o m p a n y o v er a s s e t s o r m a n a g e m e n t o f a n o t h e r c o m p a n y w i t h o u t a n y c o m b i n a t i o n of c o m p a n i e s . s e p a r a t e l e g a l e n t i t y . b u t t h er e m a y be change in control of companies.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s the amalgamating company or companies become shareholders of the amalgamated company. T h u s .

A company can have effective control over another company by holding minority ownership. legal control. TYPES OF MERGER AND ACQUISITION M e r g e r a n d a c q u i s i t i o n d e p e n d s u p o n t h e p ur p o s e f or w h i c h the target company is acquired. takeover means acquisition of not less than 25 percent of the voting power in a company. A company will seek to acquire the other company only when it has arrived at its 14 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s acquisition or take-over does not necessarily entail full. Under the monopolies and Restrictive Trade Practices Act. The investment in shares of other companies in excess of 10 per cent of the subscribed capital can result into their takeover.

T h e e c o n o m i e s o f 15 . It has to aim at a suitable combination w h e r e i t c o u l d h a v e o p p or t u n i t i e s t o s u p p l e m e n t i t s f u n d s . m e r g e r s c a n b e d i v i d e d i n t o t hr e e c a t e g o r i e s : Types of Merger & Acquisition Horizontal Mergers Vertical Mergers Conglomerate Mergers ( i ) HORIZONTAL MERGERS: A h o r i z o n t a l m e r g er i n v o l v e s a m e r g e r b e t w e e n t w o f i r m s o p e r a t i n g a n d c o m p e t i n g i n t h e s a m e ki n d o f b u s i n e s s a c t i v i t y .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s own internal strength. secure additional financial facilities. T h e m a i n p ur p o s e o f s u c h m er g e r s i s t o o b t a i n e c o n o m i e s o f s c a l e of pr o d u c t i o n . eliminate competition and strengthen its market position. Based on the reason why f i r m c o m b i n e .

T h e y a r e c o m b i n a t i o n of c o m p a n i e s t h a t u s u a l l y h a v e b u y e r seller relationships. H or i z o n t a l m er g e r s a l s o h a v e a potential to create monopoly power on the part of the combined firm enabling it to engage in anticompetitive practices. H or i z o n t a l m e r g e r s o f e v e n s m a l l e n t e r p r i s e s m a y c r e a t e c o n d i t i o n s t r i g g e r i n g c o n c e n t r a t i o n of economic power and oligopoly. r e d u c t i o n i n i n v e s t m e n t i n w o r k i n g c a p i t a l . e x e r c i s e of b e t t e r c o n t r o l o n market. c o m p e t i t i o n l a w . in many countries restrictive business p r a c t i c e s l e g i s l a t i o n o r .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s s c a l e i s o b t a i n e d b y t h e e l i m i n a t i o n of d u p l i c a t i o n o f facilities and operations and broadening the product line. e l i m i n a t i o n of competition in a product. i n o t h er w o r d s . Hence. i n c r e a s e i n m a r k e t s h a r e . A company involved in a vertical 16 . looks at enforcing strict regulations on the merging or i n t e g r a t i o n o f c o m p e t i t o r s . H o r i z o n t a l m er g e r s r e s u l t i n d e c r e a s e i n t h e number of firms in an industry and hence such type of m e r g e r s m a k e i t e a s i e r f o r t h e i n d u s t r y m e m b e r s t o j oi n t t o g e t h e r f o r m o n o p o l y pr o f i t s . reduction in advertising costs. (II) VERTICAL MERGERS: A v e r t i c a l m er g e r i n v ol v e s m er g e r b e t w e e n f i r m s t h a t a r e i n d i f f e r e n t s t a g e s o f pr o d u c t i o n o r v a l u e c h a i n . etc.

Firms integrate vertically between various stages due reasons like technological economies. i m pr o v e d planning f or inventory and p r o d u c t i o n . the merging company would be either a supplier or buyer using its product as an intermediary material for final production. The a c q u i r i n g c o m p a n y t h r o u g h m er g e r o f a n o t h e r u n i t a t t e m p t s to reduce inventories of raw material and finished goods. S u c h t y p e o f m er g e r e n h a n c e s t h e o v e r a l l s t a b i l i t y of the acquirer company and creates balance in the 17 . etc. T h e basic purpose of such combination is utilization of financial r e s o u r c e s . r e c o n c i l i a t i o n of d i v e r g e n t i n t e r e s t s of p a r t i e s t o a transaction.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s merger usually seeks to merge with another company or would like to takeover another company mainly to expand its operations by backward or f or w a r d i n t e gr a t i o n . I n o t h er w o r d s . in vertical combination. implements its production plans as per objectives and e c o n o m i z e s o n w o r k i n g c a p i t a l i n v e s t m e n t s . (III) CONGLOMERATE MERGERS : C o n g l o m e r a t e m e r g er s i n v o l v e m e r g er b e t w e e n f i r m s e n g a g e d i n u n r e l a t e d t y p e s of b u s i n e s s a c t i v i t y . elimination of transaction costs.

These mergers broaden the product line of the c) Pure conglomerate mergers involve merger between two firms with unrelated business activities. two types of conglomerate firms can be distinguished. b ) G e o g r a p h i c m a r k e t e xt e n s i o n m e r g e r s i n v o l v e a m e r g er between two firms operating in two different geographic ideas. Conglomerate mergers can be distinguished three types: ● Product extension mergers ● G e o g r a p h i c m a r k e t e x t e n s i o n m er g e r s a n d ● P u r e c o n g l o m e r a t e m e r g er s . business activities and mat also be concentric mergers. 18 . W i t h i n t h e b r o a d e r c a t e g o r y of c o n g l o m e r a t e m e r g e r s .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s c o m p a n y ’ s t o t a l p o r t f o l i o o f d i v e r s e pr o d u c t s a n d p r o d u c t i o n p r o c e s s e s a n d t h e r e b y r e d u c e s t h e r i s k of i n s t a b i l i t y i n t h e firm’s cash flow. a) Product extension mergers are merger between firms in related firms. They do not come under product extension or market extension mergers.

the acquired company transfers its assets. potential ➢ CONSOLIDATION : A consolidation is a combination of two or more B a n k i n g c o m p a n i e s i n t o a n e w c o m p a n y . ➢ MANAGERIAL CONGLOMERATES: Managerial Conglomerates transmit the attributes of f i n a n c i a l c o n g l o m e r a t e s s t i l l f ur t h e r . e x e r c i s e c o n t r o l a n d a r e t h e f i n a n c i a l r i s k t a k e r s . T h e y n o t o n l y a s s u m e f i n a n c i a l r e s p o n s i b i l i t y a n d c o n t r o l .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ➢ FINANCIAL CONGLOMERATES: F i n a n c i a l C o n g l o m e r a t e s pr o v i d e a f l o w of f u n d s t o e a c h s e g m e n t o f t h e i r o p er a t i o n s . I n t h i s f or m of merger. liabilities and shares to the acquiring c o m p a n y f o r c a s h o r e x c h a n g e of s h a r e s . B y p r o vi d i n g m a n a g e r i a l guidance and interactions increase the on decisions. In a consolidation. all companies are legally dissolved and a new entity is created. for managerial improving conglomerates performance. T h e y u n d er t a k e s t r a t e g i c p l a n n i n g but do not participate in operating decisions. b u t a l s o p l a y a r ol e i n o p e r a t i n g d e c i s i o n s . a n d pr o v i d e s t a f f e x p e r t i s e a n d s t a f f s e r v i c e s t o t h e o p e r a t i n g e n t i t i e s . 19 .

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s MERITS OF CONSOLIDATION ➢ Revenue enhancement : C o n s o l i d a t i o n c a n l e a d t o increased revenues through its effects on firm size. or m a r k e t p o w e r . The merger of ICICI Ltd. economies of scope. ➢ Efficiencie s in operations : M & A s c a n l e a d t o reduction in costs for a variety of reasons. R e s e a r c h s u g g e s t s pr o v i d e o p p o r t u ni t i e s revenue enhancement either from efficiency gains or from increased market power. fails to find much evidence suggesting that cost savings constitute an important outcome of M&As. However many pointed 20 . which focuses on cost savings attributable to economies of scale. or more efficient allocation of resources. many indicated that revenue enhancement due to increased size was a moderately important factor motivating consolidation. And ICICI Bank clearly demonstrates in the Indian context that consolidation can lead to increased revenue. firm that scope mergers (through may either product some or geographic for d i v e r s i f i c a t i o n ) . The existing research literature. However.

in At the speed same and time. Such gains are most likely to arise due to asset d i v er s i f i c a t i o n also d er i v e across f r om geographies. ➢ Diversification of income from both products and geographic area : The one ar e a where consolidation seems most likely to reduce firm risk is the potential for diversification gains.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s to economies of scale as a very important motivating factor for consolidations. ➢ Ability to spread fixed costs over a larger customer base: N e w t e c h n o l o g i c a l d e v e l o p m e n t s h a v e e n c o u r a g e d c o n s o l i d a t i o n b e c a u s e of t h e i r h i g h fixed costs and the need to spread these costs across a large customer base. dramatic of improvements the quality c o m m u n i c a t i o n s a n d i n f or m a t i o n p r o c e s s i n g h a v e m a d e i t p o s s i b l e f o r f i n a n c i a l s e r v i c e p r o v i d er s t o of f e r a b r o a d e r a r r a y o f p r o d u c t s a n d s e r v i c e s t o l ar g e n u m b e r of clients over wider geographic areas than had been feasible in the past. although even here the possibilities are complex. some gains may 21 .

or g a n i z a t i o n a l institutions b e c o m e l a r g e r a n d m or e c o m p l e x i f s e n i o r m a n a g e m e n t t e a m s s t r a y f a r f r o m t h e i r ar e a s of c o r e c o m p e t e n c y . In addition. diversification gains may r e s u l t f r o m c o n s o l i d a t i o n a c r o s s f i n a n c i a l pr o d u c t s a n d services. ➢ Stabilization of asset quality : S m a l l s i z e d b a n k s with weaker assets would find it difficult to survive in the long run as they need to meet the additional capital requirements. More broadly there is no guarantee that cost savings or efficiency gains will be realized. The exit route for such banks will be to get absorbed by the banks with strong asset quality. F or e x a m p l e . 22 . On the other hand after consolidation some firms shift t o w ar d s may may riskier increase occur as asset portfolios risks and and consolidation diseconomies o p er a t i n g financial m a n a g e r i a l c o m p l e x i t i e s .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s geographic diversification on the liabilities side of the balance sheet.

a d v e r s e l y af f e c t i n g c u s t o m e r s ’ i n t e r e s t s . In banking industry the same may lead to monopoly affecting the customer services.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s DEMERITS OF CONSOLIDATION ➢ Customer service : Merger of two Banking c o m p a n i e s m a y r e s u l t i n d i l ut i o n o f c o m p e t i t i o n i n t h e m a r k e t . The larger 23 .

➢ Depositors interests : Af t e r t h e c o l l a p s e of a m a j o r p r i v a t e s e c t o r b a n k . However it has been reported in t h e p a s t t h a t m a n y d e p o s i t o r s of t h e e r s t w h i l e Benares State Bank Ltd.1 lakh have got back at 24 . be potential e l i m i n a t e d . O r . a l a r g e u ni t m a y t a k e i n t o i t s f o l d a n efficient growing medium small-sized undertaking.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s undertaking. Is the claim correct? Not really.: t h e i r money is safe. d e p o s i t o r s h a v e n e v e r l o s t m o n e y af t e r b a n k r u n s that led to mergers and amalgamations. consequent on merger. an individual undertaking. ➢ Elimination it an actual and or of competition : competitor. have not got back all their money. a n d i t s s u b s e q u e n t m e r g er in July 2004 with a public sector bank. People who have deposits worth more than rs. or In may a get merger/amalgamation. which was amalgamated with bank of Baroda in June 2002. Authorities say that in the past. (BSBL). depositors of p r i v a t e b a n k h e a v e a c o l l e c t i v e s i g h o f r e l i e f . may exercise a market power to the detriment of its customers and suppliers.

o n e w a y o r ot h e r . The depositors of the BSBL were adversely affected in the amalgamation. t hi s c a n be achieved through a reduction in ‘cost’ or an increase in ‘revenue’. u t i l i z a t i o n o f i d l e f u n d s . WHY MERGERS IN BANKING INDUSTRY? We have earlier seen that value maximization is the key r a t i o n a l e f o r M & A i n b a n k s . n ur s i n g a s i c k u ni t o r b e t t e r / optimal utilization of capacity. A s I m e n t i o n e d e a r l i e r . Let us see how consolidation could help to achieve these objectives: 25 . s t a b i l i t y t hr o u g h d i v e r s i f i c a t i o n .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s most 85. i n m o s t o f t h e cases. depositors have suffered in the amalgamation process. t h o u g h m e r g e r s of b a n k s a r e o b j e c t e d t o w a r d s s a f e g u a r d i n g o r pr o t e c t i n g t h e i n t e r e s t o f t h e d e p o s i t o r s . This raises two very important q u e s t i o n s : j u s t h o w s a f e ar e t h e r s .15%. These adverse features may or may not be o u t w e i g h e d b y t h e p o s i t i v e f e a t ur e s of m er g e r s s u c h a s e c o n o m i e s o f s c a l e . 1 5 9 3 0 0 0 cr o r e worth of bank deposits ion India? And who is really responsible for ensuring safety of bank deposits? I n m o s t o f t h e c a s e s .

T h e m e r g e d e n t i t y w i l l b e a b l e t o reduce credit risk t hr o u g h spreading it across wider geographies or product range. d) Reduction in risk .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ➢ ACHIEVING COST REDUCTION: a) Cost reduction through economy of Scale - Consolidation helps in scaling in up operations. E x a m p l e : B a n k s c a n o f f e r i n s u r a n c e a n d i n v e s t m e n t pr o d u c t s u s i n g t h e i r b r a n c h n e t w o r k a n d t h e r e b y a c h i e v e e c o n o m y of scope c)Cost reduction through rationalization of man power : T h e m e r g e d e n t i t y w i l l b e a b l e t o i d e n t i f y t h e r i g h t p e r s o n s t o m a n c r i t i c a l f u n c t i o n s f r om a l ar g e r p o ol o f human resources.T h i s i s achieved through synergy i n v o l v e d i n t h e a b i l i t y t o o f f er m u l t i p l e p r o d u c t s u s i n g t h e s a m e i n f r a s t r u c t ur e . 26 . there by reducing per unit cost b) Cost reduction through economy of Scope .

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s e) Cost reduction t hr o u g h possible reduction in tax obligations f ) C h e a p e r s o u r c i n g of i n p u t s w i t h i n c r e a s e d b a r g a i n i n g power with vendors and suppliers g) Ability to enter new business areas with reduced initial cost as compared to a new set up. ➢ Increasing Revenue : a) A bigger entity will be able to serve a large customer better. By offering more services and taking bigger share in the business of the customer the bank will be able to increase the revenue per customer b) Product diversification will facilitate ‘one stop shopping’ by the bank’s customers. 27 .

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s c ) A l a r g e r c u s t o m e r b a s e w i l l g e n e r a t e m or e r e v e n u e d) Greater visibility in the market place will enhance the ability to attract new customers. PROCESS OF M&As Generally.e. e) A bigger size and share in the market will boost the bank’s ability to raise pr o d u c t prices w i t h o ut losing customers f ) T h e m e r g e d e n t i t y w i l l b e a b l e t o t a k e b i g g er r i s k a n d reap its rewards. business fit management and financial strength. the merger transaction includes the following steps: ➢ Screening proposal : and When investigation t h er e is an of merger of intention a c q u i s i t i o n o r m e r g e r of o t h e r b u s i n e s s u n i t . 28 . t h e primary step is that of screening and motive needs to be judged against three strategic criteria i.

shareholding pattern. The acquirer company should not only c o n s i d e r t h e b e n e f i t s t o b e o bt a i n e d b u t a l s o b e careful about the attendant risks. Before the negotiations start. earnings. After the consideration is decided then the payment t e r m s a n d e x c h a n g e r a t i o of s h a r e s b e t w e e n t h e companies will be decided the exchange ratio is an 29 . the seller needs to d e c i d e t h e m i n i m u m pr i c e a c c e p t a b l e a n d t h e b u y e r needs to decide the maximum he is ready to pay. market share. this form of investigation w i l l b r i n g o u t t h e s t r e n g t h s a n d t h e w e a k n e s s e s of both one’s own company and the perspective merger candidate. dividends. management. gearing.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s O n c e t h e p r o p o s a l f i t i n t o t h e s t r a t e g i c m ot i v e of t h e a c q u i r e r . t h e n t h e m a t t e r w i l l b e c a r r i e d f u r t h er . t h e n t h e p r o p o s e d a c q u i r er w i l l c o l l e c t all relevant i n f or m a t i o n relating to the target company about share price movements. ➢ Negotiation stage : The negotiation is an important stage in which the bargain is made in o r d e r t o s e c u r e t h e h i g h e s t pr i c e b y t h e s e l l e r a n d t h e a c q u i r e r k e e n t o l i m i t t h e pr i c e of t h e b i d . benefits from proposed acquisition etc. If the proposal is v i a b l e a f t e r t hr o u g h a n a l y s i s f r o m a l l a n g l e s . financial position.

30 . A p p r o v e d v a l u er o r a f i r m o f C h a r t e r e d A c c o u n t a n t s will evaluate the shares on t h e b a s i s of a u d i t e d accounts as on the transfer date. ➢ Approval of shareholders : T w o .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s important factor in the process of amalgamation.t h i r d m a j or i t y o f t h e s h a r e h o l d e r s of e a c h b a n k s h o u l d a p p r o v e t h e d r a f t s c h e m e o f m er g e r .t h i r d m a j or i t y o f t h e m e m b er s o n t h e i r boards and not just those present at the board meeting alone. t r a n s f e r or a n d t r a n s f e r e e c o m p a n y a s p e r t h e n o r m s a n d m e t h o d s o f v a l u a t i o n of s h a r e s . ➢ Approval of RBI : A p p r o v a l s f r o m t h e R B I i s m u s t b e f o r e t h e m e r g er a s R B I i s t h e a p e x b o d y i n c a s e of banking sector. then the proposal will be put for t h e B o a r d o f D i r e c t o r ’ s a p pr o v a l . T h e R B I h a s s t i p u l a t e d t h a t m er g e r o f b a n k s s h o u l d h a v e t h e c o n s e n t o f t w o . a f t e r n e c e s s a r y c l e a r a n c e s b y t h e i r b o a r d of d i r e c t o r s . T h i s h a s t o b e w o r k e d o u t b y v a l u i n g t h e s h a r e s of t h e b o t h . ➢ Approval of proposal by Board of Directors : Deciding upon the consideration of the deal and terms of payment.

➢ Integration stage : aspects of the two T h e s t r u c t u r a l a n d c u l t ur a l organizations. confirming the scheme of amalgamation is r e q u i r e d . 31 . if applicable.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ➢ Approval of respective high court (s): Approval of respective high court of seller and acquirer. T h e c o u r t s h a l l i s s u e o r d er s f o r w i n d i n g up of the amalgamating company without d i s s o l u t i o n o n r e c e i p t o f t h e r e p or t s f r o m t h e o f f i c i a l l i q u i d a t or a n d t h e R e g i o n a l d i r e c t o r t h a t t h e affairs of the amalgamating company have not been c o n d u c t e d i n a m a n n e r pr e j u d i c i a l t o t h e i n t e r e s t s o f its members or to public interest. ➢ Approval of central government : D e c l a r a t i o n of the central government on the recommendation ➢ made by the specified Authority under section 72A of the income tax act. if carefully integrated in the new organization will lead to the successful merger and ensure that expected benefits of merger are realized.

T h i s i s c a l l e d winners curse hypothesis. O f t e n h i g h e s t b i d d e r i s o n e w h o o v er e s t i m a t e s value out of ignorance. he h a p p e n s t o b e i n a w a y t h e u nf o r t u n a t e w i n n e r . Though he emerges as the winner. a company may tend to p a y m o r e . Excessive premium In a competitive bidding situation. When the acquirer fails to achieve the synergies required compensating the price. the M&As 32 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s CRITICAL FACTORS FOR MERGERS AND ACQUISITIONS WHY DO MERGERS FAIL? 1.

the harder you will have t o w o r k t o m a k e i t w o r t h w h i l e f o r y o ur s h a r e h o l d e r s . Lack of research A c q u i s i t i o n r e q u i r e s g a t h er i n g a l o t o f d a t a a n d i n f or m a t i o n and analyzing it. A carelessly carried out research about the acquisition causes the destruction of acquirer's wealth. Diversification Very few firms have the ability to successfully manage the d i v e r s i f i e d b u s i n e s s e s . the deal may not create value. 4. More you pay for a company. Many a c q u i s i t i o n s f a i l e i t h e r b e c a u s e of ' a c q u i s i t i o n i n d i g e s t i o n ' t h r o u g h b u y i n g t o o b i g t ar g e t s or f a i l e d t o g i v e t h e s m a l l e r acquisitions the time and attention it required. It requires extensive research. Size Issues A mismatch in the size between acquirer and target has been found to lead to poor acquisition performance. how well the deal may be executed. 2.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s fails. 3. l o w er c a p i t a l p r o d u c t i v i t y a n d a h i g h e r d e gr e e o f v a r i a n c e i n p e r f or m a n c e 33 . U n r e l a t e d d i v er s i f i c a t i o n h a s b e e n a s s o c i a t e d w i t h l o w e r f i n a n c i a l p e r f or m a n c e . W h e n the price paid is too much.

6. are cultural that due diligence will is every bit as to due important as careful financial analysis. I t m a y a l s o h e l p t h e m b y t a k i n g a d v i c e i n or d e r t o m a x i m i z e chances of acquisition success. are more likely to make successful acquisitions. Those serial acquirers. Cultural 34 . Previous experience will help the a c q u i r e r s t o l e a r n f r o m t h e pr e v i o u s a c q u i s i t i o n m i s t a k e s a n d h e l p t h e m t o m a k e s u c c e s s f u l a c q u i s i t i o n s i n f ut u r e . a lack of focus as well as perceived inability to gain meaningful synergies. who p o s s e s s t h e i n h o u s e s k i l l s n e c e s s a r y t o p r o m ot e a c q u i s i t i o n success as well trained and competent implementation team. the chances great M&As and quickly amount misunderstanding.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s f o r a v a r i e t y o f r e a s o n s i n c l u d i n g a l a c k o f i n d u s t r y or geographic knowledge. 5. Without it. Previous Acquisition Experience While previous acquisition experience is not necessarily a requirement unsuccessful for future acquisition usually have success. However. m a y turn out to be big disappointment in reality. w h i c h m a y a p p e a r t o b e v er y p r om i s i n g . Poor Cultural Fits C u l t u r a l f i t b e t w e e n a n a c q u i r e r a n d a t ar g e t i s o n e of t h e m o s t n e g l e c t e d a r e a s o f a n a l y s i s p r i o r t o t h e c l o s i n g of a deal. confusion conflict. little many previous acquirers acquisition experience. U nr e l a t e d a c q u i s i t i o n s .

Faulty evaluation 35 . Poor Organization Fit Organizational fit is described as "the match between a d m i n i s t r a t i v e p r a c t i c e s . P o t e n t i a l s o u r c e s o f c l a s h must be managed. management of conflict. time horizon for decisions. It influences the ease with which two organizations can be integrated during i m p l e m e n t a t i o n . It is n e c e s s a r y t o a s s e s s t h e c u l t ur a l f i t b e t w e e n t h e a c q u i r e r a n d t a r g e t b a s e d o n c u l t u r a l pr o f i l e . etc. risk orientation. openness to change. It is necessary to identify the impact of cultural gap. 8. M i s m a t c h o f or i g i n a t i o n f i t l e a d s t o f a i l u r e of mergers. c u l t u r a l pr a c t i c e s a n d p e r s o n n e l characteristics of the target and acquirer.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s d i l i g e n c e i n v o l v e s t e p s l i k e d e t er m i n i n g t h e i m p o r t a n c e o f c u l t u r e . level of team work. and develop and execute strategies to use the i n f o r m a t i o n i n t h e c u l t ur a l p r of i l e t o a s s e s s t h e i m p a c t t h a t the differences have. speed in decision making. a s s e s s i n g t h e c u l t u r e o f b o t h t ar g e t a n d a c q u i r e r . I t i s u s e f u l t o k n o w t h e t a r g e t m a n a g e m e n t b e h a v i or w i t h respect to dimensions such as centralized versus decentralized decision making. 7.

10. Over Leverage 36 . They make a wrong assessment of the b e n e f i t s f r o m t h e a c q u i s i t i o n a n d l a n d u p p a y i n g a h i g h er price. Incomplete and Inadequate Due Diligence L a c k o f d u e d i l i g e n c e i s l a c k of d e t a i l e d a n a l y s i s of a l l important features like finance. management. I S P AT S t e e l i s a c o r p o r a t e a c q u i r er t h a t c o n d u c t s M & A a c t i v i t i e s a f t e r e l a b o r a t e d u e di l i g e n c e . capability. M e r g e r o f e q u a l s m a y a l s o cr e a t e e g o c l a s h . T h e D u n l o p P i r e l l i m e r g e r i n 1 9 6 4 . Merger between Equals M e r g e r b e t w e e n t w o e q u a l s m a y n o t w or k . 11. w h i c h cr e a t e d t h e w or l d ' s s e c o n d largest tier company. 9. physical assets as well as intangible assets results in failure.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s A t t i m e s a c q u i r e r s d o n o t c a r r y o u t t h e d e t a i l e d d i l i g e n c e of the target company. ended in an expensive d i v or c e . Manufacturing plants can be integrated easily. human beings c a n n o t .

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

Cash acquisitions results in the acquirer assuming too much d e b t . F u t u r e i n t e r e s t c o s t c o n s u m e s t o o gr e a t a p or t i o n o f t h e a c q u i r e d c o m p a n y ' s e a r n i n g s ( B u s i n e s s I n d i a 2 0 0 5) . 1 2 . Incompatibility of Partners Alliance between two strong companies is a safer bet than between two weak p ar t n e r s . Frequently many strong c o m p a n i e s a c t u a l l y s e e k s m a l l p ar t n e r s i n o r d e r t o g a i n control while weak companies look for stronger Banking Company.

1 3 . L a c k o f P r o p e r C o m m u n i c a t i on Lack of proper communication after the announcement of M&As will create lot of uncertainties. Apart from getting down to business quickly companies have to necessarily talk to employees and constantly. Regardless of how well e x e c u t i v e s c o m m u n i c a t e d ur i n g a m e r g e r or a n a c q u i s i t i o n , uncertainty will never be completely eliminated. Failure to manage communication results in inaccurate perceptions, l o s t t r u s t i n m a n a g e m e n t , m or a l e a n d pr o d u c t i v i t y p r o b l e m s , s a f e t y p r o b l e m s , p o o r c u s t o m e r s e r v i c e , a n d d e f e c t i o n of k e y p e o p l e a n d c u s t o m e r s . I t m a y l e a d t o t h e l o s s of t h e s u p p o r t of key stakeholders at a time when that support is needed the most.

37

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

14. Failure of Leadership Role Some of the role leadership should take seriously are modeling, quantifying strategic benefits and building a case for M&A activity and articulating and establishing high standard for value creation. Walking the talk also becomes very important during M&As.

Research Shows That In Most Cases Mergers Fail To Deliver Against Their Expectations, Whatever The Rationale
Poor deal

• • •

Unrealistic synergies Price too high Competitor reactions

30 70

38

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

Good deal poorly implemented

60-70 failed

• • • • •

Poor integration management Failure to address cultural differences Customer losses Poor communication Poor tracking

60-70

RECOMMENDATIONS FOR A SUCCESSFUL MERGER
P e o p l e i n v o l v e d i n a n M & A d e a l e n d u p w i t h t o n s of d e a l fees and bonuses. They also frequently find their name in the newspapers, particularly if the merging companies are big e n o u g h . T o b e c o m e a s u c c e s s f u l M & A b a n k er y o u s h o u l d have of qualities land like communication the skills, a pleasing to
39

personality, a head for relationships, the knowledge of law the (especially legislations p er t a i n i n g

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s

takeovers,

share

transfers

and

buybacks)

and

sound

analytical skills.

➢ COMMUNICATION SKILL
As a banker you might have to do tough negotiations in o r d e r t o b r i n g a b o u t t h e d e a l . T h i s r e q u i r e s g o o d or a l c o m m u n i c a t i o n a b i l i t i e s a n d a c l e a r t hi n k i n g . I n t h e pr o c e s s o f n e g o t i a t i o n s , n u m e r o u s of f er s a n d c o u n t e r - of f er s w o u l d be made. Deep analytical skills and quick thinking are n e e d e d t o i m m e d i a t e l y u n d er s t a n d t h e i m p l i c a t i o n s o f a l l such terms. Strong mental abilities and personality is necessary for quick decision-making. The work also entails good deal of diplomacy and patience so that the deal doesn’t f a i l d u e t o t h e i m p e r t i n e n c e o f t h e i nt e r m e d i a r y .

➢ TEAM WORK
O n e s h o u l d a l s o b e a g o o d t e a m w o r k er . A p a r t f r o m t h e m e m b e r s o f y o u r o w n or g a n i z a t i o n , y o u a l s o n e e d to work with the executives/management of the client. While working out the details of the deal, one also has t h e o t h e r c o m p a n y ’ s of f i c i a l s o n t h e t e a m . M o r e o v e r , t h e b a n k e r h a s t o w o r k w i t h s i m i l a r b a n k e r s of o t h e r i n v e s t m e n t b a n k s w h o m i g h t b e r e pr e s e n t i n g b o t h t h e companies.
40

and should cover all t h e k e y a s p e c t s o f a n or g a n i z a t i o n i n c l u d i n g p e o p l e . F or o r i g i n a t i n g d e a l s . strategic thinking and creativity in identifying business s y n e r g i e s a r e e s s e n t i a l . ➢ EFFECTIVE PLANNING “Success in m er g e r s and acquisitions correlates directly with the level of planning that goes into them. systems and organizational processes. a l l o t h er a b i l i t i e s like working for long hours. Effective 41 . sustaining on p a t h e t i c d e s k t o p l u n c h e s e t c . Plans need to include realistic goals and reasonable timeframes.” C a r e f u l a n d e a r l y p l a n n i n g h a s b e e n s h o w n t o i nf l u e n c e the success of a merger. flying from an airport to another (sometimes i n t er n a t i o n a l l y ) . not just four). documentation skills and taxation k n o w l e d g e a r e h i g h l y w e l c o m e .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ➢ FINANCIAL SKILLS Sound financial skills are required as many aspects of the merger are numerical in nature. w o u l d a l s o b e h e l p f ul . . You might even h a v e t o i d e n t i f y t h e s y n e r g i e s i n v o l v e d i n t h e m e r g er (the theory of synergy says 2 + 2 = 5. A d d i t i o n a l l y . Legal knowledge.

With an increasing trend towards global m er g e r s . w h i c h i s often a major reason behind the decision to merge.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s planning leads the way to a smoother implementation p r o c e s s a n d m a x i m i z e s t h e c h a n c e s of s u c c e s s o f t h e merging organization. and companies should consider providing language training t o t h e i r e m p l o y e e s i f t h i s c a n b e n e f i t t h e i nt e g r a t i o n 42 . s h o u l d t a k e p r i o r i t y d u r i n g t h e m e r g er pr o c e s s . ➢ RETAINING KEY PEOPLE T h e r e t e n t i o n of a t a l e n t e d w or k f or c e . language barriers also need to be taken into consideration. a n d management needs to adopt measures to improve the retention rate of the best people in the merging companies. ➢ MANAGING CULTURAL DIFFERENCES Companies that are merging need to be aware of cultural differences between them and need to find practical ways of reconciling those differences.

c u l t u r a l a w a r e n e s s a n d s e n s i t i v i t y a r e cr u c i a l t o a v o i d potential clashes and misunderstandings between the people in the two companies RBI GUIDELINES ON MERGERS & ACQUISITIONS OF BANKS With a view to facilitating consolidation and emergence o f s t r o n g e n t i t i e s a n d pr o v i d i n g a n avenue for non disruptive exit of weak/unviable entities in the banking sector. S u c c e s s f u l l y i n t e g r a t i n g t h e t w o c u l t ur e s of t h e m e r g i n g c o m p a n i e s i s a n e s s e n t i a l s t e p t o w ar d s achieving a successful partnership. it has been decided to frame guidelines to encourage merger/amalgamation in the sector.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s p r o c e s s . In order to do this. 43 .

o p e r a t i v e b a n k r e g i s t e r e d u n d e r t h e C E NT R A L .o p e r a t i v e society under the State Acts with that under the Central Act. order it is felt that. Although there are no specific provisions in the State A c t s o r t h e C e n t r a l A c t f o r t h e m er g e r of a c o . if all concerned RBI may including consider administrators of the concerned Acts are agreeable to merger/ amalgamation. p r o p o s a l s o n m e r i t s l e a v i n g t h e q u e s t i o n of c o m p l i a n c e w i t h r e l e v a n t s t a t u t e s t o t h e a d m i n i s t r a t or s o f t h e A c t s . t h e p o s i t i o n w i t h r e g a r d t o t a k e o v e r of a co-operative bank registered under the State Act by a c o . of RBI for an order. 1949 does not empower Reserve Bank to formulate a scheme with r e g a r d t o m e r g e r a n d a m a l g a m a t i o n of b a n k s . While the State Acts specifically p r o v i d e f o r m e r g e r of c o . t h e S t a t e G o v e r n m e n t s h a v e i n c o r p or a t e d i n t h e i r r e s p e c t i v e A c t s a p r o v i s i o n f o r o b t a i n i n g p r i o r s a n c t i o n i n wr i t i n g .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Although the Banking Regulation Act. for sanctioning a scheme of amalgamation or reconstruction. 44 . The request for m e r g er can emanate from banks registered under the same State Act or from banks registered under the Multi State Co-operative Societies A c t ( C e n t r a l A c t ) f or t a k e o v e r o f a b a n k / s r e g i s t e r e d under State Act. inter-alia.o p e r a t i v e s o c i e t i e s r e g i s t e r e d u n d e r t h e m .

DETAILED CASE STUDY OF “PUNJAB NATIONAL BANK” & “NEDUNGADI BANK” PUNJAB NATIONAL BANK Introduction: Punjab National Bank (PNB) was established in 1895 at L a h o r e . Once the valuation is accepted by the respective banks. valuation report etc to Reserve Bank of India a n d o t h e r r e g u l a t or y b o d i e s s u c h S e c u r i t y & e x c h a n g e b o a r d o f I n d i a ( S E B I ) f o r t h e i r a p pr o v a l . P N B h a s t h e d i s t i n c t i o n of b e i n g t h e f i r s t I n d i a n 45 . its reach and a n t i c i p a t e d g r o w t h a n d s e n d s i t s r e p or t t o t h e r e s p e c t i v e banks. Valuates the banks on the basis of its share capital. they send the proposal along with all relevant documents such as Board approval. assets and liabilities. market capital. only Reserve to Bank will confine and to its the examination financial aspects i n t e r e s t s o f d e p o s i t o r s a s w e l l a s t h e s t a b i l i t y of t h e financial system while considering such proposals. shareholders approval.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s In other words.

P u n j a b National Bank has achieved many awards and distinctions. London.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s bank to have been started solely with Indian capital.A . Punjab National Bank was nationalized along with 13 other banks P u n j a b N a t i o n a l B a n k s e r v e s o v e r 3 . Ranked as 323rd biggest bank in the world by Bankers Almanac (January 2006). Economic Times. In 1969.4 0 6 2 br a n c h e s a n d 4 4 7 e x t e n s i o n c o u n t e r s s p r e a d a l l o v er t h e c o u n t r y . 5 cr o r e c u s t o m e r s a n d h a s t h e l a r g e s t b r a n c h n e t w o r k i n I n d i a . C N i e l s o n S ur v e y .2005 by Institute of Directors. Earned 9th place among India's Most Trusted top 50 service b r a n d s i n E c o n o m i c T i m e s . 46 . Golden Peacock Award for Excellence in Corporate Governance . Ranked 368 amongst the top 1000 banks in the world according to "The Banker" London. Major among them are: Ranked 21st amongst top 500 companies by the leading financial daily.

1 .07%.2005. T h e P u n j a b N a t i o n a l B a n k t o d a y t o o k o v er t h e 47 . T h i s increased the paid up capital of the Company to Rs 135.p e r s h a r e a g g r e g a t i n g R s 1 0 5 c r or e i n J u l y 2 0 0 0 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s F I C C I ' s R u r a l D e v e l o p m e n t A w a r d f or E x c e l l e n c e i n R u r a l Development . On Feb. NEDUNGADI BANK It is a Kerala-based bank paving the way for the Delhibased bank’s expansion in the southern state. The Company decided to expand its capital base & came w i t h a n I P O o f R s 3 . 5 c r o r e s h a r e s a t a n o f f e r p r i c e of R s 3 0 / .01 c r o r e s a n d r e d u c e d t h e h o l di n g o f P u n j a b N a t i o n a l B a n k t o 74.

The RBI had placed the K er a l a .b a s e d bank under moratorium up to February 1. S .b a s e d Nedungadi Bank has announced that it is ready for the merger with Punjab National Bank. K o h l i . Announcing the takeover. 0 0 0 i n t h i s period.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Nedungadi Bank Limited (NBL). “The Board has approved the merger of Nedungadi Bank with PNB. b u t a m er g e r of north and south is on the cards. 2003. T h e m e r g e r m o v e f o l l o w s t h e R e s e r v e B a n k n o t i f yi n g t h e d r a f t s c h e m e of a m a l g a m a t i o n o f N e d u n g a d i B a n k w i t h P N B o n N o v e m b er 1 4 . a s s u r e d f u l l pr o t e c t i o n to the customers and depositors E A S T A N D W e s t m a y n o t r e a d i l y m e e t . the oldest private sector bank in Kerala. S . t h e P N B C h a i r m a n . K e r a l a. and restricted d e p o s i t o r s f r o m w i t h dr a w i n g m or e t h a n R s 5 . We have to do the due diligence now. 48 . with all its 174 branches working as PNB branches.” PNB chairman S S Kohli.

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s The probable objectives behind m er g e r s and acquisitions may be highlighted as given below: 1 ) T o o v e r c o m e t h e p r o b l e m of s l o w p a c e of gr o w t h a n d profitability due to widening of banking industry. 49 . 2) To revive a loss-making bank as it may not be able to restore the Non Performing Assets (NPAs) on its own.

The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s 3 ) T o u t i l i z e t h e u n d e r u t i l i z e d m a r k e t p o w e r i n t er m s of regional or geographical coverage in the best possible manner. Global evidence seems to suggest that even 50 . 6) To gain economies of scale and increase in income in proportion to less amount of investment. Most o f t h e P S B s a r e e i t h e r l o o k i n g t o p i c k u p a s m a l l e r b a n k or w a i t i n g t o b e p i c k e d u p b y a l ar g e r b a n k .( t h i s h a p p e n s w h e n t h e m e r g e r i s v e r t i c a l o r c o n g l o m e r a t e) 5 ) T o l i m i t c o m p e t i t i o n a n d pr e v e n t o v e r cr o w d i n g a n d mushrooming up of many banks. This is the only bank from India to make it to the list of Top 100 banks. 4 ) T o a c h i e v e s o m e s o r t o f d i v e r s i f i c a t i o n . globally. 8) To carve a niche for oneself as a strategic empire builder amass vast economic power URGE TO MERGE I n t h e r e c e n t p a s t t h e r e h a s b e e n a l o t of t a l k a b o u t I n d i a n Banks lacking in scale and size. 7) To utilize under utilized resources. The resources include human. physical or managerial skills.

Merger of unequals PNB Nedungadi Bank (as a % of PNB) 51 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s though there is great enthusiasm when companies merge or g e t a c q u i r e d . B e f o r e a m e r g e r i s c a r r i e d o u t c u l t ur a l i s s u e s s h o u l d b e l o o k e d i n t o . S o t h e i n t e g r a t i o n pr o c e s s m i g h t b e c o m e v e r y d i f f i c u l t . "Worldly wisdom teaches us that it's better for reputation t o f a i l c o n v e n t i o n a l l y t h a n s u c c e e d u n c o n v e n t i o n al l y " . A b a n k b a s e d p r i m ar i l y o u t o f N or t h I n d i a m i g h t w a n t t o a c q u i r e a b a n k b a s e d pr i m a r i l y o u t o f S o u t h I n d i a t o i n c r e a s e i t s g e o g r a p h i c a l p r e s e n c e b u t t h e i r c u l t ur e s m i g h t b e v e r y d i f f e r e n t . m a j o r i t y o f t h e m e r g er s / a c q u i s i t i o n s d o n o t really work. Banks should avoid falling into this trap. The banks must not just merge because everybody around t h e m i s m e r g i n g . A s K e y n e s wr o t e . T e c h n o l o g i c a l c o m p a t i b i l i t y i s a n o t h er i s s u e t h a t n e e d s t o b e l o o k e d i n t o i n d e t a i l s b ef o r e a n y m e r g e r or acquisition is carried out. S o i n t h e z e a l t o m e r g e w i t h or a c q u i r e a n o t h e r b a n k t h e PSBs should not let their common sense take a back seat.

734 cr 562 cr Negative 4.369 cr 1.2 2. I n a c c u r a t e e s t i m a t i o n of m a r k e t p o t e n t i a l 2.123 cr 34.2 as of FY02 PRICE FOR ACQUISITION WOULD LARGELY DEPEND UPON: a) b) c) d) e) Strength of selling company Number of bidders P o s s e s s i o n o f i n s i d e i n f or m a t i o n Motives of buyers Macro economic realities and conditions UNCERTAIN BLOCKS IN M & A : 1 . Hidden Liabilities 52 .870 64. Overestimation of synergies 3.2 2.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Networth Branches Deposits Advances Net NPAs Income Profit 3.2 13.9 0. Valuation pitfalls 4.24 cr 3.5 2.810 cr 7.216.

Poor public relations 9.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s 5. “What you see is not what you get” POSITIVE ASPECTS ACQUISITIONS ● Enhance entity value OF MERGERS AND ● Increase leveraging capability ● Lower cost of capital ● Cash in-flows ● Cheaper working capital ● Tax benefits NEGATIVE ASPECTS OF MERGERS AND ACQUISITONS ● Valuation pitfalls 53 . Implementation delays 8. Cultural differences 7. Conflict of Interest 10. Size mismatch 6.

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ● Hidden liabilities ● Size mismatch ● Limited funding options ● Unviable transaction cost FOUNDATION FOR MERGERS IN INDIA W e w i l l n o w e x a m i n e s o m e of t h e u n d e r l y i n g f a c t o r s behind the wave of mergers and acquisitions in India in recent times. D i v er s i f i c a t i o n c a n b e u s e d a s a t o o l to hedge risk. ➢ ECONOMIES OF SCALE 54 . ➢ DIVERSIFICATION D i v e r s i f i c a t i o n a f or m of i n o r g a n i c gr o w t h m a y b e a c h i e v e d b y b u y i n g t h e f i r m s a l r e a d y s e r v i n g t h e t ar g e t markets (acquisition) or by establishing new facilities i n t h e t a r g e t a r e a s .

which to has a positioned financial itself from a wholesale lender supermarket. t h er e is consolidation in the industry to cut costs. ICICI. These acquisitions h a v e h e l p e d I CI C I t o o b t a i n q u i c k a c c e s s t o a w e l l dispersed distribution network. ➢ TAX ADVANTAGES 55 . has acquired ITC Classic Finance and Anagram Finance in a bid to penetrate the retail market. This happens by means of fragmented players being acquired by big firms or some big firms merging together. acquiring companies with good m a n u f a c t u r i n g a n d d i s t r i b u t i o n n e t w o r k s or f e w b r a n d s o f a c o m p a n y g i v e s t h e a d v a n t a g e of a r a p i d m a r k e t share.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s When the industry reaches the maturity stage ( w h e r e t h e g r o w t h i s s t a g n a t e d ) or i s i n r e c e s s i o n . ➢ EARLY ENTRY PENETRATION AND MARKET An early mover strategy can reduce the lead time taken in establishing the facilities and distribution channels. So.

Take the example of l e n d i n g b u s i n e s s i n I n d i a w h e r e F l s a n d b a n k s ar e c o m p e t i n g with each other by entering into each other's business. ➢ SIZE I n t h e g l o b a l b u s i n e s s .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Some acquisitions are made with the sole intention t o g e t a t a x s h i e l d . d i d n o t e n c o ur a g e t h e f o u n d a t i o n o f f u l l y . f o r e i g n f i r m s h a v e g e n e r a l l y l o o k e d a t j o i n t v e n t u r e s or acquisitions of majority stakes in the Indian firms. An attempt 56 . So. looking at the d i s a d v a n t a g e s a s s o c i a t e d w i t h t h e f or m a t i o n o f s u b s i d i a r i e s .o w n e d subsidiaries by foreign firms. There has been some consolidation to increase the size. T h i s i s m or e s o i n c a s e o f a c q u i r i n g of sick banking companies where the acquirer gets the tax shield in the form of unclaimed depreciation and carry forward losses. s i z e h a s b e c o m e o n e of t h e important parameters for competition. i n a b i d t o pr o t e c t t h e d o m e s t i c i n d u s t r y . This can also be a quick entry strategy. ➢ REGULATORY CONSIDERATIONS I n d i a n g o v e r n m e n t .

Acquiring company must be able to provide the top management to the acquired company. RULES FOR SUCCESFUL MERGER: According to Peter Drucker (1981). 2.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s t o a c h i e v e g l o b a l e c o n o m i e s of s c a l e c a n b e s e e n i n t h e merger of SCICI with ICICI. A common core of unity is required. Acquirer must contribute something to the acquired. 57 . 4. T h e D r u c k e r f i v e c o m m a n d m e n t s f or s u c c e s s f u l a c q u i s i t i o n s a r e : 1. Acquirer must respect the business of the acquired firm. 3. e c o n o m i c a l l y s e n s i b l e m er g e r s m u s t f o l l o w f i v e r u l e s .

RBI Guidelines for “PUNJAB NATIONAL BANK ” AND “NEDUNGADI BANK ” T HE R e s e r v e B a n k o f I n d i a t o d a y u n v e i l e d t o p u b l i c a d r a f t s c h e m e t o m er g e t h e K e r a l a . T h e p r o p o s e d s c h e m e o f a m a l g a m a t i o n o f f e r s f u l l pr o t e c t i o n o f a l l p u b l i c d e p o s i t s i n t h e o l d pr i v a t e s e c t o r b a n k . T h e R B I said in a notification that it had got several requests from depositors of Nedungadi Bank to allow them to withdraw in e x c e s s o f R s 5 . m a n a g e m e n t i n b o t h t h e c o m p a n i e s s h o u l d r e c e i v e pr o m o t i o n a c r o s s t h e e n t i t i e s . 58 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s 5 . 0 0 0 f o r v a r i o u s p er s o n a l a n d o t h e r r e a s o n s and that it would consider these requests on a case-to-case basis depending on the genuineness.b a s e d N e d u n g a d i Bank with Punjab National Bank (PNB). The scheme would be available to the public from both the banks. W i t h i n t h e f i r s t y e a r of m e r g e r .

59 . ➢ The d r a f t m e r g e r pr o p o s a l m i g h t r e q u i r e t h e Intervention to minimise the possible loss that could result Punjab National Bank. powers. ➢ The books of the Nedungadi Bank will be closed a n d t h e b a l a n c e d b a l a n c e s h e e t p r e p ar e d a s o n November 2. claims and d e m a n d w i l l b e t r a n s f e r r e d t o P u nj a b N a t i o n a l B a n k from data to be notified by the RBI. liabilities. ➢ E n t i r e p a i d – u p c a p i t a l of t h e N e d u n g a d i B a n k w i l l be treated as the bad and doubtful debts and ➢ Depreciation.2002.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s ➢ All the Employees of the Nedungadi Bank will become the Employee of the Punjab National Bank on the same pay and terms. ➢ All the assets.

screening and the negotiation. consists of the search. T h e implementation contacting the stage target. T h e p l a n n i n g s t a g e c o n s i s t s of t h e d e v e l o p m e n t o f t h e b u s i n e s s a n d t h e a c q u i s i t i o n s pl a n s . integration e v a l u a t i o n a c t i v i t i e s .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s THE MERGER AND ACQUISITION PROCESS The M&A process can be divided into a planning stage and a n i m p l e m e n t a t i o n s t a g e . I n s h o r t t h e pr o c e s s of a c q u i s i t i o n c a n be summarized in the following steps: 60 .

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s MERGER & ACQUISITIONS PROCESS Business Plan Acquisition Plan Search Screen First Contact 61 .

A business plan c o m m u n i c a t e s o r v i s i o n f or t h e f i r m a n d a s t r a t e g y f o r achieving that mission. ➢ BUILDING THE ACQUISITION PLAN After a proper analysis of the various available options if it is determined that a merger or an 62 . The acquisition strategy should fit the b a n k i n g c o m p a n y ’ s s t r a t e g i c g o a l s of i n c r e a s i n g t h e n e t cash flow and reduce risk.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Negotiation Integrating Plan Closing Integration Evaluation ➢ DEVELOPING THE BUSINESS PLAN D e c i s i o n o n a m er g e r or a n a c q u i s i t i o n i s a strategic choice.

➢ THE SEARCH PROCESS After the firm has developed a viable business plan that a c q u i r e s a n a c q u i s i t i o n r e a l i z e t h e f i r m ’ s s t r a t e g i c di r e c t i o n and an acquisition plan. ➢ THE SCREENING PROCESS T h e s c r e e n i n g p r o c e s s s t a r t s w i t h t h e r e d u c t i o n of t h e initial list of potential candidates identified by using the primary criteria such as the size and the type of industry. t h e market share etc are also used in the screening process. then an acquisition plan is prepared.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s a c q u i s i t i o n p r o c e s s i s a p p r o pr i a t e t o i m p l e m e n t t h e business strategy. the search for the right candidate for acquisition begins. In addition to the p r i m ar y criteria employed. O t h e r m e a s u r e s l i k e t h e f i r m ’ s pr o f i t a b i l i t y . ➢ First Contact 63 . secondary s e l e c t i o n c r i t e r i a i n c l u d e a s p e c i f i c m ar k e t s e g m e n t w i t h i n t h e i n d u s t r y o r a s p e c i f i c p r o d u c t l i n e w i t hi n t h e m ar k e t s e g m e n t .

T h e actual purchase consideration is determined during this p h a s e .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s T h e c o n t a c t p h a s e of t h e p r o c e s s i n v o l v e s m e e t i n g the acquisition candidate and p ut t i n g forward the proposal of acquisition. F or t h e r e s u l t t o b e i n l i n e 64 . This activity is a k e y i n p u t i n d e t e r m i n i n g t h e p ur c h a s i n g p r i c e . a s i t h e l p s i n i d e n t i f y i n g a p r a c t i c a l l i m i t o f t h e a m o u n t of the purchase price the buyer can offer the seller. ➢ NEGOTIATION The negotiation phase of the acquisition process consists of many activities conducted simultaneously b y t h e v a r i o u s m e m b er s of t h e a c q u i s i t i o n t e a m . O n e o f t h e i m p or t a n t a c t i v i t i e s i n t h e n e g o t i a t i o n phase is to develop a financing plan. I m p r o v i n g t h e pr e l i m i n a r y v a l u a t i o n b a s e d o n n e w i n f o r m a t i o n r e v e a l e d d ur i n g d u e d i l i g e n c e pr o v i d e s t h e s t a r t i n g p o i n t f or n e g o t i a t i n g t h e a g r e e m e n t of purchase and sale. ➢ Integration Plan: Making the combined firm perform in line with the e x p e c t a t i o n s i s a d i f f i c u l t t a s k . T h i s i s d i f f e r e n t f r om t h e pr e l i m i n a r y v a l u a t i o n of the target company made when the first contact is m a d e .

Proper care must be exercised to ensure that all the necessary filings required by law have been made. a n d w i t hi n t h e t i m e provided in the acquisition plan. a t t h e c o s t i n c l u d e d i n . Without adequate p l a n n i n g . ➢ INTEGRATION: T h i s i s t h e m o s t i m p or t a n t i n t e g r a t i o n p h a s e i n t h e acquisition process. All the necessary legal approvals are attained at this stage. regulatory and third party consents. i n t e g r a t i o n i s u n l i k e l y t o pr o v i d e t h e s y n e r g i e s a n t i c i p a t e d b y . It consists of all necessary shareholder. ➢ CLOSING: C l o s i n g i s t h e f i n a l l e g a l pr o c e d u r e w h e r e t h e b a n k i n g company changes hands. p r o p er p l a n n i n g i s n e d d e d b e f o r e t h e agreement of purchase and sale is signed.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s w i t h e x p e c t a t i o n s . ➢ EVALUATION: 65 .

t o d e t er m i n e . Only a few a c q u i r i n g f i r m s c l o s e l y m o n i t o r t h e p er f o r m a n c e o f t h e acquisition according to the plan. The lessons can sometimes be embrassing.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s The post-closing evaluation is done to determine if the a c q u i s i t i o n i s m e e t i n g e x p e c t a t i o n s . 66 . Success of the merger can be measured by evaluating the a c t u a l p e r f o r m a n c e o f t h e f i r m af t e r t h e m e r g e r a g a i n s t t h e performance anticipated in the acquisition plan. but help not to commit the same mistakes in the future acquisitions. c o r r e c t i v e actions if necessary . Many firms commonly o v e r l o o k t h i s p h a s e a n d f a i l o u t t h e e f f e c t i v e n e s s of t h e acquisition process. to identify what was done and what should be done to avoid making the same mistakes in the future acquisitions.

P o o r l y c o n c e i v e d or b a d l y e x e c u t e d b a n k m e r g e r s w h i c h l e a d t o s u b s e q u e n t f a i l ur e o f t h e m er g e r entity can present risks to the entire economy as a stable b a n k i n g s y s t e m i s a p r er e q u i s i t e f o r a h e a l t h y e c o n o m y . NEED FOR A MERGER REVIEW PROCESS Banks play a vital role in the payment and settlement system o f a n e c o n o m y . T h e r e f o r e w h i l e c o n s i d e r i n g a n y pr o p o s a l f o r t h e m e r g er o f b a n k s . I n o r d e r t o m i t i g a t e t h e r i s k of a f a i l u r e o f a l a r g e merger banking organization there is a definite need to 67 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s T h e m e r g e r p r o c e s s w i l l n o d o u b t c h a n g e i n t h e n e ar f u t u r e . a s d y n a m i c t e c h n o l o g i e s a l l o w f or t h e d e v e l o p m e n t o f a more streamlined marketplace which manages to protect the privacy of interested companies while linking up ideal candidates for a merger. i t w i l l b e n e c e s s a r y t o e v a l u a t e t h e i m p a c t of t h e merger on the safety and the soundness of the banking s y s t e m .

The RBI will need to examine the reasonableness of financial p r oj e c t i o n s . a While undertaking the merger review process. as a result of the merger since banks in India also have to fulfill various social obligations. S i n c e R B I i n i t s c a p a c i t y o f t h e pr i m a r y r e g u l a t o r a n d s u p e r v i s o r o f t h e b a n k i n g s y s t e m h a s i nf o r m a t i o n o n t h e present functioning of all the banks in India. impact on society. The assessment will i n v ol v e a r e vi e w of the m e r g er applicants’ implementation and integration plans. RBI will also need to examine the implications on regional development. RBI will need to examine proposal m e r g er prudential perspective to gauge the impact on stability and financial well being of the merger applicants and on the financial system. as well as examination of their completeness and reasonableness and any challenges that might be posed. the RBI is best suited to undertake the the m er g e r for review from process. In addition to the assessment of the impact of the p r o p o s e d m e r g e r o n t h e c o m p e t i t i v e n e s s a n d s t a b i l i t y of t h e financial system. i n c l u d i n g b u s i n e s s p l a n s a n d e ar n i n g s a s s u m p t i o n s a s w e l l a s t h e e f f e c t o f t h e p r o p o s e d m e r g er o n t h e m e r g e d e n t i t y ’ s 68 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s develop a merger review process and also to identify the a u t h o r i t y t h a t w i l l b e r e s p o n s i b l e f o r c o n d u c t i n g t h e m e r g er review process. etc.

p a r t i c u l ar l y t h e e x t e n t t o w h i c h t h e l e v e l o f r i s k w o u l d c h a n g e a s a r e s u l t of t h e proposed merger and the merger entity’s ability to measure. Finally. any amalgamation plan between two p u b l i c s e c t o r b a n k s w o u l d r e q u i r e P ar l i a m e n t a r y a p p r o v a l and this might lead to long delays.' it be necessary c or p o r a t i s e registered under the `Companies Act. RBI will have to consider potential changes to risk profiles and the capacity of merger a p p l i c a n t s r i s k m a n a g e m e n t s y s t e m s . he said. Since would public sector banks to are governed them by and the get `Bank them Nationalization Act' and the `Banking Regulation Act.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s capital position. “CORPORATISATION – A KEY TO MERGER OF PUBLIC SECTOR BANKS” T HE Indian Banks Association is of the view that ` c o r p o r a t i s a t i o n ' o f p u bl i c s e c t o r b a n k s m a y b e t h e k e y t o f a c i l i t a t i n g t h e m e r g e r b e t w e e n P S U b a n k s i n t h e f u t ur e . Alternatively. monitor and manage those risks. 69 .' according to an IBA source.

I t ’ s a b s o l u t e l y e s s e n t i a l . t o 70 .” S o r t i n g o u t t h e i n f o r m a t i o n t e c h n o l o g y ( I T ) i s s u e s a f t er a bank merger is a massive exercise. TECHNOLOGY’S THE KEY TO A MERGER “Technology increasingly lies at the heart of a modern bank and it is a critical issue that can make or break a merger. amalgamations have been relatively easier as they are governed by the `Companies Act. a n d t h e process is relatively quicker.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s In the case of private sector banks.' Here the decision to merge is taken by shareholders w i t h t h e a p p r o v a l o f t h e R e s e r v e B a n k o f I n di a . and usually leads to paralysis for one to two years while the IT departments try to work things out. according to sources. t h e r e f or e .

” says an IT consultant w h o h a s s e e n o n e m e r g er f r o m c l o s e q u a r t e r s . “So while they may be handling the same fundamental banking functions like deposits. W h a t d o e s I T i n t e g r a t i o n r e a l l y i n v ol v e ? E a c h b a n k h a s i t s own data centre.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s carefully consider p r i or to the merger whether the t e c h n o l o g y p l a t f o r m s a r e s i m i l a r or a t l e a s t c a p a b l e of t a l k i n g t o e a c h o t h e r . “ J u s t a s miracles cannot happen o v er n i g h t . By consolidating data centre. w h a t t h e o v er l a p p i n g t e c h n o l o g y c o s t s a r e a n d w h a t t h e c o s t o f pr o c e s s i n t e gr a t i o n i s . implementation is vastly different. an enormous amount of costs can be saved. . different database vendors. different networks. use different technologies for scanning cheques and they may not even speak the same computer language. he says. interest calculations. 71 . and all that a bank is for the customer. withdrawals. There could be cases where both banks have different hardware. the snap of the c h a i r m a n ’ s f i n g e r s c a n n o t m e r g e t h e r e c o r d s o f m i l l i o n s of customers in one database”.

72 . KEY MESSAGES ➢ M&A in the Indian banking sector is an opportunity and an essential. ➢ M&A has to be based on a banking foundation and e f f e c t i v e e x e c u t i o n – t h e r e i s n ot e n o u g h t r a c k record of that in the Indian banking sector. ➢ India may have to follow a managed transition model to ensure a stronger banking sector. For instance.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s What’s more. “ U s u a l l y bank officials are not competent to decide which IT platform would be better. should Bank A which is working on SAP decide to acquire Bank B w h i c h i s o n t h e O r a c l e p l a t f or m . mergers between two banks that work on different platforms could be difficult. t h e m a n a g e m e n t w o u l d n e e d t o e i t h e r m o d u l a t e o n e o f t h e t w o or s c r a p o n e . with IT vendors ensuring their indispensability.

We have noticed that . generally. provides useful insight into the manner in which dealmakers view employees.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s LEVERS OF VALUE IN M&A 1 Collections 2 Processes 3 Distribution 4 Infrastructure 5 IT 6 Operations Revenue enhancement 7 Product Segments Key source of value for the acquirer Ability to maximise the speed and recovery of NPAs Ability to redesign processes Ability to integrate and rationalise branches and other channels Ability to combine corporate/regional infrastructure Ability to upgrade overall technology Ability to quickly centralise operations Ability to upgrade product range and increase cross-sell Ability to ensure geographic growth and synergy Cost savings 8 Geographies 9 Cost of funds 10 Trading income Treasury improvement Ability to reduce cost of funds Ability to leverage scale and improve trading income IMPACT OF MERGERS & ACQUISITIONS ➢ IMPACT ON EMPLOYEES: The consideration the of public in i n t er e s t merger gr o u n d s . very little consideration 73 . review particularly employment the process in South Africa.

This highlights the strength of the competition regulatory environment/framework in that it takes into account the issues affecting employees directly affected by a particular transaction. The critical issue is that in mergers and acquisitions. A c c o r d i n g t o t h e m e r g i n g p a r t i e s t h i s i s d o n e i n o r d er t o r e d u c e c o s t s and other duplications once the firms have merged. because public interest issues justify that it be prohibited. i t i s i m p or t a n t t o m e a s u r e s u c h f a i l u r e a g a i n s t t h e c o s t s o f l o s s o f j o b s f or e m p l o y e e s . if a pro-competitive merger will result in m a s s i v e j o b l o s s e s . In other words. C o m p e t i t i o n l a w e nf o r c e m e n t i n S o u t h A f r i c a p r o v i d e s for merging parties to consider the impact that a particular merger will have on employment. be noted that we have never turned down a p r o .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s i s g i v e n t o t h e f at e of e m p l o y e e s i n m e r g er s a n d a c q u i s i t i o n s . F i r m s m u s t t a k e i nt o 74 . I t i s i n f a c t a c c e p t e d t h a t t h er e s h o u l d b e j o b l o s s e s a s a r e s u l t of a m e r g e r . however. It must. Employees should not be considered as merely ‘collateral d a m a g e ’ i n m e r g e r s a n d a c q u i s i t i o n s .c o m p e t i t i v e m er g e r o n t h e g r o u n d s o f j o b l o s s . the t i m e h a s c o m e t o r e v i e w t h e i m p a c t t h a t t h e s e m e r g er s m a y h a v e o n e m p l o y e e s . t h a t m e r g er m a y b e p r o h i b i t e d o n that basis alone. S i n c e m o s t m e r g er s e v e n t u a l l y f a i l t o a c h i e v e t h e p r o m i s e s m a d e .

employees in public sector banks a r e l o a t h t o m o v e f r o m o n e t a b l e t o a n o t h er o f s a m e branch. B e s i d e s . In India about 11% of the over 800000 strong bank employees opted for the first ever voluntary retirement scheme in the s t a t e r u n b a n k i n g i n d u s t r y . a political time boom t i c k i n g a w a y . i t w i l l a l s o c a l l f or l a r g e. ➢ IMPACT OF M&AS ON THE HUMAN RESOURCE-DEVELOPMENTEMPLOYEES : Human resource is another sensitive issues on the r o a d t o c o n s o l i d a t i o n . this is the major bottleneck in the mergers and acquisition phase. Now. So the frequent 75 . w i t h w o r k er s s u d d e n l y b e c o m i n g u n e m p l o y e d . the trade union seems to be willing to a l l o w m o b i l i t y f or e m p l o y e e s w i t h i n a d i s t r i c t .s c a l e redeployment of employees. T h e E ur o p e s u r v e y e s t i m a t e s t h a t 130000 jobs have been lost in the last 10 years as a result of mergers and takeovers alone.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s a c c o u n t t h e s o c i a l a n d o t h er i m p a c t s t h a t o c c u r a s a r e s u l t of t h e s e m e r g e r s . B u t mergers will force them to move from one state to another state.. T h e c o n s o l i d a t i o n dr i v e w i l l make more employees redundant. Traditionally.

38 14. i n t er m s o f w o r k i n g h o u r s m o t i l i t y and skills excellent and highly motivated employees of t h e m e r g e d e n t i t y m a y f e e l f r u s t r a t e d a n d m a y r e s i g n or t h e y m a y n o t g i v e t h e i r b e s t t o t h e or g a n i z a t i o n w h i c h they were expected to. of staff deployment will not be M e r g e r s o f t e n l e a d t o h i g h er w or k l o a d s b e i n g placed on remaining staff.80 16.04 6.82 15.08 5.89 7.53 25.77 14.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s rationalization successful. Bank employees response to VRS offer Name of the bank Total VRS optees SBI Allahabad Bank Andhra Bank Bank of Baroda Bank of Maharashtra Bank of India Canara Bank Dena Bank Indian Bank Indian Overseas strength 237000 22345 14603 47054 16098 51962 55363 14412 25935 28008 35000 1571 1758 3200 2700 7700 8600 3710 3988 3944 800 Percentage 13.56 Bank Oriental Bank of 14398 of Commerce 76 . with companies requiring g r e a t e r f l e x i b i l i t y . It is very relevant especially for the service industry like banking.74 15.03 12.

83 16. experience from most M&As in the mid of 1980s is not very encouraging in this regard.96 14. However. many newly found merged cost banks and insurance increased.07 17.12 17. companies their structures r e s u l t i n g i n d u p l i c a t i o n of s t r u c t ur e a n d c o s t s r a t h e r than predicted savings. i m p er i l i n g the ability of m er g e d c o m p a n i e s t o a c h i e v e t h e h i g h er l e v e l s o f s a l e s r e v e n u e 77 .55 13.59 Bank Punjab and Sind 12192 Bank Syndicate Bank 33883 UCO Bank 31223 Union Bank of 30834 India Union Bank of 21316 13646 India Vijaya Bank ➢ IMPACT ON SHAREHOLDERS: Increasing shareholder value is generally held to b e t h e p a r a m o u n t o b j e c t i v e of m o s t M & A s t o d a y .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s Punjab National 65705 5800 2000 7157 5479 4303 3000 2400 8. The much slower growth in the 1990s and the of high target p r e m i um s companies. At that time. usually mean paid that to the shareholders restructuring needed to achieve satisfactory cost saving from mergers can only be obtained with much deeper cost cutting.40 21.

d e t e r i o r a t e d af t e r the event. Acquired companies which did badly in a d v a n c e o f m e r g e r w e n t f r o m b a d t o w o r s e f u r t h er m o r e . While looking at the impact of M & As 78 . i t i s f o u n d t h a t b e t w e e n 1 9 . w h i c h d i d w e l l p r i o r t o t h e m er g e r . T h e E u r o p e a p p o i n t s t hr e e e x e c u t i v e s t o s u r v e y the impact of M&As on shareholder.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s r e q u i r e d t o r e p a y m er g e r r e l a t e d d e b t a n d i n c r e a s e shareholder value. ➢ IMPACT ON CUSTOMERS: A n u m b e r o f pr o d u c t s a r e of f e r e d i n t h e M & A s phase by banks. A large US study showed that acquired companies. Their studies r e v e a l s h a r e p r i c e of t h e t a r g e t c o m p a n y i s p o s i t i v e . 4 7% o f a r e a c q u i s i t i o n s were disinvested within 10 years of acquisition. academic studies have consistently shown that only 15% of mergers are successful and over 60% have negative results. Over the years. W h i l e o n t h e s h a r e p r i c e of t h e a c q u i r i n g c o m p a n y i s n e g a t i v e i n t h e m e d i u m a n d l o n g t er m a f t e r t h e merger announcement.

T r a d i t i o n a l p r o v i d e r s h a v e r e s p o n d e d t o t h i s t r e n d. It is argued that recent trends in the financial services. They are able to do this because new information and communication technology allows them t o s a v e c o s t b y o p er a t i n g w i t h f e w e r br a n c h e s o r without a traditional br a n c h n e t w or k .i n order to meet consumer needs. offering more choices at the reduced prices. as they no longer have to rely on branch opening hours to conduct their business. the number of products in the market has increased significantly in the recent years. (i.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s o n p r o d u c t p r o v i s i o n . New p r o d u c t a n d p r o v i d er s a r e a l s o a r g u e d t o of f e r m a n y clients more time flexibility. as most new market entrants are seeking to compete on the basic of price. it is argued that in general. c h o i c e a n d t h e c o s t of pr o d u c t s . W h i l e t h e m a j o r i t y of larger.e. including mergers and acquisitions have had a v a r y i n g i m p a c t o n d ef e r e n t c l i e n t s . but also to cut running costs-by closing branches. without problems of bad credit histories) have benefited from the increase in the product choice and the proliferation o f i n f o r m a t i o n a n d c o m m u ni c a t i o n t e c h n o l o g y b a s e d 79 . wealthy and “standard” clients.

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s service this (such as as i n t er n e t lack banking) access to a significant required or the minority of individuals are detrimentally affected by trend they the information and communication technology knowledge to use while at the same thing losing access to local branches. As a r e s u l t t h e l e v e l of p h y s i c a l . t h r o u g h f or e . Such consumers argue that recent developments have 80 . m er g e r While job losses branch w er e in e v i d e n c e p r i o r t o t h e c u r r e n t m e r g e r w a v e . While a significant number of consumers welcome the ability to conduct t h e i r f i n a n c i a l b u s i n e s s a t a n y t i m e o f d a y . g . r e q u i r i n g c o n s u m e r s t o t r a v e l gr e a t e r d i s t a n c e to receive a personal service. c a l l c e n t e r or I n t er n e t s e r v i c e . l o c a l s e r v i c e pr o v i s i o n i s r e d u c e d . local face-to-face interaction. I n m a j or i t y accelerates closures programmer and the transfer of backroom functions. . Branch closures and the loss of many o t h er b a c k r o o m f u n c t i o n s a s a r e s u l t o f pr o l i f er a t i o n o f information and communication technology have led to significant of cases. o t h e r s r e g r e t t h e loss of more personal. job a losses.

I n c r e a s i n g m e r g er a c t i v i t y i s s e r v i n g o r e s t r i c t c o m p e t i t i o n a n d w i l l t h e r e f or e i n t h e long run be a disbenefit to consumers. BANK MERGERS AND ACQUISITIONS SINCE NATIONALIZATION Year 1989-90 1989-90 1989-90 1989-90 1990-91 1993-94 1993-94 1995-96 1996 1997 Bank/NBFC Merged with United Industrial Allahabad Bank Bank Bank of Tamilnad Bank of Thanjayur Parur Central Bank Purbanchal Bank N e w B a n k of I n d i a Indian overseas Bank Indian Bank B a n k o f I n di a Central bank India Punjab of national bank Bank of Karad B a n k o f I n di a K a s i n a t h S et h B a n k S B I SCICI I CI C I ITC Classic I CI C I 81 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s lowered the quality of financial service provision by bringing degradation of the relationship with the f i n a n c i a l s e r v i c e pr o v i d e r .

MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s 1997 1997 1998 1999 1999 Bari doab Bank Punjab Or i e n t a l Bank of of commerce C o . Times Bank Bank of Madura Benaras State Bank Nedungadi Bank S o u t h G u j ar a t L o c a l Ar e a B a n k Global Trust Bank 82 .Or i e n t a l B a n k commerce I CI C I Bank of Baroda operative Bank Anagram finance Bareilly C o r p or a t i o n B a n k 20th century Centurion Bank Finance C o r p or a t i o n British bank 1999 1999 2000 2001 2002 2003 2004 2004 of HSBC Union Bank HDFC Bank I CI C I Bank of Baroda Punjab National bank Bank of Baroda Or i e n t a l commerce bank of Middle East S i k ki m B a n k l t d .

liberalization. Business firms now have to face increased competition not only from firms w i t h i n t h e c o u n t r y b u t a l s o f r om i n t e r n a t i o n a l b u s i n e s s giants thanks to globalization. economies of scale. increase in domestic market share and also to c a p t u r e f a s t g r o w i n g i n t e r n a t i o n a l m ar k e t s a b r o a d . B u t 83 . b e t t e r f i n a n c i a l a n d m a r k e t i n g a d v a n t a g e s . changes. improved inventory management. etc.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s “The future is not going to be built brick by brick but it will be of the instant variety” M & A s h a v e b e c o m e v er y p o p u l ar o v e r t h e y e a r s e s p e c i a l l y during the last two decades owing to rapid changes that have taken place in the business environment. technological Generally the objective of M&As is wealth maximization of shareholders by seeking gains in terms of synergy. d i v er s i f i c a t i o n and reduced earnings volatility.

committed and competent leadership. M e t i c u l o u s p r e.MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s a s t o n i s h i n g l y . s p e e d w i t h w h i c h t h e i n t e g r a t i o n p l a n i s i n t e gr a t e d a l l t h i s p a v e f o r t h e s u c c e s s of M & A s . W h i l e m a k i n g t h e m er g e r d e a l s . the results of the studies on the impact of m e r g e r s o n t h e p e r f o r m a n c e f r o m t h e a c q u i r er s ' s h a r e h o l d e r s p e r s p e c t i v e h a v e b e e n hi g h l y d i s a p p o i n t i n g . t h o u g h t h e n u m b er a n d v a l u e o f M & A s a r e growing rapidly. i t i s n e c e s s a r y n ot o n l y t o m a k e a n a l y s i s of t h e financial aspects of the acquiring firm but also the cultural a n d p e o p l e i s s u e s o f b o t h t h e c o n c e r n s f o r pr o p e r p o s t acquisition integration. I n t h i s p a p e r a n a t t e m p t h a s b e e n m a d e t o d r a w t h e r e s u l t s o f o n l y s o m e of the earlier studies while analyzing the causes of failure of majority of the mergers. 84 . attitudes a n d m i n d s e t s .m e r g e r p l a n n i n g i n c l u d i n g conducting proper due diligence. Making the m e r g er s work s u c c e s s f u l l y i s n o t t h a t e a s y a s h er e w e ar e n o t o nl y j u s t p u t t i n g t h e t w o o r g a n i z a t i o n s t o g e t h e r b u t a l s o i n t e gr a t i n g people of two organizations with different cultures. effective communication during the integration.

” 85 .MERGER AND ACQUISITION OF PUBLI C SECTOR BANK’s FIELD STUDY Bank Details Name Of The Bank: PNB BANK ( COLABA Branch) Person Vistied: Mr.PINTU (HRD MANAGER) Purpose Of Questionnaire: Project Report TOPIC: “MERGER & ACQUISITION IN THE PUBLIC SECTOR BANKS.G.B.