Mergers & Acquisitions IN Indian Banking Industry: An Assignment On

An Assignment on
MERGERS & ACQUISITIONS

IN
INDIAN BANKING INDUSTRY
Under the Guidance of
Mr. Prakash Misal
Visiting Faculty (PUMBA)
as part of the partial fulfillment of

Internal Exam Requirements of
Advanced Banking and Insurance Course
5th Trimester MBA++
Submitted by:
SR.NO ROLL NO. NAME

1 9209 Neelesh Chavan
2 9212 Ankul Chowdhary
3 9213 Siddharth Dhende
4 9221 Somnath Ghorpade
5 9224 Virendra Gupta
6 9225 Hemant Gurav
7 9228 Kushal Jain
8 9230 Girish Jaiswal
Advanced Banking and Insurance
TABLE OF CONTENTS
Sr. No. Topic Page No.
1 Mergers and Acquisitions 3
2 Banking Sector Mergers (Regulatory guidelines) 6
3 Strategic Implications 10
4 Financial Implications 14
5 Impact on the Economy 17
6 Need for M&A in Indian Banking 19
7 Synergy and Value Proposition 21
8 Banking M&A Cases in India 23
8.1 Centurion Bank of Punjab with HDFC Bank 24

8.2 Acquisitions by ICICI Bank 25
8.3 Global Trust Bank with Oriental Bank of Commerce 26
8.4 United Western Bank with IDBI Bank 26
8.5 Suvarna Sahakari Bank with Indian Overseas Bank 27
8.6 Acquisitions by State Bank of India 27
9 Conclusions and the Way Forward 28
10 Annexure 29
10.1 Financials of SBI 29
10.2 Financials of ICICI Bank 30
10.3 Financials of IDBI Bank 31
11 References /Bibliography 32
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Department of Management Sciences (PUMBA), University of Pune
CHAPTER 1
MERGERS AND ACQUISITIONS
1. Acquisition
An acquisition, also known as a takeover, is the buying of one company (the „target‟) by
another. Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger or
longer established company and keep its name for the combined entity.
Types of acquisitions:
i. Friendly takeover: Before a bidder makes an offer for another company, it

usually first informs the company's board of directors. If the board feels that
accepting the offer serves shareholders better than rejecting it, it recommends the
offer be accepted by the shareholders.
ii. Hostile takeover: A hostile takeover allows a suitor to take over a target
company's management unwilling to agree to a merger or takeover. A takeover is
considered "hostile" if the target company's board rejects the offer, but the bidder
continues to pursue it, or the bidder makes the offer without informing the target
company's board beforehand.
iii. Back flip takeover: A back flip takeover is any sort of takeover in which the
acquiring company turns itself into a subsidiary of the purchased company. This
type of a takeover rarely occurs.
iv. Reverse takeover: A reverse takeover is a type of takeover where a private
company acquires a public company. This is usually done at the instigation of the
larger, private company, the purpose being for the private company to effectively
float itself while avoiding some of the expense and time involved in a
conventional IPO
2. Merger
In business or economics a merger is a combination of two companies into one larger

company. Such actions are commonly voluntary and involve stock swap or cash payment
to the target.
Classification of Mergers:
i. Horizontal mergers: It takes place where the two merging companies produce
similar product in the same industry.
ii. Vertical mergers: They occur when two firms, each working at different stages
in the production of the same good, combine.
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iii. Congeneric merger/concentric mergers : They occur where two merging firms
are in the same general industry, but they have no mutual buyer/customer or
supplier relationship, such as a merger between a bank and a leasing company.
Example: Prudential's acquisition of Bache & Company.
iv. Conglomerate mergers : It takes place when the two firms operate in different
industries.
v. Accretive mergers: These are those in which an acquiring company's earnings
per share (EPS) increase. An alternative way of calculating this is if a company
with a high price to earnings ratio (P/E) acquires one with a low P/E.
vi. Dilutive mergers: It is the opposite of above, whereby a company's EPS
decreases. The company will be one with a low P/E acquiring one with a high P/E
A unique type of merger called a reverse merger is used as a way of going public without
the expense and time required by an IPO.
3. Distinction between Mergers and Acquisitions
When one company takes over another and clearly established itself as the new owner,
the purchase is called an acquisition.
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. Both companies'
stocks are surrendered and new company stock is issued in its place.
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.
4. Important Terms in M&A Lexicon
i. Back-end: A back-end plan is a type of poison pill arrangement. In such a plan,

current shareholders of a targeted company receive a rights dividend which allows for
exchange of shares of stock (including voting rights) for senior securities or cash
equivalent to the back-end price established by the targeted firm. As a result of this
strategy, a takeover bidder is unable to both exercise this right and easily deter a rise
in acquisition price.
ii. Bankmail: In a bankmail engagement, the bank of a target firm refuses financing
options to firms with takeover bids. This takeover tool serves multiple purposes,
which include
a) Thwarting merger acquisition through financial restrictions,

b) Increasing the transaction costs of competitor‟s firm to find other financial options,
c) To permit more time for the target firm to develop other strategies or resources.
iii. Golden Parachute: A golden parachute is an agreement between a company and

an employee (usually upper executive) specifying that the employee will receive
certain significant benefits if employment is terminated. Sometimes, certain
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conditions, typically a change in company ownership, must be met, but often the
cause of termination is unspecified. These benefits may include severance pay, cash
bonuses, stock options, or other benefits.
iv. Greenmail: Greenmail or greenmailing is the practice of purchasing enough shares

in a firm to threaten a takeover and thereby forcing the target firm to buy those shares
back at a premium in order to suspend the takeover.
v. Poison Pill: A shareholder rights plan, colloquially known as a "poison pill", or

simply "the pill" is a kind of defensive tactic used by a corporation's board of
directors against a takeover. In the field of mergers and acquisitions, shareholder
rights plans were devised in the early 1980s as a way for directors to prevent takeover
bidders from negotiating a price for sale of shares directly with shareholders, and
instead forcing the bidder to negotiate with the board.
vi. White Knight: In business, a white knight, or "friendly investor" may be a

corporation, or a person that intends to help another firm. There are many types of
white knights. Alternatively, a grey knight is an acquiring company that enters a bid
for a hostile takeover in addition to the target firm and first bidder, perceived as more
favorable than the black knight (unfriendly bidder), but less favorable than the white
knight (friendly bidder).
5. M&A Life Cycle
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CHAPTER 2
BANKING SECTOR M&A (REGULATORY GUIDELINES)
1. Introduction
One of the principal objectives behind the mergers and acquisitions in the banking
sector is to reap the benefits of economies of scale.
With the help of mergers and acquisitions in the banking sector,
achieve significant growth in their operations and
Minimize their expenses to a considerable extent.
Competition is reduced because merger eliminates competitors from the banking
industry.
Mergers and acquisitions in banking sector are forms of horizontal merger
because the merging entities are involved in the same kind of business or
commercial activities. Sometimes, non-banking financial institutions are also
merged with other banks if they provide similar type of services.
Through mergers and acquisitions in the banking sector, the banks look for
strategic benefits in the banking sector. They also try to enhance their customer
base. Growth achieved by taking assistance of the mergers and acquisitions in the
banking sector may be described as inorganic growth.
In many countries, global or multinational banks are extending their operations
through mergers and acquisitions with the regional banks in those countries.
These mergers and acquisitions are named as cross-border mergers and
acquisitions in the banking sector or international mergers and acquisitions in the
banking sector. By doing this, global banking corporations are able to place
themselves into a dominant position in the banking sector, achieve economies of
scale, as well as garner market share.
Mergers and acquisitions in the banking sector have the capacity to ensure
efficiency, profitability and synergy. They also help to form and grow shareholder
value. In some cases, financially distressed banks are also subject to takeovers or
mergers in the banking sector and this kind of merger may result in monopoly and
job cuts.
Deregulation in the financial market, market liberalization, economic reforms, and
a number of other factors have played an important function behind the growth of
mergers and acquisitions in the banking sector. Nevertheless, there are many
challenges that are still to be overcome through appropriate measures. Mergers
and acquisitions in banking sector are controlled or regulated by the apex
financial authority of a particular country. For example, the mergers and
acquisitions in the banking sector of India are overseen by the Reserve Bank of
India (RBI).
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2. Guidelines for merger/amalgamation of private sector banks
A. General
1.1 The Reserve Bank has discretionary powers to approve the voluntary amalgamation
of two banking companies under the provisions of Section 44A of the Banking
Regulation Act, 1949.
1.2 These powers do not extend to the voluntary amalgamation of a banking company
with a non-banking company where amalgamations are governed by sections 391 to 394
of the Companies Act, 1956 in terms of which, the scheme of amalgamation has to be
approved by the High Court.
1.3 However, in both situations, the Reserve Bank is concerned that while amalgamations
are normally decided on business considerations such as the need for increasing the
market shares, synergies in the operations of businesses, acquisition of a business unit or
segment etc., it is essential that considerations like sound rationale for the amalgamation,
the systemic benefits and the advantage accruing to the residual entity are evaluated in
detail.
1.4 These guidelines cover two situations namely:
(a) An amalgamation of two banking companies
(b) An amalgamation of a non-banking finance company (NBFC) with a banking
company.
B. Amalgamation between two banking companies
2.1.1 Section 44A of the Banking Regulation Act, 1949 requires that the draft scheme of
amalgamation has to be approved by the shareholders of each banking company by a
resolution passed by a majority in number representing two-thirds in value of the
shareholders, present in person or by proxy at a meeting called for the purpose.
2.1.2 Before convening the meeting for the purposes of obtaining the shareholders'
approval, the draft scheme of amalgamation needs to be approved individually by the
Boards of Directors of the two banking companies. When according this approval, the
Boards need to give particular consideration to the following matters :-
(a) The values at which the assets, liabilities and the reserves of the amalgamated
company are proposed to be incorporated into the books of the amalgamating banking
company and whether such incorporation will result in a revaluation of assets upwards or
credit being taken for unrealized gains.
(b) Whether due diligence exercise has been undertaken in respect of the amalgamated
company.
(c) The nature of the consideration, which, the amalgamating banking company will pay
to the shareholders of the amalgamated company.
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(d) Whether the swap ratio has been determined by independent valuers having required
competence and experience and whether in the opinion of the Board such swap ratio is
fair and proper.
(e) The shareholding pattern in the two banking companies and whether as a result of the
amalgamation and the swap ratio the shareholding of any individual, entity or group in
the amalgamating banking company will be in violation of the Reserve Bank guidelines
or require its specific approval.
(f) The impact of the amalgamation on the profitability and the capital adequacy ratio of
the amalgamating banking company.
(g) The changes which are proposed to be made in the composition of the board of
directors of the amalgamating banking company, consequent upon the amalgamation and
whether the resultant composition of the Board will be in conformity with the Reserve
Bank guidelines in that behalf.
2.2.1 Section 44A of the Banking Regulation Act, 1949 also requires that after the
scheme of amalgamation is approved by the requisite majority of shareholders in
accordance with the provisions of the Section, it shall be submitted to the Reserve Bank
for sanction.
2.2.2 To enable the Reserve Bank to consider the application for sanction, the
amalgamating banking company should submit to the Reserve Bank the information and
documents specified in Annexure A.
2.3.1 The aforementioned Section provides that a dissenting shareholder is entitled, in the
event of the scheme being sanctioned by the Reserve Bank, to claim from the banking
company concerned, in respect of the shares held by him in that company, their value as
determined by the Reserve Bank when sanctioning the scheme and such determination by
the Reserve Bank as to the value of the shares to be paid to the dissenting shareholders
shall be final for all purposes.
2.3.2 To enable the Reserve Bank to determine such value, the amalgamated
banking company should submit the following: -
(a) a report on the valuation of the share of the amalgamated company made for this
purpose by the valuers appointed for the determination of the swap ratio
(b) Detailed computation of such valuation
(c) Where the shares of the amalgamated company are quoted on the
Stock exchange:-
(i) Details of the monthly high and low of the quotation on the exchange where the shares
are most widely traded together with number of shares traded during the six months
immediately preceding the date on which the scheme of amalgamation is approved by the
Boards.
(ii) the quoted price of the share at close on each of the fourteen days immediately
preceding the date on which the scheme of amalgamation is approved by the Boards.
(d) Such other information and explanations as the Reserve Bank may require.
C. Amalgamation of an NBFC with a banking company
3.1 Where the NBFC is proposed to be amalgamated into a banking company, the
banking company should obtain the approval of the Reserve Bank of India after the
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scheme of amalgamation is approved by its Board but before it is submitted to the High
Court for approval.
3.2 When according its approval to the scheme, the Board should give consideration to
the matters listed in paragraph 2.1.2 above. In addition, it should examine whether: -
(a) The NBFC has violated / is likely to violate any of the RBI/SEBI norms and if so,
ensure that these norms are complied with before the scheme of amalgamation is
approved.
(b) The NBFC has complied with the "Know Your Customer" norms for all the accounts,
which will become accounts of the banking company after amalgamation.
(c) The NBFC has availed of credit facilities from banks/FIs and if so,whether the loan
agreements mandate the NBFC to seek consent of the bank/FI concerned for the proposed
merger/amalgamation.
3.3 To enable the Reserve Bank of India to consider the application for approval, the
banking company should furnish to Reserve Bank of India information and documents
listed in Annexure A excluding item 4 and also the information and documents listed in
paragraph 2.3.2 above.
3.4 The provision of paragraphs 3.1 to 3.3 above will also apply mutatis mutandis
in the rare cases where a banking company is amalgamated into an NBFC.
D. Norms for promoter buying or selling shares directly/indirectly,

before, during and after discussion period
4.1 Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations,1992,

which is applicable to the securities of listed companies, defines price sensitive
information, as “any information which relates directly or indirectly to a company and
which if published is likely to materially affect the price of the securities of the
company”.
4.2 SEBI regulations on Prohibition of Insider Trading should be strictly complied with,
as the various information relating to takeover/merger and transfer of shares of listed
banks / NBFCs are price sensitive. Even the unlisted banks / companies should follow the
SEBI guidelines in spirit and to the extent applicable.
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CHAPTER 3
STRATEGIC IMPLICATIONS
1. Major Implications for Banks
a. Identifying Opportunity
The ability to strengthen the network and drive key growth areas along with the
access to high end technological solutions and qualified manpower in the acquired
bank. The opportunity also lies in the sphere of significant value over the longer
term through M&A, risk sharing of the product and asset portfolio and an
expansion in geographic reach without having to reinvent the wheel.
b. Performing Grass-Root work

Banks might acquire certain targets (acquired banks) that have been riddled with
gross inefficiencies, poor goodwill and shady deals along with doubtful asset
quality. They could also have been placed under restructuring or penalized by the
RBI. Under such circumstances it would be prudent for the Acquirer to initiate a
grass-root audit and scrap certain systems and processes and implement strategies
from scratch in these areas.
c. Focus on Robust Due Diligence

Whenever a Bank considers the option of acquiring another Bank, it has to
undertake a holistic and rigorous due diligence process to ensure that they are
completely aware of the quantum of liability and quality of assets that they will
have to assume in the future. Although there are strict and exhaustive guidelines
both from the RBI and SEBI for conducting due diligence, they are seldom
followed leading to operational and survival issues in the future.
d. Win-Win Transactions
The transactions conducted in the M&A space for Indian banking have always
proved to be highly beneficial for the buyers and sellers (promoters and
acquirers). The key to achieving a win-win transaction will depend upon the kind
of benefits that these mergers can create for customers (more product options,
better service), employees (higher retention and enhanced growth opportunities)
and society (fail safe banks and wider access). The objective of failsafe banks is
brought forward in a twisted manner by creating banks that are too big to fail
(TBTF) and require a government bailout when in crisis.
e. Cultural Integration and Avoiding Clashes

The most important factor separating one organization from another is the culture
of that particular organization. If we were to discount culture, most organizations
would look, work and behave in a similar manner. While culture is the source of
strength for an organization acting independently, it becomes a bone of contention
10
when two organizations are merged together; the reason for failure in a majority
of mergers has been the clash of diverse cultures. The key to a successful merger
lies in avoiding such clashes and achieving cultural integration in a phased and
dedicated timeframe with minimal costs.
f. Talent Retention
While talent retention is the least likely cause of effecting a merger, it is the most
prominent prerogative for the acquiring company to ensure that the synergies and
benefits it expects from the merger on paper are truly realized on the ground. The
ability to retain and gain the confidence of key executives in the acquired
organization will go a long way in the success of the merger and the benefits that
the acquiring company wishes to achieve from it.
g. Discovering Synergy
The idea behind every M&A activity is to identify areas where new opportunities
can be explored, plugging gaps in the existing portfolio of the acquiring company
and looking for opportunities of synergy. Ideally the possibilities of synergy
would have been discovered during the process of due diligence, however if new
opportunities or arenas come to light after acquisition, they need to be vetted and
evaluated to identify their fit in the long term strategy of the Bank.
h. Aggressive Integration
After the acquisition process is complete, the need for integration becomes
imperative. This process of integration should be pursued aggressively with a
definite timeline in mind. The inability to do so will lead to customer
dissatisfaction, lost opportunity and regulatory tangles. It can easily be achieved
by conducting workshops and training sessions for the employees of the
respective organizations.
2. Strategic Considerations of Various Stakeholders

The process of M&A involves lengthy negotiations to ensure that the
considerations of people sitting on either sides of the table as well as the ones
observing and supervising it are met to the best extent possible. This will involve
the following stakeholders:
i. Buyers (acquiring Bank)
ii. Sellers (Promoters of Acquired bank)
iii. Customers on either side
iv. Regulatory Authorities
v. Employees (particularly of acquired Bank)
vi. Society at large
The following figure gives an idea of the considerations of the buyers and sellers:
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Figure: Strategic Implications for all Stakeholders
The other important factors while considering the M&A deal will be as follows:
i. creating economies of scales

ii. expanding geographically
iii. increasing the combined capital base (size) and product offering
iv. gaining market power.
They can be shown diagrammatically in a fish bone diagram as follows:
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Figure 1 - Strategic Fishbone

(Bold Type indicates significance)
Increase Net Revenue
Increase Gross Revenue Increase Margin

Increase Existing
Introduce Product Volume
Franchising Increase Price
New Product Joint Acquisition
Venture Increase Add Value Decrease cost
New Merge Acquire Market Increase Demand
Industry Current Share Eliminate Sales Government
Industry Reduce Competition Financing
New Supply Compliance
Compliment Segment Info
Product Compliment Differentiate Increase Overhead
Substitute Market Territory Product Decision
Substitute New Product Need Management Lines
Product
Geographic Support
Decrease Increase Demographic Invent Communications
Price Present Use Invent New Uses Distribution
Impair Perceived New Uses Channel
Competition Price Promotion Storage Length
Increased Increase Product Scheduling
Potential Feature/Function Perceived Purchasing
Existing entry/exit Product Need Increase Power
Scale
barriers Price Companion Cost Increase Human Economics
Buyout Engineering Productivity
Competition Pre-emptive Perceived Real Products Use Improve
Market Strike Feature/Function Feature/Function Process Reduce
Distribution Increase
Power Style Waste
Channels Increase Speed
Supplier Brand Packaging Product Reduce Increase Quality
Power Scale Promotion
Sizes Locations Waste Speed
Vertical
Warranties Increase
Buyer Economics Inventory
Horizontal Quality Options Transport Quality Adapted from Nolan,
Power Volumes Learning Features Norton & Company
Curves
One way to categorize potential M&A opportunities is by their geographic

characteristics—that is, domestic, cross-border, or global. For example, in domestic
M&As, a local bank buys other local banks to become a national player. This strategy is
most prevalent in countries with highly fragmented markets.
Cross-border M&A activity has historically started with strategic alliances and small
purchases, rather than mega-mergers. In this way banks can establish a significant
presence in other countries while avoiding any existing regulatory and political barriers to
large deals. The degree of market consolidation is a key factor when considering likely
M&A opportunities and strategic choices. Domestic markets can be divided into three
stages of consolidation based on the number of players and the percentage of market
share they control.
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CHAPTER 4
FINANCIAL IMPLICATIONS OF BANKING M&A
Identification and measurement of the strategic variables:
These indicators include measures of financial performance:

asset and liability composition
capital structure
liquidity
risk exposure
profitability
financial innovation and efficiency
As dependent variable, we measure change of performance as the difference between the
merged banks‟ two-year average return on equity (ROE) after the acquisition and the
weighted average of the ROE of the merging banks two years before the acquisition.
Table: Definition of the variables
Sr. Definition Formula

No.
1 Performance Change (ΔROE) Return on equity (After merger)
2 Liquidity (LIQ) Liquid Asset/Total Deposit
3 Cost-income ratio (COST/INC) Total cost/Total revenue
4 Capital to asset ratio (CA/TA) Total capital/Total asset
5 Loans to total assets ratio (LOAN/TA)) Net Loans/Total asset
6 Credit Risk (BADL/INT_INC) Loan loss provision/Net interest
revenues
7 Diversity Earning (OOR/TA) Other operational revenues/Total
assets
8 Off balance sheet (OBS/TA) Off balance sheet item/Total asset
9 Loans to deposit ratio (LOANS/DEP) Customer loan to Customer
deposit
10 Other expenses in services & technology Other expenses/Total assets
(TECH)
11 Bidder performance (PREROE_B) Return on equity of bidder (Pre
merger)
12 Relative size (RSIZE) Total asset of target/Total asset of
bidder
Sources: Bankscope and Thomson Financial Deals.
a) Earnings Diversification Strategy

It is a broad product strategy, referred to the emphasis on other sources of income
apart from the traditional net interest revenues. These could be derived from
potential new revenues, diversification and access to financial innovation
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possibilities from producing new products and services. Maximization of non-

interest revenue as a general strategy is measured by the ratio of other operational
revenue to total assets (OOR/TA). The focus or exposure to off-balance-sheet
activities (OBS) is measured as the ratio of off-balance-sheet activity to total
assets (OBS/TA). At the outset, dissimilarities in non-interest income sources of
revenues (OOR/TA) and in off-balance-sheet activities exposure (OBS/TA) are
both expected to enhance post-merger performance (ΔROE) as they could help
spreading access to financial innovation and new sources of revenues. This
positive relationship is expected to be particularly strong in the case of domestic
mergers where homogeneity among merging entities tends to be higher and the
difficulties associated with the integration of the new products are normally
lower than in the case of cross-border mergers (see Harrison et al., 1991).
b) Asset Quality Profile

It refers to banks‟ credit risk stance, measured as the level of loan loss provisions
divided by interest revenues. As it is not possible to get information on the actual
amount of non-performing loans in several European Union countries10 several
aspects of banks‟ risk and revenue profile are considered. Banks‟ estimates of
potential loan losses are included to measure the quality of assets via the ratio of
loan loss provision to net interest revenues (LLP/IR).
To consider the balance between loans and deposits, the ratio of total loans to
total customer deposits (L/D), commonly referred to as a loan-back ratio, is also
considered. This ratio provides a proxy for the use of relatively low-cost deposits
in relation to the amount of loans. Also, banks‟ balance sheet loan composition is
measured by the ratio of net loans to total assets ratio (NL/TA), which takes into
account the prominence of traditional and normally un-hedged loan lending in
terms of its weight on the overall portfolio. In general, it can be argued that
worsening post-merger performance may be expected when banks with very
different asset quality and overall portfolio strategies merge. Since pursuing
economies of scale and quickly integrating their cost base is an essential goal of
a great deal of domestic mergers, conflicts arising from managerial disparities on
critical decisions, such as asset quality or the overall portfolio strategy structure,
may be an obstacle to creating such synergies: the greater the difference among
strategies, the lower the performance after merging is initially expected to be.
The opposite may happen in cross-border mergers as one of the goals of these
operations may be to improve revenues derived from including new portfolio
strategies or reduce the risk profile of one of the merging partners.
c) Cost Controlling Strategy

It shows the emphasis to minimize cost by relating expenditure to returns and it is
measured by the total cost-to-total income ratio (CIR). As a result of economies
of scale and scope deriving from the combination of similar skills, a firm
competing on the basis of low-cost and operating efficiency is expected to benefit
from merging with another organization characterized by a set of similar
competencies. Firms characterized by different cost controlling strategies,
however, may show a drop in performance if they decide to merge. As a
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consequence, the cost to income ratio (CIR) is expected to be negatively

correlated with overall performance (ROE). On the other hand, this kind of
relationship may not be significant in the long term if a cost-efficient bidder
manages to implement their low cost strategy to the broader merged firm. This
might also be the case for cross-border M&A where cost controlling may not be
the main strategic advantage sought by the firms involved.
d) Capital Adequacy Levels

It shows banks‟ strategy regarding their capital structure, measured as the ratio of
equity to total assets (CA/TA). Practitioners, analysts and regulators have given
this strategy increased importance. From a prudential regulatory perspective,
bank capital has become a focal point of bank regulation as the general trend is to
introduce competition in banking and to check risk-taking with capital
requirements and appropriate supervision. The effect of changes on the capital
levels on performance hinges on the recent theory of the banking firm, which is
based on the „specialness‟ of banks in a setting in which there are asymmetries
of information. In this setting, according to the „signaling hypothesis‟,
commercial banks specialize in lending information to problematic borrowers.
Therefore, banks can signal favourable information by merging with banks with
larger capital ratio indicating a positive correlation between capital and earnings,
and suggesting a positive relationship between capital structure dissimilarities
and performance. Alternatively lower, rather than higher, capital ratios signal
positive information since signaling good quality through high leverage would be
less onerous for a „good‟ bank than for a „bad‟ bank.
e) Liquidity Risk Strategy
It refers to banks‟ strategy towards managing liquidity risk measured by the ratio
of liquid assets to customer and short-term funding (LIQ). As maintaining a
generous liquidity ratio is expensive, different strategies according to which the
merging banks can acquire better liquidity management would imply a better
performance. However, the effect of liquidity is expected to have declined in
recent years as liquidity management via the asset side of the balance sheet has
decreased its importance in favour of active liability liquidity management.
f) Technology and Innovation

It is measured as other costs (i.e. total costs excluding interest, staff and other
overheads payments) as a proportion of total assets are included to account for
investment in technology and innovation (TECH). Dissimilarities in investments
in technology among bidders and targets are expected to produce better
performance as each of the merging partners may benefit from returns to scale
and scope derived from the investments made by their merging counterpart. In
the case of cross-border mergers, however, and due to the risk of incompatibility
among technologies across borders, differences in this strategy may lead to a
drop in performance.
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CHAPTER 5
IMPACT ON THE ECONOMY
Banks as financial intermediaries play a significant role in economic growth, provide

funds for investments, and keep the cost of capital low. During the last few decades,
structure of banking sector has turned from a controlled system into liberalized one. The
efficiency of banks, which reflects the ability of banks in transforming its resources to
output by making its best allocation, is essential for the growth of an economy. However,
due to the major role played by banks in the development of economy, the banking sector
has been one of the major sectors that have received renewed interest from researchers
and economists.
Advantages of M&A of banks in Indian economy

1. Financial Stability of the Economy
M&A provides a greater market share of the bank and broaden the capital base, cash and
other assets of the bank and so the M&A helps the economy having more stable banks on
which the country can trust more.
2. Global presence and geographical exposure of the country
M&A helps economy for achieving global exposure by merging or acquiring the other
foreign banks, this provides the broader geographical reach to the banks, so the country is
known at global level.
3. Cost benefit to the people:
When two institutions merged together they are able to utilize their resources at fullest, as
it increases the economies of scale which increase the operational efficiency of the bank
so the banks are able to provide funds at low interest rate.
4. Foreign currency
A country also gets the foreign currency benefit if the merger or acquisition is of
international level.
5. Increased network
That regional strength is one of the benefits that a bank looks for, but the merger will also
offer several others, such as get familiar with the working culture and the attitude of the
people of that particular region, so the institutions are not limited a particular region.
EG: Merger of Bank of Rajasthan with ICICI Bank
6. Defragmentation
Indian financial sector is very fragmented which makes it very difficult for ensuring that
all the financial institutions are working honestly and efficiently, so M&A makes it easy
for the central bank the supervision of the financial institutions and having more time for
policy making and implementation.
7. Restricting foreign banks
The RBI, which is protective for the Indian banking industry, has already sounded a note
of warning to the foreign banks who expect easier entry and takeover norms. Under
World Trade Organization commitments, licenses may be denied to new foreign banks if
the share of this category in total banking assets in the country exceeds 15%.
17
8. Reduction of dependency on foreign banks

M&A provides the financial stability in the economy as the banks are quite strong and
big, which tries to ensure the fund sufficiency so the less dependency on the foreign
banks.
9. Increase competition( more products)
M&A helps banks to be more competitive as after M&A bank‟s operational efficiency
increases, so the margins increases and banks have more funds for research and
development which help to offer new and more products to the customers.
10. Ease in import and export
The import and export of a country is very much affected by the financial condition of a
country so the presence of the banks of the country in other counties makes import and
export easy and cost effective.
11. Financial inclusion
As the M&A provides the economies of the scale to the banks which helps to
reduce the cost of fund and increases the margins so the banks captures more market
which is not yet serviced so well, in this way M&A helps in fulfilling the dream of
financial inclusion
Disadvantages of M&A of banks in Indian economy

1. Threat from domestic banks:
An emerging consensus suggests that more bank mergers may be inevitable. Giant
SBI has already announced that it is working on a plan to merge some of its seven
associate banks -- the wholly-owned State Bank of Hyderabad, State Bank of Patiala and
State Bank of Saurashtra; and State Bank of Bikaner & Jaipur, State Bank of Mysore,
State Bank of Travancore and State Bank of Indore (in which its stake ranges from 75%
to 98%). That plan has, however, run into opposition from politicians and unions who
fear job losses.
2. Unrest increases in the employees of two different institutions:
During M&A the institution grows as the margins of the company goes up but leads
to the employee unrest as two different company cultures tries to be one, and the
employees of both the companies have to compromise.
3. Burden on the customer:
Mergers could lead to charging of higher fees for the services rendered,
especially if there is no `effective' competition or if smaller banks exhibit `herd behavior'
in imitating the bigger entities. This negative aspect of mergers may not, however, be as
serious as when mergers lead to loss of availability of or access to credit or to lower
employment, especially of female labor.
4. Survival of comparatively small banks will be very difficult
In the present scenario of fragmented financial sectors there are lots of small banking
institutions, which have threat from the domestic banks as well as the foreign banks in the
global world, which will result into more job losses and employees unrest, especially in
case of foreign banks acquisition this can be a big problem and challenge for Indian
economy.
18
CHAPTER 6
NEED FOR M&A IN INDIAN BANKING
1. Key Drivers for M&A
Companies need to offer services across geographies to compete effectively.

Mergers and Acquisitions help in reducing the lead time required for achieving
global scale.
Gaining global market share (higher volumes for economies of scale and rollout
of business models to other regions)
Access to higher margin and revenue markets
Secure long term access to raw materials and key parts of supply chain
Immediate access to technologies and/or distribution channels
Buying underperforming brands and then turning them around
Opportunities for growth enhancing acquisitions and JVs/alliances
Enhancing existing product portfolio/service offerings
Customer acquisition
De-risking the business model by acquiring plant capacities in various locations to
beat the business cycle
The availability of many companies for sale in Europe and USA and liquidation
of private equity investments in these regions are often cited as primary triggers
for overseas acquisition.
2. Key drivers for M&A in the Banking Sector
To protect the interest of depositors.

The merged entity becomes strong and develops ability to withstand the market
shocks.
Margins are coming down and scale in terms of size and geography, is gaining
importance in banking. Need for capital will be the biggest drive for M&A in the
sector.
Stability and return on shareholders‟ fund are also important driver for M&A as
fragmented industry is more prone to market shocks.
Will help banks raise capital for growth from the financial market without further
liquidating the public sector character in ownership and management.
Prevailing uncertainty and ambiguity in the regulatory environment are also
responsible for notching up a large number of M&A deals in the banking industry
for both survival and growth.
19
3. Motives behind M&A

The following motives are considered to improve financial performance:
Synergies: the combined company can often reduce its fixed costs by removing
duplicate departments or operations, lowering the costs of the company relative to
the same revenue stream, thus increasing profit margins.
Increased revenue/Increased Market Share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up the
bank's customers for brokerage accounts. Economies of Scale: For example,
managerial economies such as the increased opportunity of managerial
specialization. Another example is purchasing economies due to increased order
size and associated bulk-buying discounts.
Taxes: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability.
Resource transfer: resources are unevenly distributed across firms and the
interaction of target and acquiring firm resources can create value through either
overcoming information asymmetry or by combining scarce resources.
Vertical integration: Vertical Integration occurs when an upstream and
downstream firm merges (or one acquires the other). By merging the vertically
integrated firm can collect one deadweight loss by setting the upstream firm's
output to the competitive level. This increases profits and consumer surplus. A
merger that creates a vertically integrated firm can be profitable.
Therefore, additional motives for merger and acquisition that may not add shareholder
value include:
Diversification: While this may hedge a company against a downturn in an

individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a much
lower cost than those associated with a merger.
Manager's hubris: manager's overconfidence about expected synergies from M&A
which results in overpayment for the target company.
Empire building: Managers have larger companies to manage and hence more
power.
Manager's compensation: In the past, certain executive management teams had
their payout based on the total amount of profit of the company, instead of the
profit per share, which would give the team a perverse incentive to buy companies
to increase the total profit while decreasing the profit per share (which hurts the
owners of the company, the shareholders); although some empirical studies show
that compensation is linked to profitability rather than mere profits of the
company.
20
CHAPTER 7
SYNERGY AND VALUE PROPOSITION
1. Synergy: Meaning and Importance
 Synergy, in general, may be defined as two or more agents working

together to produce a result not obtainable by any of the agents
independently. The term synergy comes from the ancient Greek word syn-
ergos, meaning 'working together'. In a technical context, its meaning is a
construct or collection of different elements working together to produce
results not obtainable by any of the elements alone. The elements, or parts,
can include people, hardware, software, facilities, policies, documents: all
things required to produce system-level results.
 Corporate synergy occurs when corporations interact congruently. A
corporate synergy refers to a financial benefit that a corporation expects to
realize when it merges with or acquires another corporation. This type of
synergy is a nearly ubiquitous feature of a corporate acquisition and is a
negotiating point between the buyer and seller that impacts the final price
both parties agree to. There are distinct types of corporate synergies:
 Revenue
 Management
 Leverage
 Cost
 In the context of Banking sector in India, we can identify synergies in the
following arenas based on their benefits to stakeholders:
 Increased Geographical reach
 Wide range of products
 Access to new customer segments
 Compliance to regulations like Capital Adequacy, Disclosures and
Priority sector lending.
 There is a price to Synergy and it is reflected in the premium paid by the
acquirer over and above the prevailing market price of the shares of the
acquired Bank. However this price can be compensated only when the
synergies that were identified are actually realized and benefits are
accrued to the parent organization.
 Synergy should not be used as a crutch or smoke-screen by Banks to
justify the price they are paying for an acquisition or initiating the process
for an acquisition. There are empirical methods to calculate synergy
however what should really be the deciding criterion is whether the deal
will create value for the stockholders and long term tangible benefits for
the society and the capital lending establishment.
Thus Synergy is only as good as its realization by the stakeholders.
21
2. Value Proposition of M&A in Banking
(1) Mergers improve financial performance

Increase in net operating profits and reduces duplication costs, thus leading to
creation of shareholder‟s value which is ultimate objective of business in general.
(2) Mergers produce financial benefits

It increases the consolidated debt capacity of amalgamated firm and it makes
possible lending on favourable terms. It enhances ability to offer larger loans
without another bank partner thereby reducing Loan syndication costs.
(3) Capital adequacy

Due to increased capital base, Capital adequacy required to mitigate credit risk
enhances. This results in better risk management and ability to deploy resources
judiciously on the part of resultant entity.
(4) Compliance
Increased capital base allows bank to comply easily with regulatory guidelines.
This make banks to focus more on profit making business activities rather than
trying to make adjustments for regulatory compliances. It also increases customer
service resulting in lower costs and foray into new product categories
(5) Efficiency
Increased operating efficiency allows banks to provide value added services to its
customer resulting into better customer relationship management and the ability to
service larger number of customer in a given duration thereby reducing costs
(6) Resource Utilization

M&As can pave the way for better utilization of resources of both the entities
leading to improved operational efficiencies which in turn facilitates better value
delivery to customer at lower cost.
(7) Financial Inclusion

In recent era, banks have to complete certain obligations towards society such as
Financial Inclusion. M&As in Banking sector have made this possible with
improved reach to sections having lower access to financial services. For e.g.
Bank of Sangli merger with ICICI Bank has increased branch network of ICICI
bank by 25% especially in rural areas.
(8) Technology
It can be economical only when it is implemented on a larger scale. M&As has
made this possible for Indian banking and cloud computing gives better results in
the future when combined with Business Correspondent (BC) model.
22
CHAPTER 8
BANKING M&A CASES IN INDIA
The history of Indian banking can be divided into three main phases:
Phase I (1786- 1969) - Initial phase of banking in India when many small banks
were set up
Phase II (1969- 1991) - Nationalization, Regularization and growth
Phase III (1991 onwards) - Liberalization and its aftermath
With the reforms in Phase III the Indian banking sector, as it stands today, is mature in
supply, product range and reach, with banks having clean, strong and transparent balance
sheets. The major growth drivers are increase in retail credit demand, proliferation of
ATMs and debit-cards, decreasing NPAs due to Securitization, improved macroeconomic
conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g.
amendments to the Banking Regulation Act).
Certain trends like growing competition, product innovation and branding, focus on
strengthening risk management systems, emphasis on technology have emerged in the
recent past. In addition, the impact of the Basel II norms is going to be expensive for
Indian banks, with the need for additional capital requirement and costly database
creation and maintenance processes. Larger banks would have a relative advantage with
the incorporation of the norms.
The Narsimhan Committee report on the Indian Banking Industry has been a watershed event as it
has clearly laid down the path to be adopted for the Indian Banking industry to be globally
competitive, functionally relevant and able to fulfil the needs and aspirations of the New India.
It lays emphasis on the following factors:
Improving the productivity and profitability of the existing Public Sector Banks
Opening up the sector for private sector and foreign Banks to increase
competition and deliver better customer service
Consolidation of the Indian Banking industry to 3-4 banks at the International
Level, 20-25 banks at the National Level and around 100 Banks at the local level
to streamline the Banking system.
The focus of the drive for consolidation will be to merge co-operative sector banks into
established banks and also reduce the number of Public Sector Banks from the current
number to a more realistic number of 6-7. Also with Basel III norms to be implemented
in the sector by 2012 and the drive for Financial Inclusion, consolidation in the Banking
sector by way of M&A looks to be a prudent way out. Now we discuss around 8
prominent cases of M&A in the Indian Banking Industry.
23
8.1 Centurion Bank of Punjab with HDFC Bank
On February 25th the boards of HDFC Bank and Centurion Bank of Punjab (CBoP)
agreed to the biggest merger in Indian banking history, valued at around `95.2bn
(US$2.4 billion). The merger is subject to statutory and regulatory approvals. CBoP
shareholders got one share of HDFC Bank for 29 shares of CBoP. The merged entity was
called HDFC Bank. . HDFC Bank has lived up to its parent's pedigree, turning out
consistent growth of at least 30% in net profits year after year and becoming a stock
market favorite.
More benefits
That regional strength is one of the benefits that HDFC Bank was looking for, but the
merger will also offer several others. HDFC Bank says it was looking to supplement
organic growth with a merger that would add scale, geographical reach and experienced
staff, which is in short supply. HDFC Bank has 23,000 employees while CBoP has about
7,500. The deal will add 394 branches and 452 ATMs to HDFC Bank's existing 754
branches and 1,906 ATMs, giving the combined entity 1,148 branches. That will be the
country's largest private branch network, larger than private-sector leader ICICI Bank's
955 branches.
But even post-merger, HDFC Bank will be only the third-largest bank by assets in India
after the market leaders, the State Bank of India (SBI) and ICICI Bank, both of which
will outrank it by a wide margin. Based on figures from end-December 2007, the new
entity will have assets of about Rs1.5 trillion, against SBI's Rs5.7 trillion and ICICI
Bank's Rs3.8 trillion. The merged entity will also have a deposit base of around Rs1.2trn
and net advances of around Rs850 billion.
On the day the swap ratio was announced, CBoP shares, which had run up in anticipation,
fell 14.5% to Rs48.25 per share in adjustment to the ratio. HDFC Bank shares, however,
fell 3.5% to close at Rs1, 422.70 a share, reflecting investor concerns that CBoP's
valuation was too high. CBoP's asset quality and resource profile, though healthy, are
slightly weaker than HDFC Bank's own and could impact HDFC Bank adversely in the
short term. For example, HDFC Bank's net non-performing assets as a percentage of net
advances for fiscal year 2006/07 stood at an excellent 0.43%, compared to the higher--
though still acceptable--figure of 1.26% for CBoP. HDFC Bank's capital adequacy is
13.8% against CBoP's 11.5%.
According to rating agency CRISIL, however, the benefits of an expanded branch

network and wider geographical coverage will more than offset any short-term negatives.
HDFC Bank is also likely to make a preferential offer to its promoter, HDFC, to allow it
to maintain its shareholding in the merged entity. HDFC held 23.3% in HDFC Bank at
end-December 2007; this share will fall to about 19% after the merger. HDFC will
probably invest about Rs39bn to bring its shareholding back up, a infusion that will
further bolster the bank's capitalization.
24
8.2 Acquisitions by ICICI Bank
Intent of ICICI
ICICI Bank‟s proposal to merge The Sangli Bank and Bank of Rajasthan with itself is
line with the former‟ strategy to rapidly expand its rural and small enterprise banking
operations; these two segments are among the main growth drivers identified by ICICI
Bank.
Benefits
This had enhanced ICICI‟s branch network of about 625 branches and extension
counters by almost 32% to 823.
Half of Sangli Bank‟s branches were in rural and semi-rural India. And with nearly half
a million customers and loan offerings like agriculture, home, education, personal, etc,
Sangli Bank is a good fit for ICICI.
For Sangli Bank‟s shareholders too, it was profitable deal the merger ratio of 100 shares
of ICICI for 925 shares of Sangli Bank translates into a value of Rs 282.6 crore and an
equity dilution of 0.39% for ICICI Bank.
It‟s a win-win for both. While Sangli Bank‟s balance-sheet size is not significant;
advances of Rs 880 crore and deposits of Rs 2,004 crore, apart from network, it also
provides ICICI Bank access to Sangli Bank‟s customer base, which can used to cross-sell
various products and services. And given ICICI Bank‟s track record, the gains should
materialize sooner rather than later.
Sangli Bank‟s current-and-savings-account deposit ratio is also estimated at around
40%, again a positive for IB, which is seeking low-cost deposit base.
However, Sangli Bank had reported a loss of Rs 29 crore for 2005-06 and its net NPA
ratio stood at 2.1%. Besides, its capital adequacy ratio of just 1.64% is far from the
minimum of 9% mandated by regulations. This is where the merger with ICICI Bank will
make a difference, given its size (deposits of nearly Rs 200,000 crore), profitability (net
profit of Rs 2,540 crore for 2006-07), range of products and technology among others.
Merger of Bank of Rajasthan with ICICI Bank.

It came with effect from August 13, 2010. The boards of both banks approved a share-
swap deal that valued the Udaipur-based BoR at over Rs3, 000 crore. The shares of ICICI
Bank closed at Rs963.95, down 0.74%, while those of Bank of Rajasthan slipped 0.03%
to Rs190.15 on the Bombay Stock Exchange. The share-swap ratio was fixed at one
ICICI Bank share for every 4.72 shares of BoR. The integration of BoR would help ICICI
Bank to increase its branch network by 25% to about 2,500 across the country. It will also
give greater visibility to the bank in the western and northern parts of the country.
With the merger, the turnover of ICICI Bank would cross Rs4, 00,000 crore. BoR has a
total business of over `23,000 crore, against nearly Rs3, 84,000 crore of ICICI Bank
25
8.3 Global Trust Bank with Oriental Bank of Commerce
GTB‟s audited balance sheet for March 31, 2002, showed net worth of Rs 400.4
crore & a profit of Rs 40 crore. However, RBI‟s inspection revealed that net worth is
negative. RBI‟s inspection in 2002-03 showed that GTB‟s net worth has further eroded
and capital adequacy ratio (CAR) was negative. GTB was advised to take immediate
steps to infuse fresh capital to restore its CAR to 9% and indicate a time-bound program.
Global Trust Bank Ltd., (GTB) was placed under an Order of Moratorium on July
24, 2004. The option available with the Reserve Bank was to compulsory merger under
section 45 of the Banking Regulation Act, 1949. Oriental Bank of Commerce (OBC)
interest was examined by the Reserve Bank of India keeping in view its financial
parameters, its retail network and its synergies as well as strategic advantages. Taking
into account the interests of the millions of depositors of GTB, the Reserve Bank
prepared following draft scheme of amalgamation of GTB with OBC. The amalgamation
came into force on August 14, 2004.
8.4 United Western Bank with IDBI Bank (2006)

The merger is likely to help IDBI expand its retail presence, though its size may
not increase substantially. Of the several benefits the deal brings access to the branch
network. The merger would give IDBI immediate access to the 230-branch network of
UWB, thereby widening its deposit franchise. For IDBI, growing at 25 per cent, addition
of branches would have helped sustain the momentum. Deposits may expand by over 20
per cent and the asset base by about 10 per cent. Second, the merger with UWB is likely
to help IDBI diversify its credit profile. Dominant in industrial financing, IDBI should
get exposure to agriculture credit through UWB; nearly half the number of UWB its
branches is in semi-urban and rural areas, and should complement IDBI's loan book. The
third aspect relates to the benefit of an improved deposit mix for IDBI. It has about 60 per
cent of the liabilities in the form of long-term borrowings. Low-cost deposits are just
about 9 per cent of the total. This perhaps explains IDBI's low net interest margins (0.5
per cent versus industry average of three) and the high cost of funds (6.5 per cent versus
the industry average of five). In this backdrop, the access to UWB's low-cost deposit base
should prove advantageous for IDBI in the long run.
Key challenges
On the face of it, an outflow of Rs 150 crore may appear inexpensive. But if one
were to consider the hidden costs in the form of bad loans and the likely slippages in the
quality of existing assets, the effective cost is likely to go up by another Rs 100 crore.
Considering IDBI's size, this may still be a small sum. Post-merger, its level of net non-
performing assets is likely to increase to 1.4 per cent from about one per cent now. As
such, managing and containing the level of bad loans remain a challenge for IDBI.
Integration of UWB with itself is likely to be a key challenge for IDBI. UWB has
an employee base of over 3,200, which is about 70 per cent of IDBI's. Going by the draft
amalgamation scheme, IDBI is required to absorb the entire workforce, a move that is
likely to push up its wage cost and make integration a tricky exercise.
26
8.5 Shree Suvarna Sahakari Bank with Indian Overseas Bank (IOB)
State-run Indian Overseas Bank (IOB) acquired the troubled Shree Suvarna Sahakari
Bank (SSSB), nearly ten months after it planned the acquisition. The bank would not
pursue acquisition of co-operatives for expansion in the future because of the difficulties
involved in securing branch licenses for the acquired bank. SSSB's NPAs account for
more than Rs 300 crore, primarily due to connected lending. The 37-year-old cooperative
bank, SSB has 12 branches, nine in Pune, two in Mumbai and one in Shripur. The total
employee strength is reportedly a little over 100 with deposits of more than Rs 700 crore
currently has accumulated losses to the tune of Rs 300 crore. The acquisition will provide
access to three lakh customers and open the doors for agro-financing opportunities in the
region.
8.6 Acquisitions by State Bank of India

SBI has signed an agreement to acquire Giro Commercial Bank of Kenya as part of its
strategy to increase presence in Africa and Asia to gradually emerge as a global banking
major. The country's largest bank will acquire a 76 per cent stake in Giro Commercial
Bank for US$7 million along with management control subject to regulatory approvals.
Giro Commercial Bank, which was formed after the merger of two small banks - Giro
Bank and Commerce Bank - is one of the leading banks in Kenya. It is a closely held
entity with promoters of Indian origin and the bank has six branches located in Nairobi,
Mombassa and Kisumu.
The decision to take over Giro Commercial Bank came six months after its first overseas
acquisition of Indian Ocean International Bank of Mauritius for $10 million. The
acquisitions are part of SBI's broad plan to acquire at least four banks abroad each with
assets of $50-200 million.
The government wants consolidation in the banking sector and emergence of 4-5
international level banks to exist alongside 4-5 national level banks. Indian banks have to
adopt stringent Basel II norms from 2007 which prescribes for higher provisioning for
operational and market risks. The higher capital requirement and investment on
technology will further push consolidation process in the near future.
In the past few years SBI has successfully completed the merger and amalgamation of
State Bank of Saurashtra (SBS) and State Bank of Indore (SBIn) into itself to increase its
size and reach. The ultimate aim is to merge all the remaining associate banks to create
an organization of international scale and standards.
27
CHAPTER 9
CONCLUSIONS AND THE WAY FORWARD
Based on the trends in the banking sector and the insights from the cases highlighted in
this study, one can list some steps for the future which banks should consider, both in
terms of consolidation and general business. Firstly, banks can work towards a synergy-
based merger plan that could take shape latest by 2009 end with minimization of
technology-related expenditure as a goal. There is also a need to note that merger or large
size is just a facilitator, but no guarantee for improved profitability on a sustained basis.
Hence, the thrust should be on improving risk management capabilities, corporate
governance and strategic business planning. In the short run, attempt options like
outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of
this fast changing environment, where product life cycles are short, time to market is
critical and first mover advantage could be a decisive factor in deciding who wins in
future. Post-M&A, the resulting larger size should not affect agility. The aim should be to
create a nimble giant, rather than a clumsy dinosaur. At the same time, lack of size should
not be taken to imply irrelevance as specialized players can still seek to provide niche and
boutique services.
In 2009, further opening up of the Indian banking sector is forecast to occur due to the
changing regulatory environment (proposal for up to 74% ownership by Foreign banks in
Indian banks). This will be an opportunity for foreign banks to enter the Indian market as
with their huge capital reserves, cutting-edge technology, best international practices and
skilled personnel they have a clear competitive advantage over Indian banks. Likely
targets of takeover bids will be Yes Bank and IndusInd Bank. However, excessive
valuations may act as a deterrent, especially in the post-sub-prime era.
Persistent growth in Indian corporate sector and other segments provide further motives
for M&As. Banks need to keep pace with the growing industrial and agricultural sectors
to serve them effectively. A bigger player can afford to invest in required technology.
Consolidation with global players can give the benefit of global opportunities in funds'
mobilization, credit disbursal, investments and rendering of financial services.
Consolidation can also lower intermediation cost and increase reach to underserved
segments.
The Narasimhan Committee (II) recommendations are also an important indicator of the
future shape of the sector. There would be a movement towards a 3-tier structure in the
Indian banking industry: 2-3 large international banks; 8-10 national banks; and a few
large local area banks. In addition, M&As in the future are likely to be more market-
driven, instead of government-driven.
28
CHAPTER 10
ANNEXURES
10.1 FINANCIALS OF STATE BANK OF INDIA
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Equity share capital 634.88 634.88 631.47 526.3 526.3
Reserves & surplus 65,314.32 57,312.82 48,401.19 30,772.26 27,117.79
Total Loan Funds 8,70,065.43 8,00,020.82 5,86,436.60 4,66,819.65 4,07,690.14
Investments 2,85,790.07 2,75,953.96 1,89,501.27 1,49,148.88 1,62,534.24
Total net current assets 2,44,979.03 2,06,827.50 1,53,929.48 1,17,217.80 1,32,129.85
Number of equity shares
outstanding (Lacs) 6348.83 6348.8 6314.7 5262.99 5262.99
Operating income 85,909.36 74,880.76 56,821.55 43,860.57 37,869.52
Adjusted PAT 9,176.51 9,124.18 6,718.08 4,529.18 4,404.73
Equity dividend 1,904.65 1,841.15 1,357.66 736.82 736.82
Adjusted EPS (Rs) 144.54 143.71 106.39 86.06 83.69
Dividend per share 30 29 21.5 14 14
Net operating income
per share (Rs) 1,353.15 1,179.45 899.83 833.38 719.54
Operating margin (%) 16.96 19.5 19.29 17.72 17.33
Net profit margin (%) 10.54 12.03 11.65 10.12 11.21
Reported return on net
worth (%) 13.89 15.74 13.72 14.5 15.94
Total debt/equity 12.19 12.81 10.96 13.91 13.75
Owners fund as % of
total source 7.57 7.24 8.36 6.7 6.78
Fixed assets turnover
ratio 7.26 7.2 6.32 5.44 5.1
Current ratio 0.43 0.34 0.53 0.42 0.4
Dividend payout ratio
(net profit) 23.36 22.9 22.64 18.98 19.06
(cash profit) 21.2 21.13 20.56 16.75 16.35
29
10.2 FINANCIALS OF ICICI BANK
Equity share capital 1,114.89 1,113.29 1,112.68 899.34 889.83
Total loan Funds 2,53,634.96 2,68,230.84 2,91,251.26 2,55,173.45 1,87,639.16
Investments 1,20,892.80 1,03,058.31 1,11,454.34 91,257.84 71,547.39
Total net current assets 14,496.05 -9,362.37 -11,765.62 -14,676.78 -9,585.09

Adjusted PAT 3,890.47 3,740.62 4,092.12 2,995.00 2,532.95
Equity dividend 1,337.95 1,224.58 1,227.70 901.17 759.33
Adjusted EPS (Rs) 34.9 33.6 36.78 33.3 28.47
Dividend per share 12 11 11 10 8.5
Operating profit per share
(Rs) 49.8 48.58 51.29 42.19 36.75
Net operating income per
share (Rs) 293.74 343.59 354.71 316.45 196.87
Reported return on net
worth (%) 7.79 7.58 8.94 12.79 11.43
Owners fund as % of total
source 20.35 18.46 15.95 9.52 11.83
Fixed assets turnover ratio 4.6 5.14 5.61 4.52 2.94
Current ratio 1.94 0.78 0.72 0.61 0.62
Dividend payout ratio (net
profit) 37.31 36.6 33.12 33.89 34.08
(cash profit) 32.33 31 29.08 28.84 27.36
30
10.3 FINANCIALS OF IDBI BANK
Equity share capital 724.86 724.78 724.76 724.35 723.79
Total 1,75,894.20 1,19,845.31 79,797.88 49,589.99 32,372.98
Investments 73,345.46 50,047.60 32,802.93 25,675.31 25,350.53
Total net current assets -3,585.71 -1,277.45 -6,107.86 -3,777.31 -4,360.10

Adjusted PAT 1,032.57 845.26 728.64 451.69 554.54
Equity dividend 217.46 181.2 144.95 108.65 108.57
Adjusted EPS (Rs) 14.24 11.66 10.05 6.24 7.66
Dividend per share 3 2.5 2 1.5 1.5
Operating profit per share
(Rs) 28.72 12.88 10.85 5.73 7.02
Net operating income per
share (Rs) 235.4 174.79 126.38 96.56 88.41
Reported return on net worth
(%) 12.53 11.53 10.72 10.1 8.8
Owners fund as % of total
source 4.67 6.21 8.52 12.57 19.68
Current ratio 0.55 0.79 0.4 0.61 0.49
Dividend payout ratio (net
profit) 24.14 24.69 22.92 20.16 22.07
Dividend payout ratio (cash
profit) 22.18 23.26 20.56 16.89 17.57
31
CHAPTER 11
BIBLIOGRAPHY
References
1. India Finance and Investment Guide, 'History of Banking in India'. August 2010.
2. C.R.L. Narisimhan, 'A touch of history in Indian Banking, November 2009
3. Reserve Bank of India 'Developments in commercial banking November 2010.
4. Government of India, Ministry of Finance 'The Banking Regulation Act of 1949
(Section 45.2)'
5. Red herring prospectus of Bank of Baroda dated December 29, 2005.
6. K. Venu Babu, 'ICICI or Bank of Madura: Who will benefit?', July 31, 2008
7. 'ICICI Bank Ltd. - Analysts' transcript, August 2010
8. BS Bureaus, 2004, 'SBI may take over GTB', July 26, 2004,
9. Dr. Rupa Rege Nitsure (Chief Economist, Bank of Baroda), 'Consolidation of
Banks - Some Thoughts', Financial Sector Seminar Series , April 8, 2008
Websites
1. Reserve Bank of India

www.rbi.org.in
2. India Brand Equity Foundation

www.ibef.com
3. McKinsey & Co.
http://www.mckinsey.com/ideas/articles/India_Banking_2010.pdf
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An Assignment on

MERGERS & ACQUISITIONS

as part of the partial fulfillment of

SR.NO ROLL NO. NAME

Sr. No. Topic Page No.

1 Mergers and Acquisitions 3

2 Banking Sector Mergers (Regulatory guidelines) 6

5 Impact on the Economy 17

6 Need for M&A in Indian Banking 19

7 Synergy and Value Proposition 21

8 Banking M&A Cases in India 23

8.1 Centurion Bank of Punjab with HDFC Bank 24

i. Friendly takeover: Before a bidder makes an offer for another company, it

In business or economics a merger is a combination of two companies into one larger

3. Distinction between Mergers and Acquisitions

4. Important Terms in M&A Lexicon

i. Back-end: A back-end plan is a type of poison pill arrangement. In such a plan,

a) Thwarting merger acquisition through financial restrictions,

iii. Golden Parachute: A golden parachute is an agreement between a company and

iv. Greenmail: Greenmail or greenmailing is the practice of purchasing enough shares

v. Poison Pill: A shareholder rights plan, colloquially known as a "poison pill", or

vi. White Knight: In business, a white knight, or "friendly investor" may be a

5. M&A Life Cycle

BANKING SECTOR M&A (REGULATORY GUIDELINES)

2. Guidelines for merger/amalgamation of private sector banks

B. Amalgamation between two banking companies

C. Amalgamation of an NBFC with a banking company

D. Norms for promoter buying or selling shares directly/indirectly,

4.1 Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations,1992,

1. Major Implications for Banks

b. Performing Grass-Root work

c. Focus on Robust Due Diligence

e. Cultural Integration and Avoiding Clashes

2. Strategic Considerations of Various Stakeholders

Figure: Strategic Implications for all Stakeholders

i. creating economies of scales

They can be shown diagrammatically in a fish bone diagram as follows:

Figure 1 - Strategic Fishbone

Increase Net Revenue

Increase Gross Revenue Increase Margin

One way to categorize potential M&A opportunities is by their geographic

FINANCIAL IMPLICATIONS OF BANKING M&A

Identification and measurement of the strategic variables:

These indicators include measures of financial performance:

Table: Definition of the variables

Sr. Definition Formula

Sources: Bankscope and Thomson Financial Deals.

a) Earnings Diversification Strategy

possibilities from producing new products and services. Maximization of non-

b) Asset Quality Profile

c) Cost Controlling Strategy

consequence, the cost to income ratio (CIR) is expected to be negatively

d) Capital Adequacy Levels

f) Technology and Innovation

Banks as financial intermediaries play a significant role in economic growth, provide

Advantages of M&A of banks in Indian economy

8. Reduction of dependency on foreign banks

Disadvantages of M&A of banks in Indian economy

NEED FOR M&A IN INDIAN BANKING

1. Key Drivers for M&A

Companies need to offer services across geographies to compete effectively.

2. Key drivers for M&A in the Banking Sector