Bank of Madura Merger

With ICICI Bank: An

Analysis
Justln Paul

10

Justin Paul is faculty member, Staff Training

Col- lege, Soutfi Indian Bank, Trichur. He was
Assis- tant Professor, Narsee Monjae Institute
of Man- agement Studies, Mumbai and is an
alumnus of IIT Bombay. justin @ iitb.ac.in

T he principal factors behind the corp‹›rate re-

structuri n g actiy ity in Indiu leave been the
pt›licy changes thai were aitnt›unccd in the
t”urm of econum ie reforms. These inc ludc the re-
moval of restrictions on corporate investmencs and
grow ch cr›ntained in the Mnnopc›l ies and Restric-
t i ve Trade Pra cti ces (MRTP) Act, exte nsi ve trade
re1orms involving I‹›wering of tariff and ph vsicul
harriers on imports, fi nBnc ial seclur re l'orms permit -
ti ng public sect‹›r banks and t”inancial institutions
cu cap capi tal mcrk ets, a policy tc enccuraye the
inward flew ct” foreign ditecc i M veslment and for-
eign poi tf‹›1io investinen r.
Mergers and Acq uisit ions (M‹k As) ha ve been t he
princ i pa I tools of ciw por ate res tructur ing in 1ndia
after the i m plementat ion of economic refor m s since
1991. The I ndi o n ct›r porate sector has
experienced a majot restruc fur in g I h rough M &
As w it h the changes brought .ibout in the MRTP
Act as we11 as in the 1nd ustrial Pr›lic y Resol ution
o1 Ju ne, 199 I which related the norms for 1
icensing and growth. Companies seem to be
combining at a rate aI most unprecedented in
history on a global scale. tn thc automob i ie
industry, Do inn ler-Benz and Chrys ler Isa ve
joined h rinds, Ford h as taken over the auto- mcbile
operations ‹›f Vol ve and so un. In the bank- ing
industry Grindlay s merged with Standard Char-
tered bank. Sim ilar merger examples can be
found in industries as di verse as entertainment,
‹elecommu- nicatic›ns and eyen in the cci I sec
lcr. In Jndia some recent mcrgers in ihe bitnk
ing sectu‹ are the merger of ’I imes Bank w ith
HDFC Ba n k and the merger of Bank of M adura
with ICICI Bank in December, 2000.
Scope of Study
The strategic manage me nt aspect of a merger
has been ana ly sed in th is paper on the basis of
factors such us shareholder v nl ue, com pet it io n,
geographi- ca1 base and mar ket s h u re of com
pa nies in t he merger deal. Pre viou s Work on the
su bject inc lu des that of G hemawat and G h adar '
who have found that the rush to wards h uge mergers
is based on a faul ty understundin g of economics and
that there are bet- ter ways 1 o add ress global isa t
ion. Ven k ites war an’ has ana I ysed the e in erg ing
scenar it› in the en nte x I of restructuring co r porate
India. Pa w ask ar° stud- ied the impact of mi•rgers
on corporate performance by corn p arin g I he post-
merger performance of the acq uirer with its pre-
merger per fr› rmance, ta k ing a

Banh of Madura Mefgar Wlth ICICI Bank.' An Analysis

sample cf 36 cases ‹ merger be-
tween I 912 and I 905. The regressm›
res u I is in rh c s lud y sh u wed I h al
there are no signi ficent di I”feronces

two firms in vol ved in merger.

In his resea rch study, Pandey‘ has
anal ysed the stucK priue
perfcrmunce of targel firms in th e c‹›
n tex t n f change in management
control in the case ‹› I” takeover
announcements u nd has shown thnt
the targel firm val u - ations increase
in the run up to an- nouncement. This
paper is an at- tempt l‹› c‹›ntribute tu
che literature on M&As in the Indian
context, and lock s a I the lac tors in fl
uencin g merger dec is iuns and the
imp*ct uf swap ratiu ann‹ unoement un
share price.

Profiles of Bankc
Bank of Madure {BohfJ linasin ii N a i ari a ieaaaaaal/
4r A South Indd a hand bun k esxb I ised i n the
year I 943. with a tack reccrd ot S7 years, with
stcn g brand cqu ity
0 Asset Birse — Over Rs 4.400 crore (44 bn) With
a Capital Adequacy Ral in (CAR) of I I.257e
0 Distribution Reach tFY 2000) and Autcmacion
— *63 banking branches, with 182 briinches in T«mi1
Nadu, I .2 mill ion customer acc‹›unts. 132 comput-
erised branches accounting for '?0' • cf the busi-
ness. 47 branc he.s networked through VSATs
o Em ploy ees — Totnl stren gth o I‘ 2577 ; of these.
2000 ct›r»puter I iterate.
R First tndian bank ter list on New York Stock Ex-
change with US GAAP account ing. It was estcb-
ltshed in the year 1 994 by Induscri«I Credit and In-
vestment Corporation of India ( ICICI) as a new ten-
et at ion private sector banK.
0 Asset Bese — One of the largest private sector
banks based in India With an asset base of over Rs
12.000 crores ( 120 bn) with strong CAR of 19.67c
0 Distribution Reach and Automation — Te hn‹yl-
ogy driven business gt‘oWtls With 104 branches.
366 At M •' — the largest ATM ne lWor k in I ndi a,
ten Call Centres. all branches computerised, Internet
ban king fact li iy
iiivia Management Review, September 2003
0 Employ cms — Total strength tif arou nd 1500:
all computer literate
A comparison of‘ balance sheets of ICI CI Bank and
BoM tExhibit 1) shows ICIC I Bank to ad vantage in
terms ct' assets. advances and deposits mobi lised.
The income stiitements of the two banks (Ex hi bit 2)
reveal that ICICI Bond’s interest income was Rs
8528 mn whereas BoM’s was much lower at Ps
3,702 mn. Toial i ncome of 1CIC1 Bank (Rs 10,470
mn) is more than twice BoM’s total income lRs
4,689 m nJ, Profit after Tax of ICIC1 Bank is nl so
more than twice that tif B‹iM.
6wap Ratio an4 gtock Price
Ftuctuatlans
On rriday, 8"' December, 2000, Bank cf M adur*
merged w ith ICICI Bank. The new s was published
in the newspapers on 9"’ December and the merger
decision with swap r*tio wAs officially announced
un I 1'^ December,2000. The shareholders approved
the decision nn January 19, 200 I end the banLs got
approval from the Reserve Bank of India (RBI) on
1*' March, 200J .
The compels tion lot business vo1time, the moti va-
tion tti increase shareholder value and the desire to
become big players have led banks in India to think
‹›f mergers and ct›nsoIidat i‹›ns. Though ihe Tndian
banking industry w i massed the emergence ot new
pr:vale banks like Times Bank, tnduslnd Bcnk, tCICt
BanL, UDhC Bank. UTI Bank and Gluhsl Trust
BqnL
11

Exhibit2
in the early 1990s. many executives felt the need for
consolidation of operations in the late 1990s in or-
der to compete wit h other strong players. There
were tal ks between banlts (even w ith the old pri-
vate secior banks) to nrrive at an acceptable swap
ratio for a possibl e merger.
On8”December2000,FñdoyTCIC1Bankand Bonk
otMaduzac4metgehetoworkouhtmergeof
Bo M with the former. The swap ratio announcement
w:is postponed to 11'• December, Monday by the
board of diree tors of the banks. However, on heat-
ing the news about the merger decision between
these ban ks (before it appeared in the newspapers
on S'• December. 3001 Saturday), ICICI Bank’s stock
shot u p by l27• to Rs 170 and BoM’s by 8*4 to Rs
131.6, o n 8* December at the Bonn bay Stock Ex-
chanye. The ex pectatinn that the ac
quiriny b‹›nk would been me a strong
pl a ver, muti vated people abruad tco,
en the some day, lo pure hese share.s
of ICICI Bank at New York Exchange
in bul k, and the price of the Ameri -
can Depository Share uf ICICI Ban k
rhot up by’ I7Vr on the same day, fi cm
the pre›' ious day’.s c los ing value of
lt is interesting to look at the factors
i o fl uenc i rig the swap rat io n a
m v• roe r den 1. Th e s wa p rat i o an-
n min ced in ihe case of the B o M -
ICIC I B an k merger was 1 : 2. ie, t he
sh a re h o I ders of B a n k of‘ Mad
ura were to get two sh*tres of ICICI
Ban k [‘or eac li B oM sh are . The ni a
rket
12
price of an ICICI Bank share on 7"'
Decem ber, 2000 was Rs 1 52.95 and
BoM’s price was Rs 122.45. The
swap rntio coul d have been derived
in favour of ICICI Bank if the valua-
tion had been done on the basis of
the market price of‘ the sh nres, the
bal nnce sheets t 0 sh nres of ICICI
Bun k for 13 shares o I BoM), and
the No n -Performing Assets (N PA)
of both the banks. The net NPA to
net ad vances wns 1.3'7o for ICICI
Bank, while it was 4% in the case ot‘
BoM.• However, the swap ratio was
derived on the basis of financial
and strate- gic rat‹cs.
Financ ia1 ratios such as Booh Val
ue of the share of both the banks as
on September 30, 2000, Ear nin g Per
Share — EPS (Net profitfshares out-
stand ing), last di vidend paid, and the percentage
of NPAs were taken into consideration for deriving
the swap ratio.
Bank of Madura had an edge with EPS, BooK Val ue
and percentage of last di* id end paid (Exhibit 3)
whereas IC ICI Ban k had more assets earned, higher
market price of share (pre -mergei a nnou ncement
phase), low NPAs end hi gh-tech image. The swap
ratio for the BoM-lCIC I Bank mei-ger could have
been in the i-ante of 1:1 to 1 : 1.5 as most of the
ad *antages of' the Bank of Madura were neuti'al ised
by the disadvantages (high NPA le›'el, low markel
price etc.). But while calculating su'ap rntios in any
merger decision, other than financia I ratios, compa-
nies must al so analy se the need fot merger and the
moti vation for ac qui si tion. In this case, the swap
Exhibit 3
Bank ol Madura Ivferger W’rh ICICI Bank. An Analysis

Exhibit4
ratio was announced in favour of Bank of Madura
mainly because of IC ICI Bank’s desire to acquire
a good bank in South India, where they did not
have strong presence and geographical advantage.
The range of posslblc swap ratios (Theoretical and
Practical) based on various parameters is shown
in Exhibit 4.
There was spcculation in the stoCk market for
about no weeds. when tbe discussions were
going oa between the banks, that Bonk of Madura
would get a favourable swap ratio. Bank of
Madura had gained sharply by around 70a in the
fortnight bet weeo the last week of November and
the first week of December 2000, expectlng a
better swap ratio and merger. The swap ratio for
the BoM-ICtCI Bank merger was announced as
1:2 on i 1'• December. Monday, proving that
higher swap ratio is ltte only way an acquisition
can be doric in the Indian bank- ing sector. Bank
of Madura shareholders got a bet- ter deal as they
could exchange one share worth approz imately Rs
120/- and get approx imately Rs 304/- .
The impact of the announcement of
the swap ratio on the share prices of
the acquiring bank (ICIC I Band)
and the enquired banlt (Ban k of
Madura) shows tint the investors in
the stock market reacted
immediately (or hear- ing the news
of the S z'ap Ratio. be- fore it was
appeared in the newspa- per the
next day). The share price of Bank
of Madora at the Bombay Stock
Eschange and N ationol Stock Ext-
cha nge shot up on 1 I * December.
2000. the same day as the announce
ment of the Swap R,atio and ICICI
Bank’s share price slipped down
tRx-
The Ban k of Madura scri p was
traded at 79.20 on lS'• Noverr›bet,
2000 anti increased sharply, closing
at Rs 90.50 on 30" November, 2000
and touched Rs 122.45 on 7"
Decem- ber, 2000 (around 70a
increase over a period of
fortnight).• This could Joe linked to
the rounds of negotia- tions held
between Bank of Madura and ICICI
Bank during this period for a
possible merger. (ICICI Bank had
held negotiations with other banlts
too, fot o poasible acquisition.) The
closing price of ICICI Bank scrip at
National Stock Exchange on l5'•
No- vember was Rs 142.30 and
Increased
to Rs 142.95 on the 30'• and Rs t68.95 o0 8"'
Deoem- bar 2000 before the announcement of the
merger. While the share price of both the banks
increased in the pre-merger announcement per iod,
the percent- age price increase of the BoM scrip
was much more than the increase in ttie ICICI
Bank share price.•
Though the merger swap racio was announced
on I I' December, 2000, by the board of directors
of the banks, the scrips were available for trading
till the date the decision was approved by the
share- holders of both the banks. Hence, it *s
important to look at the impact of the swap ratio
announcement on the share prices of both tfie
banks, The stocl‹ price fluctuations have been
shown in the graphs in kzhlbit 6 (Before the
announcement of Merger and Swap Ratio ftom
15" November 2000 to 11" De- cember 2000) and
E8htblt 7 (After the announce- ment of Metger
Decision and Swap Ratio - trom l2'• December to
29" December 2000). 9/hile thc Bank of Maduro
scrip shot up from Rs I 32.25 (closing price on 8'•
December. 2000) t.o Rs 244.90 on 20'• December,
the ICICI Bank scrip fell from Rs 168.95
13
 Exhibit 6
(closing price on 8"' December. 2000) to Rs t57.OF bank fur a possible merger but the negotiations
were on 18' December. Thcugh the ICICI Bank share price not successful. For Bank of IVtcdura,
financial con- increased tu Rs 158.00 on t’J“' December, it slipped solidaticn was becoming
imperative for growth and dcwn further to Rs 143.35 and Rs 14 1. 10 on 2G' and lhe 4ec isi on to merge
was based on value cre- 27" December 2000. The increased demand f'cr Bank ation ' ’.
of Madura scrip resul ted in the increase in iis \›rice,
because in vestors ex pected to make m‹›ney fry ex-
Suitability Analyais
changing the share in future ag.‹inst the ICICI Be nk A fler a suitability an:llysis uf the merger was car-
sh *re ai I :2 swap rutio, cfter the sharch‹›lders end
ried uut, an attempt was made to pusitiun huth th«
the It B I approved the merger decision.
banks in the context uf the new trends in the indus-
According lo iCtCI Bank »uurcns, the issues con- lrinl secttir. The emerging trends are summori sed in
sidered fur che merger were customer base, ge‹›- the What's IN and What’s OUT furm at in Exhibit 8.
¿rcphic a I base and enhancing shareholder val tie, Bank of M‹idura represents the cu I ture ‹›f a 57 year
and Ilank uf Msduru hcd a strong prerenc e i n the old priva ie rector organi set ie n which has been
suuth , a high econom i« cc tiv ity area. Wi th the cmph«si sing the pa rameters I i stcd under W hat’*
merger, ICICI Bank w‹1uld be looking at a branc h OU1' whereas tCiC1 B‹ink ieprescn ts a siX year old
network of’ 350-400, which would have taken at * new age” crganisati‹›n, c leading private pl ayer.
least f'ive ye:irs ter achieve on its own. and an cmphasi sing mc›re ‹›n What’s in. Bank of Mad ura
addition a1 had tradiliuna II y Fee usscd on mass banki ng sli ate-
1.2 mill ion customers (Bank of Madura ’s el ient gies based nn st›ciaI c›hjecii vis, whereas ICICI Bank
base) which *ould have required a minimum of two has been emp hasi sing parameters I i ke proti tabi11
years. In tact. ICICI Bank had negotiated with other ty in the i nter«sts ‹›f sh«rehcl ders. ICICI Bank has a
south Indin based banks including Karnataka-based Crcdi I Rico very management cell, whereas Bank nf
Vysya bank, Kera la-based Federal bank and South
I nd in

Exhibit7
Bank of Madura fvlerper Wtth /C/C/ Benk: An Aoa/ysis
 IIM B.Management Raview, Saptemdar 2003

Exhibit 8
Madura had a Credit Monitoring Department
The merger has been beneficial for the parties con-
cerned. 9/hile {I was not such a task for Bojvt to
orient thomsel ves to the functional styles of ICICI
Bank, integrating the human resources of BoM with
its employees is a difficult process for ICICI Ban k.

The synergies of the merger of Bent of Madura with

ICICI Bank can be discussed as foI lows.
p Financial Capability: With a combined asset
base of Rs. t6,000 crores (160 ba}, ICICI Bank
will be amongst the largest pri voto sectur banks
in In- dia, with a stronger fingnc ial and
operational struc- ture, which w ill give it the
capability of greater resource/deposit
mobilisecion.
o Branch Necwork: ICICI Bank now has a net-
work of over 560 branches, it6 branch network
hav- ing increased by 2h4, as also its geographic
cover- age and convenience to customers. The
time for setting up new branches has been
reduced.
g Customer Base: Its combined uustozner base of
2.7 mn has enabled ICIOI Bank to oJ’fer banking
and financial sereiees and products and also
facilitated cross -set ling of products and servaces of
the ICICI group'
p Tech Edge: The merger will enable ICICI Brink
to provide ATMs. Phone and Inter net banking
and financia! setv ices and products to a large
customer base, with expected savings in costs and
operating expenses.
c Priority Soctor Advances: The enhanced rural
branch netwoilc hcs enabled ICICI Bank to lend
for micro-finance 8cti vities through self-help
groups, and to the agricultural sector in its
priority seccor initiatives through its acquired 87
rutal und 88 semi-
 income groups those who non Id not be able to
urban branches. maintain the mini rtium of Rs SQOO/- in their
0 Equity Capital and savings batik acsounts. Also, most of the BoM
EPS : The deal wiih BoM is li employees working rn the rural branches are li kely
Rely to di - lute the current to retire soon, os the average age of BoM
equity capital by a.round l2&.
And the merger is ex- pected to
bring 20a percent gains in 15
EPS of ICICI Bank. The bank's
comfortable Capital Adequacy
Ra- tio (CAR) of 19.64 T› has
declined to 17.64.
O Managing Human
Re- sources: One of the
greatest chal- lenges before
ICICI Bank is man- aging
human resources. ICICI Bank
had less than 1500 employees
while
BoM had over 2500. The merged enttcy has
about
400.0 employees, which makes it one of the
largest banks among the new generation
private sector bunks. Given that the staff of
ICICI Bank, mostly young qualified
professionals with a bcckgraund in
computers, would probably prefer to work in
big cittes, and the trade unicn affiliations of
BoM em- ployees, wko have dcc lined
voluntary retirement or retrenchment
schemes, integrating the rwo work cultures
may prove to be u I-tercuJean task' *. How-
ever, most ol' the BoM employees have
recei vcd an upward pay revisio.n.
0 lvtannging Client Base: The cl ient base of
SCICI Bank, after the merger, is 2.7 million,
an accumula- tion of2.2 million frowi its provioas
0.5 rail|ion, more- over a client base whose
quality is not uniform. Bank of Madura had
built up its client base over a period of time,
on ttie basis of personalised ser- vices. In
order to deaJ with BoM’s client base, ICICI
Bank needs to redefine its strategies to s.uit the
new culture, afid be mindful of its relationship
with small and medium borrowers.
R M ona ping R are I B ra ne hes: ICICI’s m
njor branches were in major metros atid cities,
whereas BoM spread its wings mostly in the
semi urban and rural segments of south India.
The merged entity has its task cut out in handl
ing the business mi x of the rural branches of
BoM, given the geographic location of its
branches and the level of competi- tion. For
example, an account bolder reeds to main- tain a
minimum of Rs 5000/- in n savings bank ac-
count with ICICI Bank, whereas BoM’s
requirement was Rs 500/-. Rural branches hnve
a numb.er of cus- tomers from low and iriidd ie
employees is almost twice that of ICICI Bank.
ICICI Bank employees, mostly youngsters, would
prob- abl y prefer not io get transt‘erred to the rural
branches.
Conclusion
In the era of g lobalis ntion, organisations w ill have
to become competitive. ‘Survival of the fittest’ has
become the teal ity in most of the sectors including
banking, with the entry of foreign players. While
mergers can be considered barriers to perfect com-
petiti‹in, ‘small ’ companies tend to look at the short
term (immediate) gain th rough merger and let the
'bigwigs* acqui re them. Lack of resources required
to compete with the bi g pl ayers may al so, force the
‘small’ to merge with the ‘ big’. In the case of the
Bank of Madura -lC ICI Bank merger while BoM
shareholders benefitted from the merger in the short
tun, ICIC I Bank could i ncrease its e us to mers ,
branches and business which would be helpful to
them in the long run in rising tu u position of
strength in the Indian banking i nduslry.
After v iew ing t he merger sy ndrome, it is possible
th at permutations and combinations of mergers in
the Indian bank in g ind ustry may take place in
the future. The public sector banks, wh ie h will shortl
y be losing their publ ie sector nature (as the Go
vern- ment of India is pl anni ng to reduce its stake
from l00W to 33'7'› ) are strong contenders to take
over the old generati on private sector banks.
Foreign banks will not stay behi nd in the takeover
bids.
Af earlic•r versi.on of this papei- wcs y rescii ted nt
the 15"' A uJi rehasinn r,onJRreri ce on Bnnk iii g anil
Finiui we o rgym ised b y the Us i versii y o/ jVe Pp SO
If I li Wnles ( 16 - 18 Dec erm bc r, 200.* J.
References and Notes
1 Ghemawah Pankaj, and Farihorz Ghadar, 2000, ‘The DubiouS
16
LagicoFGlobal Mogamergers’. IJarvard IJusiiiess Review, July-
Aug, 65-72.
2 Venkiteswaran, N, 1997. ‘Rssuueturing of Corporate India:
The Emerging Scenario’. YfRtpa, 22 (3). July-Sept, 3-13.
3 Pawaskar. Vardhitna, 2001, ' Effect of Mergers on
Corporate Performance in India , Y?io/po. 26 (1), Jan-
March,19-31.
4 Pandey, Ajay, 2001, ”TakeoverAnnouncemenis, Open
Offer., and Shareholders’ Relums in Targc‹ Pirms’, Pte/pa,
26 (3), July-Sept, 19-26.
5 As on 7th December. 2000. The tool number c£ATMs were
increased to more than IQ/0 by ICICI Bank in «» « 200 I .
6To quote from the fco»oriiic“no . 9 Do 2000, 'Swap
Ratio could be 10 shares of ICICI Bima tor 13 shnres of
bank of
kladura. The ratio could be influenced by NPA level of” the
two ba*›ks*.
7.'\ccurding in ihc r•xoiioiiiic Billies. I2 Dec. 2000. The Bun
tray Stc›ck Exchange share price o1” ICICI Bank I”elI to Rs I
GB.30 un I th December Monday, against the Fri5ay’s close
of‘ Rs I69.85. Bank of Mcdura scrip, on the other I u4
gaJned Iroin Rs l3 I .6 t8h Dec, 2000 Friday's close) c‹›
tuuch Rs I42. I (I I December Monday’s clnse). The some
tr4nd is seen ai the National Stock Exchange too.
8 The share price and volume-ilata for Bank ul' hiodura and
ICICI Bent lrad«d at N ztional S\ock Exchange of InJia (NSE)
l”rom ! ñth Novcinbe r, 2000 to 29th Decc mher 2000 s‹›u‹ eJ
from h‹tp://ascin4i1.cciv
9 The ffindu Business £Jne. 'Stock Focus'. 10 Drc, 2000
tone day ixtore the announcement ot ihe Swap Ratio) said,
‘ It is quiie likely that the Swap Ratio may be iixcd in a
munncr ih*it holds out a goud dent tor shareholders ot Bank
ot Madura.. The scrip has gained sharply by around 709r in
the pu.st fortnight. ex mating a favourahle s«’ap raiio and
merger.’
! 0 Derived I rom the scite‹z4ents made fry P FI R aviku nor.
$eni‹›r Vice F'i-esidenl, ICICI Bank. Mr Sinor. ChaimJan 4nd
Managing Director, ItICJ Bank and K M Thiogazajan, tl›en
Chairi»an and Managing Di reclur uF 8lpk cf Madum in the
/uono/r/i‹ /i//z‹’.Y. 12 Dccember,2000.
I I as u ndc rstood fr‹› nJ discussions w ith o f”ficia I s c I” the
conccrneJ blf\k.
Repriitl Nu 03301
Bank of Madura Merger N/if/1' ICiCt Bank: An Analysis
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