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Mergers, Acquisitions

and Valuations
AuthorsMr.M.Kannadas – Assisant professor,Bank Management
Nipun Bajaj
- 1st year, Accounting and Finance
Ramakrishna Mission Vivekananda College
Evening- Autonomous,
Mylapore, Chennai

ABSTRACT
The purpose of this paper is to explore the various
motivations, needs and ideas of mergers and acquisitions
in
the Indian Banking sector. The primary objective behind
this study is to attain growth at the strategic level in
terms
of size and customer base. This, in turn, increases the
credit-creation capacity of the merged bank tremendously.
Small banks fearing aggressive acquisition by a large bank
sometimes enter into a merger to increase their market
share and protect themselves from the possible
acquisition.  The study helps to realise the intent, Benefits
and drawbacks by showing cases of different mergers and
acquisitions of Indian Banks. This study also helps us to
know the future of Mergers and Acquisitions in the Indian
Banking sector considering the overall impact and
government policies for better scope.

INTRODUCTION In the globalized economy. The main motive behind the Merger and acquisitions (M&As) is to create synergy. Merger and Acquisitions (M&As) acts as an important tool for the growth and expansion of the economy. that is one plus one is more than two and this rationale beguiles the companies for merger at the tough times. Companies are confronted with the facts that the only big players can survive as there is a cut throat competition in the market and the success of the merger depends on how . Merger and Acquisitions (M&As) help the companies in getting the benefits of greater market share and cost efficiency.

.Key M&A Deals 2000 onwards: Some Case Studies The cases chosen for the purpose of this study were selected based on their prominence and recency (all post-2000) to ensure that the motives driving the deals will remain relevant in the current context.

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In addition.For CBoP. . geography (northern and southern states) and management bandwidth. HDFC bank would exploit its underutilized branch network that had the requisite expertise in retail liabilities. there was a potential of business synergy and cultural fit between the two organizations .HDFC Bank Acquires Centurion Bank of Punjab (May '08) INTENT: For HDFC Bank. transaction banking and third party distribution. The combined entity would improve productivity levels of CBoP branches by leveraging HDFC Bank's brand name. this merger provided an opportunity to add scale.

the deal. The merger also greatly reduced the risk profile of ANZ by reducing its exposure to default prone markets. . funded its share buy-back in Australia (a defence against possible hostile takeover). It also leveraged the infrastructure of ANZ Grindlays to service its overseas clients. There were also rumours of the resulting organisation becoming too large an entity to manage efficiently.Benefits Standard Chartered became the largest foreign bank in India with over 56 branches and more than 36% share in the credit card market. especially in the fast changing financial sector. at a premium of US $700 million over book value.  Drawbacks The post merger organisational restructuring evoked widespread criticism due to unfair treatment of former Grindlays employees.  For ANZ.

For ANZ.Grindlays had been a poor performer and the Securities Scam involvement had made ANZ willing to wind up.the deal provided immediate returns to its shareholders and allowed it to focus on the Australian market. It aimed at becoming the world's leading emerging markets bank and it thought that acquiring Grindlays would give it a well-established foothold in India and add strength to its management resources.Standard Chartered Acquires ANZ Grindlays Bank (November '00) Intent Standard Chartered wanted to capitalise on the high growth forecast for the Indian economy. .

Benefits Standard Chartered became the largest foreign bank in India with over 56 branches and more than 36% share in the credit card market. The merger also greatly reduced the risk profile of ANZ by reducing its exposure to default prone markets. funded its share buy-back in Australia (a defence against possible hostile takeover). especially in the fast changing financial sector. It also leveraged the infrastructure of ANZ Grindlays to service its overseas clients. 4There were also rumours of the resulting organisation becoming too large an entity to manage efficiently.  Drawbacks The post merger organisational restructuring evoked widespread criticism due to unfair treatment of former Grindlays employees.  For ANZ. the deal. at a premium of US $700 million over book value. .

Bank of Baroda Acquires South Gujarat Local Area Bank Ltd (June '04) Intent According to the RBI. South Gujarat Local Area Bank had suffered net losses in consecutive years and witnessed a significant decline in its capital and reserves5. decided that all seven branches of SGLAB function as branches of Bank of Baroda. Bank of Baroda was against the merger. RBI first passed a moratorium under Section 45 of the Banking Regulation Act 1949 and then. The final decision about the merger was of the Government of India in consultation with the RBI. after extending the moratorium for the maximum permissible limit of six months. and protested against the forced deal . To tackle this.

This further strengthened its position in rural Gujarat. Drawbacks There was no widespread criticism or any apparent drawback of the merger since the financials involved were not very high. Since BoB was a large entity (total assets of Rs.Benefits The clients of SGLAB were effectively transferred to Bank of Baroda. 793. Albeit minor. deriving the advantage of dealing with a more secure and bigger bank. albeit under a different name. . SGLAB did not benefit much. addition of a small liability did not affect it much. it obtained seven more branches and the existing customers of SGLAB.2 billion at the time of merger). except that it was able to merge with a bigger bank and able to retain its branches and customers.

ICICI Bank Ltd. technologybased. enhance career opportunities for its employees and provide first rate. BoM was a plausible target since its cash management business was among the top five in terms of volumes.  BoM wanted a (financially and technologically) strong private sector bank to add shareholder value. without acquiring RBI's permission for branch expansion. there was a possibility of reorienting its asset profile to enable better spreads and create a more robust micro-credit system post merger. modern banking services to its . In addition. Acquires Bank of Madura (March '01) INTENT ICICI Bank Ltd wanted to spread its network.

the Capital Adequacy Ratio of the merged entity was lower (from 19% to about 17%). including 97 branches in the rural sector. The two banks also had a cultural misfit with BoM having a trade-union system and IBL workers being young and upwardly mobile. The Core fee income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. Drawbacks Since BoM had comparatively more NPAs than IBL. With the manual interpretations and procedures and the lack of awareness of the . which was very different from BoM's ISBS software. unlike those for BoM.55 %. It possessed the largest customer base in the country.from 97 to 378. thus enabling the ICICI group to crosssell different products and services. IBL gained an additional 1. There were technological issues as well as IBL used Banks 2000 software.9 The Net Interest Margin increased from 2.46% to 3. besides making an entry into the small and medium segment.2 million customer accounts.

The bank also had a lower . In addition. OBC's presence in southern states increased along with the modern infrastructure of GTB. a workforce of 1400 employees and one million customers. The merger also filled up OBC's lacunae computerization and high-end technology. by an RBI ruling. GTB had no choice as the merger was forced on it. GTB being a south-based bank would give OBC the much-needed edge in the region apart from tax relief because of the merger. following its bankruptcy.Trust Bank Ltd (August '04) Intent For Oriental Bank of Commerce there was an apparent synergy post merger as the weakness of Global Trust Bank had been bad assets and the strength of OBC lay in recovery. which was detrimental to solvency. Benefits OBC gained from the 104 branches and 276 ATMs of GTB. Drawbacks The merger resulted in a low CAR for OBC. Both banks also had a common IT platform.

has better ability in terms of both revenue enhancement and cost reduction. in turn. in most cases. Such growth helps the banks to reach a wider customer base with ease with the availability of manpower and funds. With separate resources guarding managerial efficiency the banks become more professional and systematic . we can narrow down the motives behind M&As to the following : •Growth .Acquirer can better manage the resources of the target whose value. rises after the acquisition.Based on the cases. •Synergy .Organic growth takes time and dynamic firms prefer acquisitions to grow quickly in size and geographical reach.The merged entity. •Managerial efficiency . .

and .To protect depositors. Market entry becomes much more easy as the financial and quality output is considerably increased. It is very common for the banks to get into such transactions for getting something important for them .Strategic motives . •Regulatory intervention . •Tax shields and financial safeguards . Tax savings helps in cost reduction and hence has a positive impact on Profitability.Two banks with complementary business interests can strengthen their positions in the market through merger.Tax concessions act as a catalyst for a strong bank to acquire distressed banks that have accumulated losses and unclaimed depreciation benefits in their books. •Market entry .Cash rich firms use the acquisition route to buyout an established player in a new market and then build upon the existing platform.

Likely targets of takeover bids will be Yes Bank. However. This will be an opportunity for foreign banks to enter the Indian market as with their huge capital reserves.Persistent growth in Indian corporate sector and other segments provide further motives for M&As. Bank of Rajasthan. especially in the post-subprime era.sector is forecast to occur due to the changing regulatory environment (proposal for upto 74% ownership by Foreign banks in Indian banks). 2. excessive valuations may act as a deterrent. A bigger player can afford to invest in required technology. cutting-edge technology. and IndusInd Bank. Consolidation with global players can give the benefit of global opportunities in funds' . best international practices and skilled personnel they have a clear competitive advantage over Indian banks. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively.

which would pave the way for the creation of stronger entities through consolidation and for foreign banks to strengthen their local presence. and a few large local area banks.  The finance ministry and the Reserve Bank of India (RBI) are working on new guidelines that will ease mergers and acquisitions (M&As) among banks. M&As in the future are likely to be more market-driven. There would be a movement towards a 3-tier structure in the Indian banking industry: 2-3 large international banks. instead of governmentdriven. 8-10 national banks.3. In addition. Although global uncertainties and .The Narasimhan Committee (II) recommendations are also an important indicator of the future shape of the sector.

but no guarantee for improved profitability on a sustained basis. large scale multinational corporations. where product life cycles are short. can be considered. There is also a need to note that merger or large size is just a facilitator. lack of size should not be taken to imply irrelevance as specialised players can still seek to provide niche and boutique services. the thrust should be on improving risk management capabilities. Banks need to take advantage of this fast changing environment. They took mergers as a protective strategy to save their business from being perished in the newly created dynamic .plan that could take shape latest by 2009 end with minimisation of technology-related expenditure as a goal. many small organizations hastily got into mergers to stand against highly-competitive. 2. time to market is critical and first mover advantage could be a decisive factor in deciding who wins in future.In the short run. etc. Following globalization. attempt options like outsourcing. corporate governance and strategic business planning. rather than a clumsy dinosaur. the resulting larger size should not affect agility. The aim should be to create a nimble giant. At the same time. Post-M&A. Hence. strategic alliances.

The most challenging task is to bring together people and make them work as a team. many fearing retrenchment resign leading to a complete break-down at . 4. lawyers. advisors.Another reason for an unsuccessful merger is the lack of efficient management to unite different organizational cultures.Moreover.3. etc. Establishing a new organizational structure that fits all the employees is also difficult.) could not be covered by the combined revenue of the merged organization leading to its failure. paperwork. the high costs of business consolidation (professional fees of bankers. Hence.

•.Developments in Commercial banking (2004)'. 2002.com/btoday/20021124/ cover2.in/scripts/Publicatio nsView.References•The Economic Times news edition 1.rbi.org. 2008. 1. Last accessed on August 7.  http://www.'The Banking Regulation Act of 1949 (Section 45. November 24.Business Today. 'The Inside Story: How Standard Chartered effected the integration of Grindlays into itself'. 2008. . 2002. Last accessed on August 5.2)'.aspx?Id=6935 .html .  http://india-today.