Kotak - ING Vysya

Merger
“A Merger of Equals”
 Group 5

Team Members
016 - Rudra Deolankar 101 - Aarushi Goel

030 - Krishna Mundada 119 - Harshita Goel

048 - Roli Dube 146 - Renita Raphael

CONTENTS
Synergy in the Deal. 05
01 Sectoral Conditions -
Pre Deal
Sectoral conditions 06
Post-Deal
Features of Buying and
02 Target Company Legalities and any legal
issues associated 07

03 Deal Attractiveness, Resulting entity

Reasons for the Deal performance Post-deal 08

04 Issues during and after

Deal Financials the deal
09
including Valuation
 01
Sectoral Conditions - Pre Deal
 Indian Banking can be divided into three main phases:
● Phase I (1786 – 1969): Initial phase of Banking in India where many small banks were set up

● Phase II (1969 – 1991): Nationalization, Regularization and Growth marked this period

● Phase III (1991 onwards): Liberalization and its aftermath In post liberalization regime, Government
had initiated the policy of liberalization and licenses were issued to the private banks which led to the
growth of the Indian Banking Sector.

● The Narasimham Committee (December, 1997)

 Banking sector Features
Global Banks
IMF’s financial access survey of 2011
Parameters India China

Branches - 30.43 - 24.43 1428.98 - 2975.05

ATM’s(Per
1000km)

Branches - 10.64 - 8.9 23.81 - 49.56

ATM’s(Per 1lakh
population)

Bank Deposits - 68.43% - 51.75% 433.96% -

Credit (% of GDP) 287.89%
 M&A in the sector
● 81 Amalgamation in the sector, 47 before Nationalization, 26 of remaining 34 between a private

and public sector bank, rest between private

● Industry facing slowing domestic economy, Tepid global Recovery and volatile financial markets
 02
Features of the Target and Buying Company
 Kotak Mahindra Bank Limited - Buyer

1. Established in 1985, the flagship company of the Kotak Group, Kotak Mahindra Finance
Capital Management Limited, started off as a non-banking financial services company.

2. In 2003 it became the first ever NBFC to be converted into a bank.

3. It caters to wide variety of banking needs of both individuals and corporates.

4. It provides consumer banking services,commercial banking services, investment

bankings services, and numerous other financial services.

5. Before the merger, Kotak was primarily promoted by Mr. Uday Kotak who held about
40.02% of the capital interest and is listed on the NSE and BSE.
 ING Vysya Bank Limited - Target

1. Started in 1930s, ‘Vysya Bank’ comes with a long heritage of banking in the trade
communities of south India.

2. In 2002, it became the first ever Indian bank to merge with a foreign one, when it officially
announced its merger with the Dutch banking giant ING Group.

3. The bank has over time grown a strong presence in south India with over 500 branches in the
south.

4. Before the Deal, the ING Group promoted ING Vysya, holding a 44% equity stake in the bank.

5. The bank majorly dealt in retail, private and wholesale banking services.
Pre-Merger Dynamics of both
Companies
Zone-wise Coverage
 03
Deal Attractiveness & Reasons for the
deal
 Chronology of the Deal
January 2015
Deal approved by share-
September 2013 holders of both the banks.
ING’s intention to
September 2015
99.93% of the Shareholders
sell its stake in ING (by value) of Kotak & The merger process
VYsya 96.89% of ING Vysya’s was completed
shareholders by value.

November 2014 April 2015

Scheme approved by RBI approved the
board of directors of scheme
Kotak & ING Vysya
 Reasons for the deal
1. ING Group’s exit from India :

● Since 2013, ING - the Dutch banking giant with a controlling stake in ING Vysya intended to
divest and leave India.
● ING took a hit in the global recession and was heavily indebted to the Dutch Government.

2. RBI Directive to Uday Kotak :

● In May 2014, Uday Kotak received a directive from RBI to reduce his shareholding in the
Bank to 20% (from 45.3% at that time) by December 2018.
● In agreement to the Deal, the promoter’s stake in the Company will be reduced to 33%
putting him well on his way to meet the requirements of the directive.
 Deal Attractiveness
The deal was structured as a Merger and not Share Acquisition.

1. Promoter Dilution & Capital Expenditure:

Given, the RBI directive to dilute the Promoter’s stake in Kotak, the Deal, which entailed a
share swap instead of a capital expenditure (which would have been required for a share
purchase), allowed Kotak to avoid the cash needs of an acquisition, and directly dilute its
shareholders (primarily Mr. Uday Kotak).

2. Takeover Code Exemption:

The merger was exempt from the obligation to make an open offer under the Takeover
Code, and thus, relieves Kotak from having to make an open offer.
 Deal Attractiveness

3. Tax Benefits:

● The Deal being structured by way of a merger, was tax neutral under the IT Act.
● Further, when ING eventually exits from the merged entity, it can do so by selling its stake
on the floor of the market and thus avail of the tax exemptions afforded to such
Transactions.

4. A Single Large Bank:

● If the deal was structured as Share Purchase the result would have been two separate
banks. However,the primary commercial reason for the Deal was to consolidate the value
that both Kotak and ING Vysya had into a single large bank, drawing the benefits of both.
 Deal Attractiveness

5. ING’s Banking Leverage

● The combined entity could leverage ING’s digital banking strengths, evident from the fact
that ING was among the top two or three consumer banks in Germany with zero branch
presence. Kotak bank could also leverage ING’s expertise in international corporate
banking.

● Customers and employees would benefit from the wider geographical presence, and
broader product and expertise base.
 04
Deal Financials including
Valuation
Financials
 Deal Valuation and other features
● The Deal structured as amalgamation accordance with Section 44A of the BR Act.
● ING and Kotak relationship
● 725 equity shares (face value INR 5) of Kotak issued to the shareholders of ING
Vysya ‘s 1000 equity shares (face value INR 10) of ING Vysya held by them. ING
valued at $2.4 billion (Rs 15,475-crore)
● The deal values VYSB at ~INR150b (INR790/share, +16% over 30D avg. share
price)
● One of ING Vysya’s directors joined the Board of Directors of Kotak.
● The deal values of ING Vysya is about 2.2 times its estimated FY 15 adjusted book
value.
● Swap ratio calculation
● Partial Shares not issued
● 17% equity dilution for Kotak
● Foreign investment in combined entity 46.9% vs
maximum permissible limit of 74%
● Dilution of Uday Kotak’s holdings
 05
Synergy
 Synergy
● Replaced Yes Bank
● Deepened geographical presence
● Expansion in rural and southern India along with overseas corporate clients
● Increased number of Branches and ATM network
● Distribution of Life Insurance and Asset Management Products
● Leveraging the branch network to drive higher SA, CA, TD and (TPP)
distribution

Revenue synergy :

● Customer acquisition and increased revenue

● Added ~100,000 customers a month in FY16
● The Bank saw traction in credit cards and auto loans
Cost Synergy :

● Consolidation of data centres and eliminating overlapping IT systems

● Driving Savings Account (SA) with 6%
● Creating an efficient organisational structure
● Rationalising overlapping branches, co-locating teams, vacating high cost premise
Overall Product Synergy
 06
Sectoral Conditions - Post Deal
 Banking Sector Post Merger

● This deal had sparked speculation that some old private-sector banks could be the target of large lenders.

● Arun Jaitley in his budget in July 2015, talked about consolidation of state-run banks.

● The government launched a host of reforms, called Indradanush, aimed to improve governance in public sector

banks, proposed the formation of Bank Board Bureau for top level appointments and announced Rs.70,000

crore capital infusion in public sector bank over four years.

 07
Legalities and Compliances
Merged under the Section 44A of Banking Regulations Act instead of the Companies Act as the 2 merging entities are banking companies

• Upward revaluation of assets

• Requires approval by the board of
directors and 2/3rd of the shareholders
(by value) of each company
• 96.89% of shareholders in value of Ing
Vysya & 99.93% of Kotak approved
• Due diligence undertaken or not
• Nature of consideration paid
• Swap ratio determined or not
• Shareholding pattern and change in the
composition of board of directors
• No ‘AAEC’ - appreciable adverse effect
in competition - in relevant market -
banking services

Board & Shareholder

Merger Guidelines CCI Approval
Approval

RBI Approval FIPB Approval

• To avoid crossing the 49% limit in FDI

through automatic route in banking sector
• Requires approval or sanction by the • Was increased to 55% by approval
Reserve Bank of India • FIPB abolished now
Disclosures required -
● Listing Agreement
● Insider Trading
Takeover Code not triggered as the deal was covered by the exemption under Regulation 10(d)

Advisors Kotak ING Vysya

Accounting Diligence Ernst & Young LLP PWC Pvt. Ltd.

Advisors

Amarchand & Mangaldas

Legal Advisors AZB & Partners
& Suresh A. Shroff & Co.

Valuers S.R. Batliboi & Co. LLP PWC & Co. LLP

Avendus Capital Private Edelweiss Financial

Fairness Opinion
Ltd. Services Limited
 08
Resulting entity performance post
deal
Growth in the long term
Financial Performance
Market Price Dynamics
 09
Issues Encountered
 Challenges and Issues Encountered

● Integration of workforce of Vysya Bank with KMB especially old employees of Vysya Bank
linked to Indian Bank’s Association Payroll (nearly 3000 employees).

● Protest by Vysya Bank employees regarding job security.

● Overlapping of branches in some of the key centers.

● There were reports that ING Vysya Bank could be acquired by L&T Finance Holdings,
although no such move was confirmed by either company at that time.
 Challenges and Issues Encountered
● Differential deposit rates- The savings account interest rate of ING was 4% and of Kotak was 6%.

Post-merger, Kotak had to offer 6% savings interest rate to ING customers also, costing 140cr.

● SEBI probe into possible insider trading ahead of the announcement on the merger.

● In the month preceding the announcement of the deal, ING Vysya was up by 29.1%, and Kotak

by 15.24%. By comparison, the banking index rose only 8.83%.

THANK
YOU