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A Pre and Post Merger and Acquisition Analysis of Indian Banks

A Pre and Post Merger & Acquisition Analysis of Indian Banks

A PROJECT SUBMITTED IN PART COMPLETION OF MASTERS OF MANAGEMENT STUDIES TO THAKUR INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

Submitted by SUSHAMA H MAURYA

Under the guidance of Dr. GITIKA MAYANK

FULL TIME BATCH 2012-14

Thakur Institute of Management Studies and Research Kandivali East, Mumbai 400 101

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A Pre and Post Merger Analysis of Indian Banks

DECLARATION

I hereby declare that this project report is the record of authentic work carried out by me during the period from 15-12-2013 to 14-02-2014 and has not been submitted to any other University or Institute for the award of any degree / diploma etc.

Signature Sushama Maurya Date:

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A Pre and Post Merger Analysis of Indian Banks

CERTIFICATE

This is to certify that Ms. Sushama Maurya of Thakur Institute of Management Studies & Research has successfully completed the project work titled A Pre and Post Merger Analysis of Indian Banks in partial fulfillment of requirement for the completion of MMS course as prescribed by the management institute.

This project report is the record of authentic work carried out by her during the period from 15/12/2013 to 15/02/2014. She has worked under my guidance.

Signature Dr. Gitika Mayank Project Guide (Internal) Date:

Counter signed by Dr. Subhash Kulkarni Director Date:

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A Pre and Post Merger Analysis of Indian Banks

ACKNOWLEDGEMENT

It is not possible to prepare a project report without the assistance & encouragement of other people. This one is certainly no exception. On the very outset of this report, I would like to extend my sincere & heartfelt obligation towards all the personages who have helped me in this endeavor. Without their active guidance, help, cooperation & encouragement, I would not have made headway in the project. I would like to express my heart full gratitude to Dr. Gitika Mayank who guided me for my final project. I am extremely thankful and pay my gratitude to my mentor and faculty for the valuable guidance and support on completion of this project report. I extend my gratitude to Thakur Institute of Management Studies & Research for giving me this opportunity. I also acknowledge with a deep sense of reverence, my gratitude towards my parents and member of my family, who has always supported me morally as well as economically. At last but not least gratitude goes to all of my friends who directly or indirectly helped me to complete this project report.

Any omission in this brief acknowledgement does not mean lack of gratitude.

-Sushama. H. Maurya

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A Pre and Post Merger Analysis of Indian Banks

LIST OF TABLE
No 1 2 3 4 TABLE Key Business Parameters of HDFC Bank Scope for improved utilization of branches Mergers by ICICI Bank Ltd. in India Financial results of ICICI Bank and Bank of Rajasthan Ltd PAGE 18 25 28 36

LIST OF CHARTS
No 1 2 3 4 5 6 7 8 9 CHARTS Return on Equity for HDFC Return on Asset for HDFC Net Profit Margin for HDFC Debt Equity for HDFC Return on Equity for HDFC Return on Asset for HDFC Net Profit Margin for HDFC Debt Equity for HDFC Performance Analysis of ICICI Bank and Bank of Madura PAGE 19 20 20 21 32 33 34 35 36

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A Pre and Post Merger Analysis of Indian Banks

LIST OF ABBREVIATIONS

BOR- Bank of Rajasthan BOP- Bank of Punjab BOI- Bank of India BSA- Bilateral Swap Agreement BSE- Bombay Stock Exchange CASA- Current Account and Saving Account CAGR- Compounded Annual Growth Rate CBOP Centurion bank of Punjab C/I- Cost per Income Div- Dividend DPS- Dividend per Share EPS- Dividend per share GDR- Global Depository Receipt LKB- Lord Krishna Bank M&A- Merger and Acquisition NIM- Net Interest Margin NSE- National Stock Exchange OECD- Organization for Economic Co-operation and Development ROE- Return on Equity ROI- Return on Investment SEBI- Securities Exchange Board of India RBI- Reserve bank of India

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TABLE OF CONTENT
Chp. No 1 Topics Introduction
Background of the Topic Situational analysis Statement of the Problem Objective of the Study Limitation of the Study 2 3 4 Literature Review Research Methodology Economic Analysis Introduction to Banking Sector Important Milestone in Banking 5 Introduction to the Sample Merger Case 1 HDFC Bank acquired Centurion bank of Punjab About of HDFC About Centurion Bank of Punjab Merger of HDFC Bank with CBOP Data Analysis and Interpretation Aftermath of the Merger Post Merger Consolidation 6 Introduction to the Sample Merger Case 2 ICICI Bank Acquired Bank of Rajasthan About ICICI Bank About Bank of Rajasthan Key facts of the Merger Data Analysis and Interpretation Performance Analysis for pre and post merger 7 8 9 Recommendation Conclusion Bibliography and Reference

Page No 1-4
1 2 3 4 4 5-7 8 9-12 10 12 13-24 13 13 14 15 18 22 24 25-37 25 26 28 29 31 35 38 40 42

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A Pre and Post Merger Analysis of Indian Banks

EXECUTIVE SUMMARY

As a part of the MMS Curriculum and in order to gain in depth knowledge in the area of interest, the final project is the best option and opportunity provided to us by University of Mumbai and our Institute. The main objective behind this project is to acquaint us with the rigors of the corporate world and get an opportunity to apply skills, tools and techniques of management and provide recommendations as per our understanding The purpose of this paper is to explore various motivations of Merger and Acquisitions in the Indian banking sector. This includes the various aspects of banking Industry's Merger and Acquisitions. It also compares pre and post merger financial performance of merged banks with the help of financial parameters like Gross-Profit Margin, Net- Profit Margin, Operating Profit Margin, Return on Capital Employed (ROCE), Return on Equity (ROE) and Debt-Equity Ratio. Through literature review it comes to know that most of the work done high lightened the impact of Merger and Acquisitions on different aspects of the companies. The data of Merger and Acquisitions since economic liberalization are collected for a set of various financial parameters. This study also examines the changes occurring in the acquiring firms on the basis of financial ground and also the overall impact of Merger and acquisitions (M&As) on acquiring banks. The result of the study indicates that the banks have been positively affected by the event of Merger and acquisitions (M&A). These results suggest that merged banks can obtain efficiency and gains through Merger and Acquisitions (M&A) and passes the benefits to the equity share holders' in the form of dividend.

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CHAPTER 1 INTRODUCTION
1.1 Background of the Topic
In todays globalised economy, competitiveness and competitive advantage are the buzzwords for corporate around the world. Companies, for entering new markets, asset growth, garnering greater market share/ additional manufacturing capacities, and gaining complementary strengths and competencies, and to become more competitive in the market place, are increasingly using Mergers and Acquisition. The Indian economy has undergone a major transformation and structural change following the economic reforms introduced by the Government of India in 1991. Since then, the M&A movement in India have picked up momentum. In the liberalized economic and business environment , magnitude and competence have become the focal points of every business enterprise in India , as companies have realized the need to grow and expand in business that they understand well to face the following competition. Indian corporate has under taken restructuring exercise to sell off non core business and to create stronger presence in their core areas of business interest. M& A emerged as one of the most effective methods of such corporate restructuring and have, therefore become an integral part of the long term business strategy of corporate in India. Three distinct trends can be seen in the M&A activity in India after the reforms in 1991. Initially, there was intense investment activity, a wave of consolidation within the Indian industry, as companies tried to prepare for the potentially aggressive competition in the domestic and overseas market, through M&A and achieve economies of scale and scope. In the second significant trend , visible since , 1995, there was increased activity in consolidation of subsidiaries by multinational companies in to the national market , through the acquisition route , with liberalized norms in place for foreign Direct Investments( FDIs) . Indian companies focused on capital and business restructuring,
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and cleaned up their balance sheets.

There was consolidation in the domestic

industries such as steel, cement and telecom. The third wave of M&A in India, evident since 2002, is that of Indian companies venturing abroad and making acquisition in developed markets for gaining entry into the international market. Indian companies have been actively pursuing overseas acquisitions in recent years. The opening up of Indian economy and financial sector, huge cash reserves following some years of great profits, and enhanced competiveness in the global markets have given greater confidence for big Indian companies to venture abroad for market expansion. Surge in economic growth and fall in interest rates have made the financing of such deals cheaper. Changes in regulations made by the finance Ministry in India pertaining to overseas investments by Indian companies have also made it easier for the companies to acquire abroad. The past five years have seen Indian Corporate in several international acquisition deals in developed and emerging markets.

1.2 Situational Analysis


In the globalized economy, Merger and Acquisitions (M&A) acts as an important tool for the growth and expansion of the economy. The main motive behind the Merger and acquisitions (M&A) is to create synergy, that is one plus one is more than two and this rationale beguiles the companies for merger at the tough times. Merger and Acquisitions (M&A) help the companies in getting the benefits of greater market share and cost efficiency. 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 well the two companies integrate themselves in carrying out day to day operations. One size does not fit for all, therefore many companies finds the best way to go ahead like to expand ownership precincts through Merger and acquisitions (M&A). Merger creates synergy and economies of scale. For expanding the operations and cutting costs, Business entrepreneur and Banking Sector are using Merger and Acquisitions
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world wide as a strategy for achieving larger size, increased market share, faster growth, and synergy for becoming more competitive through economies of scale. A merger is a combination of two or more companies into one company or it may be in the form of one or more companies being merged into existing companies or a new company may be formed to merge two or more existing companies. On the other hand, when one company takes over another company and clearly well-known itself as the new owner, this is called Acquisition. The companies must follow legal procedure of Merger and Acquisitions (M&As) which has given by RBI, SEBI, Companies Act 1956 and Banking Regulation Act 1949. Growth is always the priority of all companies and confers serious concern to expand the business activities. Companies go for Merger and Acquisitions (M&As) for achieving higher profit and expanding market share. Merger and Acquisitions (M&As) is the need of business enterprises for achieving the economies of scale, growth, diversification, synergy, financial planning, The Banking system of India was started in 1770 and the first Bank was the Indian Bank known as the Bank of Hindustan. Later on some more banks like the Bank of Bombay-1840, the Bank of Madras-1843 and the Bank of Calcutta-1840 were established under the charter of British East India Company. These Banks were merged in 1921 and took the form of a new bank known as the Imperial Bank of India. For the development of banking facilities in the rural areas the Imperial Bank of India partially nationalized on 1 July 1955, and named as the State Bank of India along with its 8 associate banks (at present 7). Later on, the State Bank of Bikaner and the State Bank of Jaipur merged and formed the State Bank of Bikaner and Jaipur. The Indian banking sector can be divided into two eras, the pre liberalization era and the post liberalization era. In pre liberalization era government of India nationalized 14 Banks on 19 July 1969 and later on 6 more commercial Banks were nationalized on 15 April 1980. In the year 1993 government merged The New Bank of India and The Punjab National Bank and this was the only merger between nationalized Banks, after that the numbers of nationalized Banks reduced from 20 to 19. In post liberalization regime, government had initiated the policy of liberalization and
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licenses were issued to the private banks which lead to the growth of Indian Banking sector. The Indian Banking Industry shows a sign of improvement in performance and efficiency after the global crisis in 2008-09. The Indian Banking Industry is having far better position than it was at the time of crisis. Government has taken various initiatives to strengthen the financial system. The economic recovery gained strength on the back of a variety of monetary policy initiatives taken by the Reserve Bank of India. On 13th August 2010, the process of M&A in the Indian banking sector passes through the Bank of Rajasthan and the ICICI Bank. Moreover, the HDFC Bank acquired the Centurion Bank of Punjab on 23 May 2008. The Reserve Bank of India sanctions the scheme of mergers of the ICICI Bank and the Bank of Rajasthan. After the merger the ICICI Bank replaced many banks to occupy the second position after the State Bank of India (SBI) in terms of assets in the Indian Banking Sector. In the last ten years, the ICICI Bank, the HDFC bank in the private sector, the Bank of Baroda (BOB) and the Oriental Bank of Commerce (OBC) in the public sector involved themselves as a bidder Banks in the Merger and Acquisitions (M&As) in the Indian Banking Sector.

1.3 Problem Identification:

It is seen that, most of the works have been done on trends, policies & their framework, human aspect which is needed to be investigated, whereas profitability and financial analysis of the mergers have not been given due importance. This project would investigate the detail of Merger and Acquisitions with greater focus on the Indian Banking sector. The study will also discuss the pre and the post merger performance of banks. An attempt is made to predict the future of the ongoing Merger and Acquisitions on the basis of financial performance and focusing mainly of Indian banking sector.
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1.4 Objective of Study


The objective of the project is: 1. To study value addition and return gained by the banks pre and post merger. 2. To study the performance of Mergers on Profitability on Acquiring Banks. 3. To study the operating performance of the banks in the pre and post M & A. 4. To study the effects on efficiency of Bank Mergers.

1.5 Limitation of the Study

The limitation to the study is the time limit as the time available for the project was just 2 months. The report is purely based on the secondary data available and the recommendations with respect to investment decisions are personal opinion of the researcher and does not involve experts recommendation. There is no opportunity to gather first hand information for the project. The research is purely based on the data provided in the annual reports and the charts representation as per the movements of the stocks prices on the sensex.

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CHAPTER 2
LITERATURE REVIEW Anand Manoj & Singh Jagandeep (2008) studied the impact of merger announcements of five banks in the Indian Banking Sector on the share holder bank. These mergers were the times Bank merged with the HDFC Bank, the Bank of Madurai with the ICICI Bank, the ICICI Ltd with the ICICI Bank, the Global Trust Bank merged with the Oriental Bank of commerce and the Bank of Punjab merged with the centurion Bank. The announcement of merger of Bank had positive and significant impact on shareholders wealth. The effect on both the acquiring and the target banks, the result showed that the agreement with the European and the US Banks Merger and Acquisitions except for the facts the value of share holder of bidder Banks have been destroyed in the US context, the market value of weighted Capital Adequacy Ratio of the combined Bank portfolio as a result of merger announcement is 4.29% in a three day period (-1, 1) window and 9.71 % in a Eleven days period (-5, 5) event window. The event study is used for proving the positive impact of merger on the bidder Banks.

Hijzen Alexander etal., (2008) studied the impact of cross border Merger and Acquisitions (M&As) and analyzed the role of trade cost, and explained the increased in the number of cross border Merger and Acquisitions (M&As) and used industry data of 23 countries over a period of 1990 -2001. The result suggested that aggregate trade cost affects cross border merger activity negatively, its impact differ importantly across horizontal and non-horizontal mergers. They also indicated that the less negative effects on horizontal merger, which is consistent with the tariff jumping agreement, put forward in literature on the determinant of horizontal FDI.

Mantravadi Pramod & Reddy A Vidyadhar (2007) evaluated that the impact of merger on the operating performance of acquiring firms in different industries by using pre and post financial ratio to examine the effect of merger on firms. They selected all mergers involved in public limited and traded companies in India
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between 1991 and 2003, result suggested that there were little variation in terms of impact as operating performance after mergers. In different industries in India particularly banking and finance industry had a slightly positive impact of profitability on pharmaceutical, textiles and electrical equipments sector and showed the marginal negative impact on operative performance. Some of the industries had a significant decline both in terms of profitability and return on investment and assets after merger.

Coming down on the various motives for Merger and Acquisitions, Mehta Jay & Kakani Ram Kumar (2006) stated that there were multiple reasons for Merger and Acquisitions in the Indian Banking Sector and still contains to capture the interest of a research and it simply because of after the strict control regulations had led to a wave of merger and acquisitions in the Banking industry and states many reason for merger in the Indian Banking sector. While a fragmented Indian banking structure may be very well beneficial to the customer because of competition in banks, but at the same time not to the level of global Banking Industry, and concluded that merger and Acquisition is an imperative for the state to create few large Banks.

R. Srivassan et al., (2009) gave the views on financial implications and problem occurring in Merger and Acquisitions (M&As) highlighted the cases for consolidation and discussed the synergy based merger which emphasized that merger is for making large size of the firm but no guarantee to maximize profitability on a sustained business and there is always the risk of improving performance after merger.

Aharon David Y et al., (2010), analyzed the stock market bubble effect on Merger and Acquisitions and followed by the reduction of pre bubble and subsequent, the bursting of bubble seems to have led to further consciousness by the investors and provide evidence which suggests that during the euphoric bubble period investor take more risk. Merger of banks through consolidation is the significant force of change took place in the Indian Banking sector.
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Pradeep & Gian (2010) examined the impact of merger on the cost efficiency of Indian commercial banks, and found that, to some extent, merger programmes had been successful in the banking sector.

Sinha Pankaj & Gupta Sushant (2011) studied a pre and post analysis of firms and concluded that it had positive effect as their profitability, in most of the cases deteriorated liquidity. After the period of few years of Merger and

Acquisitions(M&As) it came to the point that companies may have been able to leverage the synergies arising out of the merger and Acquisition that have not been able to manage their liquidity. Study showed the comparison of pre and post analysis of the firms. It also indicated the positive effects on the basis of some financial parameter like Earnings before Interest and Tax (EBIT), Return on share holder funds, Profit margin, Interest Coverage, Current Ratio and Cost Efficiency etc.

Sinha, Kaushik and Chaudhary (2010) performed a survey on selected financial institutes of India for the period 2000-2009 and used the methodology of ratio Analysis. According to their study, more than half of the mergers showed better results in the post- merger stages than in the pre- merger stages. Their research showed a significantly good result in earnings available to the shareholders and debt to equity ratio, in the return on net worth, liquidity position and the profit before tax to total income in the post merger stage.

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CHAPTER 3 3. RESEARCH METHODOLOGY A. Data For the purpose of evaluation investigation data is collected from Merger and Acquisitions (M&A) of the Indian banking industry in post liberalization regime. The financial and accounting data of banks is collected from companies Annual Report to examine the impact of M&A on the performance of sample banks. Financial data has been collected from Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Securities and Exchange Board of India (SEBI) & money control for the study.

B. Methodology To test the research prediction, methodology of comparing the pre and post performances of banks after Merger and Acquisitions(M&As) has been adopted, by using following financial parameters such as Net profit margin, Operating profit margin, Return on capital employed, Return on equity, and Debt equity ratio. The research highlights two cases of Merger and Acquisitions (M&As) randomly as sample, HDFC Bank which acquired Centurion Bank of Punjab and ICICI Bank which acquired Bank of Rajasthan in order to evaluate the impact of M&As. The pre merger (2years prior) and post merger (after 3 years) of the financial ratios are being compared. The observation of each case in the sample is considered as an independent variable. Before merger two different banks carried out operating business activities in the market and after the merger the bidder bank carrying business of both the banks.

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CHAPTER 4 4. ECONOMIC ANALYSIS India is the most attractive investment destination in the world, according to a survey by global consultancy firm Ernst & Young (EY). The Indian economy is expected to grow at 3.4 per cent in the current fiscal, a slight increase from 3.3 per cent in FY 201213, as per projections from the Organization for Economic Co-operation and Development (OECD). The growth is estimated to be even greater in FY 2014 15 (5.1 per cent) and FY 201516 (5.7 per cent). The US$ 1.2 trillion investment planned in the infrastructure sector will go a long way in boosting export performance of Indian companies and the Indian growth story, according to Mr Anand Sharma, Union Minister for Commerce and Industry, Government of India. The HSBC Trade Confidence Index, the largest trade confidence survey in the world, has positioned India at the top with 142 points. The increasing demand due to its population makes the country a good market for consumption goods, according to the report. It was a challenging year for the Indian economy with lingering concerns over global growth prospects and financial stability weighing on external demand and international funding. Further, local headwinds such as firm inflation, rising interest rates and policy impediments to investment only exacerbated the impact of a shaky global environment on domestic growth. Headline GDP growth as a result is likely to have fallen to 5.0% in FY13 from 6.2% a year ago and 9.3% in FY11.While there was some course correction by way of policy responses both from the government and the central bank their impact will be visible only with a lag. In particular, the government has embraced a path of fiscal consolidation that kept the fiscal deficit target for FY13 below the initial level of 5.1% of GDP and it is likely that the fiscal deficit could drift lower to 4.8% of GDP in FY14.The RBI on the other hand fell back on measured policy easing in FY13 that could gain momentum amidst the prospect of falling inflation amidst weak global commodity prices and subdued domestic demand. That said,
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macro-stability risks from a large current account deficit which is likely to have reached a record 5.1% of GDP in FY13 and placed the rupee under extreme depreciation pressure could curtail the extent of this easing. On balance, the prospect of some monetary easing going ahead, a normal monsoon and some traction in government capital expenditure could pave the way for a revival in GDP growth to 5.8%-6% in FY14 and could keep India a significant out-performer in the global context. Over the past couple of years, the Indian banking sector has displayed a high level of resiliency in the face of high domestic inflation, rupee depreciation and fiscal uncertainty in the US and Europe. In order to stimulate the economy and support the growth of banking sector, the Reserve Bank of India (RBI) adopted severe policy measures such as increasing the key monetary policy rates such as repo and reverse repo 16 times since April 2009 to Oct 2011 and tightening provisioning requirements. Amidst this economic scenario, the key challenge for the Indian banking system continues in improving their operational efficiency and implement prudent risk management practices.

4.1 INDIAN BANKING SECTOR: BRIEF INTRODUCTION Indias banking sector is currently valued at Rs 81 trillion (US$ 1.31 trillion). It has the potential to become the fifth largest banking industry in the world by 2020 and the third largest by 2025, according to an industry report. The face of Indian banking has changed over the years. Banks are now reaching out to the masses with technology to facilitate greater ease of communication, and transactions are carried out through the Internet and mobile devices. With the Parliament passing the Banking Laws (Amendment) Bill in 2012 the landscape of the sector will likely change. The bill allows the Reserve Bank of India (RBI) to make final guidelines on issuing new bank licenses. This could lead to a greater number of banks in the country; the style of operation could also evolve with the integration of modern technology into the industry.
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The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9 billion in the period 20012010. In that phase, the profit after tax rose about nine-fold from US$ 1.4 billion to US$ 12 billion. Banking Index with the Sensex (Bankex) that tracks the performance of primary banking sector stocks grew at a compounded annual growth rate (CAGR) of nearly 20 per cent over the period 20032012. Total number of onsite and offsite ATMs of Indian Banks reached 100042 in July 2012. The central banks of Japan and India have agreed to a proposal that expands the maximum amount of the Bilateral Swap Arrangement (BSA) between the two countries to US $50 billion. The agreement is for a three-year period (201215); the previous size of the BSA was US $15 million. The new agreement will enable the two countries to swap their local currencies against the US dollar for an amount up to US$50 billion. Public sector banks will soon offer customers insurance products from different companies as against products from one company. The finance ministry has asked public sector banks to become insurance brokers instead of corporate agents. This move was one of the steps stated by finance minister Mr P Chidambaram in early 2013, as a way to increase insurance penetration. In an effort to expand its revenue streams, Bank of India (BOI) plans to enter the merchant banking space through BOI Shareholding Ltd. BOI is looking to buy Bombay Stock Exchanges (BSE) entire shareholding in their joint venture BOI Shareholding Ltd (BOISL). Another reason for BOIs inclination to foray into merchant banking is to offer a greater range of financial services to its customers. ROAD AHEAD India is one of the top 10 economies in the world, where the banking sector has tremendous potential to grow. The last decade saw customers embracing ATM, internet and mobile banking. The number of ATMs has doubled over the past few years, with more than 100,000 in the country at present (70 per cent in urban areas).
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They are estimated to further double by 2016, with over 50 per cent expected to be set up in small towns. Also, the scope for mobile and internet banking is big. At the start of 2013, only 2 per cent of banking payments went through the electronic system in the country. Today, mobility and customer convenience are viewed as the primary factors of growth and banks are continuously exploring new technology, with terms such as mobile solutions and cloud computing being used with greater regularity.

4.2 IMPORTANT MILESTONE OF BANKING INDUSTRY

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CHAPTER 5 5. INTRODUCTION OF THE SAMPLE MERGER CASE:


Case1: HDFC Bank Acquired Centurion Bank of Punjab (Year of Merger 2008) The merger between HDFC Bank and Centurion Bank of Punjab (CBOP) was billed as one of the biggest mergers in the banking history of India in 2008. The talk at the time of merger revolved around leveraging the strengths of HDFC bank and CBOP in terms of branches, serving different segments of the market and the general synergy brought about by mergers. It is interesting to note that citigroup was the single largest shareholder of HDFC, the parent company of HDFC bank. Also, all the top executives of HDFC and CBOP like Aditya Puri, Rana Talwar and Shailendra Bandari were ex citi bankers. It is about four years since the merger was completed and hence the synergy effect that was envisaged at the time of merger would have played out its part. It is in this context that this exercise of evaluating the merger was taken up. The merger of CBOP and HDFC bank was initiated in 2007 and completed 2008 with the requisite approvals.

5.1 ABOUT HDFC BANK Promoted in 1995 by housing development finance corporation (HDFC), Indias leading housing finance company, HDFC Bank is one of Indias premier banks providing a wide range of financial products and services to its over 11 million customers across over three hundred cities using multiple distribution channels including a Pan-India network of branches, ATMs, phone banking, net banking and mobile banking. Within a relatively short span of time, the bank has emerged as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments.
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The banks competitive strength clearly lies in the use of technology and the ability to deliver world-class service with rapid response time. Over the last 13 years, the bank has successfully gained market share in its target customer franchises while maintaining healthy profitability and assets quality. As on January 2014, the bank nationwide network of 3,251 Branches and 11,177 ATM's in 2,022 Indian towns and cities.

5.2 ABOUT CENTURION BANK OF PUNJAB Centurion Bank of Punjab was one of the leading new generation private sector banks in India. The bank served individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offered its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership position. The bank was also strong player in foreign exchange services, personal loans, mortgages and agricultural loans. On August 29, 2007, Lord Krishna Bank (LKB) merged with Centurion Bank of Punjab, post obtaining all statutory and regulatory approvals. This merger has further strengthened the geographical reach of the bank in major town and cities across the country, especially in the State of Kerala, in addition to its existing dominance in the northern part of the country. Centurion Bank of Punjab now operates on a strong nationwide franchise of 394 branches and 452 ATMs in 180 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the Indian stock exchanges, the banks shares are also listed on the Luxembourg stock exchange. Centurion Bank is Indias fourth largest private-sector bank, after the significantly larger ICICI Bank, HDFC Bank and UTI Bank. Centurion's balance sheet is of modest scale, much smaller than those of major private-sector banks. The bank is capitalized to support rapid growth, and its high fixed operating costs suggest that profitability
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is leveraged to asset growth. Centurion's acquisition of Bank of Punjab has substantially bolstered its distribution franchise, widened its product and customer mix, and gives it the Platform to aggressively expand its balance-sheet; which it has hitherto achieved quite well. It was predominantly a Consumer bank with almost 70% of its loans are in relatively high yield segments. Its distribution concentration is largely in the Western and Northern parts of the country. Bank Muscat is the largest shareholder in the bank post-merger with a 20.5% stake; Keppel Corp holds 9.0% and 18.6% is held through GDRs. Sabre Capital and BOP promoters hold 4.4% and 5.0%stakes in the bank, respectively. HDFC Bank and Centurion Bank of Punjab have decided to merge. It is the largest merger in the space in recent times and perhaps the beginning of the consolidation wave in the BFSI sector. The HDFC Bank-CBOP merger is a smooth exercise when it comes to the marriage of technology at both banks. The merger comes as no surprise.

5.3 MERGER OF HDFC BANK WITH CENTURION BANK OF PUNJAB Merger with Centurion Bank of Punjab in the swap ratio of 1:29

The boards of both HDFC Bank and Centurion Bank of Punjab (CBOP) approved the merger between the two banks in the ratio of 1:29(1 share of HDFC Bank for 29 shares of CBOP) HDFC bank also considered selling shares to HDFC in order to maintain its holding over 20%. The merger was rated as neutral for HDFC Bank on as a long term perspective. However on a short term basis, it is negative for HDFC Banks standalone financials and shareholders At the current price, the CBOPs was richly valued compared with that of HDFC bank despite CBOPs lower banking franchise, inferior return ratios and higher NPAs. CBOPs asset book constitutes about 20% of that of HDFC Bank; while its profit is merely 11%.

Following is a summary of the key business parameters across HDFC Bank and Centurion Bank of Punjab:
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Main Highlights of Merger The merger was effected using the pooling of interest method. The banks main task was to harmonize the accounting policies and, as a result, HDFC Bank took a hit of Rs. 7 billion to streamline the policies of erstwhile CBoP itself. Of this Rs. 7 billion, around 70% went toward the harmonization of accounting policies relating to loanloss provisioning and depreciation of assets, and the balance 30% reserves write-offs were toward the merger-related restructuring costs like stamp duty, HR and IT integration expenses.

The loan book size of erstwhile CBoP was close to Rs. 150 billion, largely constituted by retail loans with only around 15% of corporate loans. In terms of asset quality, the gross NPAs at the end of March 2008 were around 3.8% and net NPAs at around 1.7%. The harmonizing was done to bring in more stringent provisioning requirements for identifying NPAs as the existing norms of the erstwhile CBoP were comparatively more relaxed. The duration of CBoPs lending portfolio was around 18-20 months so the risk of incremental slippage continued; however the bank was confident of its strong recovery management process and anticipates lesser pain.

The CASA ratio at the end of June 2008 was 45%. This in line with expectations of analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of Pre-merged HDFC Bank. By the end of the year, the target CASA ratio was around 47-48%.

Of the total non- interest income of CBoP, fee income constituted around 50% which was generated mainly through distribution of insurance products (Aviva) and from processing fees. In line with regulatory and operational issues, these streams of income have temporarily been discounted. This aspect acted as a drag on the other income of the merged entity and it took 2-3 quarters for the issues to be addressed.

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Till these issues were resolved positively, the other income growth (primarily the fee income) remained muted for the merged entity. The cost/income (C/I) ratio of the merged entity has increased to around 56% from 50% levels for standalone HDFC Bank. The increase was expected as CBoPs C/I ratio was around 60%. HDFC Bank has retained almost all the employees of CBoP and expects to achieve full synergies and efficiencies, in terms of the restructured HR and IT processes, in the next 2-3 quarters. It reduced C/I ratio to around 52-53% by the end of FY09.

Key Business Parameters (Rs Million)


HDFC BANK DEC-07 Branches (Nos) ATM (Nos) Customer A/C (M) Debit cards (m) Credit cards (M) 754 1906 10 5.0 3.5 CBOP DEC-07 394 452 2 1.1 0.2

Table 1: Source- HDFC Bank Report, (Annual Report)

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5.4 DATA ANALYSIS AND INTERPRETATION: Ratio analysis:


1. Return on Equity = Net Profit/Equity 2011
Return On Equity 15.20

2010
15.81

2009
14.81

2008
13.25

2007
22.47

2006
23.86

Return on Equity
30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011 Return on Equity

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The return on capital employed in case of HDFC has declined over a period of 6 years from 23.86% in 2006 to 15.20% in the year 2011. This shows the performance of the company have declined over a period of 6 years. This highlights the main reason behind the decline is the merger with CBOP in a situation where in the profit of Centurion Bank of Punjab was negative which affected the profitability of HDFC Bank.

2.

Return on Assets = Net Profit/ Total Assets 2011 2010


1.94 2.10

2009
1.86

2008
1.83

2007
2.07

2006
2.12

Return on Assets (%)

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Return on Asset
2.2 2.1 2 1.9 1.8 1.7 1.6 2006 2007 2008 2009 2010 2011 Return on Asset

Return on asset looks at the ability of the company to utilize its assets to gain a net profit. The return on assets of HDFC bank has a fluctuating pattern. It is evident from the chart that the bank is not able to manage efficiently the assets. The pre merger figures show that the fluctuations are very high. However, post merger the increase on the return of the bank is very high.ie from 1.83% in 2008 to 2.12%. This shows very evident impact of merger on the returns of the bank.

3. Net Profit Margin: 2011 Net Profit Margin (%)


17.9

2010
26.22

2009
19.73

2008
30.76

2007
27.24

2006
29.01

Net Profit Margin


35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011 Net Profit Margin

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The net profit margin states the amount of net profit on the total turnover that a business has earned, Net profit is the amount left after deducting all the expenses and after interest, tax and dividend payment that is left out with the company. This ratio measures the operating efficiency i.e. higher the ratio higher is the efficiency and vice-versa. In the year 2006 the net profit margin of the company was 29.01% and it had declined drastically to 17.9% in the year 2011. This shows that the company is efficient enough in managing its operation to some extent. This increase is due to a higher increase in HDFCs income as compared to its increase in expenditure in the year 2013 that had lead to increase in net profit ratio.

4. Debt Equity Ratio: 2011 Debt Equity Ratio


5.59

2010
5.42

2009
6.22

2008
5.55

2007
9.09

2006
9.72

Debt Equity
12 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011 Debt Equity

It indicates what proportion of equity and debt the company is using to finance its assets. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing
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may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

In case of HDFC Bank the Debt Equity ratio has declined and been controlled. This indicates the control system which the management of the company applied in order to reduce the huge debt burden to increase the profitability. The debt equity ratio in 2006 was 9.72, however it reduced to 5.59. The bank tried to control the debt cost so that the bank can provide appropriate return to the shareholders.

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5.5 AFTERMATH OF THE MERGER A. Branch expansion likely determinant of the merger

The biggest benefit to HDFC Bank from this acquisition was the addition of 394 of CBoP branches with dominance in the areas of mortgages, personal loans, 2-wheelers and commercial vehicles (CVs). Both banks earned higher net interest margins HDFC Bank is at 4%+ and CBoP is at ~3.6%. Moreover, the banks have a similar business model and philosophy underlined by a thrust on branch network expansion, retail assets, high margin business and strong fee income sources.

B. HDFC Bank would emerge as the biggest private bank in terms of branches

HDFC Bank has always maintained that fast branch expansion is a key ingredient that will sustain its high CASA deposits and margins. This merger with CBoP resulted in the combined entity having 1148 branches at present, which is the largest branch distribution network for a private bank in India (ICICI Bank currently has 955 branches). This apart, HDFC Bank gained dominance in states like Punjab, Haryana, Delhi, Maharashtra and Kerala.

C. Positive aspects of the merger:

(1) increased footprint and metro presence; (2) cost-income ratio has room for improvement; (3) Enhanced management bandwidth to enable entry in to International business; (4) Both banks have senior managements of high caliber who have worked with Citigroup at some point in their career.

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Negatives: (1) Merger was EPS dilutive for the next two years, due to valuations; and (2) Integration of LKB branches posed a challenge.

MAJOR BENEFITS ACCRUING FROM THE MERGER: Wider distribution reach: 32% of CBoP branches are in metros The merger added close to 394 branches to HDFC Banks network of 750 branches, almost 50% increase in the existing network, while adding close to 19% to its asset base. HDFC Banks branches are currently spread throughout the country, whereas CBoP has a strong presence in Punjab, Maharashtra, and with the acquisition of LKB, now in Kerala as well. In view of RBIs stringent license policy, metro licenses have been hard to come by for most banks. With the merger, HDFC Banks metro branches increased by 44% in one shot, while its non metro branches increased by 57%

Complementary Overlay

CBoP has traditionally been strong in high yielding SME and retail segments, while HDFC Bank has an enviable retail deposit franchise. With the merger, CBoPs ability to grow its loan book complements HDFC Banks deposit franchise. On the product portfolio side, both the banks have a strong foothold in vehicle financing, which is a natural synergy.

Near term performance likely to be muted; benefits to accrue over medium term

The merger is positive from a strategic perspective; however, from minority shareholders perspective it is EPS dilutive, at least till FY09E. Consequently, we believe that near term stock performance is likely to be capped due to this EPS dilution. Upside risks exist in the form of sooner-than-expected merger synergies.

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Scope to enhance productivity

CBoPs, as a standalone bank, cost to income ratio is high at 63%; however, merging with a larger organization like HDFC Bank gives significant scope for operating leverage with economies of scale. There is also scope for improvement in utilization ratios with improvement in branch and employee productivity to near HDFC Banks levels.
Table 2: Scope for improved utilization of branches INR million Business/branch Business/employee Assets/branch Assets/employee PAT/branch PAT/employee HDFC Bank 2,289 80 1,762 61 24 0.8 CBoP 908 65 645 46 5 0.3 Merged entity 1,812 77 1,376 58 17 0.7

5.6 POST MERGER CONSOLIDATION


At a swap ratio of 1:29, it led to dilution of 21% for HDFC Bank. HDFC Bank issued 76m shares (fully diluted) to CBOP shareholders. The merger would worsen HDFC Banks RoEs, CASA ratio and asset in the near term and make valuations additionally expensive.

Profitability and return ratios to be affected HDFC Banks NIM at 4.5% is much higher than CBoPs 3.6%, hence we expect NIM of the merged entity to decline in the medium term, but show improvement once HDFC Bank is able to leverage branches optimally. HDFC Banks productivity and profitability ratios are among the best in the industry, which is also expected decline in case of the merged entity.
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CHAPTER 6 6. INTRODUCTION TO THE SAMPLE MERGER CASE 2 Case 2: ICICI Bank Acquired Bank of Rajasthan (Year of Merger 2009-10) 6.1 ICICI Bank:

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for
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earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI's strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments, particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity. ICICI Bank is India's largest private sector bank with total assets of Rs. 5,367.95 billion (US$ 99 billion) at March 31, 2013 and profit after tax Rs. 83.25 billion (US$ 1,533 million) for the year ended March 31, 2013. The Bank has a network of 3,603 branches and 11,162 ATMs in India, and has a presence in 19 countries, including India.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab

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Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

Due to the changing business environment and after the adoption of liberalization, ICICI considered various corporate restructuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, and the move towards universal banking. The managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic alternative for both the entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. Further, the merger would enhance value for ICICI shareholders through the merged entity by low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services.

The below mentioned table gives details of all the mergers and amalgamations done by ICICI Bank: Table 3 Mergers by ICICI Bank Ltd. in India: S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. Mergers by ICICI Bank Ltd. in India SCICI ITC Classic Finance Ltd. Anagram Finance Bank of Madura Ltd. ICICI Personal Financial Services Ltd ICICI Capital Services Ltd. Standard Chartered Grind lays Bank Sangli Bank Ltd. The Bank of Rajasthan Ltd. (BoR) Year of Merger 1996 1997 1998 2001 2002 2002 2002 2007 2010

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Source: - Goyal, K. A. and Joshi, V. (2011) Mergers in Banking Industry of India: Some Emerging Issues. Asian Journal of Business and Management Sciences, 1(2), 157-165

6.2 BANK OF RAJASTHAN The Bank of Rajasthan Ltd. was incorporated on May 7, 1943 as a Company defined under the Companies Act, 1956 and has its Registered Office at Raj Bank Bhawan, Clock Tower, Udaipur, and Rajasthan. The Bank of Rajasthan had a network of 463 branches and 111 automated teller machines (ATMs) as of March 31, 2009. The primary object of the Transferor Bank was banking business as set out in its Memorandum of Association. For over 67 years, the Bank of Rajasthan had served the nations 24 states with 463 branches as a profitable and well-capitalized Bank. It had a strong presence in Rajasthan with branch network of 294 that is 63 percent of the total branches of BoR with men power strength of more than 4300. The balance sheet of the Bank shows that it had total assets of Rs. 173 billion, deposits of Rs. 150.62 billion, and advances of Rs. 83.29 billion as on March 2010. The profit and loss account of the bank shows the net profit as Rs. -1.02 billion as on March 2010, which shows that bank, was not in good financial condition.

On the other hand, The ICICI Bank Ltd. was incorporated on January 5, 1994 under the Companies Act, 1956 and has its Registered Office at Landmark, Race Course Circle, Vadodara, Gujarat. The Transferee Bank, as of May 21, 2010, has a network of 2,000 branches and extension counters and has over 5,300 automated teller machines (ATMs). At present the bank has 79,978 employees with strong financial like total assets of Rs. 3634 billion, total deposits of Rs. 2020.16 billion, advances of Rs.1812.06 billion and net profit of Rs. 42.25 billion as on March 2010. The amalgamation of the Transferor Bank with the Transferee Bank was in accordance with the provisions of the Scheme formulated pursuant to Section 44A of the Banking Regulation Act, 1949, Reserve Bank of Indias guidelines for merger/amalgamation of private sector banks dated May 11, 2005, and in accordance with the applicable provisions of the Companies Act, 1956, and the Memorandum and Articles of Association of the Transferor Bank and the Transferee Bank and other applicable provisions of laws.
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The objectives and benefits of this merger are clearly mentioned in the scheme of this merger by ICICI Bank its customer centric strategy that places branches as the focal points of relationship management, sales, and service in geographical micro markets. It is evident that the BoR had deep penetration with huge brand value in the State of Rajasthan where it had 294 branches with a market share of 9.3% in total deposits of scheduled commercial banks.

It was presumed that the merger of BoR in ICICI Bank will place the Transferee Bank among the top three banks in Rajasthan in terms of total deposits and significantly augment the Transferee Banks presence and customer base in Rajasthan and it would significantly add 463 branches in branch network of ICICI Bank along with increase in retail deposit base. Consequently, ICICI Bank would get sustainable competitive advantage over its competitors in Indian Banking. When the information about this merger was communicated to the employees, they did not accept this merger. All the employees were against this merger. All the three major employee unions i.e. All India Bank of Rajasthan Employees Federation, All India Bank of Rajasthan Officers' Association and Akhil Bhartiya Bank of Rajasthan Karmchari Sangh, called the strike demanding the immediate termination of the ICICI-BoR merger proposal. It is a very strong phenomenon of the behavior of employees in the growth strategy like mergers and acquisitions. The issue of employees perception towards mergers needs special attention from researchers and thinkers in order to convert mergers as synergy. At this juncture, the biggest challenge for ICICI Bank Ltd. was to encounter the agitation from the 4300 BoR employees.

Key Facts of the Merger:

Private sector lender Bank of Rajasthan on 18th May 2010 agreed to merge with ICICI Bank, Indias second largest private sector lender. Bank of Rajasthan had a market value of $296 million. The acquisition of Bank of
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Rajasthan by ICICI bank was the first consolidation of countrys crowded banking sector since 2008. ICICI Bank and BOR boards clear there merger through an all- share deal, valued at about 30.41 billion rupees. ICICI offered Bank of Rajasthan 188.42 rupees per share in an all share deal, for Bank of Rajasthan, a premium of 89% to the small lenders closing price on the previous day, valuing the business at $668 million. ICICI offered the smaller banks controlling shareholders 25 shares in ICICI for 118 shares of Bank of Rajasthan.

The Big Deal: The deal which would give ICICI bank a sizeable presence in the northwestern desert state of Rajasthan, valued the small bank at 2.9 times in the book value, compared with the Indian Banking sector average of 1.84. Bank of Rajasthan had a network of 463 branches and a loan book of 77.81 billion rupees ($1.7 billion).

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6.3 DATA ANALYSIS AND INTERPRETAION:


RATIO ANALYSIS: 1. Return on Equity = Net Profit/Equity 2013 Return On Equity
13.96

2012
12.47

2011
11.01

2010
9.10

2009
7.58

2008
7.53

Return on Equity
16 14 12 10 8 6 4 2 0 2008 2009 2010 2011 2012 2013 Return on Equity

Return on capital employed is the broadest term to measure the performance of the company. Higher the ratio is favorable and lower ratio is unfavorable. This ratio is very important to the shareholders and stakeholders as its the ultimate measure of companies overall performance.

The return on return on capital employed in case of ICICI has declined over a period of 6 years from 13.64 % in 2008 to 11.63% in the year 2013. This shows the performance of the company have declined over a period of 6 years. This highlights the main reason behind the decline is the merger with BOR in a situation where in the profit of BOR was negative which affected the profitability of ICICI Bank.

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2. Return on Assets = Net Profit/ Total Assets 2013 Return Assets (%) on
1.42 1.26 1.14 0.95 0.74 0.70

2012

2011

2010

2009

2008

Return on Asset
1.5 1 Return on Asset

0.5

0 2008 2009 2010 2011 2012 2013

Return on asset looks at the ability of the company to utilize its assets to gain a net profit. The return on assets of ICICI bank has increased as compared to that of 2008. It has shown almost 100% increase post merger. The pre merger figures show that the increase was minimal. However, post merger the increase on the return of the bank is very high. This shows very evident impact of merger on the returns of the bank.

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3. Net Profit Margin: 2013


Net Profit Margin (%) 17.19

2012
15.75

2011
15.79

2010
12.17

2009
9.74

2008
10.51

Net Profit Margin


20 15 10 5 0 2008 2009 2010 2011 2012 2013 Net Profit Margin

The net profit margin states the amount of net profit on the total turnover that a business has earned, Net profit is the amount left after deducting all the expenses and after interest, tax and dividend payment that is left out with the company. This ratio measures the operating efficiency i.e higher the ratio higher is the efficiency and vice-versa.

In the year 2008 the net profit margin of the company was 5.66% and it had increased to 12.94% in the year 2012. This shows that the company is efficient enough in managing its operation to some extent. This increase is due to a higher increase in ICICIs income as compared to its increase in expenditure in the year 2013 that had lead to increase in net profit ratio.

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4. Debt Equity Ratio: 2013 Debt Equity Ratio


7.09

2012
7.23

2011
6.96

2010
6.96

2009
7.43

2008
8.02

Debt Equity
8.5 8 7.5 7 6.5 6 2008 2009 2010 2011 2012 2013 Debt Equity

It indicates what proportion of equity and debt the company is using to finance its assets. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The above chart clearly highlights the fluctuations in the debt equity ratio. It is evident that the company had huge Debt Equity ratio in the financial year 2008; however it declined gradually in the year 2013. This shows that ICICI managed its debt, while considering the growth opportunities and expansion field.

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6.4 Pre- Post Merger Financial performance of Sample Merger Case:


Table 4 showing the financial results of ICICI Bank and Bank of Rajasthan Ltd during the pre and post merger:
Ratios Acquirer or Parent Company (ICICI Bank) 2006-07 Operating Profit Net Profit ROI EPS Dividend Payout Debt Equity Acquired Company Bank of Rajasthan Post Merger Period

2007- 2008- Avg. 2006- 2007- 2008- Avg. 2010Avg. 08 09 07 08 09 11 28.87 26 26.22 27.03 28.84 21.18 21.12 23.71 24.81 24.81 10.81 82.46 34.59 28.91 9.5 10.51 62.34 37.37 29.43 5.27 9.74 10.35 56.72 67.17 33.76 35.24 32.58 30.31 4.42 6.39 12.56 140.8 10.28 19.45 25.37 9.75 173 8.57 5.83 26.15 7.81 10.04 185.2 166.4 7.3 2.74 8.72 9.34 15.91 15.91 42.97 42.97 44.73 44.73 31.29 31.29 4.1 4.1

23.6 25.04

Source: Published Financial Statement of the Banks

ICICI Bank
30 20 10 0 Operating Profit Net Profit Debt Equity 2006-07 2007-08 2008-09 2010-11

ICICI Bank
90 80 70 60 50 40 30 20 10 0 ROI EPS Div Payout

2006-07 2007-08 2008-09 2010-11

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Analysis of the Financial Results: The above table shows the position of ICICI Bank and Bank of Rajasthan Ltd during pre and post merger period. ICICI Bank acquired Bank of Rajasthan Ltd, raising the share value of ICICI Bank to new heights and making the former a stronger bank with a stronger balance sheet.

When we start comparing the ratios of both the banks pre and post merger, one very important ratio which indirectly tells the strength of the companies operation is the operating ratio which was 27.03% for ICICI bank premerger while it was 23.71% for Bank of Rajasthan. Post merger the ratio changed to 24.81% indicating a decline. This clearly indicates that the Company has realized some losses which might be due to the high costs incurred during the merger period.

Talking about the Net ratio for the acquirer Company before merger was 10.35% while the net profit ratio for the acquired company was 10.04%. During post merger the average Net Profit ratio was 15.91 % which shows significant increase from 10.35% to 15.91% and a clear communication that the company has made profits after merger. It can be suggested that the company has gained monopoly and the advantages of goodwill are helping the company gain some substantial profit.

The pre- merger average for ROI for the acquirer Company was 67.17% while the return on investment for the acquired company was 166.44%. Post merger the average return on investment declined to 42.97. Also the average of Networth before merger for the acquiring Company was 9.89% while the return on the net worth for the target company was 22.96%. After merger the average on return on Net worth slightly declined to 9.35% for the acquired company. This indicates that less was incurred at the time of merger.

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Taking the financial condition of the bank in consideration average earnings per share during pre- merger for ICICI Bank was (35.24) while that of the target company was (8.72). Post merger the average earnings per share increased to (44.73). This might be attributed that the shareholders had retained some profits or dividends to make the company a stronger financial organization.

The operating Ratio, return on investment has indicated a slight decline in their performance. The company has shown potential in attaining high profits as the main parameter i.e. net profit ratio, earning per share have shown a significant increase in their performance.

Further the table shows that the dividend payout average ratio was 30.31% for the acquirer company it was 9.34%. After Merger the payout ratio changes to 31.29%. This indicates a very slight increase in post merger period for the acquirer company from 30.31% to 31.29%. The average Debt equity ratio before the acquirer company was 6.39 and that of the target company was 25.04. Post merger the ratio had declined to 4.10.

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CHAPTER 7 7. RECOMMENDATION The analysis of the subject helps me to understand various positive and negative things of Merger and Acquisition on the Banking Sector. However, it provides various opportunities to grow as well in the industry. Thus below are some of my recommendations for the Banks which have undergone the M&A process and also for Banks which have not undergone the same: 1. Grab the Opportunity: Further opening up of the Indian banking sector is forecast to occur due to the changing regulatory environment (proposal for upto 74% ownership by foreign banks in Indian banks and New Banking License). This will be an opportunity for foreign banks and domestic players to enter the Indian market with their huge capital reserves, cutting-edge technology, best international practices and skilled personnel they have a clear competitive advantage over Indian banks.

2. Synergy Based Plan for the merger: Persistent growth in Indian corporate sector and other segments provide further motives for M&A. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively. Banks should not randomly take a decision for the Merger. An appropriate planning is must for any bank to be successful in long run.

3. Investment in technology: A bigger player can afford to invest in required technology. Consolidation with global opportunities in funds mobilization, credit disbursal, investments and rendering of financial services is an important factor. Consolidation can also lower intermediation cost and increase reach to underserved segments.

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4. Thrust on Risk Management: 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.

5. Opt for Outsourcing and Strategic Alliance: 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.

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CHAPTER 8 8. CONCLUSION The banking industry is one of the rapidly growing industries in India. It has transformed itself from a sluggish business entity to a dynamic industry. The growth rate in this sector is remarkable and it has become the most preferred banking destinations for international investors. In the last two decades, there have been paradigm shift in Indian banking industries. The Indian banking sector is growing at an astonishing pace. A relatively new dimension in the Indian banking industry has accelerated through mergers and acquisitions.

Mergers in banking sector are a form of horizontal merger because the merging entities are involved in the same kind of activity. By the way of Mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations, minimize their expenses to a considerable extent and also competition is reduced because merger eliminates competitors from the banking industry. Based on the analysis of 3 years pre and post merger financial ratios merger data of ICICI Bank, it can be concluded that Net profit margin, Operating profit margin, Return on capital employed, Return on equity and Debt-Equity ratio there is significant difference in the Operation of the business and the profitability.

Based on the analysis of 3 years financial ratios pre and merger data of HDFC bank data it can be concluded that Net profit margin, Operating profit margin, Return on capital employed, Return on equity and Debt-Equity ratio there is no significant difference in these ratios before after merger. The merger has proved not that beneficial for HDFC in short run. However, HDFC need to plan their business operations efficiently in order to make it successful, profitable and revenue generator for the shareholders.

Thus Merger & Acquisition is one of the fastest means for any business entity to grow and operate in larger market.

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A Pre and Post Merger Analysis of Indian Banks

BIBLIOGRAPHY:
Goyal, K. A. and Joshi, V. (211). Mergers in Banking Industry of India: Some Emerging Issues. Asian Journal of Business and Management Sciences, 1(2), 157-165 Murthy, G. K. (2007). Some Cases of Bank Mergers in India: A Study. In Bose, J. (Ed.), Bank Mergers: The Indian Scenario. (244-259). Hyderabad: The ICFAI University Press. Antony Akhil, K. (2011), Post-Merger Profitability of Selected Banks in India, International Journal of Research in Commerce, Economics and Management, Vol. 1, No. 8, (December), pp. 133-5. Dr. Rupa Rege Nitsure (Chief Economist, Bank of Baroda), 'Consolidation of Banks -Some Thoughts', Financial Sector Seminar Series , April 8, 2008, Ghosh, A., (2001): 'Does operating performance really improve following corporate acquisitions?' Journal of Corporate Finance 7 pp 151 Mohamad Akbar Noor and Nor Hayati Bt Ahamad, (2012), The determinants of efficiency of Islamic Bank,IUP Journal Of bank Management,May 2012, Vol XI, No. 2 pp 32-70 India Finance and Investment Guide, 'History of Banking in India', C.R.L. Narisimhan, 'A touch of history with nostalgia: the Grindlays story', The Hindu, April 30, 2000,

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Business Today Finance Journal Economic Times Business Standard

Website Reference:
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