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of the new private sector banks, but also the shares of old generation private banks and even
public sector banks experienced a buying interest. Are these merger moves a culmination of
the consolidation in the industry? Will any bank be untouched and which will be left out?
To answer this question let us first glance through the industry and see where the different
players are placed. The Indian banking industry is consists of four categories-public sector
banks, new private sector banks and foreign banks. The public sector banks control a major
share of the banking operations. These include some of the biggest names in the industry like
State Bank of India and its associate banks, Bank of Baroda, Corporation bank etc. their
strength lies in their reach and distribution network. Their problems rage from high NPAs to
over employment. The government controls these banks. Most of these banks are trying to
change the perception. The government controls these banks. Most of these banks are trying
to change the perception. The recent thrust on reduction of government stake, VRS and NPA
settlement are steps in this direction. However, real consolidation can happen if government
reduces its stake and changes its perception on the need of merger. The governments stand
has always been that consolidation should happen to save a bank from collapsing. The old
private sector banks are the banks, which were established prior the Banking
Nationalization Act, but could not be nationalized because of their small size. This segment
includes the Bank Of Madura, United Western Bank, Jammu and Kashmir bank; etc. who
banks are facing competition from private banks and foreign banks. They are trying to
improve their margins. Though some of the banks in this category are doing extremely well,
the investors and the markets seem not to reward them adequately. These banks are unable to
detach themselves effectively from the older tag. The new private banks came into existence
with the amendment of Banking Regulation Act in 1993, which permitted the entry of new
private sector banks.
Of the above the spotlight is on the old generation private banks .the OGPBs can become
easy takeover targets .the sizable portfolios of advances and deposits act as an incentive.
Added to this these banks have a diversified shareholder base, which inhibits them from
launching an effective battle against the potential acquirers. The effective shield against
takeovers for these banks could be to get into strategic alliances like the Vysya bank model,
which has bank Brussels Lambert of the Dutch ING Group as a strategic investor. United
Western Bank and Lord Krishna Bank are already on a lookout for strategic partners. But the
problems go beyond the shareholding pattern and are far rooted .the prudential norms like the
increasing CAR and the minimum net worth requirements are making the very existence of
these banks difficult. They are finding it difficult. They are finding difficult to raise capital
and keep up with the ever-tightening norms .one of the survival routes for these banks is to
merge with another bank.
Strategic alliance
It is not only important for banks to merge with banks but also entities in the other business
activities. Strategic partnership could become the important thing. Strategic mergers between
banks for using each others infrastructure enabling remittance of funds to various centers
among the strategic partner banks can give the account holder the flexibility of purchasing a
draft payable at centers where the strategic tie-up exists. The strategic tie-up could also
include a bank with another specialized investment bank to provide value-added services.
Tie-ups could also be between a bank and technology firm to provide advanced services. It is
these strategic tie-ups that are set to increase in future. These along with providing valueadded benefits, also help in building positive perceptions in the market.
In a macro perspective mergers and acquisition can prove effective on strengthening the
Indian financial sector. Today, while Indian banks have made tremendous strides in extending
the reach domestically, internationally the Indian system is conspicuous by its absence. There
are very few catering mostly to India related business. As a result India does not have a
presence in international financial markets. If India has to emerge as an international banking
center the presence of large banks with foreign presence is essential. With globalization and
strategic alliances Indian banks would grow originally. The large banks with international
presence. Globally the banking industry is consolidating through cross-border mergers. India
seems to be far behind. The law does not allow the foreign banks with branch network to
acquire Indian banks. But who knows with pressures of globalization the law of the land
could be amended paving way for a cross border deal.
While the private sector banks are on the threshlod of improvement, the public sector banks
(PSBs) are slowly contemplating automation to accelerate and cover the lost ground. To
contend with new challenges posed by the private sector banks, PSBs are pumping huge
amounts to update their It. but still, it looks like, public sector banks need to shift the gears,
accelerate their moivements, in the right direction by automation their branches and
providing, Internet banking services.
Private sector banks, in order to compete with large and well-established public sector banks,
are not only foraying into IT, but also shaking hands with peer banks to establish themselves
in the market. While one of the first initiatives was taken in November 1999, when Deepak
Prakesh of HDFC and S.M.Datta of Times bank shook hands, created history. It is the first
merger in the Indian banking, signaling that Indian banking sector joined the mergers and
acquisitions bandwagon. Prior to this private bank merger, there have been quite a few
attempts made by the government to rescue weak banks and synergize the operations to
achieve scale economies but unfortunately they were all futile. Presently size of the bank is
recognized as one of the major strengths in the industry. And, mergers amongst strong banks
can both a means to strengthen the base, and of course, to face the cutthroat competition.
The appetite for mergers is making a comeback among the public sector banking industry.
The instincts are aired openly at various forums and conferences. The bank economist
conference perhaps set the ball rolling after the special secretary for banking Devi Dayal
stressed the importance of the size as a factor. He pointed out the consolidation through
merger and acquisition was becoming a trend in the global banking scenario wanted the
Indian counterparts to think on the same lines. There is also a feeling threat there are far too
many banks. PS Shenoy, chairman and managing director of Bank of Baroda, said, There are
too many banks to handle the size of business. The pace of mergers will hasten. As the time
runs out and the choice of target banks with complementary businesses gets reduced there
would be a last minute rush to acquire the remaining banks, which will hasten the process of
consolidation.
Phase I (1786- 1969) - Initial phase of banking in India when many small banks were
set up
Phase II (1969- 1991) - Nationalisation, regularisation and growth
Phase III (1991 onwards) - Liberalisation and its aftermath
With the reforms in Phase III the Indian banking sector, as it stands today, is mature in
supply, product range and reach, with banks having clean, strong and transparent balance
sheets. The major growth drivers are increase in retail credit demand, proliferation of
ATMs and debit-cards, decreasing NPAs due to Securitisation, improved macroeconomic
conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g.
amendments to the Banking Regulation Act).
Certain trends like growing competition, product innovation and branding, focus on
strengthening risk management systems, emphasis on technology have emerged in the
recent past. In addition, the impact of the Basel II norms is going to be expensive for
Indian banks, with the need for additional capital requirement and costly database creation
and maintenance processes. Larger banks would have a relative advantage with the
incorporation of the norms.
initiative to merger New Bank of India (NBI) with Punjab National Bank (PNB). Ultimately,
this turned out to be an unhappy event. Following this, there was a long silence in the market
till HDFC Bank successfully took over Times Bank. Market gained confidence, and
subsequently, there were two more mega mergers. The merger on Bank Of Madura with
ICICI Bank, and of Global Trust Bank with UTI Bank, emerging as a new bank, UTI Bank,
emerging as a new bank, UTI-Global Bank.
The following are the recommendations of the committee
1) Globally, the banking and financial systems have adopted information and
communications technology. This phenomenon has largely bypassed the Indian
banking system, and the committee feels that requisite success needs to be achieved in
the following areas:
a) Bank automation
b) Planning, standardization of electronic payment systems
c) Telecom infrastructure
d) Data warehousing network
2) Mergers between banks and DFIs and NBFCs need to be based on synergies and
should make a sound commercial sense. Committee also opines that mergers between
strong banks/FIs would make for greater economic and commercial sense and would
be a case where the whole is greater than the sum of its parts and have a force
multiplier effect. It is also opined that mergers should not be seen as a means of
bailing out weak banks.
3) A weak bank could be nurtured into healthy units. Merger could also be a solution to a
weak bank, but the committee suggests it only after cleaning up their balance sheets.
It also says, if there is no voluntary response to a takeover of their banks a
restructuring, merger amalgamation, or if not closure.
4) The committee also opines that, licensing new private sector banks, the initial capital
requirements need to be reviewed. It also emphasized on a transparent mechanism for
deciding the ability of promoters to professionally manage the banks. The committee
also feels that a minimum threshold capital for old private banks also deserves
attention and mergers could be one of the options available for reaching the required
threshold capitals. The committee also opined that a promoter group couldnt hold
more than 40% of the equity of a bank.
RESEARCH METHODOLOGY
Objectives:
1. To critically analyse the impact of Mergers and Acquisitions on Operating
performance of Banking firms in India.
2. To Identify how Mergers and Acquisitions in banking sector look for strategic benefits
in terms of
a) Profits
b) Increase in Customer Base
c) Increase in shareholders value.
Impacts on Employees
Mergers and acquisitions may have great economic impact on the employees of the
organization. In fact, mergers and acquisitions could be pretty difficult for the
employees as there could always be the possibility of layoffs after any merger or
acquisition. If the merged company is pretty sufficient in terms of business
capabilities, it doesn't need the same amount of employees that it previously had to do
the same amount of business. As a result, layoffs are quite inevitable. Besides, those
who are working, would also see some changes in the corporate culture. Due to the
changes in the operating environment and business procedures, employees may also
suffer from emotional and physical problems.
Impact on Management
The percentage of job loss may be higher in the management level than the general
employees. The reason behind this is the corporate culture clash. Due to change in
corporate culture of the organization, many managerial level professionals, on behalf
of their superiors, need to implement the corporate policies that they might not agree
with. It involves high level of stress.
Impact on Shareholders
Impact of mergers and acquisitions also include some economic impact on the
shareholders. If it is a purchase, the shareholders of the acquired company get highly
benefited from the acquisition as the acquiring company pays a hefty amount for the
acquisition. On the other hand, the shareholders of the acquiring company suffer some
losses after the acquisition due to the acquisition premium and augmented debt load.
Impact on Competition
Mergers and acquisitions have different impact as far as market competitions are
concerned. Different industry has different level of competitions after the mergers and
acquisitions. For example, the competition in the financial services industry is
relatively constant. On the other hand, change of powers can also be observed among
the market players.
TYPES OF MERGERS
Mergers can be a distinguished into the following four types:1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger
Horizontal Merger
Horizontal merger is a combination of two or more corporate firms dealing in same lines of
business activity. Horizontal merger is a co centric merger, which involves combination of
two or more business units related to technology, production process, marketing research,
development and management
Vertical Merger
Vertical merger is the joining of two or more firms in different stages of production or
distribution that are usually separate. The vertical Mergers chief gains are identified as the
lower buying cost of material. A vertical merger is one of the most common types of
mergers. When a company merges with either a supplier or a customer to create an
extension of the supply chain, it is known as a vertical merge or integration.
Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in respect of
technology, production process or market and management. Conglomerate mergers are types
of mergers that are in different market businesses. There is no relationship between the types
of business one company is in and the type the other is in. The merger is typically part of a
desire on the part of one company to grow its financial wealth. By merging with a completely
unrelated, but often equally profitable company, the resulting conglomerate gains a revenue
stream in many types of industries.
Concentric Merger
Concentric merger are based on specific management functions whereas the conglomerate
mergers are based on general management functions. If the activities of the segments brought
together are so related that there is carry over on specific management functions. Such as
marketing research, Marketing, financing, manufacturing and personnel.
ii.
By enhancing debt capacity. This is because a merger of two companies can bring
stability of cash flows which in turn reduces the risk of insolvency and enhances
the capacity of the new entity to service a larger amount of debt
iii.
By lowering the financial costs. This is because due to financial stability, the
merged firm is able to borrow at a lower rate of interest.
8. Other Motives for Mergers: Merger may be motivated by other factors that
should not be classified under synergism. These are the opportunities for acquiring
firm to obtain assets at bargain price and the desire of shareholders of the acquired
firm to increase the liquidity of their holdings.
a) Purchase of Assets at Bargain Prices: Mergers may be explained by opportunity to
acquire assets, particularly land mineral rights, plant and equipment, at lower cost
than would be incurred if they were purchased or constructed at the current market
prices. If the market price of many socks have been considerably below the
replacement cost of the assets they represent, expanding firm considering construction
plants, developing mines or buying equipments often have found that the desired
assets could be obtained where by heaper by acquiring a firm that already owned and
operated that asset. Risk could be reduced because the assets were already in place
and an organization of people knew how to operate them and market their products.
b) Increased Managerial Skills or Technology: Occasionally a firm will have good
potential that is finds it unable to develop fully because of deficiencies in certain areas
of management or an absence of needed product or production technology. If the firm
cannot hire the management or the technology it needs, it might combine with a
compatible firm that has needed managerial, personnel or technical expertise. Of
course, any merger, regardless of specific motive for it, should contribute to the
maximization of owners wealth.
c) Acquiring New Technology: To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller
company with unique technologies, a large company can maintain or develop a
competitive edge.
i.
ii.
Increased Revenue or Market Share: This assumes that the buyer will be absorbing
a major competitor and thus increase its market power (by capturing increased market
share) to set prices.
iii.
Cross-Selling: For example, a bank buying a stock broker could then sell its banking
products to the stock broker's customers, while the broker can sign up the bank's
customers for brokerage accounts. Or, a manufacturer can acquire and sell
complementary products.
Merger and acquisition process is the most challenging and most critical one when it comes
to corporate restructuring. One wrong decision or one wrong move can actually reverse the
effects in an unimaginable manner. It should certainly be followed in a way that a company
can gain maximum benefits with the deal.
Following are some of the important steps in the M&A process:
Business Valuation
Business valuation or assessment is the first process of merger and acquisition. This step
includes examination and evaluation of both the present and future market value of the target
company. A thorough research is done on the history of the company with regards to capital
gains, organizational structure, market share, distribution channel, corporate culture, specific
business strengths, and credibility in the market. There are many other aspects that should be
considered to ensure if a proposed company is right or not for a successful merger.
Proposal Phase
Proposal phase is a phase in which the company sends a proposal for a merger or an
acquisition with complete details of the deal including the strategies, amount, and the
commitments. Most of the time, this proposal is send through a non-binding offer document.
Planning Exit
When any company decides to sell its operations, it has to undergo the stage of exit planning.
The company has to take firm decision as to when and how to make the exit in an organized
and profitable manner. In the process the management has to evaluate all financial and other
business issues like taking a decision of full sale or partial sale along with evaluating on
various options of reinvestments.
Structuring Business Deal
After finalizing the merger and the exit plans, the new entity or the takeover company has to
take initiatives for marketing and create innovative strategies to enhance business and its
credibility. The entire phase emphasize on structuring of the business deal.
Stage of Integration
This stage includes both the company coming together with their own parameters. It includes
the entire process of preparing the document, signing the agreement, and negotiating the deal.
It also defines the parameters of the future relationship between the two.
Operating the Venture
After signing the agreement and entering into the venture, it is equally important to operate
the venture. This operation is attributed to meet the said and pre-defined expectations of all
the companies involved in the process. The M&A transaction after the deal include all the
essential measures and activities that work to fulfil the requirements and desires of the
companies involved.
For HDFC Bank, this merger provided an opportunity to add scale, geography (northern
and southern states) and management bandwidth. In addition, there was a potential of
business synergy and cultural fit between the two organizations.
For CBoP, HDFC bank would exploit its underutilized branch network that had the
requisite expertise in retail liabilities, transaction banking and third party distribution. The
combined entity would improve productivity levels of CBoP branches by leveraging
HDFC Bank's brand name.
Benefits
The deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in India),
providing massive scale economies and improved distribution with 1,148 branches and
2,358 ATMs (the largest in terms of branches in the private sector). CBoP's strong SME
relationships complemented HDFC Bank's bias towards high-rated corporate entities.
There were significant cross-selling opportunities in the short-term. CBoP management
had relevant experience with larger banks (as evident in the Centurion Bank and BoP
integration earlier) managing business of the size commensurate with HDFC Bank.
Drawbacks
The merged entity will not lend home loans given the conflict of interest with parent
HDFC and may even sell down CBoP's home-loan book to it. The retail portfolio of the
merged entity will have more by way of unsecured and two-wheeler loans, which have
come under pressure recently.
Merger of HDFC and Centurion Bank of Punjab08
S.NO.
Contents
HDFC
1.
2.
3.
4.
5.
Branches
ATMs
Deposits
Net profit
Net worth
452
674
7.11 crore
132.1 crore
713.3 crore
For ANZ, the deal, at a premium of US $700 million over book value, funded its share
buy-back in Australia (a defence against possible hostile takeover). The merger also greatly
reduced the risk profile of ANZ by reducing its exposure to default prone markets. 3
Drawbacks
The post-merger organisational restructuring evoked widespread criticism due to unfair
treatment of former Grindlays employees. 4 There were also rumours of the resulting
organisation becoming too large an entity to manage efficiently, especially in the fast
changing financial sector.
Particulars
ICICI Bank
Bank of Madura
0003(12)
0003(12)
185.92
104.12
Net Profit
105.3
45.58
Deposits
9866.02
3631.04
5030.96
2072
Total Assets
12072.6
4443.7
19.6
15.8
RoNW (%)
30.1
19.9
RoA (%)
0.9
7.3
7.3
1.1
4.7
5.95
2.02
0.08
0.02
Shareholding pattern in %
Pre-Merger
Post-Merger
Particulars
ICICI Bank
BOM
ICICI Bank
ICICI Ltd
62.2
55.6
ADS
16.2
14.4
FIIs
6.9
6.1
FIs
4.7
7.3
MF & Banks
1.4
1.4
1.4
BOM Promoter
24.9
2.7
Kotak Mahindra
11.4
1.2
Employees
6.2
Public
8.6
48.8
13.6
Global Trust
bank
Oriental Bank
of Commerce
Combined
Advances
Investments
Deposits
Net profit
Gross NPA
Net NPA
Gross NPA (%)
Net NPA (%)
Branches (nos)
Staff (nos)
32.76
26.5
69.21
-2.73
9.16
6.48
25.8
19.8
87
1314
156.77
147.8
298.09
4.57
11.46
2.25
6.9
1.4
989
13507
189.53
174.3
367.3
20.62
8.73
10.8
4.6
1076
0.0
14.0
12.2
Growth - Organic growth takes time and dynamic firms prefer acquisitions to grow
quickly in size and geographical reach.
Synergy - The merged entity, in most cases, has better ability in terms of both revenue
enhancement and cost reduction.
Managerial efficiency - Acquirer can better manage the resources of the target whose
value, in turn, rises after the acquisition.
Strategic motives - Two banks with complementary business interests can strengthen
their positions in the market through merger.
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.
Tax shields and financial safeguards - 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.