Mergers and Acquisitions in Indian Banking Sector

Mergers and Acquisitions in Indian banking sector
Introduction
Generally speaking, a bank is an institution dealing in money. The origin of the word
bank is traced back to Italian word banca or banque, which means a bench. It is stated in
middle Ages the European money changers and moneylenders displayed their coins on their
benches and conducted their business. Hence the term bank refers to the bench on which the
business of money changing and money lending was conducted. Hence, the term banking is
defined as accepting for the purpose of lending or investment, the deposits of money from the
public, repayable on demand or otherwise and withdrawal by cheque, draft and order or
otherwise.
In the recent past, the Indian banking system has been undergoing major changes that
have affected both its structure and nature of interactions among banking institutions. Different
strategies have been adopted to tackle the demand of this new operating environment, one such
strategy having been consolidation via mergers and acquisitions.
It is observed that banking industry is moving from traditional savings-cum=lending
functions to other services as well, such as bank assurance and security trading. In recent times
banks have diversified their activities to cover a wide range of activities. They arrange remittance
of funds from one place to another, they act as agent of their customers in certain activities like
payment of subscription, and they also act as guarantor to their customers. Thus, banks in India
need to change their form and structure so as to adopt to meet this changing scenario of being a
total financial service provider and for this a preferred route of consolidation through mergers
and acquisitions.
Consolidation of banks through mergers and acquisitions is an important force of change
taking place in the Indian banking sector. These are driven by the objective of leveraging the
synergies arising from the process of M&A. Due to the financial transformation process, Indian
banking system is witnessing a sea change from controlled to market driven environment,
which has made the industry more competitive. This competition has forced the banks to look for
the restructuring in the form of M&A.
D.M.T.R. N.M.D.COLLEGE.GONDIA
Page 1
Global market and technological developments, macroeconomic pressures and banking

crises in 1990s have forced the banking industry and the regulators to change the old way of
doing business and to deregulate the banking industry at the national level and open up financial
markets to foreign competition. These changes have significantly increased competitive
pressures on banks in the emerging economics and have lead to deep changes in the structure of
the banking industry.
Page 2
Rationale of study
Banking system occupies an important place in a nations economy. It plays a pivotal role
in the economic development of a country. Mergers and Acquisitions in the Indian Banking
Sector are going to be the order of the day. India is slowly but surely moving from a regime of
`large number of small banks' to `small number of large banks'. With the help of mergers and
acquisitions in the banking sector, the banks can achieve significant growth in their operations
and minimize their expenses to a considerable extent. Another important advantage behind this
kind of merger is that in this process, competition is reduced because merger eliminates
competitors from the banking industry. Hence, in the preview of the present scenario, it is
imperative to study the cases of mergers and acquisitions in Indian banking system.
Page 3
Objective of study
The following are the objectives of the research:
1. To study the motives for mergers and acquisitions.
2. To study the need for mergers and acquisitions in banking sector.
3. To study the impact of these mergers and acquisitions.
Page 4
Scope of research
The research has been conducted through the study of banking sector, in general and cases of
merger and acquisition of following cases, in particular.
1. Merger of Centurion Bank of Punjab and HDFC bank.
2. Proposed merger of State Bank of Indore with SBI.
Page 5
Research methodology
Many different types of methods, tools or techniques are used for research methodology.
It is a path adopted by the researchers to complete the research process. Hence it plays a vital
role, because without this the project cannot be completed.
The methodology or course of action adopted to fulfill the objectives was Exploratory Research.
The data is mainly collected from secondary sources like Published reports, websites, various
books and journals.
Page 6
INTRODUCTION
TO
MERGERS
AND
ACQUISITIONS
Page 7
INTRODUCTION TO MERGER AND ACQUISITION

MERGERS
A merger occurs when two or more companies combines and the resulting firm maintains the
identity of one of the firms. One or more companies may merger with an existing company or
they may merge to form a new company.
Usually the assets and liabilities of the smaller firms are merged into those of larger firms.
Merger may take two forms1. Merger through absorption
2. Merger through consolidation.
Absorption
Absorption is a combination of two or more companies into an existing company. All companies
except one lose their identity in a merger through absorption.
Consolidation
A consolidation is a combination if two or more combines into a new company. In this form of
merger all companies are legally dissolved and a new entity is created. In consolidation the
acquired company transfers its assets, liabilities and share of the acquiring company for cash or
exchange of assets.
ACQUISITION
A fundamental characteristic of merger is that the acquiring company takes over the ownership
of other companies and combines their operations with its own operations.
An acquisition may be defined as an act of acquiring effective control by one company over the
assets or management of another company without any combination of companies.
Page 8
DISTINCTION
BETWEEN
MERGERS
AND
ACQUISITIONS
Although they are often uttered in the same breath and used as though they were
Synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to exist,
the buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain separately owned and operated.
This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks
are surrendered and new company stock is issued in its place.
In practice, however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that
the action is a merger of equals, even if it's technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal as a merger, deal makers and top
managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the
best interest of both of their companies. But when the deal is unfriendly - that is, when the target
company does not want to be purchased it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies in
how the purchase is communicated to and received by the target company's board of directors,
employees and shareholders.
Page 9
TYPES OF MERGERS
Mergers are of many types. Mergers may be differentiated on the basis of activities,
which are added in the process of the existing product or service lines. 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 and
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. Minimization of distribution costs, assured supplies and market
increasing or creating barriers to entry for potential competition or placing them at a cost
disadvantage.
Page 10
Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in
respect of technology, production process or market and management. In other
words, firms engaged in the different or unrelated activities are combined together.
Diversification of risk constitutes the rational for such merger moves.
Concentric Merger
Concentric merger are based on specific management functions where as 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.
Page 11
MOTIVES FOR MERGER
1. GROWTH 0R DIVERSIFICATION: -
Companies that desire rapid
growth in size or market share or diversification in the range of their products may find that a
merger can be used to fulfill the objective instead of going through the tome consuming process
of internal growth or diversification. The firm may achieve the same objective in a short period
of time by merging with an existing firm. In addition such a strategy is often less costly than the
alternative of developing the necessary production capability and capacity. If a firm that wants to
expand operations in existing or new product area can find a suitable going concern. It may
avoid many of risks associated with a design; manufacture the sale of addition or new products.
Moreover when a firm expands or extends its product line by acquiring another firm, it also
removes a potential competitor.
2. SYNERGISM: - The
nature of synergism is very simple. Synergism exists when
ever the value of the combination is greater than the sum of the values of its parts. In other
words, synergism is 2+2=5. But identifying synergy on evaluating it may be difficult; in fact
sometimes its implementations may be very subtle. As broadly defined to include any
incremental value resulting from business combination, synergism in the basic economic
justification of merger. The incremental value may derive from increase in either operational or
financial efficiency.
Operating Synergism: -
Operating synergism may result from
economies of scale, some degree of monopoly power or increased managerial efficiency.

The value may be achieved by increasing the sales volume in relation to assts employed
increasing profit margins or decreasing operating risks. Although operating synergy usually
Page 12
is the result of either vertical/horizontal integration some synergistic also may result from
conglomerate
growth. In addition, some times a firm may acquire another to obtain patents, copyrights,
technical proficiency, marketing skills, specific fixes assets, customer relationship or managerial
personnel.
Operating synergism occurs when these assets, which are intangible, may be
combined with
the existing assets and organization of the acquiring firm to produce an incremental value.
Although that value may be difficult to appraise it may be the primary motive behind the
acquisition.
Financial synergism: -
Among these are incremental values resulting
from complementary internal funds flows more efficient use of financial leverage, increase
external financial capability and income tax advantages.
a) Complementary internal funds flow

Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or eliminated by
merger. If so, financial synergism results in reduction of working capital requirements of the
combination compared to those of the firms standing alone.
b) More efficient use of Financial Leverage

Financial synergy may result from more efficient use of financial leverage. The acquisition firm
may have little debt and wish to use the high debt of the acquired firm to lever earning of the
combination or the acquiring firm may borrow to finance and acquisition for cash of a low debt
firm thus providing additional leverage to the combination. The financial leverage advantage
must be weighed against the increased financial risk.
Page 13
c) Increased External Financial Capabilities

Many mergers, particular those of relatively small firms into large ones, occur when the acquired
firm simply cannot finance its operation. Typical of this is the situations are the small growing
firm with expending financial requirements. The firm has exhausted its bank credit and has
virtually no access to long term debt or equity markets. Sometimes the small firm has
encountered operating difficulty. In this type of situation a large firms with sufficient cash and
credit to finance the requirements of smaller one probably can obtain a good buy bee, making a
merger proposal to the small firm. The only alternative the small firm may have is to try to
interest 2 or more large firms in proposing merger to introduce, competition into those bidding
for acquisition.
d) The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a merger,
e.g. assume that a firm A has earnings before taxes of about rupees ten crores per year and firm B
now break even, has a loss carry forward of rupees twenty crores accumulated from profitable
operations of previous years. The merger of A and B will allow the surviving corporation to
utility the loss carries forward, thereby eliminating income taxes in future periods.
3.INCREASED MANAGERIAL SKILLS :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.
4. ACQUIRING NEW TECHNOLOGY:D.M.T.R. N.M.D.COLLEGE.GONDIA
Page 14
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.
Page 15
NEED
FOR
MERGERS
AND
ACQUISITIONS
NEED FOR MERGER AND ACQUISITION
Page 16
The earlier economic turmoil in several developing nations demonstrated that strong banking
system is critical. Throughout the world, banking industry has been transformed from highly
protected and regulated to competitive and deregulated. Globalization coupled with
technological development has shrinked the boundaries. Trade has become transactional from
international. Due to this, there is no difference between domestic and foreign currency. As a
result innovations and improvement assumed greatest significance in institutional performance.
This trend of global banking has been marked by twin phenomena of consolidation and
convergence.
The trend towards consolidation has been driven by the need to attain meaningful balance sheet
size and market share in the face of intensified competition. The trend towards convergence is
driven by a move across industry to provide most of the financial services under one roof. Indian
banking experienced wide ranging reforms in the last decade and these reforms have contributed
to a great extent in enhancing their competitiveness. The issue of bank restructuring assumes
significance from the point of view of making Indian banking strong and sound apart its growth
and development to become suitable.
International evidence also strongly indicates greater gains to banking industries after the
restructuring process. With the impending capital account convertibility, cross border movement
of financial capital would become a reality. Such a scenario would lead to the alignment of
various structures with the international Indian banks for that matter almost all the banks in Asia,
especially in small emerging countries are at disadvantage on all fonts- size, technology, capital
base, cost of fund, availability of highly trained personnel to deal in international market,
worldwide networking and freedom of actions. If we cannot consolidate our size, it is rather
difficult to find reasons that could prevent Indian banks from being swallowed by the powerful
foreign banks in the long run, under the free for all environments. The core objective of
restructuring is to maintain long term profitability and strengthen the competitive edge of
banking business in the context of changes in the fundamental market scenario. Restructuring
can have both internal and external dimensions.
The pace of change in the financial market world over and in the external economic
environment, in which we work, shows no sign of slowing down. Commercial banks now have
to think global to service the requirements of the highly sophisticated multinationals that are
increasingly dominated the industrial world. The development of a global market place has
Page 17
accelerated through the deregulation of domestic markets and the removal of barriers to cross
border trade. Even on the merger front, we have witnessed an increasing number of cross border
alliances. As per the recent guidelines, the overall ceiling for foreign direct investment in private
sector banks has also been enhanced. In the changed scenario, it has now become extremely
important for Indian banks to remain competitive for surviving. Universally there is a move
towards consolidation and convergence. The bank merger process should be primarily market
driven and such proposals should come voluntarily from the banks themselves, depending on the
organizational synergy and the market share. If you look at our banks in global context, we do
not really feature high in the list of large banks. In the top 1000 list only 20 Indian banks feature
and in the top 200 only one bank gets listed. Even smaller countries like Taiwan has larger than
the largest Indian bank.
Certainly, there is need for us to pause and seriously think this issue out. Today banking is a
competitive field, something which was not really conceivable a decade back. Niche players
could play out for a while, but would put pressure on banks to reach critical sizes of mass to
succeed in business. Further, the pressure of capital would tend to surround the management of
banks, which in turn requires enough clout to access markets. As is true, only the best or largest
would survive. Bank mergers would be the rule rather than exception in times to come and there
is a need for banks to check their premises before embanking on their future plans. There are
synergies to be leveraged through consolidation where factors such as size, spread, technology,
human resource and capital can be reconciled. We could hence think of a situation where we
have 4-5 global players which are really large, a handful of regional banks which will gradually
set to merger and some other players which will get to acquire special niche to serve limited
market. But it involves the sorting of various issues such as legal, regulatory, procedural etc. This
is statement of SH. V. Leeladhar, chairman, IBA on 28th August, 2004.
History has improved beyond doubt that strong banking systems are critical for sound economic
growth. It is important to improve the comprehensiveness and quality of the banking system to
bring efficiency in the performance of the real sector in India.
Throughout the world, banking industry has been transferred from a highly protected and
regulated situation to competitive and deregulated. Globalization coupled with technological
development has shrinked the boundaries. Financial services and products are being provided to
the customers across the length and breadth of the globe.
Page 18
Due to this, domestic and foreign currency, banking and non banking financial services are
getting closer. Correspondingly innovations and improvements assumed greater significance in
institutional performance. This trend of global banking has been marked by twin phenomena of
consolidation and convergence. The trend towards consolidation has been driven by the need to
attain meaningful balance sheet size and market share in the face of intensified competition. The
trend towards convergence is driven by a move across industry to provide most of the financial
service viz., banking, insurance, investment etc, to the customers in one roof. Consolidation of
banking industry is critical from several aspects. The factors inducing mergers and acquisition
include technological progress, excess capacity, emerging opportunities and deregulation of
geographic, functional and product restrictions. It may also bring the performance of public
sector banks to a remarkable level without variation between banks in public sector.
Page 19
MERGERS AND
INDIAN
BANKING
SECTOR
MERGER AND INDIAN BANKING SECTOR
Page 20
Mergers and acquisitions encourage banks to gain global reach and better synergy and allow
large banks to acquire the stressed assets of weaker banks. Merger in India between
weak/unviable banks should grow faster so that the weak banks could be rehabilitated providing
continuity of employment with the working force, utilization of the assets blocked up in the
weak/unviable banks and adding constructively to the prosperity of the nation through increased
flow of funds.
The process of merger and acquisition is not a new happening in case of Indian Banking, Grind
lay Bank merged standard charted Bank, Times Bank with HDFC Bank, bank of Madura with
ICICI Bank, Nedungadi Bank Ltd. With Punjab National Bank and Global Trust Bank merged
with Oriental Bank of Commerce. The small and medium sized banks are working under threats
from economic environment which is full of problem for them, viz. inadequacies of resources,
outdated technology, on systemized management pattern, faltering marketing efforts and weak
financial structure. Their existence remains under challenge in the absence of keeping pace with
growing automation and techniques obsolescence and lack of product innovations. These banks
remain,
at
times,
under
threat
from
large
banks.
Their
reorganization
through
consolidation/merger could offer succor to re-establish them in viable banks of optimal size with
global presence.
Merger and amalgamation in Indian banking so far has been to provide the safeguard and
hedging to weak bank against their failure and too at the initiative of RBI, rather than to pay the
way to initiate the banks to come forward on their own record for merger and amalgamation
purely with a commercial view and economic consideration.
As the entire Indian banking industry is witnessing a paradigm shift in systems, processes,
strategies, it would warrant creation of new competencies and capabilities on an ongoing basis
for which an environment of continuous learning would have to be created so as to enhance
knowledge and skills.
There is every reason to welcome the process of creating globally strong and competitive banks
and let big Indian banks create big thunders internationally in the days to come.
In order to achieve the INDIAN VISION 2020 as envisaged by Honble president of India Sh.
A.P.J.Addul Kalam much requires to be done by banking industry in this regard. It is expected
that the Indian banking and finance system will be globally competitive. For this the market
players will have to be financially strong and operationally efficient. Capital would be key factor
Page 21
in the building a successful institution. The Banking and finance system will improve
competitiveness through a process of consolidation either through mergers and acquisitions or
through strategic alliances. There is need to restructure the banking sector in India through
merger and amalgamation in order to makes them more capitalized, automated and technology
oriented so as to provide environment more competitive and customer friendly.
RISKS ASSOCIATED WITH MERGER
Page 22
There are several risks associated with consolidation and few of them are as follows: 1) When two banks merge into one then there is an inevitable increase in the size of the
organization. Big size may not always be better. The size may get too widely and go beyond the
control of the management. The increased size may become a drug rather than an asset.
2) Consolidation does not lead to instant results and there is an incubation period before the
results arrive. Mergers and acquisitions are sometimes followed by losses and tough intervening
periods before the eventual profits pour in. Patience, forbearance and resilience are required in
ample measure to make any merger a success story. All may not be up to the plan, which
explains why there are high rate of failures in mergers.
3) Consolidation mainly comes due to the decision taken at the top. It is a top-heavy decision and
willingness of the rank and file of both entities may not be forthcoming. This leads to problems
of industrial relations, deprivation, depression and demotivation among the employees. Such a
work force can never churn out good results. Therefore, personal management at the highest
order with humane touch alone can pave the way.
4) The structure, systems and the procedures followed in two banks may be vastly different, for
example, a PSU bank or an old generation bank and that of a technologically superior foreign
bank. The erstwhile structures, systems and procedures may not be conducive in the new milieu.
A thorough overhauling and systems analysis has to be done to assimilate both the organizations.
This is a time consuming process and requires lot of cautions approaches to reduce the frictions.
5) There is a problem of valuation associated with all mergers. The shareholder of existing
entities has to be given new shares. Till now a foolproof valuation system for transfer and
compensation is yet to emerge.
6) Further, there is also a problem of brand projection. This becomes more complicated when
existing brands themselves have a good appeal. Question arises whether the earlier brands should
continue to be projected or should they be submerged in favor of a new comprehensive identity.
Goodwill is often towards a brand and its sub-merger is usually not taken kindly.
ORGANISED BANKING STRUCTURE IN INDIA
Page 23
Page 24
MERGER
OF
HDFC BANK
AND
CENTURION
BANK OF PUNJAB
MERGER OF HDFC BANK

AND
CENTURION BANK OF PUNJAB
ABOUT HDFC BANK
Page 25
Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd,
was established in the year 1994, as a part of the liberalization of the Indian Banking Industry by
Reserve Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval
from RBI, for setting up a bank in the private sector. The bank was incorporated with the name
'HDFC Bank Limited', with its registered office in Mumbai. The following year, it started its
operations as a Scheduled Commercial Bank. Today, the bank boasts of around 1500 branches
and over 4700 ATMs across India.
Promoted in 1995 by Housing Development Finance Corporation (HDFC), India's leading
housing finance company, HDFC Bank is one of India's 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.
The bank's 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
asset quality.
About Centurion Bank of Punjab
Page 26
Centurion bank of Punjab is a new generation private bank offering a wide spectrum of retail,
SME and corporate banking products and services. It has been among the earliest banks to offer a
technology enabled customer interface that provides easy access and superior customer service.
Centurion Bank of Punjab has a nationwide reach through its network of 241 branches and 389
ATMs. The bank aims to serve all the banking and financial needs of its customers through
multiple delivery channels, each of which is supported by state of the art technology architecture.
Centurion Bank of Punjab was formed by the merger of Centurion Bank and Bank of Punjab,
both of which had strong retail franchises in their respective markets. Centurion Bank had a well
managed and growing retail assets business, including leadership positions in two wheeler loans
and commercial vehicles loans and a strong capital base. Bank of Punjab brings with it a strong
retail deposit customer base in North India in addition to a sizable SME and agriculture portfolio.
The shares of the bank are listed on the major stock exchanges in India and also on the
Luxembourg Stock exchange. Among centurion bank of Punjabs greatest strengths is the fact
that it is a professionally managed bank with a globally experienced and capable management
team. 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.
PROFILE OF BIDDER BANK (HDFC)

Page 27
Capital Adequacy Ratio (%)

13.1
Net Profit After Tax (cr)
1143.5
Deposits (cr)
68297.9
Advances (cr)
46944.8
Balance sheet size (cr)
91235.6
Equity share Price Before merger 1474.9
(Rs)
Net NPA (%)
0.4
Number Of branches
1100.0
Number Of employees
21477.0
PROFILE OF TARGET BANK (CBOP)

Capital Adequacy Ratio (%)
Net Profit After Tax (cr)
Deposits (cr)
Advances (cr)
Balance sheet size (cr)
Equity share Price Before merger (Rs)
Net NPA (%)
Number Of branches
Number Of employees
MERGER POSITION
Page 28
11.1
121.4
14863.7
11221.4
18482.8
56.4
1.3
394.0
7500.0
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was
formally approved by Reserve Bank of India to complete the statutory and regulatory approval
process. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC
Bank for every 29 shares of CBoP.
The merged entity has a strong deposit base of around Rs. 1, 22,000 crore and net advances of
around Rs. 89,000 crore. The balance sheet size of the combined entity was over Rs. 1, 63,000
crore. The amalgamation added significant value to HDFC Bank in terms of increased branch
network, geographic reach, and customer base, and a bigger pool of skilled manpower.
HDFC Perspective
While the swap ratio of 1:29 for HDFC-CBOP merger turned out to be more favorable
for HDFC Bank than expected by the market, the merger appears to be long-term positive on
market
cap
to
branch
basis.
The market cap to branch ratio of HDFC Bank is Rs.721m where the same for CBOP is
Rs. 238m. Hence, HDFC Bank has been able to buy the franchisee of CBOP at almost one-third
of
what
the
market
is
currently
giving
to
its
own
franchisee.
HDFC Bank has managed to improve the productivity of these branches to even half the levels
of
HDFC
Bank
branches;
the
merger
has
become
positive
in
longer
term.
It is expected that HDFC Bank has taken a one-time charge of ~Rs3.5bn to be netted off
against reserves in order to clean up CBoPs balance sheet at the time of the merger and to
account
for
the
merger
Page 29
related
expenses.
CBoP Perspective
The bank has been valued at 4.7x FY08E BV. Given the fact that the profitability ratios of
CBoP are quite low, this looks an expensive proposition for HDFC in the short run. Thus the deal
is a profitable deal for CBoP who in all probabilities would have sold out to a foreign player past
2009.
Positives from the Merger
HDFC get an access to 394 branches of CBoP and an increased presence in southern and
northern states. At present, 170 of CBoPs branches lie in the North, concentrated in the National
Capital Region (NCR, 55), Punjab (78), Haryana (28); 150 of its branches are situated in the
South, mainly in Kerala (91). The merger has provided the HDFC Bank with greater access to
the North (Punjab and Haryana) as well as the South (particularly Kerala), thereby strengthening
its presence in those regions.
Apart from the strong retail focus of both the banks, CBoPs strong SME relationship has
complemented HDFC bias towards highly rated corporate thus expanding HDFCs base.
The merger has resulted in the creation of Indias 7th largest bank, just behind public giants like
Bank of Baroda, Bank of India. An important gain for HDFC Bank is induction of a strong and
capable management team with extensive industry experience and proven capabilities.
Page 30
ASSET SIZE OF 7 LARGEST BANKS OF INDIA
Post Merger Scenario
Retail segment is the main focus for the combined entity and is the crucial growth driver. Due to
an influx of 394 branches from CBoP, there is a significant increase in the number of branches
for HDFC. There is significant scope for improvement in utilization of the branch network, as
branch/ employee productivity is still way below that for the peer group. As the combined entity
leverages the CBoPs branch network, the opex to average asset has continued to trend down.
The opex to average asset is expected to decline from 3.4% in FY08 to 3.28% in FY10.
CBoP had a weaker asset profile with net NPAs of 1.6% as against 0.4% for HDFC Bank. Going
forward, HDFC Bank (combined entity) has maintained its NPA profile at these levels, which has
required a charge of ~Rs2bn. In addition, it is expected that HDFC Bank has provided for
another Rs1.5bn towards any potential NPAs.
Page 31
In the opinion of the Board of Directors of HDFC bank the following are amongst others, the
benefits that have accrued to the members from the proposed scheme:
(a) Financial Capability: The amalgamation has enabled the merge entity to have a stronger
financial and business profile, which has been synergized to both for resources and mobilization
and asset generation.
(b) Branch Network: As a result of the amalgamation, the branch network of the merged entity
has increased to 394 branches, providing increased geographic coverage, particular in the
northern India and Kerala, giving it a larger national foot print as well as convenience to its
customers.
(c) Retail Customer Base: The amalgamation has enabled the merged entity to increase its retail
customer base. This larger customer base has provided the merged entity enhanced opportunities
for offering banking and financial services and products and facilitate cross selling of products
and services.
(d) Use of Technology: Post amalgamation, the merged entity has been able to provide through
its branches, ATMs, phone and the internet banking and financial services and products to a
larger customer base, with expected savings in costs and operating expenses.
(e) Larger Size: The larger asset base of the merged entity has put the merged entity amongst the
bigger players in the private sector banking space.
Page 32
PROPOSED
MERGER
OF
STATE BANK OF INDIA
AND
STATE BANK OF
INDORE
Page 33
PROPOSED MERGER OF
STATE BANK OF INDIA
AND
STATE BANK OF INDORE
ABOUT STATE BANK OF INDIA
State Bank of India is the nation's largest and oldest bank. Tracing its roots back some 200 years
to the British East India Company (and initially established as the Bank of Calcutta in 1806), the
bank operates more than 15,000 branches within India, where it also owns majority stakes in six
associate banks. State Bank of India (SBI) has more than 80 offices in nearly 35 other countries,
including multiple locations in the US, Canada, and Nigeria. The bank has other units devoted to
capital markets, fund management, factoring and commercial services, credit cards, and
brokerage services. The Reserve Bank of India owns about 60% of State Bank of India.
The corporate center of SBI is located in Mumbai. In order to cater to different
functions,
there are several other establishments in and outside Mumbai, apart from the corporate center. The
bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major cities
throughout India. It is recorded that SBI has about 10000 branches, well networked to cater to its
customers throughout India. SBI surpassed market expectations and posted a 10.19 per cent growth in
net profit to Rs 2,490 crore for the quarter ended September 2009. Punters expected nine to 10 per
cent growth in net profit during the quarter.
The Six Banking Subsidiaries Of SBI Are:
State Bank of Bikaner and Jaipur (SBBJ)
State Bank of Hyderabad (SBH)
State Bank of Indore (SBIR)
Page 34
State Bank of Mysore (SBM)
State Bank of Patiala (SBP)
State Bank of Travancore (SBT)
ABOUT STATE BANK OF INDORE

One of the nationalized banks in India, State Bank of Indore was formerly named as Bank of Indore
Ltd. It was established under a special charter of His Highness Maharaja Tukojirao Holker-III, the
then ruler of Malwa region. The Bank is also known as Indore Bank in Malwa region. It became a
subsidiary of State Bank of India on 1 January 1960, under the State Bank of India Subsidiary Banks
Act, 1959. Bank of Indore Ltd. and came to be known as State Bank of Indore, after its association
with SBI.
State Bank of Indore was upgraded to class 'A' category bank in 1971. Over the years, the Bank has
been making significant growth in terms of its business. The business turnover of the Bank crossed
Rs.47000 Crore at the end of December 2008. It has emerged as the premier bank of Madhya Pradesh
due to its steady progress. The Bank aims to be the premier financial institution of Indore and wants
to secure its position as a prominent part of the State Bank group.
Apart from general banking operations, State Bank of Indore has undertaken multi-faceted banking
activities too. It has also succeeded to great extent in reaching the rural sectors, especially agricultural
segment in the country. In the process, the Bank has provided many useful services to its customers,
such as credit and loans to the farmers. Schemes such as Kisan Gold Card Scheme and the Kisan
Credit Card Scheme are part of the efforts taken by State Bank of Indore to reach its customers in the
rural areas of the country. State Bank of Indore posted a 25.69 per cent year-on-year rise in net profit
at Rs 78.62 crore for the second quarter ended September 30, as total income rose to Rs 776.39 crore.
It has over 500 branches, located mainly in the central parts of India.
Page 35
MERGER POSITION
The Government has granted sanction to State Bank of India (SBI), under Section 35(1) of the State
Bank of India Act, 1955, vide Department of Financial Services letter dated 08.10.2009 for
proceeding with the negotiation with State Bank of Indore for acquiring its business. Consequently,
the scheme of acquisition of State Bank of Indore by the State Bank of India has been approved by
Board of both the Banks. The Government keeps in view the interest of all the stakeholders including
employees of the merging banks. It was supposed that the merger would be completed by December.
This is the second subsidiary to be merged with SBI. As part of consolidating its operations, SBI had
merged the State Bank of Saurashtra with itself last fiscal. Due to the opposition of the bank unions,
the proposed merger could not be materialized on time.
The SBI board approved a swap ratio of 34 SBI shares for every 100 shares of State Bank of Indore..
SBI is learnt to have argued that the merger will help avoid duplication and also benefit the
employees of State bank of Indore. The bank said that it would be issuing 1.16 lakh shares to
the minority shareholders of State Bank of Indore. The face value of each share will be Rs. 10.
Talking about this, SBI said in a statement that the Central Bank had approved this merger during the
Board meeting which took place on March 26. The statement further added that as per the current
situation, post-merger the issued capital of SBI would rise to Rs. 635.08 crore as against the current
level of Rs. 634.69 crore. But, this is still subject to approval from the government.
On March 25, SBI chairman OP Bhatt said, The proposal for the merger of State Bank of Indore
with SBI is on track. The bank is waiting for the government approval," adding it may happen in the
Page 36
first quarter of next fiscal and that the bank is procedural issue which is being looked into.
Post-merger, the SBI will be left with five associate banks State Bank of Bikaner and Jaipur, State
Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad.
Among these, State Banks of Bikaner and Jaipur, Mysore and Travancore are listed banks.
FUTURE SCENARIO
The future outlook of the Indian banking industry is that a lot of action is set to be seen with respect
to M & As, with consolidation as a key to competitiveness being the driving force. Both the private
sector banks and public sector banks in India are seeking to acquire foreign banks. As an example, the
State Bank of India, the largest bank of the country has major overseas acquisition plans in its bid to
make itself one of the top three banks in Asia, and among the top 20 globally over next few years.
Some of the PSU banks are even planning to merge with their peers to consolidate their capacities. In
the coming years we would also see strong cooperative banks merging with each other and weak
cooperative banks merging with stronger ones.
While there would be many benefits of consolidation like size and thereby economies of scale, greater
geographical penetration, enhanced market image and brand name, increased bargaining power, and
other synergies; there are also likely to be risks involved in consolidation like problems associated
with size, human relations problems, dissimilarity in structure, systems and the procedures of the two
organizations, problem of valuation etc which would need to be tackled before such activity can give
enhanced value to the industry.
Page 37
CONCLUSION
Growth is always essential for the existence of a business concern. A concern is bound to die if it does
not try to expand its activities. The expansion of a concern may be in the form of enlargement of its
activities or acquisition of ownership and control of other concerns. Internal expansion results gradual
increase in the activities of the concern. External expansion refers to business combination where
two or more concerns combine and expand their business activities.
The undercurrent of thinking is that the larger the bank the higher its competitiveness and better its
prospects of survival. This argument implies that Indian banks are not in a position to compete for
business internationally in terms of funds mobilization, credit disbursal, investments and rendering of
financial services essentially because of their relatively small size.
As the entire Indian banking industry is witnessing a paradigm shift in systems, processes, strategies,
it would warrant creation of new competencies and capabilities on an ongoing basis for which an
environment of continuous learning would have to be created so as to enhance knowledge and skills.
There is every reason to welcome the process of creating globally strong and competitive banks and
let big Indian banks create big thunders internationally in the days to come.
The Banking and finance system will improve competitiveness through a process of consolidation
through mergers and acquisitions. There is need to restructure the banking sector in India through
merger and amalgamation in order to makes them more capitalized, automated and technology
oriented so as to provide environment more competitive and customer friendly.
Page 38
SUGGESTIONS
When we look at the cases of past mergers in Indian banking sector, we find that that these mergers
have always proved to be beneficial for both the banks, as well as for the banking sector as a whole.
Hence, it can be suggested that:1. The banking sector in India should be restructured through merger and amalgamation in order
to makes them more capitalized, automated and technology oriented.
2. Given the successful merger of SBI with one of its associate bank, State bank of Saurashtra, it
can be suggested that SBI should merger its another associate bank, State bank of Indore as
well.
Page 39
BIBLIOGRAPHY
1.FINANCIAL MANAGEMENT, THEORY CONCEPTS AND PROBLEMS

------ R.P. RUSTAGI
2.FINANCIAL MANAGEMENT, PRINCIPLES AND PRACTICES
------ G. SUDARSHAN REDDY
3.RESEARCH METHODOLOGY
------ C.R. KOTHARI
4.THE INDIAN JOURNAL OF COMMERCE, JULY-SEPTEMBER 2009
WEBLIOGRAPHY
www.banknetindia.com
www.financialexpress.com
Page 40
www.thehindubusinessline.com
www.topnews.in/sbi
beta.profit.ndtv.com
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