A PROJECT REPORT

on

PROJECT REPORT ON MERGER & ACQUISITION

in the subject COMMERCIAL BANK MGMT
Submitted to
University of Mumbai
for II Semester of M.Com.
BY

PRIYANKA BHUMESH GUNDLA

Roll No. 11
under the guidance of
Prof. SAURABH CHAWAN
2014-2015

C E R T I F I C ATE

This is to certify that the project entitled

PROJECT REPORT ON MERGER & ACQUISITION Roll No. 11
student of M.Com. Banking & Finance (University of Mumbai) (IInd
Semester) examination has not been submitted for any other examination
and does not form a part of any other course undergone by the candidate. It
is further certified that she has completed all required phases of the project.
This project is original to the best of our knowledge and has been accepted
for Internal Assessment.

Internal Examiner

External Examiner

Co-ordinator

Principal

College seal

DECLARATION BY THE STUDENT

I, Ms. Priyanka Bhumesh Gundla student of M.Com. (Semester Ist) Banking

& Finance, Roll No. 11 hereby declare that the project for the Subject
COMMERCIAL BANK MANAGEMENT titled,
PROJECT REPORT ON MERGER & ACQUISITION submitted by me
to University of Mumbai, examination during the academic year 2014-2015, is
based on actual work carried by me under the guidance and supervision of Prof.
SAURABH CHAWAN.

I further state that this work is original and not submitted anywhere else for
any examination.

PRIYANKA BHUMESH GUNDLA

Signature of student ______________

ACKNOWLEDGEMENT

At the beginning, I would like to thank GOD for his shower of blessing. The
desire of completing this project was given by my guide
Prof.SAURABH CHAWAN. I am very much thankful to him for the guidance,
support and for sparing his precious time from a busy schedule.

I would fail in my duty if I dont thank my parents who are pillars of my life.
Finally I would express my gratitude to all those who directly and indirectly
helped me in completing this project.

PRIYANKA BHUMESH GUNDLA

INDEX

Sr. No.

Topic

Page No.

Introduction

Meaning of Merger & Acquisition

Merger OR Acquisition?

Difference between M&A

10

Types of M&A

11

Merger & Acquisition Process

12

Advantages &Disadvantages of M&A

13

Case Study Analysis

16

Merger Strategy

20

10

Aftermath of the Merger

26

11

CONCLUSION

34

Chapter1.
INTRODUCTION

Mergers and Acquisitions (M&A) are both aspects of strategic management,

corporate finance and management dealing with the buying, selling, dividing and
combining of different companies and similar entities that can help an enterprise grow
rapidly in its sector or location of origin, or a new field or new location, without
creating a subsidiary, other child entity or using a joint venture.
M&A can be defined as a type of restructuring in that they result in some entity
reorganization with the aim to provide growth or positive value. Consolidation of an
industry or sector occurs when widespread M&A activity concentrates the resources
of many small companies into a few larger ones, such as occurred with the automotive
industry between 1910 and 1940.
The distinction between a "merger" and an "acquisition" has become increasingly
blurred in various respects (particularly in terms of the ultimate economic outcome),
although it has not completely disappeared in all situations. From a legal point of
view, a merger is a legal consolidation of two companies into one entity, whereas
an acquisition occurs when one company takes over another and completely
establishes itself as the new owner (in which case the target company still exists as an
independent legal entity controlled by the acquirer). Either structure can result in the
economic and financial consolidation of the two entities. In practice, a deal that is an
acquisition for legal purposes may be euphemistically called a "merger of equals" if

both CEOs agree that joining together is in the best interest of both of their companies,
while when the deal is unfriendly (that is, when the target company does not want to
be purchased) it is almost always regarded as an "acquisition"

Chapter 2.
MEANING OF MERGER & ACQUISITION
Meaning of Merger
A merger refers to a combination of two or more companies, usually of not
greatly disparate size, into one company.
A merger involves the mutual decision of two companies to combine and
become one entity; it can be seen as a decision made by two "equals".
Merger refers to a situation when two or more existing firms combine together
and
form a new entity.
Merger is a marriage between two companies of roughly same size. It is thus a
combination of two or more companies in which one company survives n its
own name and the other ceases to exist as a legal entity.
Meaning of Acquisition
Acquisition refers to the acquiring of ownership right in the property and asset
Without any combination of companies. Thus in acquisition two or more
companies
May remain independent, separate legal entity, but there may be change in
control of companies. Acquisition results when one company purchase the
controlling interest in the share capital of another existing company in any of
the following ways:

 a)Controlling interest in the other company. By entering into an agreement with

a personor persons holding
b)by subscribing new shares being issued by the other company.
c)by purchasing shares of the other company at a stock exchange, and
d)by making an offer to buy the shares of other company, to the existing
shareholders of
that company.

DEFINITION OF 'MERGERS AND ACQUISITIONS - M&A'

A general term used to refer to the consolidation of companies. A merger is a
combination of two companies to form a new company, while an acquisition is the
purchase of one company by another in which no new company is formed.

Chapter 3.
Merger or Acquisition?

The terms "merger" and "acquisition" are often confused and used interchangeably by
business and financial executives. On the face of it, the difference may not really
matter since the net result is often the same: Two companies (or more) that had
separate ownership are now operating under the same roof, usually to obtain some
strategic or financial objective. However, the strategic, financial, tax and even cultural
impact of the deal may be very different, depending on how the transaction is
structured.
Merger refers to two companies joining (usually through the exchange of shares) to
become one. Acquisition occurs when one company, the buyer, purchases the assets or
shares of another company, the seller, paying in cash, stock or other assets of value to
the seller.
In a stock-purchase transaction, the seller's shares are not necessarily combined with
those of the buyer's existing company. They may be kept separate as a new subsidiary
or operating division. In an asset-purchase transaction, the assets to be conveyed by
the seller to the buyer become additional assets of the buyer's company, with the hope
and expectation that the value of the assets purchased will, over time, exceed the price
paid, enhancing shareholder value as a result of the transaction's strategic or financial
benefits.

Chapter4.
Difference Between Merger Acquisition

Although merger and acquisition are often used as synonymous terms, there is a subtle
difference between the two concepts.

In the case of a merger, two firms together form a new company. After the merger,
the separately owned companies become jointly owned and obtain a new single
identity. When two firms merge, stocks of both are surrendered and new stocks in the
name of new company are issued. Generally, mergers take place between two
companies of more or less same size. In these cases, the process is called Merger of
Equals.
However, with acquisition, one firm takes over another and establishes its power as
the single owner.Generally, the firm which takes over is the bigger and stronger one.
The relatively less powerful, smaller firm loses its existence, and the firm taking over,
runs the whole business with its own identity. Unlike the merger, stocks of the
acquired firm are not surrendered, but bought by the public prior to the acquisition,
and continue to be traded in the stock market.
Another difference is, when a deal is made between two companies in friendly terms,
it is typically proclaimed as a merger, regardless of whether it is a buy out. In an
unfriendly deal, where the stronger firm swallows the target firm, even when the target
company is not willing to be purchased, then the process is labeled as acquisition.
Often mergers and acquisitions become synonymous, because, in many cases, a bigger

firm may buy out a relatively less powerful one and compel it to announce the process
as a merger. Although, in reality an acquisition takes place, the firms declare it as a
merger to avoid any negative impression.

Chapter 5.
Types of Merger and Acquisition

There are many types of mergers and acquisitions that redefine the business world
with new strategic alliances and improved corporate philosophies. From the
business structure perspective, some of the most common and significant types of
mergers and acquisitions are listed below:
Horizontal Merger
This kind of merger exists between two companies who compete in the same
industry segment. The two companies combine their operations and gains strength
in terms of improved performance, increased capital, and enhanced profits. This
kind substantially reduces the number of competitors in the segment and gives a
higher edge over competition.
Vertical Merger
Vertical merger is a kind in which two or more companies in the same industry but
in different fields combine together in business. In this form, the companies in
merger decide to combine all the operations and productions under one shelter. It
is like encompassing all the requirements and products of a single industry
segment.
Co-Generic Merger

Co-generic merger is a kind in which two or more companies in association are

some way or the other related to the production processes, business markets, or
basic required technologies. It includes the extension of the product line or
acquiring components that are all the way required in the daily operations. This
kind offers great opportunities to businesses as it opens a hue gateway to diversify
around a common set of resources and strategic requirements.

Conglomerate Merger
Conglomerate merger is a kind of venture in which two or more companies
belonging to different industrial sectors combine their operations. All the merged
companies are no way related to their kind of business and product line rather their
operations overlap that of each other. This is just a unification of businesses from
different verticals under one flagship enterprise or firm.
Merger and Acquisition Process is probably the most important thing in a merger
or acquisition deal as it influences the benefits and profitability of the merger or
acquisition. The Merger and Acquisition Process is carried out in some steps which
are discussed in the following page.

Merger and Acquisition Process is a great concern for all the companies who
intend to go for a merger or an acquisition. This is so because, the process of
merger and acquisition can heavily affect the benefits derived out of the merger or
acquisition. So, the Merger and Acquisition Process should be such that it would
maximize the benefits of a merger or acquisition deal.

Chapter 6.
MERGER & ACQUISITION PROCESS
The Merger and Acquisition Process can be divided in to some steps. The
stepwise implementation of any merger process ensures its profitability.
PreliminaryAssessment or Business Valuation
In this first step of Merger and Acquisition Process, the market value of the target
company is assessed. In this process of assessment not only the current financial
performance of the company is examined but also the estimated future market
value is considered. The company which intends to acquire the target firm,
engages itself in an thorough analysis of the target firm's business history. The
products of the firm, its' capital requirement, organizational structure, brand value
everything are reviewed strictly.
Phase of Proposal
After complete analysis and review of the target firm's market performance, in the
second step, the proposal for merger or acquisition is given. Generally, this
proposal is given through issuing an non-binding offer document.
Exit Plan

When a company decides to buy out the target firm and the target firm agrees ,
then the latter involves in Exit Planning. The target firm plans the right time for
exit. It consider all the alternatives like Full Sale, Partial Sale and others. The firm
also does the tax planning and evaluates the options of reinvestment.

Structured Marketing
After finalizing the Exit Plan, the target firm involves in the marketing process and
tries to achieve highest selling price. In this step, the target firm concentrates on
structuring the business deal.

Origination of Purchase Agreement or Merger Agreement

In this step, the purchase agreement is made in case of an acquisition deal. In case
of Merger also, the final agreement papers are generated in this stage.
Stage of Integration
In this final stage, the two firms are integrated through Merger or Acquisition. In
this stage, it is ensured that the new joint company carries same rules and
regulations throughout the organization.

Strategies play an integral role when it comes to merger and acquisition. A sound
strategic decision and procedure is very important to ensure success and fulfilling
of expected desires. Every company has different cultures and follows different
strategies to define their merger. Some take experience from the past associations,
some take lessons from the associations of their known businesses, and some hear
their own voice and move ahead without wise evaluation and examination.
Following are some of the most essential strategies of merger and acquisition that
can work wonders in the process:
The first and foremost thing is to determine business plan drivers. It is very
important to convert business strategies to set of drivers or a source of motivation
to help the merger succeed in all possible ways.
There should be a strong understanding of the intended business market, market
share, and the technological requirements and geographic location of the

business. The company should also understand and evaluate all the risks involved
and the relative impact on the business.
Then there is an important need to assess the market by deciding the growth
factors through future market opportunities, recent trends, and customer's
feedback.The integration process should be taken in line with consent of the
management from both the companies venturing into the merger.
Restructuring plans and future parameters should be decided with exchange of
information and knowledge from both ends. This involves considering the work
culture, employee selection, and the working environment as well.
At the end, ensure that all those involved in the merger including management of
the merger companies, stakeholders, board members, and investors agree on the
defined strategies. Once approved, the merger can be taken forward to finalizing
a deal.

Chapter 7.
Advantages & Disadvantages of M&A

Advantages and disadvantages of mergers and acquisitions (M&A) are determined by

the short-term and long-term company strategic outlook of the new and acquiring
companies. This is due to a host of factors including market conditions, differences in
business culture, acquisition costs and changes to financial strength surrounding the
corporate takeover.
A well known example of mergers gone bad was the September 15, 2008 merger
between Bank of America and Merrill Lynch. This merger was surrounded by
complications ranging from employee bonuses, added debt and forced hands as
evident in the April 13, 2009 U.S. Senate Committee on Banking investigation of the
merger. (7)

In the case where short-term financial benefits are not realized, long-term advantages
may be seen as a valid and probable reason for the merger or acquisition. This article
will discuss advantages and disadvantages of mergers and acquisitions in four parts
consisting of pros and cons of M&A decision making, operational and financial
advantages, costs, and consumer benefits and drawbacks.

Pros and cons of mergers and acquisitions

A number of reasons provide sanction for a corporate merger and acquisition, not all
of which are necessarily financial in nature. Moreover, M&A is within the scope of
the Board of Directors to pursue (1) and the company executives to initiate and
execute. Since board members may also be subject to political, social, and personal
interests, decisions seemingly in favor of the shareholders may also become
quagmired with additional factors.

According to Investopedia.com, an estimated 66% of mergers and acquisitions are not

successful because of M&A intent. Of the 33% that are considered successful, the
mergers and acquisitions achieved a net gain from the M&A with our without bad
M&A intent. A number of reasons for the majority of failures exist in addition to the
failures themselves indicating a potential disadvantage of M&A activity is a relatively
high risk of failure.
This is further illustrated in an article from a 2005 article in the Journal of Global
Business on M&A preparation. (6) Moreover, the article that refers to numerous M&A
case studies and research sources states the reasons for M&A failures include bad
basis for decision making on the part of the company leadership, failure to consider
and/or incorporate the new company, bad management and overestimating the
valuation of the acquired corporation.

Despite the reasons some M&As fail, mergers and acquisitions, regulations of such
and their circumstances may harness the characteristics of the decision makers for the
net economic advantage despite possible conflicts of interest, short-term financial and
consumer disadvantages. In other words, in theory, mergers and acquisitions may be
economically beneficial in terms of reducing complexity of regulatory oversight,
increasing global corporate competitiveness, and adding to shareholders net wroth.
This is verified by the M&A activity that is successful through increases in equity
valuations, larger market share, improved operational efficiency, higher industrial
capacity etc.

Chapter 8.
Case Study Analysis
Merger between HDFC Bank Ltd and Centurion Bank of Punjab

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.
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 December 31, 2007, the bank had a network of 754 branches and 1,906 ATMs
in 327 cities. For the quarter ended December 31, 2007, the bank reported a net profit
of Rs. 4.3 billion, up 45.2%, over the corresponding quarter of previous year. Total
balance sheet size too grew by 46.7% to Rs.1, 314.4 billion.
About Centurion Bank of Punjab
Centurion Bank of Punjab is one of the leading new generation private sector banks in
India. The bank serves 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 offers its customers an array of wealth
management products such as mutual funds, life and general insurance and has
established a leadership position. The bank is also strong player in foreign exchange
services, personal loans, mortgages and agricultural loans. Additionally the bank
offers a full site of NRI banking products to overseas Indians.
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 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 is 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, and it is seeking to acquire a mid-sized bank in the
Southern parts of the country, to broaden and expand its distribution franchise. 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. With further
liberalization, post-2009, an account of WTO regulations, there would be greater
accessibility for foreign banks to Indian shores and vice-versa. With competition

hotting up, Indian Banks will have to gear up to compete with their global
counterparts in terms of products, technology and people.

Chapter 9.
MERGER STRATEGY

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) have
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 would also consider selling shares to
HDFC in order to maintain its holding over 20%. We rate this merger as neutral for
HDFC Bank on as a long term perspective. However on a short term basis, it is
negative for HDFC Banks stand-alone financials and shareholders
At the current price, the CBOPs is 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 CBOP.

Shareholding pattern of HDFC Bank on 31Dec 2007 Face value 10.00

Promoters holding
No. of shares % of holding
Indian Promoters 82443000 23.28
Subtotal 82443000 23.28
Non Promoters holding
Institutional Investors
Banks Fin. Inst. And Insurance 10068939 2.84

Main

FIIs 94087619 26.57

Subtotal 116142534 32.80
Other Investors
Private Corporate Bodies 28598234 8.08
NRI's/OCB's/Foreign Others 6019811 1.70
Govt 3841342 1.08
Others 78110019 22.06
Subtotal 116569406 32.92
General public 38920380 10.99
Grand total 354075320 100.0
Other Investors

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 bn to streamline the policies of erstwhile CBoP itself.
Of this Rs. 7 bn, around 70% went toward the harmonization of accounting

policies relating to loan- loss 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 bn, largely
constituted by retail loans with only around 15% of corporate loans. In terms of
asset quality, the gross NPAs at the end of March2008 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 is around 18-20 months so the risk of incremental slippage
would continue in near future; however the bank is 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 is around 47-48%. This would primarily be driven by an increasing
contribution of low-cost deposits from the erstwhile CBoPs branches.

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 act as a drag
on the other income of the merged entity and it would take 2-3 quarters for
the issues to be addressed. Till these issues are resolved positively, the other

income growth (primarily the fee income) would remain muted for the merged
entity.
The cost/income 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. This means that by
Q4FY09, the entire workforce would be working at full efficiency levels as that
of the existing bank and the technology and IT-platforms would be completely
integrated to support efficient performance. The aim is to reduce C/I ratio to
around 52-53% by the end of FY09.

KEY BUSINESS PARAMETERS (Rs Million) HDFC BANK DEC-07

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

Credit cards (M) 3.5 0.2

LIABILITIES
Deposits 993,869 207,100
CASA Deposits 505,630 50,740
CASA Ratio % 51 25
Share capital 3,541 1,873
NETWORTH 113,584 19,633
Other liabilities 206,942 27,306
Total liabilities 1,314,395 254,309
ASSETS
Advances 713,868 150,835
Retail 364,073 90,228
Other assets 600,527 103,204
Goodwill
TOTAL ASSETS 1,314,395 254,309
NET NPAs 2,798.0 2544.0

Chapter 10.
AFTERMATH OF THE MERGER
A.Branch expansion/Size likely determinant of the merger
The biggest benefit to

HDFC Bank from this acquisition would be

addition of 394 of CBoP branches [which are concentrated in the

states of NCR (55), Punjab (78), Haryanas(28), Maharashtra(39) and
Kerala (91)]. About 60% of CBoP advances are to retail (v/ss~50%
for HDFC Bank) with dominance in the areas of mortgages, personal
loans, 2-wheelers and commercial vehicles (CVs).
Both banks earn 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. Maharashtra(39) and Kerala (91)]. About 60% of CBoP
advances are to retail (v/ss~50% for HDFC Bank) with dominance in the areas of
mortgages, personal loans, 2-wheelers and commercial vehicles (CVs).
Both banks earn 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 would result
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 would gain 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; and

(4) Both banks have senior managements of high caliber who have worked with
Citigroup at some point in their career.
Negatives:
(1) Merger likely to be EPS dilutive for the next two years, due to valuations; and
(2) Integration of LKB branches may pose a challenge.

Major benefits accruing from the merger

Wider distribution reach: 32% of CBoP branches are in metros

The merger will add 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 will increase by 44% in one shot,
while its non metro branches will increase by 57%.

Table 1: Expanding metro reach by 44%

CBoP HDFC Metro 127 287
Non Metro 267 467
Metro Proportion 32% 38%

Non Metro Proportion 68% 62%

Chart 1: HDFC Bank to be largest private sector bank in terms of branch network

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 3: Scope for improved utilization of branches INR mn HDFC Bank CBoP
Merged entity
Business/branch 2,289 908 1,812
Business/employee 80 65 77
Assets/branch 1,762 645 1,376
Assets/employee 61 46 58
PAT/branch 24 5 17
PAT/employee 0.8 0.3 0.7

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 will complement HDFC Banks deposit franchise. On the
product portfolio side, both the banks have a strong foothold in vehicle financing,
which is a natural synergy.

Chart 2: Retail loan break up

Higher productivity to help HDFC Bank bring down cost to income ratio

Improvement in productivity levels will help HDFC Bank lower CBoPs cost to
income ratio over the medium term. High cost to income ratio, mainly due to lower
productivity of some merged branches and employees, has played a big role in
restraining CBoPs return ratios.

Strong and experienced management team: HDFC Bank may add international
business
CBoP has a strong and experienced management team. The management has
demonstrated its capability to integrate diverse organizations by successfully reaping
synergies of the merger with
Bank of Punjab. We expect the CBoP team to strengthen HDFC Banks management
bandwidth and consequently the latter may add international banking to its services
kitty.
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. With better utilization of branches and rationalization of employees with
organic expansion of business, the merger is likely to be EPS neutral in FY10E.
Upside risks exist in the form of sooner-than-expected merger synergies.
We expect 34% growth in balance sheet and 37% growth in EPS CAGR over FY0810E. The proposed issuance to HDFC is likely to provide adequate capitalization and
enable strong organic expansion over the next two years. The stock is trading at 3.0x
FY10E adjusted book(post merger) and 19.0x FY10E earnings

At a swap ratio of 1:29, it would lead to dilution of 21% for HDFC Bank. HDFC Bank
would issue 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 additionaly expensive.Presented belo is a snapshot of the merged entities
HDFC Bank gearing for competition (would become 2nd largest)
ICICI Bank, the largest private sector bank in the country, is likely to open around 425
new branches by June 2008, taking its total tally to 1,380. HDFC Bank, which
currently has 754 branches and approval for 200 other branches, is in for stiff
competition from ICICI Bank its peers who are eager to increase their share in the low
cost deposit base. Hence, the current merger will catapult HDFC Bank with the
highest network among private banks.
Additional branches counter balance high deal value
At times when branch licences are difficult to come by and with the possibility of the
sector opening up to foreign competition post March 2009, leading domestic private
banks are unlikely to sit idle. There is high possibility that these banks scale up their
reach through the organic and inorganic route. We feel CBoPs major presence in the
northern part of the country (in Punjab post its merger with Bank of Punjab) and in the
south (post its acquisition of Lord Krishna Bank) gives HDFC Bank sufficient room to
Leverage these branches going ahead.

Chapter 11.

CONCLUSION
One size doesn't fit all. Many companies find that the best way to get ahead is to
expand ownership boundaries through mergers and acquisitions. For others, separating
the public ownership of a subsidiary or business segment offers more advantages. At
least in theory, mergers create synergies and economies of scale, expanding operations
and cutting costs. Investors can take comfort in the idea that a merger will deliver
enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance
thanks to redesigned management incentives. Additional capital can fund growth
organically or through acquisition. Meanwhile, investors benefit from the improved
information flow from de-merged companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues
involved in M&A. The most beneficial form of equity structure involves a complete
analysis of the costs and benefits associated with the deals.