PROJECT REPORT

ON

STUDY OF MERGERS AND ACQUISITION IN BANKING SECTOR

SUBMITTED BY
Kajal Jain-32
UNDER THE GUIDANCE OF

Mr. Arun Patil

Course Coordinator (E-MBA BFSI)

eMBA FINANCE(BANKING & INSURANCE)

2014-2016

SUBMITTED TO MET INSTITUTE OF MANAGEMENT STUDIES

ACKNOWLEDGEMENT
I take this opportunity to express my gratitude towards my guide, Prof. Arun
Patil for extending to me all possible help during my project on STUDY ON
MERGER AND ACQUISITION IN INDIAN BANKING SECTOR . This
Project would not have been possible without his help and guidance. Apart from
Guiding me through out, he gave me utmost freedom and liberty in carrying out
my Research. I would like to thank the librarian and all other staffs for
providing access to all the relevant books from the library. I thank my
classmates, who have also extended their help whenever needed. I would also
like to thank the college for providing me with this opportunity.

Thank You.

INDEX
SR.NO
1.
2.
3.
4.
5.
6.
7.
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15.
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17.
18.
19.

PARTICULARS
EXECUTIVE SUMMARY
NEED AND JUSTIFICATION OF PROJECT
INTRODUCTION
MERGER- DEFINITION,TYPES
ACQUISITION-DEFINITION,TYPES
REASONS OF MERGER &ACQUISITION
ADVANTAGES OF MERGER & ACQUISITION
DISADVANTAGES OF MERGER & ACQUISITION
PROCESS OF MERGER & ACQUISITION
STEPS OF MERGER & ACQUISITION
DIFFERENCE BETWEEN MERGER AND ACQUISITION
HISTORY OF MERGER AND ACQUISITION
CURRENT SCENARIO OF BANKING
MERGER AND ACQUISITIONS IN INDIA
BANKS WHICH PERFOMED BETTER AFTER MERGER
LATEST MERGERS AND ACQUISITIONS
FUTURE OF MERGER AND ACQUISITION IN INDIA
CONCLUSION
BIBLIOGRAPHY

EXECUTIVE SUMMARY
Consolidation in the Banking sector is very important in terms of mergers and
acquisitions for the growing Indian Banking Industry. This can be achieved
through Cost Reduction and Increasing Revenue. The important part over here
is that why do we need consolidation in Indian Banking and what is the
Challenges Ahead. The role of the Central government is also very necessary to
be analyzed in the entire process as they play a crucial role in the policy
formation required for the growth of Indian Banking. In the recent times, we
have seen some M&A as voluntary efforts of banks. Merger of Times Bank with
HDFC Bank was the first of such consolidations after financial sector reforms
ushered in 1991. Merger of Bank of Madura with ICICI Bank, reverse merger of
ICICI with ICICI bank, coming together of Centurion Bank and Bank of Punjab
to form Centurion Bank of Punjab and the recent decision of Lord Krishna Bank
to merge with Federal Bank are voluntary efforts by banks to consolidate and
grow. Is growing is size better for the Indian banks? India is still an unbanked
country and by global standards, even the biggest of Indian banks are minnows
in a business where size means clout and where geographical boundaries are
blurring. Even by Indian standards, most of the banking sector is disadvantaged
by size: the top 25 banks of which, 18 are owned by the government
account for about 85 per cent of banking assets. An analysis of the Indian
banking industry shows that due to factors like stability, return to shareholders,
adhering to regulatory norms, etc make m&a as an imperative. Also m&a gives
an opportunity to these Indian banks of creating a universal bank. Also mergers
can be used as a strategic tool and also there is a possibility of strategic
investments where traditional M&A are not possible. In the changing economic
and business environment characterized by speed, flexibility and responsiveness
to customers, size has a lot to contribute to staying ahead in the competition.
It is in this context that mergers and acquisitions (M & As) as a tool to gain
competitive strength comes into the forefront with Partnering for
competitiveness being a recognized strategic argument for the same. Also
deregulation plays a very important role in the entire economy if its going to
opened to foreign players. A careful study needs

to be done before the foreign players are allowed to enter into the market and
examples from different economies across the globe must be considered. Also
there needs to be a proper consideration of the human resource i.e. the
employees interest must not be affected due a particular merger. Also the
various other threats need to be considered. Mergers like the one between
Centurion bank and Bank of Punjab and also CBOP and Lord Krishna Bank
shows that its upto the private sector players to understand the need to grow
inorganically and that too without any pressure from a third party. These type of
merger and the latest one that is going to happen between CBOP and HDFC
bank would ensure that Indian banks are to take on the foreign banks when they
enter the market in 2009.

NEED AND JUSTIFICATION FOR PROJECT

To understand how merger and acquisition takes place.

To understand what is merger and acquisition.
To understand why banks get merged or acquired.
To understand the effect on acquiring bank.
To understand the financial performance of acquiring bank.
To understand the difficulties faced by the banks.

INTRODUCTION
Mergers and Acquisition is an important tool for the banking growth and
expansion. The Indian Banking Sector is no exception. It is helpful for the
survival of the weaker banks by merging into the larger bank. This study has
trying to find out the impact of Mergers as sample to examine the as to
whether the merger has led to a profitable situation or not. For this purpose, a
comparison has been making between pre and post merger performance in
terms of Operating Profit Margin, Net Profit Margin, Earning per Share, Debt
Equity Ratio, and Dividend Payout Ratio. The price has been made in case of
ICICI Bank. There is no significant improvement in the performance after the
merger as the merger was mainly in the interest of the public. In the initial
stage, after merging, there may not be a significant improvement due to
teething problems but later they may improve upon.
Mergers and acquisitions are one of the easiest and cost effective methods to
enhance economic growth and profit making in the banking sector. This
method has been readily absorbed by the industry to overcome hardships and
has definitely brought about revolutionary changes in it. These evoke a hope
of resurrection as well as improvement, as the case may be. Out of all the
methods of consolidation available to the banking sector, bank mergers have
evolved as the best and surely the most effective in most cases. It helps pool in
the combined resources and cut down costs, to enhance overall profit
statements. It also improves the efficiency of the system due to increased man
force and hence service to customer.
The International banking scenario has shown major turmoil in the past few
years in terms of mergers and acquisitions. Deregulation has been the main
driver, through three major routes - dismantling of interest rate controls,
removal of barriers between banks and other financial intermediaries, and
lowering of entry barriers. It has lead to disintermediation, investors
demanding higher returns, price competition, reduced margins, falling
spreads and competition across geographies forcing banks to look for new
ways to boost revenues. Consolidation has been a significant strategic tool
for this and has become a worldwide phenomenon, driven by
apparent advantages of scale-economies, geographical diversification,
lower costs through branch and staff rationalization, cross-border expansion
and market share concentration. The new Basel II norms have also led
banks to consider.

A Merger is a combination of two or more companies into one company or

it may be in the form of one or more companies being merged into the
existing companies. On the other hand, when one company takes over another
company and clearly well known itself as the new owner, this is called as
Acquisition. The banks must follow the legal procedure of mergers and
acquisitions which is given by the Reserve Bank of India, SEBI, Indian
Companies Act and Banking Regulation Act 1949. Mergers and acquisitions is
not a short term process, it takes time to take decisions after examining all the
aspects. Indian Corporate Sector had stringent control before liberalization
but, the Government has initiated the Reform after 1991which resulted in the
adaptation of the different growth and expansion strategies by the Companies.

Indian Banking can be divided into

three main phases:
Phase I (1786 1969): Initial phase of Banking in India where
many small banks were set up
Phase II (1969 1991): Nationalization, Regularization and
Growth marked this period
Phase
III
(1991
onwards):
Liberalization and its aftermath
In post liberalization regime, Government had initiated the policy of
liberalization and licenses were
issued to the private banks which led to the growth of the Indian Banking
Sector. In the recent times, Indian Banking Industry showed a tremendous
growth because of an increase in the retail credit demand, proliferation of
ATMs and debit cards, decreasing NPAs, improved macro economic
conditions, diversification, interest rate spreads and regulatory and policy
changes.
As financial intermediates, banks are known to play an important role in the
economic growth. These provide the essential funds for investment purposes
and also keep the capital costs low. The sector has transformed from a
controlled to a liberalized system, over the years. Due to new technological
changes that have occurred and been readily absorbed by the banking sector too,
economies all across the globe have witnessed revolutionary changes in the
same. Rising, positive domestic as well as global competition has also evoked a
healthy spirit and scope for continuous improvement. Out of the various
strategies developed for improvement, bank consolidation has worked out to be
one of the best measures. Finally, of the different methods of consolidation, the
most preferred is merger of banks.

DEFINITION OF MERGER
9

A merger refers to the combination of two or more corporate entities, into a

single one, so as to enhance profits and cover up any loss incurred by the system
or organization. Stock is the chief exchange medium for raising efficacy of the
system, offered during the merger of two or more than two banks.
Merger is defined as combination of two or more companies into a single
company where one survives and the others lose their corporate existence. The
survivor acquires all the assets as well as liabilities of the merged company or
companies. Generally, the surviving company is the buyer, which retains its
identity, and the extinguished company is the seller. Merger is also defined as
amalgamation. Merger is the fusion of two or more existing companies. All
assets, liabilities and the stock of one company stand transferred to
Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company

Debentures in the transferee company

Cash, or

A mix of the above modes.

Merger is a financial tool that is used for enhancing long-term profitability by
expanding their operations. Mergers occur when the merging companies have
their mutual consent as different from acquisitions, which can take the form of a
hostile takeover.
Managers are concerned with improving operations of the company, managing
the affairs of the company effectively for all round gains and growth of the
company which will provide them better deals in raising their status, perks and
fringe benefits. If we trace back to history, it is observed that very few mergers
have actually added to the share value of the acquiring company and corporate
mergers may promote monopolistic practices by reducing costs, taxes etc.

TYPES OF MERGERS
10

Merger and amalgamation: the term merger or amalgamation refers to a

combination of two or more corporate entity into a single entity. Forms of
merger that can happen
a) absorption- one bank acquires the other.
b) consolidation- two or more banks combine to former a new entity. In India
the legal term for merger is amalgamation.
Other ways of classifying merger is upon the basis of what type of corporate
combine. It can be of following types1) Vertical merger: this is the merger of the corporate engaged in various
stages of production in an industry. A vertical merger (entities with
different product profiles) may help in optimal achievement of profit
efficiency. Consolidation through vertical merger would facilitate
convergence of commercial banking, insurance and investment banking.
E.g.: a mobile prodUCIng company merge with the company which
provides them parts of mobile and software.
2) Horizontal merger- this is the merger of the corporate engaged in the
same kind of business. e.g.: merger of bank with another bank.
3) Conglomerate merger- a conglomerate merger arises when two or more
firms in different markets producing unrelated goods join together to
form a single firm. An example of a conglomerate merger is that between
an athletic shoe company and a soft drink company. The firms are not
competitors producing similar products (which would make it a
horizontal merger) or do they have an input-output relation (which would
make it a vertical merger)

DEFINITION OF ACQUISITION

11

 A corporate action in which a company buys most, if not all, of the

target companys ownership stakes in order to assume control of
the target firm.
Acquisitions are often paid in cash, the acquiring companys stock
or a combination of both.
Acquisitions can be either friendly or hostile. Friendly acquisitions
occur when the target firm expresses its agreement to be acquired,
whereas hostile acquisitions dont have the same agreement from
the target firm and the acquiring firm needs to actively purchase
large stakes of the target company in order to have a majority
stake.
In either case, the acquiring company often offers a premium on
the market price of the target companys shares in order to entice
shareholders to sell.

TYPES OF ACQUISITION
12

Takeover
In business, a takeover is the purchase of one company (the target) by
another (the acquirer, or bidder).
Friendly takeovers
Before a bidder makes an offer for another company, it usually first
informs that companys board of directors. If the board feels that
accepting the offer serves shareholders better than rejecting it, it
recommends the offer be accepted by the shareholders.
Hostile takeovers
A hostile takeover allows a suitor to bypass a target companys
management unwilling to agree to a merger or takeover. A takeover is
considered hostile if the target companys board rejects the offer,
but the bidder continues to pursue it, or the bidder makes the offer
without informing the target companys board beforehand. A hostile
takeover can be conducted in several ways. A tender offer can be
made where the acquiring company makes a public offer at a fixed
price above the current market price. An acquiring company can also
engage in a proxy fight, whereby it tries to persuade enough
shareholders, usually a simple majority, to replace the management
with a new one which will approve the takeover. Another method
involves quietly purchasing enough stock on the open market, known
as a creeping tender offer, to effect a change in management. In all of
these ways, management resists the acquisition but in is carried out
anyway.
Reverse takeovers
A reverse takeover is a type of takeover where a private company
acquires a public company. This is usually done at the instigation of
the larger, private company, the purpose being for the private
company to effectively float itself while avoiding some of the expense
and time involved in a conventional IPO.

REASONS FOR MERGER & ACQUISITION

13

Mergers and acquisitions in the banking sector can surely provide a kick to the
existing scenario according to experts, more than scale up of internal growth.
Bank mergers are an example of horizontal mergers, i.e. mergers that take place
among corporate entities that are involved in the same kind of business and
similar targets. Merger of banks can take place due to varied reasons.
The purpose for an offeror company for acquiring another company shall be
reflected in the corporate objectives. It has to decide the specific objectives to
be achieved through acquisition. The basic purpose of merger or business
combination is to achieve faster growth of the corporate business. Faster growth
may be had through product improvement and competitive position. Other
possible purposes for acquisition are short listed below: Procurement of supplies:
1. To safeguard the source of supplies of raw materials or intermediary product;
2. To obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
3. To share the benefits of suppliers economies by standardizing the materials.
Revamping production facilities:
1. To achieve economies of scale by amalgamating production facilities through
more intensive utilization of plant and resources;
2. To standardize product specifications, improvement of quality of product,
expanding
3. Market and aiming at consumers satisfaction through strengthening after sale
Services;
4. To obtain improved production technology and know-how from the offered
company
5. To reduce cost, improve quality and produce competitive products to retain
and Improve market share.

Market expansion and strategy:

1. To eliminate competition and protect existing market;
14

2. To obtain a new market outlets in possession of the offeree;

3. To obtain new product for diversification or substitution of existing products
and to enhance the product range;
4. Strengthening retain outlets and sale the goods to rationalize distribution;
5. To reduce advertising cost and improve public image of the offeree company;
6. Strategic control of patents and copyrights.

Financial strength:
1. To improve liquidity and have direct access to cash resource;
2. To dispose of surplus and outdated assets for cash out of combined enterprise;
3. To enhance gearing capacity, borrow on better strength and the greater assets
backing;
4. To avail tax benefits;
5. To improve EPS (Earning per Share).

General gains:
1. To improve its own image and attract superior managerial talents to manage
its affairs;
2. To offer better satisfaction to consumers or users of the product.

Own developmental plans:

The purpose of acquisition is backed by the offeror company s own
developmental plans. A company thinks in terms of acquiring the other
15

company only when it has arrived at its own development plan to expand its
operation having examined its own internal strength where it might not have
any problem of taxation, accounting, valuation, etc. But might feel resource
constraint with limitations of funds and lack of skill managerial personnel. It
has to aim at suitable combination where it could have opportunities to
supplement its funds by issuance of securities; secure additional financial
facilities eliminate competition and strengthen its market position.

Strategic purpose:
The Acquirer Company view the merger to achieve strategic objectives through
alternative type of combinations which may be horizontal, vertical, product
expansion, market extensional or other specified unrelated objectives depending
upon the corporate strategies. Thus, various types of combinations distinct with
each other in nature are adopted to pursue this objective like vertical or
horizontal combination.

Corporate friendliness:
Although it is rare but it is true that business houses exhibit degrees of
cooperative spirit despite competitiveness in providing rescues to each other
from hostile takeovers and cultivate situations of collaborations sharing
goodwill of each other to achieve performance heights through business
combinations. The corporate aims at circular combinations by pursuing this
objective.

Merger of weak banks Since long, there was a practice of merging weak
banks with the strong ones in attempt of revival of the weak or its
improvement. Astonishingly, the Narsimhan committee opposed this long
practiced tradition. Mergers can potentially diversify the risk management
16

and hence it was proposed that the action of bank mergers may be carried out
among weak banks themselves.
Markets develop over time and also become more and more competitive
with each new dawn. Because of these trends, market share of individual
firms may get substantially reduced. This also triggers mergers and
acquisitions, in order to pool and enhance available shares and merger of
banks occur.
Increase in the competition in market New financial products, schemes
as well as policies are born each day. This increases the treats of the
competitive scenario. Hence, bank mergers occur with an aim of
consolidation of the regional financial systems and to increase joint profits.
There are significant capabilities of generation of economies of a desired
scale when mergers occur between the banks.
Globalization of the economy has also had its own share of impact on
mergers in the industry.
Transfer of skills, policies, approaches and experience takes place among
banks whenever a merger takes place. This helps in improvement and also
makes banks more competitive.
Technology There are certain banks that are high on the technology end
while others are efficient with functioning the conventional way. A merger
among the two can cause a revolution with consolidation of ideals.
Positive synergies When two corporate entities agree on consolidation and
merger, their chief motive is to create a positive effect on the profit
statements, which is higher than what may be achieved by individual
functioning. Hence, two aspects of mergers and acquisitions to establish
enhanced profit statements are cost synergy and revenue synergy.

ADVANTAGES OF MERGER & ACQUISITION

GROWTH or DIVERSIFICATION: 17

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.
Purchase of Assets at Bargain Price
Mergers may be explained as an 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 cheaper 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. Many of the mergers can be financed by cash tender offers to the
acquired firms shareholders at price substantially above the current market.
Even so, the assets can be acquired for less than their current casts of
construction. The basic factor underlying this apparently is that inflation in
construction costs not fully rejected in stock prices because of high interest rates
and limited optimism by stock investors regarding future economic conditions.

Increased Managerial Skills or Technology

18

Occasionally a firm with good potential 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 owner s
wealth.
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.
New resources and competencies.
Businesses may choose acquisition as a route for gaining resources and
competencies currently not held. These can have multiple advantages, ranging
from immediate increases in revenues to improving long term financial outlook
to making it easier to raise capital for other growth strategies. Diversity and
expansion can also help a company to weather periods of economic or market
slump.
Financial gain.
Acquiring organizations with low share value or low price earning ratio can
bring short-term gains due to assets stripping. Synergy between the surviving
and acquired organizations can mean substantial cost savings as well as more
efficient use of resources for soft financial gains.
Reduced entry barriers.
Acquiring an existing entity can often overcome formerly challenging market
entry barriers while reducing risks of adverse competitive reactions. Market
entry can otherwise be a costly proposition, involving market research among
other upfront expenses, and take years to build a significant client base.

DISADVANTAGES OF MERGER & ACQUISITION

19

1. Financial fallout.
Returns may not benefit stakeholders to the extent anticipated, and the
expected cost savings may never materialize or may take far too much
time to materialize due to a number of developing factors. These might
include a higher-than-anticipated price of acquisition, an unusually long
timeframe for the acquisition process, lost of key management personnel,
lost of key customers, fewer synergies than projected and other
unforeseen circumstances.
2. Hefty costs.
Under some circumstances, the cost of acquisition can climb steeply, well
beyond earlier projections. This is particularly true in situations of hostile
takeover bids. In some situations of runaway costs, the added value may
not be enough to justify the cost in dollars and resources that went into
making the acquisition happen.
3. Integration issues.
Integration of the acquired organization can bring a number of
challenges. Company cultural clash can erupt and activities of the old
organizations may not mesh as well as anticipated when forming the
newly combined entity. Employees may resent the acquisition, and
undercurrents of anxiety and anger may make integration challenging.
4. Mergers will result in shifting/closure of many ATMs, Branches and
controlling offices, as it is not prudent and economical to keep so many
banks concentrated in several pockets, notably in urban and metropolitan
centres. Though the closure or merger of a large number of branches will
not happen all of a sudden, it is bound to happen over a period of next 5
years.
5. Mergers will result in immediate job losses on account of large number of
people taking VRS on one side and slow down or stoppage of further
recruitment on the other. This will worsen the unemployment situation
further and may create law and order problems and social disturbances.
6. The Head Office of the banks after merger will be situated at a far off
place, may be more than thousand kilometers away from different
branches situated at different corners of the country.

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PROCESS OF MERGER AND ACQUISITION

Preliminary Assessment or Business Valuation-

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
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.
Exit Plan-

When a company decides to buy out the target firm and the

target firm agrees, then the latter involves in Exit Planning.

Structured Marketing-

After finalizing the Exit Plan, the target firm

involves in the marketing process and tries to achieve highest selling

price.

Stage of Integration- In this final stage, the two firms are integrated through
Merger or Acquisition.

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STEPS FOR MERGERS AND ACQUISITIONS

i.

Approval of Board of Directors

ii.

Information to the stock exchange

iii.

Application in the High Court

iv.

Shareholders and Creditors meetings

v.

Sanction by the High Court

vi.

Filing of the court order

vii.

Transfer of assets or liabilities

viii.

Payment by cash and securities

Maximum Waiting period: 210 days from the filing of notice(or the order of the
commission whichever is earlier)

22

DIFFERENCE BETWEEN MERGER AND

ACQUISITION

23

HISTORY OF MERGER AND ACQUISITION IN INDIA

The banking system in India has undoubtedly earned numerous outstanding
achievements, in a comparatively short time, for the Worlds largest and the
most diverse democracy. There have been several reforms in the Indian banking
sector, as well as quite a few successful mergers and acquisitions, which have
helped it, grow manifold.
The year 1968 witnessed an ordinance issued by the Government of India and
14 large commercial banks in the country were nationalized. These fourteen
banks, back then, contained a whooping eighty five per cent of the total bank
deposits in our country. 1980, was witness to yet another round of
nationalization and six more commercial banks came under the government
control. With this huge leap, an enormous ninety one per cent of the banking
sector came under direct control of the Indian Government. With this, the
number of nationalized banks in India rose to twenty. Sometime later, in the
year 1993, the government took yet another stride towards economic prosperity
and made a turn towards merger of banks. The New Bank of India was merged
with the Punjab National Bank (PNB). This was the first merger between
nationalized banks, ever witnessed in Indian history and consequently, the
number of nationalized banks in India was reduced from twenty to nineteen and
that remains the same till date.
The Narsimhan Committee, to file a report regarding the reforms in the Indian
Banking Sector, was set up in the month of December, 1997. It submitted a
report with the following suggestions, on April 23, 1998.
It stressed on the use of merger of banks, to enhance size as well as operational
strength for each of the banks.
It made a recommendation for the merger of the large banks in India, with an
attempt to make them stronger, so they stand mighty fine in international trade.
It recommended speeding up of computerization in the Public Sector Banks.
It established that the legal framework must be strengthened, in order to aim
for credit recovery.

24

It suggested that there be 2 to 3 banks in India that be oriented internationally,

8-10 national banks and a vast network of local banks to help the system reach
the remote corners of India.
It lay stressed that bank mergers must take place among entities of similar size.
This implies that weak banks merge with the weak ones while large banks with
the larger and competitive ones.
It also suggested the confinement of local banking network to the boundaries
of states or a few districts.
Evaluation of the manner of staffing, training process and the remuneration
policy of PSU Banks.
It stated that the enhancement in banking risk can be directed and equated to
increase in capital adequacy.
Suggested the review of the RBI Act, the Nationalization Act, Banking
Regulation Act, as well as the SBI Act.
It stressed on professionalization of banking boards.

25

Raghuram Rajan Committee

Raghuram Rajan contributed a guest column, in the month of April 2009, for
The Economist, and it was in this column that, he recommended a regulatory
system, which may reduce boom-bust financial cycles. His suggestions for the
banking sector in India were
India is a vast nation in itself, hence, given this fact, it is practically impossible
to control the flow of capital and therefore, the economy will always be
uncertain and volatile.
In order to develop into large banks, it is required that an entry point be offered
in the system, which can be used by the bodies.
Technological advances may help in evolving small banks and reduce the costs
of operation.
Encouragement must be provided to the professional markets, in full swing.
Underperforming PSUs were suggested to be sold.
Markets to be banned, in order to reduce or eliminate creation of slightest
uncertainty among the investors.
The regulation of trade to be brought under the control of SEBI (Securities and
Exchange Board of India).
He also suggested an open-minded outlook towards merger of banks and
takeovers.
Encouragement should be given to participation in the domestic market by the
foreign firms.
Must aim to create such an environment for the investors, that has high scope
for innovation and is accepting towards the same.

26

MERGERS AND ACQUISITION IN INDIA

27

28

CURRENT SCENARIO OF INDIAN BANKS

29

LIST OF BANKS WHICH PERFORMED BETTER

AFTER MERGER

HDFC Bank The HDFC Bank has witnessed two bank mergers till
date. These are the ones with Centurion Bank of Punjab in 2008 and the
one with Times Bank Ltd. In the year 2000. Both these spurted the growth
in the bank and it has now reached the zenith.

ICICI Bank ICICI Bank has undergone various mergers of banks. It

has targeted a lot of banks till date and emerged as a leading bank in India.
Here is a list of bank mergers ICICI has had in the past.
Name of the Bank Targeted by ICICI Year of merger

1.

Bank of Rajasthan Ltd.

2010

2.

Sangli Bank

2006

3.

ICICI Ltd.

2002

4.

Bank of Madura

2001

Axis Bank Bank merger has been beneficial for Axis Bank too. It has
seen record increase in business.
30

Kotak Mahindra Bank and ING Vyasa Bank Merger The most
recent merger of banks was in 2014 between these two banks. This
consolidation will surely give an upgraded geographical reach for the unit
that has been formed after the much debated merger.

IndusInd Bank It too witnessed positive synergies after the merger.

Also there has been progressive increase in its business.

Why there exists need to consolidate Indian Banks?

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The Financial Sector Reforms that were triggered in the year 1991 and there
have greatly altered the Indian Banking scenario. The regulated economy has
reformed into a deregulated yet improved, due to risk taking, market
environment. Indian banks have recently been taking long strides towards

Consolidations of different firms by policies of mergers and

acquisitions.
Universal banking approaches.
Development as well as acceptance of new and advanced
technological approaches.
Globalization of the operations.

Top bank mergers indicate that there has been potential improvement after
merger of banks. Here are some reasons that justify the need for consolidation
of banks in India.

As we are moving in a steady pace towards international banking, the

need for a large number of banks stands out to be a must. These will be
required to play a meaningful and important role in the economy which
will emerge as a result. Also, these must have a firm base to withstand
competition and live up to the rising expectations.

Bank mergers often include enhancement in technological approaches;

deregulation of functional, geographical as well as the product related
restrictions; emergence of new opportunities; and consolidating the
banking markets across borders. Government policies regarding incentives
too may pace up top bank mergers.

Major benefit from the merger of banks is incorporation of strength to

withstand the pressure that emerges because of the competition at the
global level. Also, the ability of the bank towards acceptance of
technology is enhanced. Besides all this, human resources increase and
thus there is a fine tuning of the skills and experience.

A significant observation from the past experience with mergers of banks

is that consolidation between unequal entities results in greater gains than
that among equals. Also, in case a merger is followed by appropriate
technological advances in the firm and also diversification in the range of
products and policies, the banking industry as a whole receives huge gains.
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A character unique to the banks in India is their display of similar

performance characteristics despite the differences in their size, ownership,
policies and experience. This trend in the society has also highly fueled the
scope for bank mergers.

LATEST MERGERS & ACQUISITION

2008-HDFC &CENTURION BANK OF PUNJAB
HDFC Bank a brief profile
HDFC Bank is India's second largest having an average Return on Asset of
1.4%.
The bank has emerged as the second largest player in the retail arena (after
ICICI Bank). With a growing branch network and expanding retail market, the
bank has attained extensive expertise in the retail market.
At end-Dec.07, HDFC Banks retail loans constituted 53% of its loan book.
The corporate portfolio is more biased towards highly rated companies and the
SME supply chains.
HDFC bank has been unable to add to its branch network over the past one year
on account of non receipt of branch licenses from the RBI.
HDFC Banks share of low cost deposits stands at 51% as of December 2007,
which is the most enviable feature vis--vis peers.
HDFC Banks asset quality (net NPAs at 0.4% of total advances) is very
healthy.
Advance break-up
Corporate - 47%
Retail - 53%
Deposit break - up
Term - 49%
Current - 26%
Saving - 25%

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Centurion Bank of Punjab a brief profile

CBoP is a fast growing new generation private sector bank.
CBoP has a strong and experienced management team. The management has
demonstrated a marked capability to integrate diverse organizations by
successfully merging Bank of Punjab with itself. It had recently acquired Lord
Krishna Bank, integration of which with CBoP operations is currently
underway.
The bank follows a retail focused strategy with SME as a strong second engine.
The fee income share, at 40% as of December 2007and emanating from third
party distribution of financial products, wealth management and foreign
exchange business, is one of the best in the industry.
CBoP has an average CASA of 25% a function of an improving but yet
underutilized network franchise. A latent significant operating leverage
continues to be the key attraction of the bank.
Advance break-up
Corporate - 40%
Retail - 60%
Deposit break - up
Term - 75%
CASA (Current Account & Saving Account) - 25%

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Operational Statistics of HDFC and CBoP

HDFC Perspective
While the swap ratio of 1:29 for HDFC-CBOP merger turned out to be more
favourable 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
35

franchisee of CBOP at almost one-third of what the market is currently

giving to its own franchisee.
If HDFC Bank manages to improve the productivity of these branches to
even half the levels of HDFC Bank branches, the merger will become
positive in longer term.
It is expected that HDFC Bank will take 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 related expenses. While
the merger would be EPS dilutive for HDFC Bank in the interim, more
clarity is required in terms of the initial write-off the entity would have to
take.

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 will 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 would provide 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
relationships will complement HDFC bias towards highly rated corporates
thus expanding HDFCs base.
The merger will result in the creation of Indias 7th largest bank, just behind
public giants like Bank of Baroda, Bank of India.

36

An important gain for HDFC Bank is induction of a strong and capable

management team with extensive industry experience and proven capabilities.

Post Merger Scenario

Retail segment will continue to be the main focus for the combined entity and
would be the crucial growth driver.
Post merger of HDFC-CBOP, HDFCs stake in HDFC Bank is projected to fall
to 18.7% (including ESOPs allotment). However, HDFC Bank is expected to
issue 26.3 m shares to HDFC on preferential basis, which will enable HDFC to
maintain its stake of 23.28% post merger. Hence, HDFC is expected to infuse
around Rs.39bn to HDFC bank to maintain its current ownership.
Due to an influx of 394 branches from CBoP, there will be 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 will continue to
trend down. The opex to average asset is expected to decline from 3.4% in
FY08 to 3.28% in FY10.
CBoP currently has a weaker asset profile with net NPAs of 1.6% as against
0.4% for HDFC Bank. Going forward, HDFC Bank (combined entity) would
aim to maintain its NPA profile at these levels, which would require a charge of
~Rs2bn. In addition, it is expected that HDFC Bank would provide for another
Rs1.5bn towards any potential NPAs.

37

The HDFC Bank-CBoP merger brings both advantages and downsides to the postmerger HDFC Bank.

38

Downside
Upside

HDFC Bank gets the top class

management of Centurion Bank of
Punjab.

Strong two-wheeler, commercial

vehicle and construction equipment
portfolio. About 40 per cent of
CBoP's total retail assets comprise
home loans, car loans and personal
loans.

Small and medium enterprises (SME)

client base of 2,500 and advances of
over Rs 1,500 crore.

Gets 394 branches and licences for

350 more when RBI is being very
stingy on doling out branch licences.

Gains geographical spread,

especially in Punjab and Kerala.

Share of low-cost deposits to

decline marginally as CBoP has a
much lower portfolio of such
deposits than HDFC Bank.

CBoP has relatively high net NPAs

of 1.31 per cent. This will affect
HDFC Bank's asset quality.

Employee integration to be a big

issue as CBoP has a large
workforce.

Technology integration to take

time and also cost a packet as the
two banks operate on different
latforms.

It's an all-stock deal, but HDFC

Bank promoter HDFC will have to
pump in close to Rs 4,000 crore to
maintain its stake at a little over
23 per cent.

2010-ICICI BANK & BANK OF RAJASTHAN

39

Profile of the Bidder and Target Banks

ICICI Bank

ICICI Bank is the second largest bank in India and the biggest in the
private sector. It started its operations in 1994 as a new generation private sector
bank. ICICI Bank is the first Indian bank to be listed on the New York
Stock Exchange with US GAAP accounting and has a worldwide presence
including in the UK and Canada.

Merger experience: The bank has been using mergers as a strategy to

expand their geographical coverage, increase customer base and to meet
regulatory requirements since the year 2000. The present merger with BoR is
the 4th acquisition of ICICI Bank. The other deals are:
ICICI Bank- Bank of Madura in 2000
ICICI Bank- ICICI Ltd in 2002
ICICI Bank- Sangli Bank in 2006

Focus: ICICI Bank aims at long-term wealth creation through Cs

strategy of Current Account Savings Account (CASA) growth, cost control,
credit quality and capital preservation.
Size and distribution reach: The number of branches and ATM counters were
1709 and 5219 respectively at the end of fiscal 2010. The Bank has a total
business of 3832222 million as of 31.03.2010 and has 37000 employees with a
business per branch of 304 crore.

Bank of Rajasthan

Bank of Rajasthan is an old private sector bank which has a strong

presence in the northern part of India with registered office at Udaipur,
Rajasthan. It started its operation in the year 1943.

40


Branch network: Bank has a branch network of 466 branches out of
which 280 were in Rajasthan with 4000 employees. Further, the bank sponsors
Mewar Aanchalik Gramin Bank (MAGB) which was established in 1983 under
the RRB Act, 1976.

Asset base: The Banks asset base and number of customers stands at
173000 million and 3 million respectively as on 31st March 2010.
Business: The total business amounted to 233918 million and the business
per branch is 47 crore.
Efficiency: BoR reported a net loss of 102.13 crore in 2009-10
against a profit of 117.71 crore in the previous financial year.

Merger Announcement, Share Price Movements and

Shareholding Pattern Changes
41

Mergers and takeovers are important events in the life of any company. Merger
announcements have a significant impact on the share prices of both the bidder
and target banks. There is concrete evidence for wealth shifting in the global
arena from bidder bank shareholders to target bank shareholders and vice versa.
The present deal appears more favourable to BoR since their shareholders
gained almost 90% between 07.05.2010 (the start of merger negotiations)
and 23.05.2010 (Board Meeting approval).
Table 3: Swap ratio and relevant closing prices of banks
Particulars

ICICI Bank

Swap ratio

Bank of Rajasthan

1:4.72 ( 25:118)

Price before a day of merger announcement

901.10

82.85

Price on the day of merger announcement

809.20

99.45

Price after a day of merger announcement

824.45

119.35

Source: Economic Times and website of NSE

For the purpose of analysis, the BoR share price data has been divided into three
periods, viz, Period I, Period II and Period III respectively. Period I pertains to
the point starting from February 26, 2010 (the day the RBI imposed the penalty)
to May 6, 2010 (the day before merger negotiations started). On February 26th,
the closing price of BoRs scrip was 61.8 and on 6th May, it was 84.7. This is
the period where the bank faced serious actions from the regulators.
During this period, the banks scrip value appreciated by 20.9% against the
Bank Nifty return of 9.9%. BoR recorded a price of 66.85 and 62.5 on March 8
(SEBI ban) and March 9 (RBIs special audit order) respectively.

42

43

44

Figure1: Graphical presentation

45

2014- KOTAK MAHINDRA BANK & ING VYASA BANK

Decided to acquire in Nov-2014.
15.2% of the equity share capital
ING shareholders will get 725 Kotak Bank shares for every 1000 shares
they hold
The deal implies a price of Rs.790 for each ING Vysya share based on the
average closing price of Kotak shares during the month to November 19,
valuing the deal at around Rs.15,000 crore

ING Vysyas CEO-designate Uday Sareen will be inducted into the top
management of Kotak

Fourth-largest private bank in the country in terms of total business which

is YES Bank currently
1,214 branches across the country
Access to southern states like Andhra Pradesh, Karnataka and Tamil Nadu

46

 Access even to urban areas given that more than 65 per cent of ING
Vysyas branches are in urban and metro regions, unlike most other
regional and old-generation banks
Operations from April 1, 2015.

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48

FUTURE OF MERGER AND ACQUISITION IN INDIA

Mergers will also allow Indian banks to catch up with global peers. Indias
largest lender SBI does not feature in the top 50 banks in the global ranking.
According to a Forbes study, in 2015, four Chinese banks were listed among the
top 25 lenders globally based on their profits, asset size and market value. The
Industrial and Commercial Bank of China with a total asset base of $3,322
billion leads the pack. SBI, with an asset size of ` 20,48,080 crore or $310
billion is dwarfed in comparison. We want good large banks to merge with
each other and this has to happen, said Ashvin Parekh, managing partner,
Ashvin Parekh Advisory Services, a Mumbai-based financial advisory firm.
If government interference is the reason, it should move away from running
banks. If there are governance issues, they should be addressed forthrightly. If
there is absence of talent and the decisions taken are out of incompetence, then
49

we need to get the right people. If there is no incentive structure, it should be

brought in. There is no point in PSBs earning profits and paying the government
a dividend if it has to come back to recapitalise them. Instead, if pay scales are
made attractive, there would be the right talent.

Merging PSBs may be myopic in nature when alternatives exist to strengthen

them. Decentralisation has been the buzz word when we talk of the rest of
banking or even geographic demarcation of our states as they work better. Weak
banks can walk the road of narrow banking until such time their books are
clean, which is preferable to doing things in a hurry as it sounds neat today. For
sure, we should think deeper.

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51

CONCLUSION
Mergers and Acquisitions of banks are one of the major outcomes of the
financial transformation process in India. From the study, one can come to a
definitive conclusion that the primary reason for the merger between ICICI
Bank and the Bank of Rajasthan, a major landmark in Indian Banking history,
has occurred due to the regulatory interventions of the authorities. In this paper,
the strategic similarity and dissimilarity of both ICICI Bank and the BoR are
analyzed If we include the negative figures in the contribution analysis, that
will result in negative swap ratios which is unrealistic in practice in detail. It is
observed that both the banks are dissimilar in most of the key
parameters.Therefore, the management of the acquiring firm (ICICI Bank) has
to focus on this intrinsic issue in the post-merger period to boost the
performance of the merged entity. There are only slight movements in the prices
of both the banks during the merger-negotiation period. Surprisingly, when the
RBI and SEBI were initiating actions against irregularities in BoR, the bank
experienced a major 20.9% rise in price whereas the Bank Nifty exhibited an
increase of 9.9% only. It was during this quarter that, the holding of institutional
investors increased substantially from 5.73% to 16.24%. Hence, it can be
presumed that the reason for the market price appreciation was due to
information asymmetry or insider trading or both. It is interesting to note that
after the announcement of the merger, the BoR gained about 77% in price and
ICICI Bank declined by 1.7%. The sharp increase in the share price of the BoR
can be explained as a shift to the price offered by ICICI Bank. Finally, looking
into the valuation of the merger, the swap ratio was 1: 4.72, which is fair if we
combine the results of contribution analysis of size variables and he financial
fundamentals of the banks.

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BIBLIOGRAPHY
http://www.bigskyassociates.com/blog/the-benefits-and-dangers-of-bankmergers-and-acquisitions
https://www.cleverism.com/mergers-and-acquisitions-complete-guide/
http://www.economicshelp.org/blog/5009/economics/pros-and-cons-ofmergers/
https://en.wikipedia.org/wiki/Mergers_and_acquisitions
http://finance.mapsofworld.com/merger-acquisition/process.html

http://www.ibpsexamadda.org.in/banking-awareness-49-mergers-and-acquisitions-ofbanks-7469/

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