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SUBMITTED BY
Kajal Jain-32
UNDER THE GUIDANCE OF
2014-2016
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.
8.
9.
10.
11.
12.
13.
14.
15.
16.
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.
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.
DEFINITION OF MERGER
9
Cash, or
TYPES OF MERGERS
10
DEFINITION OF ACQUISITION
11
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.
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.
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.
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.
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.
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.
20
In this process of
When a company decides to buy out the target firm and the
Stage of Integration- In this final stage, the two firms are integrated through
Merger or Acquisition.
21
ii.
iii.
iv.
v.
vi.
vii.
viii.
Maximum Waiting period: 210 days from the filing of notice(or the order of the
commission whichever is earlier)
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23
24
25
26
27
28
29
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.
1.
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.
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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.
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
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.
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34
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
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.
36
37
The HDFC Bank-CBoP merger brings both advantages and downsides to the postmerger HDFC Bank.
38
Downside
Upside
39
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.
Bank of Rajasthan
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.
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)
901.10
82.85
809.20
99.45
824.45
119.35
42
43
44
45
ING Vysyas CEO-designate Uday Sareen will be inducted into the top
management of Kotak
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.
47
48
50
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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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