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Case of ICICI and Bank of Madura

1. What are the implications of merger in banking sector?

Mergers and acquisitions (M&As) are most widely used strategy by firms to
strengthen and maintain their position in the market place. M&As are considered as
a relatively fast and efficient way to expand into new markets and incorporate new
technologies. Mergers in banking sector are one kind of business strategy taken by
the banks.

M&A activity was driven by the need for business entities to achieve economies of
scale, both from a geographical and product offerings perspective. In addition, the
theme of “diversification” gave impetus to business entities acquiring businesses
outside of their direct focus so as to mitigate the impact of the economy on their
business portfolio. This trend gave rise to conglomerates for which acquiring
disparate businesses was a stated growth strategy

With the help of mergers or acquisitions in the banking sector, the banks can
achieve significant growth in their operations and minimize their expenses to a
considerable extent. Another important advantage behind this kind of merger is that
in this process, competition is reduced because merger eliminates competitors from
the banking industry.

In the context of mergers in the banking sector, it can be considered that size does
matter and growth in size can be achieved quite easily. This kind of growths can be
called as inorganic growth. Both government banks and private sector banks are
adopting policies for mergers and acquisitions. In many countries, global or
multinational banks are extending their operations through mergers and acquisitions
with the regional banks in those countries. These mergers and acquisitions are
named as cross-border mergers.

Mergers and acquisitions in the banking sector have the capacity to ensure
efficiency, profitability and synergy. They also help to form and grow shareholder
value. But in some cases, financially distressed banks are also subject to takeovers
or mergers in the banking sector and this kind of merger may result in monopoly
and job cuts. Deregulation in the financial market, market liberalization, economic
reforms, and a number of other factors have played an important function behind
the growth of mergers and acquisitions in the banking sector. Nevertheless, there
are many challenges that are still to be overcome through appropriate measures.
2. Why did BoM agreed for merger with the ICICI Bank?

For over 57 years, Bank of Madura (MoM) operated as a profitable entity in Indian
Banking Industry. It had a significant coverage in the southern states of India. It had
extensive network of 263 branches across India. According to Murthy (2007), the
bank had total assets of Rs. 39.88 billion and deposits of Rs. 33.95 billion as on
September 30, 2000. It had a capital adequacy ratio of 15.8% as on March 31,
2000. With a view to expanding its assets, client base and geographical coverage,
ICICI Bank was scouting for private banks for merger. In addition to that, its
technological up gradation was inching upwards at snail‟s pace.

In contrast, BoM had an attractive business per employee figure of Rs. 202 lakh, a
better technological edge, and a vast base in southern India as compared to Federal
Bank. While all these factors sound good, a tough and challenging task in terms of
cultural integration and human resources issues lay ahead for ICICI Bank. With
these considerations, ICICI Bank announced amalgamation with the 57 year BoM,
with 263 branches, out of which 82 were operating in rural areas; the majority of
them were located in southern India. This merger was supposed to increase ICICI
bank‟s hold on the South Indian market. The swap ratio was approved to be at 1:2.

ICICI wanted to emerge as a big player in the market, so it liked to merge with BoM.
But the reason why BoM agreed is, it tended to look at the immediate and short-
term gain through mergers with letting the „big wig‟ getting merged. In the case of
BoM, the BoM got a better deal in the form of a higher SWAP ratio. Therefore it
seems that BoM has not compromised in the negotiation with ICICI bank. Without
any job cuts, the BoM employees were assured to this merger. Therefore, the desire
of ICICI bank to achieve more strength in less time and their urge for expansion
inspired BoM shareholders as well. So, the BoM shareholders benefited from the
merger in short run and 100 on the banks could also increase the number of
customers, branches and business which would be helpful for them in the long run
to raise new challenges to the other competitors in Indian banking industry.

3. Do you think the business strategy of ICICI Bank played a

more important role than financial ratios, while deciding the
swap ratio??

Determining swap ratio is the most important decision in a merger. In this case of
BoM merging with ICICI Bank the swap ratio was 1:2 where 1 BoM share is equal to
2 ICICI share. Here the swap ratio favors the Bank of Madura although their market
share price is lower than the share price of ICICI bank.

Analyzing the important financial ratios for swap ratio derivation we see that Bank of
Madura had an edge while analyzing the

1. Earnings per share


2. Book value
3. Percentage of the last dividend paid.

While ICICI bank had the edge in

1. Low NPA and high tech image

2. More assets earned
3. Higher market price of share

Considering the above mentioned factors the swap ratio of the merger could have
been 1:1 or 1:1.5 as most of the advantages of BoM neutralized by the
disadvantage. However ICICI bank agreed the swap ratio of 1:2 in favor of BoM
because of their strategic decisions and ambition to become one of the major
players in the highly competitive market.

They already reached out to Karnatak-based Vysya Bank; Kerala based Federal Bank
and South India Bank for a possible merger but failed to negotiate. BoM was one of
their last options where they had to be successful. In any merger the small company
looks for temporary benefit derived from the swap ratio. By giving BoM that benefit
ICICI gained a several important advantage. These are immediate strength of
customer base, geographical base, and enhancement of future shareholder value. So
even if the financial ratios show that the ICICI bank is in a losing position in terms of
swap ratio, ultimately they are winner in this highly competitive market. Finally I
think the business strategy of ICICI Bank played more important role in deciding the
swap ratio.

4. What are the synergies of the BoM merger with ICICI Bank?
Analyze the effect of the swap ratio on the share price.

Synergies of the Merger:

BoM is merged with ICICI bank because of some synergy benefits. The synergies of
the BoM merger with ICICI bank are mention below-

Expand the network over 300 branches

Reduced time for setting up new branches
Combined customer base of 2.7 million
Combined asset base of Rs. 16000 crore
Some Issues of the Merger:

The Board of Directors at ICICI Bank had contemplated the following synergies
emerging from the merger:

 Financial Capability:
The amalgamation will enable them to have a stronger financial and
operational structure, which is supposed to be capable of grater
resource/deposit mobilization. In addition to this, ICICI will emerge as one of
the largest private sector banks in the country.

 Branch Network:
The ICICI‟s branch network would not only increase by 263. But also increase
its geographic coverage as well as convenience to its customers.

 Customer Base:
The emerged largest customer base will enable the ICICI Bank to offer other
banking and financial services and products to the erstwhile customers
of BOM and also facilitate cross selling of products and services of the ICICI
group to their customers.

 Tech Edge:
The merger will enable ICICI Bank to provide ATM, phone and the Internet
banking and such other technology based financial services and products to a
large customer base, with expected savings in costs and operating expenses.

 Focus on Priority Sector:

The enhanced branch network will enable the bank to focus on micro finance
activities through self-help groups, in its priority sector initiatives through its
acquired 87 rural and 88 semi-urban branches.

 Managing Rural Branches:

Most of the branches of ICICI were in metros and major cities, whereas BOM
had its branches mostly in semi urban and city segments of south India. The
task ahead lying for the merged entity was to increase dramatically the
business mix of rural branches of BOM. On the other hand, due to geographic
location of its branches and level of competition, ICICI Bank will have a tough
time to cope with.

 Managing Software:
Another task, which stands on the way, is technology. While ICICI Bank, which is a
fully automated entity was using the package, banks 2000,BOM has
computerized 90% of its businesses and was conversant with ISBS software.
The BOM branches were supposed to switch over to banks 2000. Thought it is

not a difficult task, 80% computer literate staff would need effective
retraining which involves a cost. The ICICI Bank needs to invest Rs.50 crores,
for upgrading BOM‟s 263 branches.

 Managing Human Resources:

One of the greatest challenges before ICICI Bank was managing the human
resources. When the head count of ICICI Bank is taken, it was less than 1500
employees; on the other hand, BOM had over 2,500. The merged entity will
have about 4000 employees which will make it one of the largest banks
among the new generation private sector banks. The staff of ICICI Bank was
drawn from 75 various banks, mostly young qualified professionals with
computer background and prefer to work in metros or big cities with good
remuneration packages.

 Managing Client Base:

The client base of ICICI Bank, after merger, will be as big as2.7 million from
its past 0.5 million, an accumulation of 2.2 million from BOM. The nature and
quality of clients is not uniform. The BOM has built up its client base over a
long time, in a hard way, on the basis of personalized services. In order to
deal with the BOM‟s clientele, the ICICI Bank needs to redefine its strategies
to suit to the new clientele. If the sentiments or a relationship of small and
medium borrowers is hurt; it may be difficult for them to reestablish the
relationship, which could also hamper the image of the bank

Swap ratio effect on share price:

In 11 December 2000, the swap ratio was negotiated in favor of BoM where 1 BoM
share will be swapped for 2 ICICI share. This heavily affected the price of both BoM
and ICICI share. Before the news of the negotiation got published BoM share price
shot up because of the rumor. In the Bombay Stock exchange ICICI bank share
slipped down Rs. 4.55 on the other hand BoM share priced up by Rs. 10.50. Same
trend was showed in NYSE. This happened because the BoM shareholders got a
great deal where they can exchange a share worth of approximately 120 to double
share total worth of almost 304. Generally swap ratio is decided by the share price
of both companies in such a way that after exchanging the worth will be almost the
same. Here, however ICICI Bank favored BoM for the sake of their strategy. And
this created an arbitrage for the general investor. As a result we can see that the
share price of BoM increased from 132.24 to 231.00 Rs in 11-29 December where
ICICI lose their value from 165.30 to 150.30 Rs per share.
5. Had you been the CEO of ICIC bank, what decision you
would have taken?

As the CEO of ICICI bank my interest would be maximizing the value of the bank in
long term ensuring minimum risk. Merger is an important strategic decision for any
bank. Done correctly and it will radically boost the value of the firm. But also there is
some serious factors have to be considered in any merger. Here in the case of
merging with Bank of Madura I will try to analyze the pre-merger situation and how
the merge can benefit ICICI bank.

Before merger ICICI Bank was already one of the most tech-savvy and fastest
growing private sector banks in the country with a presence in 106 domestic
locations, including branches and extension counters. However they didn‟t have
enough coverage in the rural and semi urban area. As a result their customer base
was limited. To expand their coverage and customer base in a short time they
needed to merge with a bank like BoM. They tried to negotiate with some Kerala and
Karnatak based bank but failed to negotiate. So this negotiation is a must for ICICI
Bank. A successful merger with BoM promise to provide a branch network of 350-
400 immediately and would enable them spread their network to 16 States, which
would have taken at least five years to achieve. Moreover, to get an additional 1.2
million customers, which was BoM‟s client base it would have required a minimum of
two years. Thus, the merger enables ICICI to have an aggregate of 2.7 million
customer base and a combined asset base of Rs.16,000 crore, cross selling
opportunities for assets and other products, and good cash management services.

The only major problem in this merger is the management of huge Human resources
gained from BoM. The rules of the Indian banking sector discourages sacking
employee. On the other hand that massive employee of 2500 people are not used to
the same culture and in some extent not properly trained, compared to ICICI human
resources. To eradicate all such problems, a core group from both the banks has
been constituted to help in the integration. Besides, ICICI also plans to set up sub-
groups to look into areas such as IT, audit and HR.

So giving the temporary advantage to gain this type of benefit in the long run was
completely logical and played the mapped out strategy of ICICI perfectly. With HDFC
bank acquiring Times bank, ICICI bank‟s strategy to acquire a traditional and
established bank was necessary. As CEO of ICICI bank I would have taken the
same decision to acquire BoM.